CF工業控股 (CF) 2007 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the First Quarter 2007 CF Industries Results Conference Call. My name is Jeremy and I will be your coordinator for today.

[OPERATOR INSTRUCTIONS]

I would now like to turn the call over to your host Mr. Charles Nekvasil, Director of Investor Relations. You may proceed, sir.

Thank you, Jeremy and thank you ladies and gentlemen for joining us on this conference call for CF Industries Holdings Inc.

I'm Chuck Nekvasil, Director of Public and Investor Relations and with me today are Steve Wilson, our Chairman and Chief Executive Officer, Ernie Thomas, our departing Senior Vice President and Chief Financial Officer, Dave Pruett, our Senior Vice President - Operations and Tony Nocchiero, who is succeeding Ernie Thomas.

Yesterday afternoon, CF Industries Holdings Inc. released its first quarter results. As you read our news release, posted on the Investor Relations section of our website at www.cfindustries.com, and as you listen to this conference call, please recognize that both contain forward-looking statements within the meaning of Federal securities law.

All statements in this call, other than those relating to historical information or current conditions, may be considered forward-looking statements.

These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control and which could cause actual results to differ materially from such statements.

These risks and uncertainties include those spelled out in the Safe Harbor Statement included in the news release. Consider all forward-looking statements in light of those and other risks and uncertainties.

Now let me introduce Steve Wilson, our Chairman and Chief Executive Officer.

Thanks Chuck and thank you all for joining us this morning. Yesterday afternoon, CF Industries announced first quarter net earnings of $57.2 million or $1.02 per diluted share, representing a significant improvement over the net loss of $24.6 million or $0.45 per share that we reported in last year's first quarter.

As you look at this strong first quarter performance, there are several important points to note. First, the quarter's significantly improved pricing from that in the fourth quarter of last year. As the news release points out, we won't enjoy the full benefit until the second quarter.

However the decoupling of nitrogen fertilizer prices, especially urea prices, and natural gas costs, which began last Fall, as well as the quarter's rapid increase in phosphate prices, clearly signals the strong optimism that characterizes the American Corn Belt and really many world markets today.

Improved pricing of course helped product -- helped produce excellent margins in both our nitrogen and phosphate businesses.

Second, a marked increase in the nitrogen volume versus a year ago. Again reflecting the market's optimism heading into the Spring planting season.

Third, reduce costs especially for natural gas. We locked in a substantial portion of our first quarter natural gas needs during December when natural gas costs dropped significantly throughout the month.

Fourth, and a major component of the improved reported results, a sizable swing in our mark-to-market positions on natural gas derivatives.

And finally, our ability to execute. We maintain high cost effective operating rates throughout the quarter and positioned ammonia and other products in the marketplace to capitalize on the expected robust second quarter fertilizer demand when planting hits its stride in the corn belt.

I believe we enjoyed a strong first quarter. We reported a significant improvement in our financial performance, but just as importantly we built a very good order position, had excellent margins in anticipation of the second quarter.

Now Ernie will provide you with some added detail on our financials. Before I turn the call over to him, I want to make a few comments about the role that Ernie has played at CF Industries since joining us in 2004.

I'm sure you saw the news release we issued yesterday afternoon announcing that Ernie would be accepting a senior financial position with another company and that Tony Nocchiero is joining us as Ernie's successor.

Ernie has been a valuable member of our leadership team, helping guide us through our IPO and put in place a public company financial team. All of us thank him very much for his commitment to the company and to its stockholders.

We and I wish him continued success in his new position. I'm confident too that Tony Nocchiero, Ernie's successor, will pick -- will quickly become a key contributor to our organization. Tony is here with us on the call today.

So, Ernie?

Thanks very much Steve and good morning everyone. And thanks for joining us on today's call.

We were very pleased to be able to announce last evening very strong first quarter results, especially in comparison with our results from a year ago, which were shaped by a very different set of market fundamentals than we are experiencing this year.

We are clearly off to a good start as we are now well into the Spring planting season. Our financial highlights for the quarter were as follows. Total revenues increased by 12% to $248 million.

Total tons shipped were up by 15% compared to last year, with our nitrogen shipments up by 24%, which more than offset a 6% decline in phosphate shipments.

Our realized gas costs decreased by 15% versus the prior period. Earnings in the current quarter were increased by mark-to-market gains of $39 million versus mark-to-market losses of $20 million in Q1 of '06.

Fortunately, we were able to lock in gas in late December, prior to the run up in prices in response to an unusually cold February here in the Midwest.

