CF工業控股 (CF) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the results conference call. My name is Eric and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of the conference.

(OPERATIOR INSTRUCTIONS)

I will now like to turn your presentation over to your host for today's call, Mr. Chuck Nekvasil, Director of Investor Relations. Please proceed, sir.

Thank you, Eric. Good morning and thank you 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 are Steve Wilson, our Chairman and Chief Executive Officer, Tony Nocchiero, our Senior Vice President and Chief Financial Officer and Dave Pruett, our Senior Vice President Operations.

Yesterday afternoon, CF Industries Holdings released its third 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 may contain forward-looking statements within the meaning of Federal Securities law.

Any statements in this call, other than those relating to historical information or current condition, 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 our 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 reported third quarter net earnings of $86.5 million or $1.52 per diluted share, substantially better than the net earnings of $7.3 million or $0.13 per diluted share in last year's third quarter.

Third quarter 2007 results included a $1.9 million non-cash, pre-taxed, unrealized gain from mark-to-market adjustments on natural gas derivatives. This strong performance, delivered in a seasonally slow quarter when the North American fertilizer industry often sees price pullbacks and related margin compression, reflects the optimism pervading North American agriculture today. It also demonstrates the type of supply/demand dynamic that exists in world fertilizer markets as well as what many observers believe are extremely low inventories at every step in the fertilizer supply chain.

The story for the quarter was pricing. This summer, speaking to investors at a conference in New York, I commented, only half jokingly, that we were probably looking at the shortest summer pricing doldrums in the industry's recent history. Some nitrogen product pricing did pull back modestly early in the third quarter, but it quickly recovered and continued to rise. In the phosphate market, prices paused, then continued to increase.

Strength that prices have shown has surprised some people. As you know, little nitrogen or phosphate is actually applied on U.S. farms during the third quarter. But look at the underlying environment. U.S. average farm level crop prices for corn, wheat, and soybeans are at near record or record levels. And the USDA has predicted that net farm income will hit a record $87.1 billion in 2007, up approximately $28 billion from last year.

It's our sense that customers, anxious to assure they can capitalize on this upbeat outlook, began locking in fall and spring fertilizer needs during the third quarter, earlier than usual. That's certainly indicated by the increased bookings under our forward pricing program. All of this contributed to a continued strengthening of prices for most of our products, compared to the year earlier quarter and to this year's strong second quarter.

On the cost side of the equation, natural gas prices spiked a bit early in the quarter on storm fears, then weakened as those concerns proved unfounded. However, our reported cost of natural gas did increase, in part, reflecting the lag effect for that cost or an order sold under our forward pricing program; orders that clearly contributed to the strong profit margin performance we achieved for the quarter.

The cost of sulfur, used in the production of phosphate fertilizer, continued to increase in a tight global market. Our effective supply planning provided sufficient sulfur to support planned production levels throughout the quarter. Improved fertilizer pricing more than offset these cost increases, driving a substantial margin percentage improvement in both nitrogen and phosphate compared to the year earlier quarter.

From an operations standpoint, we executed well. This is a quarter when sales volumes are normally down, but when companies begin critical inventory rebuilding to position themselves to meet fall and even spring demand. This year we believe fall demand will be robust and we're positioned to capitalize on it.

Operationally, the third quarter was also highlighted by successful completion of scheduled maintenance activities at both of our nitrogen complexes, including a complex wide upgrade to Medicine Hat's electrical system which our employees completed ahead of schedule.

Strategically, the quarter was an important one, too, in that we announced the acquisition of a 50% interest in KEYTRADE AG, a leading international fertilizer trading organization. The transaction closed in October. I'm excited about the opportunities that this partnership provides. KEYTRADE offers us an immediate global platform from which to pursue our growth and diversification objectives.

In considering this acquisition, we believed it was important to develop such a platform to improve our existing global sourcing capabilities and market insights and to obtain the capability to enter new markets and establish new off-shore distribution channels. We are proud to be affiliated with Melih Keyman and his experienced team.

Summing up the quarter, then, improved pricing drove sharply-improved margins and exceptionally good third quarter earnings performance. Now, Tony will provide some added detail on our financials.

Thanks, Steve, and good morning, everyone. As Steve noted, third quarter net earnings were $86.5 million or $1.52 per diluted share. Those results compared to $7.3 million and $0.13 per diluted share reported for the third quarter of 2006.

Gross margin increased almost six-fold to $151 million, up from nearly $26 million in the third quarter of 2006. As Steve pointed out, the gross margin in this year's third quarter included the minimal effects of $1.9 million of mark-to-market gains on natural gas derivatives in the current quarter. We recognized $13 million of unrealized mark-to-market losses in the third quarter of 2006. Gains and losses on natural gas derivatives are reflected solely in nitrogen segment results.

Financial highlights for the quarter compared to last year's third quarter include a 46% increase in net sales, which rose to nearly $583 million. We saw a slight decline in total volume arising from the timing of shipments relative to last year, which reduced overall gross margin by just over $3 million.

Selling prices were higher for all products with increases for Urea and UAN in nitrogen and DAP and MAP in phosphate up by strong double digit percentages. In total, average nitrogen fertilizer prices increased by 45% from the year earlier quarter. In phosphate, the increase was 62%. By the way, we need to correct an error in the news release nitrogen segment exhibit. The price per ton for ammonia for 3Q 2007 should be $370 per ton, rather than the $366 per ton shown in the table.

Going back to 3Q highlights, we enjoyed a nearly $71 million increase in nitrogen gross margin and a nearly $55 million increase in phosphate gross margin. Realized natural gas costs increased by just over $38 million due, primarily, to larger realized losses incurred on the settlement of natural gas derivatives.

SG&A expenses rose by $3.4 million or 26% compared to last year's third quarter, primarily due to higher cash and stock-based incentive compensation and corporate office relocation expenses. Cash flow from operations totaled more than $201 million, twice the $100 million in the year earlier quarter. This was due primarily to a significant increase in customer advances and to the quarter's improved earnings.

We enjoyed strength and liquidity. As of September 30, 2007, we had cash and short term investments of more than $730 million and $219 million available under our senior credit facility which was undrawn. We declared our regular quarterly dividend of $0.02 per share payable on November 30 this year.

To summarize, we delivered excellent financial results in the third quarter and we're positioned to capitalize on what we expect to be a very good fall season. Steve.

Thanks, Tony. So we've just completed a very successful third quarter and carried out a number of important maintenance projects at our operations; began rebuilding inventories to meet strong anticipated demand this fall and next spring; and, thanks to a robust pricing environment, generated net earnings well beyond expectations.

We're optimistic about CF Industries' fourth quarter performance. The combination of a good harvest, expected record farm income in 2007 and continued near record or record crop prices should provide farmers with every incentive to optimize their use of fertilizer to meet strong demand and rebuild grain stocks.

Despite this year's expected large harvest for corn, U.S. and world coarse grain stocks remain at historically low levels, as coarse grain consumption has outpaced production in seven of the last eight years. We're looking at a North American fertilizer industry operating at high capacity utilization rates and on low inventories, not just at the producer level, but, apparently, throughout the supply chain.

Markets for fertilizer are strong for almost every major crop and not just in North America. Growing fertilizer demand in China, India, Latin American and other regions is contributing to the tight supply demand environment with positive implications for prices.

Crop failures, disappointing yields and other problems in Australia, Europe and China are tightening grain markets even further. It appears that new nitrogen capacity is being absorbed by demand growth, at least so far. And there has been minimal new capacity added in phosphate.

Natural gas costs, one of the biggest wildcards facing this industry long term, have been relatively stable in the U.S. and are becoming more rational in a number of off-shore fertilizer production centers, notably Eastern Europe.

That said, it's critical that our leaders in Washington recognize the opportunity we have to increase natural gas supply in this country. We will continue to advocate increased exploration and production as well as a balanced energy policy that includes conservation and development of renewable fuels.

In our case, this positive industry outlook as produced a record 3.5 million tons of forward pricing program sales for this Fall and the Spring of 2008, as well as strong spot sales going into the fourth quarter. Prices, and in the case of nitrogen gas costs associated with those forward orders, are expected to produce continued margin expansion in the fourth quarter. So we're upbeat going into the fall season.

Fall application of ammonia has begun in the Corn Belt and, while it's still early in the season, initial reports we're getting from our 19 in-market ammonia terminals, suggest that we're off to a good start at our Northern terminals and down into Iowa. We're just starting to see good movement in Northern and Central Illinois, too, as soil conditions and temperatures reach levels at which farmers can apply ammonia.

On the phosphate side of the business, we're looking at continued strength in domestic and international markets; strength which comes at a time when there's minimal new capacity expected before the end of the decade. With farmers expected to enjoy record farm income this year, it could provide them with an incentive to increase phosphate application rates.

There's a lot of volatility in crop prices and projected planting intentions in agricultural markets, but is volatility driven by demand. We're, essentially, seeing a bidding war for acres among the major crops; corn, soybeans, and wheat. And fertilizer prices reflect the market strength. Planting nearly 93 million acres of corn this year required a significant reduction in acreage for other crops including soybeans and cotton. We will see some rebalancing in 2008.

A few observations about the coming crop year. First, we're still weeks away from the point at which most farmers will make their final spring planting decisions. So the volatility in crop prices and projected planting intentions is likely to continue. Second, 2008 is highly likely to be another good year for corn acreage, especially in the Midwest assuming favorable weather.

Keith Collins, Chief Economist at the USDA, recently pointed out even if corn acreage is only 87 million acres or so of corn next year, it would still be significantly higher than the 79.1 million corn acres we averaged from 1997 to 2006. From our perspective, we believe that much, if any, reduction in corn acreage will come in less productive land outside of our core Corn Belt states. We expect strong fall and spring ammonia application seasons.