Our net cash position stood at $162 million at the end of the quarter, down from $219 million in net cash at the end of December, but greatly improved over our net debt position of $54 million this time last year.

The reduction in net cash versus December of '06 reflects primarily our normal seasonal build and inventory. We declared our regular quarterly dividend of $0.02 per share payable on May 31. Our net earnings for the quarter were $57 million compared to a net loss of $25 million in the prior year.

We reported a gross margin of $105 million for the quarter compared to a negative gross margin of $23 million in the last year's first quarter for a year-over-year improvement of $128 million.

That $128 million gross margin improvement comprises the following major items. Our selling prices overall were about $7 million higher on a year-over-year basis, with our nitrogen and phosphate segments each contributing about one half of that $7 million total.

Increased nitrogen production rates in the quarter versus the prior period resulted in fewer outside purchases of fertilizer products for a net savings of about $11 million and the avoidance of idle capacity costs of about $7 million that occurred in 2006.

Our realized gas costs for the quarter fell by $29 million versus Q1 of 2006. Our mark-to-market gains of $39 million in the quarter reflect a $59 million improvement against a $20 million in mark-to-market losses reported in Q1 of '06.

Finally our phosphate raw material costs declined by $6 million, due mainly to reduced sulfur and ammonia costs in the current period.

Our SG&A expenses for the quarter were just under $14 million versus $13 million a year ago. Just under half of that year-over-year increase is due to the company's relocation to Deerfield, Illinois.

Cash [total] from operations totaled $191 million versus just $19 million in the year earlier quarter. Inventories increased by $127 million in preparation for the Spring planting season.

This additional investment was more than offset by increased customer advances of $222 million related to our forward-pricing program.

Our adjusted free flow, which does not include changes in customer advances and other working capital items was $37 million in the current quarter compared to a negative $16 million a year ago.

In terms of liquidity, as of March 31st, we had cash and short-term investments of $491 million and $250 million available under our senior credit facility, which was undrawn.

Overall we are very pleased with our performance in the first quarter and believe that we are well positioned to exploit very positive industry fundamentals in the second quarter. Thank you. Steve?

Thanks Ernie.

The fundamentals of this Spring's North American fertilizer market are pretty well known at this point. So I'll just touch on them briefly.

We begin with low world-wide coarse grain stocks, then add significant new demand for corn required to produce ethanol, as well as continued demand for feed.

This increased demand has driven corn prices to levels at which farmers are expected to plant this country's largest corn crop since the 1940s, with the USDA survey indicating in excess of 90 million acres. That's a huge increase from just 78.3 million acres last year.

At the same time, these favorable economics in the corn market are expected to result in a rebound in application rates, representing another significant positive for fertilizer sales this Spring.

Importantly, this robust scenario isn't simply a North American phenomenon, nor is it limited to nitrogen. Demand in major offshore markets such as India and Latin America has kept worldwide supply and demand in good balance from the perspective of domestic nitrogen and phosphate producers.

As a result, there's been reduced incentive for exporters to ship nitrogen products to the U.S. market, at least leading up to and during the Spring's planting season.

Given that backdrop, we entered the Spring planting season with a great deal of optimism about second quarter prospects, given our position in the marketplace.

Our end-market distribution system is located in the heart of the Corn Belt and nitrogen, the primary nutrient for boosting corn yield, is our largest product line.

Our phosphate operations with good access to domestic and export customers are also well positioned to serve the increasingly tight phosphate market.

We enjoyed good early season movement in the southern parts of the corn growing region. Wet weather through mid-April in the northern Corn Belt did delay some planting, but we have experienced a good ammonia run during the last couple of weeks. It's still a bit too early to tell what the ultimate corn acreage will be.

Operationally, we're in a good position to serve the market. Our overall inventory levels are adequate to meet the expected robust demand and our nitrogen and phosphate complexes are operating at capacity. Other than normal maintenance, we expect to continue operating at capacity rates throughout the second quarter.

Looking at shipping and logistics, I'd characterize this as a normal planting season, with the usual localized glitches and crunches that ultimately get resolved so farmers can get their crops into the field.

The second quarter should benefit from the full effect of the rapid increase in pricing we saw during the latter part of the first quarter, especially for phosphate products and for urea. Our order book is strong with most of our nitrogen orders supported by natural gas derivatives, priced at levels moderately below today's gas costs.

Natural gas costs do remain a long-term concern for this industry as do some nitrogen capacity additions expected beginning later this year. But the table is set for us, especially for the second quarter. It's incumbent on us to execute our business and operating plans to take full advantage of this opportunity to build stockholder value. And I'm confident that our team is poised to deliver.

With that, I'll open the call to questions. Jeremy, please explain the Q&A procedure.

Yes sir. [OPERATOR INSTRUCTIONS] And your first question comes from the line of Brian Yu, CF Industries. You may proceed.

Good morning, Steve and team. A question on natural gas costs. I understand you locked in a number of forward pricing contracts towards late December when that gas was around $6.00 and below, you had a kind of quarter of natural gas costs came in quite a bit above the slot, at 757 Is it fair to say that most of those contracts are going to flow through in the second quarter?

Good morning Brian. Yes I think that's a good overall conclusion. I might just take a minute and explain the process of gas flowing through our financial statements.

When we booked natural gas derivatives and then associate those with our forward pricing orders, of course that gas is used in the production process in subsequent months.

The gas that we fixed in December was largely for production that was going to occur in the first quarter. That production part of it would ship in the first quarter, but the biggest portion of that would also ship in the second quarter and beyond. So what we recognize in cost of sales is the ultimate physical cost of gas and the realized effect of the derivatives.

The mark-to-market position that we showed at the end of the quarter is indicative of the book of derivatives that we had at that point and the benefits that will show up ultimately in realized gas costs.

And Brian, I would add the 757 does not include any of those unrealized gains.

Okay. And then on the ammonia pricing, the core, I know ammonia volumes were light compared to last year, but pricing did dip below the $300 per ton, which was a sequential quarter decline. Can you offer insight as to what drove that?

Sure. I had the same question, Brian, when I looked at that number. Over half of the ammonia that we shipped in the quarter, and keep in mind that it was a pretty quarter for shipping ammonia, came out of our Canadian operations, going largely to our partner up there on an FOB basis.

About 50,000 tons is all that went to our traditional Corn Belt kind of customers largely in the southern part of the Corn Belt and the average price of that product was $365.

So we have strong pricing in our traditional markets in the first quarter, albeit at a light volume due to weather.

Okay. Great. Thanks guys.

And your next question comes from the line of Dave Silver with JPMorgan.

Good morning Dave.

Good morning David.

Hey, good morning. Charlie -- sorry, excuse me, Ernie I'm sorry to see you go. But I just want to know, we all want to know if you're going to stop in your tireless efforts to find Chuck a good woman.

On that, David, the answer is no. My father over here.

Some questions are best answered offline.

I took a chance, but thanks for laughing. Okay. I had a couple of questions. Oh man. Okay. So I had a question.

Maybe it's a little bit related to Brian's question, but it would kind of be about the whole timing issue and when we see higher pricing start to be reflected in your results, does the -- given the moves in the products like urea, I mean it could have a significant effect on how the second quarter kind of turns out.

Could you guys provide us a little bit of color about maybe the lead time we should think about in your orders flow or whether there is some FPP issues that maybe are going to continue to kind of reduce the realized prices that you see relative to industry benchmarks?

Well I know, Dave, this is a recurring question and it's not just been posed to CF management, it's been posed to our competitors. As we've explained on several occasions, we are in the market every day.

We are looking at pricing trends and we are working with our customers to determine business arrangements that we believe are going to ultimately result in appropriately strong margins.

This is kind of the opposite of a retail gasoline operation where they change the price from $3.20 to $3.40 and it instantaneously starts getting collected.

We are taking orders weeks to months in advance of shipment and obviously the prices that are reflected are the prices associated with orders that are shipped, not orders that are taken.

I guess the best characterization I can give is that the amount of time it takes to flow through the system could be as short as a couple of weeks and it could be as long as several months.

And we do not have the benefit of waiting for the peak in pricing, assuming that we could even know we were there if we were there and then taking all our orders at that point in time. That would of course be optimal, but it's an impractical optimal situation.

And David I would add, you're seeing weighted average prices for the quarter and in the case of phosphate, the prices rose very sharply, but towards the end of the quarter. And so, again, as Steve mentioned, we'll see a lot of that benefit in the second quarter when those orders are shipped.

Okay. And if I could maybe just extend my thoughts or Steve's thoughts about the FPP program and people booking a couple of months in advance, it's a little early, but do you guys have any read on where you're able to sell urea or DAP let's say after the peak Spring planting?

In other words, are you getting any orders for post-Spring planning DAP or urea? Can you share with us kind of how that pricing might related to the current pricing now?

Well just in general terms, I think it's fair to say that unlike a typical year, there's a lot of buzz out there about what might happen in the late summer and early fall. And there activity that is encouraging in that regard and we know that from talking to our customers, a full range of customers. But I'd just as soon not get into speculating about what the price levels might be in the future.

So just to summarize, at this point you've had a lot of interest, but you haven't really transacted a meaningful amount of business for that period?

I think that's probably a fair general statement. It isn't that we haven't transacted any business, but it's too early to tell.

Okay. Quick question about the phosphate results. You mention that there was down time for maintenance and you had reduced operating rates for the quarter. Any kind of sense of what the combined effect of that would have been on your reported results?

In other words, if you had the same sales volume, but you were able to operate your plants normally throughout the quarter, what might the difference have been to your gross profit there?

Oh, I think it's -- it would be reasonable to take the gross profit rate and apply it to a few more tons. We, yes, would have a little better fixed cost absorption, but we operated on about 90% of our reported capacity, that's a very high operating rate. We have the ability to make about 500,000 tons of finished product a quarter.

And the -- given that it was a first quarter, it was a pretty good quarter and frankly one of the reasons we plan maintenance the way we do is to try to make sure we have the product produced and available to hit the best part of the market cycle. [We're] that involved.

So from your perspective, if you were kind of operating at 10% or so below name plate, there may be 10% reduction in gross profit? Is that kind of a rough --?

No, we didn't really miss any orders, David. There was less inventory backfill. We didn't really miss any orders.

Right. Okay.

I think Steve's comment about the loss absorption is probably true. But there were no orders that were missed.

Oh, okay. All right. Thanks for the call everyone, then.

Yes.

Your next question comes from the line of Steve Byrne with Merrill Lynch. You may proceed.

Hi. Is any of the gas that you locked in and recognized the mark-to-market gain not linked to your forward purchase program?

The answer is yes. In December, and we've commented on this in the past, that while our normal discipline is to link our gas purchases to our FPP business, we will look for opportunities to lock in gas beyond FPP orders when we like what we see in the gas market.

And in December we liked what we saw and we extended ourselves beyond FPP orders to a certain extent and obviously in retrospect that was a good thing. That related mostly to production. In fact, maybe all to production in the first quarter. But not necessarily to product shipped in the first quarter.

Is it fair to say that most of that hedging gain will cover nearly all of your gas costs in the second quarter? Your cost of sales of gas costs?

Oh wow. I think that might be a little beyond my ability to comment on right now because we have to worry -- we have to think about inventory impacts. The gas is used in production flows and inventory and sits there for awhile and comes on in cost of sales when we ship the product.

So I don't think I can answer that, but we can look into that and try to get back to you.

Okay. And then of the 1.3 million tons of forward bookings, is that mostly urea and UAN? Let me state it another way.

Yes.

Can you -- do you take -- is ammonia a more difficult product to sell forward, particularly towards the latter end of the Spring season?

I'd -- Steve, I'd just say that we have a pretty good order book for all of our products and ammonia is right in there with the other products.

Okay. And then just one more pricing. For the piece of your phosphate sales that flow through PhosChem, is -- do you recognize that price on a few week lag? Or how would you characterize the lag in the price that's posted FOB Tampa versus your sale? When you will recognize that sale?

Well we recognize the sale on the same basis we recognize all our sales, which is at the time we know it's shipped and built. There may be some adjustments that happen in the course of PhosChem squaring things up at the end of the time periods among members and so forth. But in general the revenue recognition is consistent with our normal revenue recognition.

But does PhosChem have a procedure of recognizing the price on a three-week lag or something along that basis?

I don't believe so, but I'm not familiar with the specific details myself. We can put that on our list of things to look at and get back to you.

Okay, thank you.

Your next question comes from the line of John Emerich with Ironworks Capital. You may proceed.

Good morning, John.

Good morning. How are you?

Okay.

Great. Is -- I'm trying to ask one with a couple of parts. From a seasonal perspective, is September still kind of a -- the best cash flow quarter of the year? It has been. I mean if there's -- it's tough to pick up the seasonality given the volatility of the end markets, but it seems to be anyway. I mean you generated cash in every quarter last year, but September I think was the biggest.

I actually don't -- I don't have that knowledge at my fingertips.

No. We can go back and look at it historically, John.

Okay.

We could do that and give you an answer offline. I don't think that we would say that necessarily, but --.

Intuitively I would think it would be second quarter.

The second quarter.

When we have our highest level of sales.

Yes.

And most of the sales would be in April and May.

Right.

And collected in June.

Okay. Well that's -- anything higher than this quarter. I mean you generated $3.00 a share in free cash this quarter alone, that's what I'm trying to figure out. You're at $9.00 a share now. It's difficult to see how you don't end the year north of $11 a share in net cash. I'm almost afraid to ask, but --.

In general, John, that -- the second quarter would be the quarter we release inventory and would be a strong shipment quarter. The first quarter and the third quarter are usually inventory build quarters.

Yes.

In general.

Yes, I hear you. But everyone's paying you up front, which is kind of a nice business to be in.

Well that's true. The FPP, which is --.

Yes.

But that's why we begged off on answering the question up front specifically. We'll have to look at it specifically.

Yes.

Yes. Yes. It's just an amazing business model. I'm actually out of questions. So I'll just let it go on.

Jeremy, do we have more questions?

Yes, sir. Your next question is from the line of -- a follow-up from Dave Silver of JPMorgan.

Yes, hi. I had a --.

Do you have another question for Chuck or not?

I'll take all the other personal questions offline. Maybe just to follow-up on the uses of free cash flow here. It's striking when you look at the balance sheet, I think $490 million of cash and short-term investments and I'm guessing that by the end of the Spring it could be higher.

Can you talk about what kind of makes sense here? I mean there's a number of capital projects that have been discussed in the past, Trinidad and coal gas and you probably have some internal debottlenecks and things.

But in terms of the sizeable cash hoard that's growing in here, Steve, what do you hear from shareholders? What internally kind of makes sense for CF here?

Well we have -- we hear from shareholders questions similar to the one you're posing. In terms of our situation, we have continued to build cash. We have a number of strategic initiatives that we are working on and they do run the gamut from very early stage ideas to more specific ideas that are well developed and moving along quickly.

As an indication of our commitment to make sound investments of our stockholders' money, you all saw that we brought in Tony Will recently, who has extensive M&A experience. That's a reflection of our commitment to make sound investments and it's a sign of our commitment to a degree of urgency with respect to this.

We're going to -- we're looking at projects that will be accretive to the shareholders and the commitment is there to proceed. When we have ideas bearing fruit, we'll be sharing those with you.

I have another question maybe about the decoupling of the urea market that you mentioned in your comments, urea from natural gas. I don't normally think of CF as a major exporter.

But my sense is that you're having discussions about domestic demand in the Fall, but one thing I'd bet is that there's going to be very strong demand in the Southern Hemisphere, our Fall, their Spring.

Donaldsonville being positioned where it is, does it make sense at all to start thinking about maybe come Fall linking up some DAP exports and some urea exports and sending them -- sending into the south? Or does that really just not fit into your overall business model?

Well obviously we have a growing amount of experience in exporting DAP. And becoming a member of PhosChem provides us a little insight into how those international markets work and the markets for DAP are not unlike the markets for urea because the products have similar handling characteristics.

We are not a complete neophyte with respect to urea exports. We've done it in the past. We've actually done it very modestly in the not-too-distant past.

If we determine that an offshore market is an attractive one, we would certainly address it and take advantage of opportunities that present themselves. You're right that our location at Donaldsonville does give us access if the net backs support that. But we're not blind to that opportunity.

Okay. That's great. Thanks very much.

Yes. Thank you David.

Your next question is from the line of Mike Judd with Greenwich. Please proceed.

Hi. Good morning.

Good morning.

Hi Mike.

A question about -- you were talking about the amount of cash that you have on the balance sheet, that you're looking at strategic alternatives, uses for growing the business, potential M&A.

Are we basically looking to perhaps diversify the portfolio at all? Perhaps look at maybe some downstream opportunities or are most of these investments really focused on areas where there would be advantaged feedstocks?

Well we -- Mike, we're looking at really in two general directions. One is to grow the company. And the other is to diversify the risk associated with selling nitrogen product in North America, made with Henry Hub priced natural gas basically.

So that -- those are pretty broad categories. We have strengthened distribution, certainly things that might augment that strength or take advantage of that strength fit in that realm. Offshore investment in projects fit there.

We've looked at Trinidad. We continue to be quite interested in Trinidad and at this point we're a bit frustrated about where we stand there. We are looking at petroleum coke. We're looking quite seriously at it, where we have had a technical team. We're doing technologies overseas very recently.

So those are -- and downstream, as it relates to distribution and other things, I think that's a possibility.

So I mean, basically, it sounds like there's just a lot of opportunities for growth and that the cash that's being generated here, there's more than enough growth opportunities here to grow the company's profits. What does basically share buy-back or dividend increases or anything like that, where does that sort of fit in, in terms of your view about uses of cash?

Well it fits in our overall considerations of capital structure and proper deployment of capital. And our -- at the Board level, we have these discussions about investment opportunities and included in those discussions is a clear understanding that should we not have sufficient opportunities of an accretive nature to invest the excess cash that it's incumbent upon us to, in concert with prudently manage the balance sheet, to get cash back to shareholders. And that's a consideration in our strategic thinking going forward.

And just as a follow-up to that. There's -- some of the different parts of the chemical industry, some of the participants are somewhat frustrated with the costs of doing M&A. As you look at these opportunities for investment, do you think that these things are basically reasonably priced at this point or -- yes, I mean that's basically my question.

Well building greenfield plants, you see it in the nitrogen fertilizer business, or any capital intensive business right now. It's tough. Capital costs are high for reasons of component costs, some basic materials are quite expensive.

In some regions labor is more expensive than it used to be and frankly engineering resources are being stretched around the world. That has been one of our challenges in trying to make a project happen in Trinidad. A very, very high cost structure for capital projects.

Having said that, as owners of existing assets in nitrogen manufacturing in particular, we don't think that's a bad thing for our base business. If it is tough for existing players in the fertilizer business to justify building greenfield plants, then it's got to be even tougher for new money without industry expertise to come in and do the same thing.

And so if we look out beyond the number of projects that we see coming online in the near future and a couple of parts of the world, there's not a new wave of that on the horizon and I believe this is one of the major reasons why we haven't yet seen a new wave of additions and expansions.

Yes, I guess -- I understand your point. I don't mean to belabor the issue, but I'm just wondering, given some of these costs, higher costs and some of the other issues involved here, whether some sort of -- it might be prudent to actually return some of the cash here to shareholders in one way or the other, sort of in the near term.

Well it's a consideration and it will continue to be a consideration as we go forward.

Thanks for the help.

Yes. Thank you.

And your next question is from the line of Matt Hagerty with Pennant Capital. You may proceed.

Good morning, Matt.

Hi Matt.

Good morning guys. How are you?

Okay.

Good.

I guess I just wanted to add, if you will, an editorial comment following along the lines of the last caller. I could be imagining things, but I think your stock took a meaningful dip when M&A was discussed.

I'm probably imagining things, but I think it might be symbolic of how a lot of your shareholders feel about a company that has had a major earnings recovery and is now sitting on a lot of cash and there's concern for how you'll use it.

I think you guys will recall having discussions a year ago about share buy-back and that would have been obviously quite value creating. So I guess maybe that's an editorial comment more than a question.

But along those lines, you have talked about different projects that are being considered at the company. And no one's asked David Pruett a question, so I don't know if he could maybe comment a little bit more substantively on the [Pet Co] project.

And then secondly, there's been some talk about a uranium recovery project within phosphates. And I was wondering if you could characterize that as what stage of development and priority is that being given? Thank you.

Okay. Matt, this is Steve. I'll answer the second question and then I'll toss it to Dave for the first. There's been a bit of publicity recently about the possibility of uranium recovery being associated with phosphate production in general and CF in particular.

The history here is that, and this predates my arrival at CF, but there was an investment made by one of our competitors and the uranium recovery unit at our facility in the past.

And it was a substantial investment and by the time it was built, the market changed and we never made any money off of it. I don't think we lost any money either because we didn't make the investment. But we ultimately dismantled that unit.

We are well aware of the run up in uranium prices. We're aware of the technology and it's something that is in our study group of projects and if something ever comes of it, we'll certainly share it with you. Pet Co, Dave?

Good morning, Matt. Yes, we are still pursuing the Pet Co project quite diligently, as Steve indicated earlier and the decision that first has to be made is which of at least three or four different technologies for doing gasification make the most sense at the Donaldsonville plant.

Clearly the decision on the technology is a major cost driver, so you have to decide that first, so then you can do some evaluation of what the costs will be, so you can eventually make a decision as to whether or not the project makes sense.

So we do have the technical team visiting plants, talking to technology providers, looking at things from an engineering perspective to see which one would fit best. Once we've made that decision, we can continue on down the process.

Okay. But this has been on the docket for a long time. If that's the first decision that needs to be made, has that technical team been at this for a year or more? I mean this is not a new discussion.

No it's not. It was originally, actually, looked at a couple -- or three years ago and then got put on hold through the IPO and then through the hurricane recovery. It was only in the last, I'm going to say, three months or so that we really picked it up and started running, maybe even a little less than that, that it got back on the front burner as a priority one project.

Okay. Thank you.

Your next question comes from the line of Bob Goldberg with Scopus Asset Management. You may proceed.

Good morning guys.

Good morning Bob.

Good luck, Ernie. We'll miss you.

Thanks a lot, Bob.

Alright. I had a -- this may be a overly simplistic question, but just looking at the nitrogen fertilizer business and you made about $90 million in gross profit in the first quarter on the 1.4 million tons of nitrogen, which is about $63 a ton in gross profit.

And that is, of course, as we know, well below, if you look at published prices for the products that you're selling, in terms of a cash margin.

I'm just wondering what -- the second quarter and beyond are -- do you expect to see your profitability, your profitability per ton, improve towards those types of posted levels that would be implied by prices that are occurring in the marketplace?

Well Bob I think the short answer is yes. Let me give you just a bit of perspective. We -- I talked earlier about the sort of anomaly in our ammonia price in the first quarter.

But let me give you just some -- a couple of numbers related to our other products. First quarter versus fourth quarter. And these are just comparisons of the numbers published in our current release against our previous one.

Our urea price, $54 higher or 23% higher; our UAN price, $24 higher, 16% higher; and our DAP price, $17 or 8% higher. Those are substantial increases, remembering that what we're dealing with here is a portfolio of business that's been booked over a period of time and is evolving through our system.

So we feel quite optimistic that the second quarter is going to reflect a lot more of this pricing phenomenon that has been seen in the spot market recently.

I guess -- I mean is -- should we continue to expect though some sort of a haircut, it seems, versus the posted -- what would be implied by the posted prices?

Well I need to go back to what I talked about earlier and that is that we don't have the flexibility nor do I think it is desirable frankly to hold our product in advance and price it all at the same time.

We are dealing with our customers on a regular basis, they want us to commit to providing volume and of course along with that commitment comes committed prices.

I think frankly that our pricing compares reasonably well with that of our competitors. Yes, there are transactions that are done at those spot prices, there's no question about that.

Those are transactions that are reported to publications, but sometimes they might be small quantities, sometimes they might be a little bit more substantive qualities.

They represent opportunistic situations, excuse me. So we'd love to have that kind of margin on all of our business, but I think it's unrealistic to expect us to do that on a -- by turning on a dime.

And I guess the same question on phosphate, Steve. Again it was an improved quarter, but the profit per ton was maybe $30 versus spot margins of, pick a number, I don't know, $150 a ton or more based on published phosphate prices.

How much improvement do you expect to see there? There's such a large gap that existed from the first quarter, it's even a bigger gap there I think than it is in the nitrogen business.

Well Bob, I know specifically with respect to DAP that run up occurred largely in March. And so very little of that run up would be reflected in our first quarter business.

I think there is a likelihood of substantial expansion in margins in the second quarter in phosphate. But I can't put a number on it.

And what would you say is the lag time on the phosphate business in terms of the time you take the orders to the time you ship?

It's a -- its weeks to months. It depends on what the customer wants, when he wants it and once we've put it on the books, shipping -- the shipping date is largely determined by when the customer can take it. So there is a lot of variability in that and it works over a range of weeks to several months.

Okay. Okay. Thanks.

Yes.

And your next question comes from the line of Paul D'Amico of TD Newcrest. You may proceed.

Thanks gentlemen for taking the call. In the early remarks, you made references to long-term supply concerns, some capacity expected to come on this year. Could you give some granularity on that, in terms of what you're seeing, and how much and when?

Well there are some projects in the nitrogen area that are pretty well known and have been in process for a number of years, particularly a couple of projects in Iran. It's difficult to get visibility into that activity because of the, frankly, just the difficulty in knowing what's going on Iran. They've been delayed, but they are coming.

There's a new plant in Saudi Arabia up and running. It's been running. There's an Egyptian plant that came on in March. And they're already reported to be exporting.

Could you just -- sorry to interrupt, just going back to the same sequence. On the Iranian, you said it was delayed. Do you have a point of reference delay from where to where?

Well again these are opinions and so --.

No, I understand.

I actually suggest perhaps you look at some industry publications and we know there have been delays because we haven't seen the product in the marketplace. The best evidence of a completion of a project is when the product shows up on ships.

Yes. No, I've seen the same references, I was just trying to get your market intel to see if it was different.

It really isn't because we don't have anybody on the ground looking at these projects.

Understood. Okay. And was there any more that sort of stood out?

I think those are the major ones.

Thank you.

Yes.

Your next question is from the line of Ronald Redfield with [Ratfield, Flows, and Company]. You may proceed.

Hi. Actually it's Redfield Blonsky, but I got disconnected before. Hey guys, if this question is not -- since I got disconnected, I don't know if you covered it. So just tell me.

I have a question regarding Ernie Thomas's departure. If Ernie had chosen to stay employed for an extended period, would he have been welcome to do so?

And then on top of that, I have another question for Ernie and for you all, have you -- has Ernie had any discrepancies with the auditors, with management on anything including financial and/or any of the accounting procedures?

Well with respect to the first question, we're not going to respond on a personnel matter.

With respect to the second question, Ernie, I'd be pleased to have --

The answer is no and a little more color on the -- my departure, it is I have a chance to go return close to my relatives and my wife's relatives and a chance to join a great company.

And I'm very excited about that and I'm very proud of what we've done here at CF and I think the company is in a great position, both in terms of financial reporting and its transition from co-op to a public company and I think Tony is going to come on and do a great job.

But there's no issue surrounding anything with auditors or accounting or anything like that.

Were you happy with the company? Was it [about] position? Is there anything they could do to keep you?

And very -- and still remain very happy with the people I work with and the company. That's --.

I just feel like it's a canned answer, but I understand that gets -- that's how you all have to approach it, especially with not being able to answer my first question. And, Ernie, I've admired your work for a long time.

We have a long standing policy of not commenting on human resources questions and that has nothing to do with Ernie Thomas or anything else. That is just a corporate policy from day one. So please read absolutely nothing into Steve -- into the comment there please.

Oh no, not at all. I'm just trying to do my due diligence.

Yes. Understood.

Good luck with everything, Ernie.

Thank you very much.

Okay.

And your final question comes from the line of Marshall Reid with Banc of America Securities. You may proceed.

Good morning everyone, squeezing in toward the end here. On phosphate inventories, certainly they appear tight throughout the chain.

But can you give us maybe your assessment on urea inventories with imports having improved just in the last couple of months and sort of the slow start to the planting season here?

Well at the end of March, domestic urea inventories were about 22% below where they were a year ago. So --.

That's at the producer level right?

That's at the producer level.

Okay. How about in the -- farther down the chain?

We --.

At the retail industry level.

We really don't have good visibility into that. I mean the sense is a general favorable situation from a producer standpoint. But we don't really have evidence to cite on that.

Okay. And then I think a related question to a previous one. I noticed the FPP volumes increased sequentially to 52% I think in the quarter for nitrogen.

Does that hold you back in the quarter in terms of realized margins and do you think that's the right mix of forward versus spot in this kind of environment?

And I guess lastly, are there some constraints there in terms of shifting the mix more towards spot?

Well, Marshall, we approach this in a couple of perspectives. One of course is our daily perspective of assessing the market, putting out price offers that reflect the market conditions as we know them. So that when the market is tight, we'll be more aggressive than otherwise.

We don't have a crystal ball as to where peaks might be in the future. We don't have a targeted level of FPP business that we're trying to achieve. What we want each and every day is the best set of orders that we can get.

If we can't, sometimes in strong market situations or certain market situations we can't achieve our price targets and that's okay. We go on to fight the next day and maybe make appropriate adjustments going forward.

Okay. And then just last question on nitrogen, I think you've been running pretty close to 100% on your facilities the last couple of quarters.

Can you just talk about sort of the relative improvement in fixed costs per ton over the last couple of quarters and how much operating leverage you're seeing as a result of some of these higher rates?

We have been roughly 100% for the past couple of quarters, but we could get back to you offline on more specifics on that.

And we typically, through the year, run at very high operating rates and what happened in the fourth quarter of '05 and the first quarter of '06 was quite unusual in our history. So our fixed cost absorption is, I guess, back to being more typical in our operating performance.

And I think the fourth and first quarter were very similar operating rates.

Okay. Great. Thanks guys.

Thank you.

And at this time, I'd like to turn it back over to Steve Wilson for any closing remarks.

If there are no questions, we'll close the call. I would invite any of you to follow-up with any questions by calling Chuck in our IR department. And as always, thanks for your continued interest in CF Industries and we look forward to talking with you in the future.

Thank you for your participation in today's conference. Ladies and gentlemen, this does conclude the presentation and you may now disconnect. Have a wonderful day.