Third, a scenario of decreased corn acreage and increased wheat acreage isn't all bad. Wheat also requires nitrogen fertilizer and with record high wheat prices, farmers will want to maximize yields.

We also need to look at what's happening to so-called minor crops, sorghum, to cite just one example. Poor weather and reduced grain yields have created a feed shortage in Europe. There's resistance there to genetically-modified corn grown in the U.S., but sorghum isn't grown from modified seed. The U.S. Grains Council has suggested that sorghum exports to Europe could double this year, helping push 2008 planting for the crop by more than a million acres to, perhaps, 9 million for next year. Sorghum, just like corn, requires nitrogen.

So, as I said earlier, we may be looking at continued crop price-driven volatility in agricultural markets. But most of the likely outcomes bode well for the North American fertilizer industry and for CF Industries.

So, with the usual caveats, including weather, raw material availability and cost and other factors, we're looking at an excellent fourth quarter and exciting prospects for the spring of 2008. We're committed to delivering on those prospects. With that, I'll open the call to your questions. Eric, please explain the Q and A procedure.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Marshall Reid with Banc of America. Please proceed.

Good morning; great quarter, guys.

Thanks. Good morning, Marshall.

Could you just talk about the run up in oil prices and natural costs in Europe and the potential impact there on U.S. ammonia as well as urea imports here heading into the spring?

Wow. Well, so far, we have not seen a coupling of what's happening with crude oil prices and what's happening with natural gas costs in the U.S. Clearly, they've got high gas costs in many parts of Europe and that is -- and that, coupled with high ocean freight rates, has made it difficult for some countries to export nitrogen fertilizer to North America.

And in our situation in this country, we've got record or near record inventories of natural gas. And so we have, while not low gas costs, at least we have, I guess, moderated gas costs compared to some recent years. So I think, overall, from a domestic producer standpoint, we're in good shape on that score.

Okay. And then just in terms of the fall season, can you talk about fall application versus spring on corn? If a farmer applies more in the fall, does that mean he needs less in the spring?

Well, I guess if we had a really outstanding gangbuster fall application season, that might borrow some from the spring. But, given where corn prices are, the farmers' incentive is going to be to maximize yields and to, if the weather cooperates, to put ammonia down perhaps twice.

Okay. And last question, I'll get back in queue. Just on the forward pricing program, volumes increased significantly. You stepped up taking orders at current fertilizer prices. Does that reflect any concern about pricing this spring? And wouldn't it make sense to hold back a bit for another potential run in prices this spring?

Well, we've taken orders at prices out into the future that we deem to be good prices for the months in which they'll be shipped, compared to our costs of production in those months. We are very, very comfortable with those margins. Might there be an opportunity, in the spring, that we have to pass on? I suppose that's possible. But, frankly, when we look at the margins that have been available to us, it's very hard to turn away from the certainty associated with those margins as we've seen them develop in the late summer and through the fall.

Okay. Great. Thanks, Steve.

Your next question comes from the line of Mark Connelly with Credit Suisse. Please proceed.

Thank you. Just two questions. First, with respect to KEYTRADE, as that relationship develops, should we expect any disruption in business flow? I'm thinking about you have to withdraw from PhosChem and whether that's going to affect your phosphate exports in the short run?

Well, first of all, our experience with PhosChem was a positive one. Our decision to acquire half interest in KEYTRADE was really driven by much larger considerations. Clearly, KEYTRADE does bring capability to handling our exports force on that product. We are anticipating a very smooth transition from doing business one way to doing business a new way.

Okay. And just one other question. Looking back at sulfur, your sulfur situation seems to be okay. Are you concerned about availability at all in 2008?

Well, I wouldn't say we're unconcerned. But we have very good relationships with our suppliers and we're comfortable with our situation as we know it right now.

Okay. Thanks very much.

Your next question comes from the line of Steve Bryne with Merrill Lynch. Please proceed.

Hi. Steve, your ammonia net realizations have historically tracked the Corn Belt prices given you can move it up the pipeline from Donaldsonville. But it appeared in this third quarter that they decline sequentially more like U.S. Gulf prices. Was that a mix shift change during the quarter where your ammonia sales in third quarter were more in industrial markets or contracts tied to Tampa that could potentially shift or reverse back in the fourth quarter?

Well, Steve, the shorter answer is it's a mixed shift. But it's a different one than the one that you alluded to. Remember that the third quarter is typically a very light quarter in terms of direct application ammonia. A rather large percentage of our reported ammonia volume this quarter was shipments to our joint venture partner at Medicine Hat, WESTCO. And those volumes are priced FOB the Medicine Hat plant. So that distorted the average. I can tell you that quarter-over-quarter, the ammonia that went in to our normal market area was actually at a higher average price than the second quarter.

Okay. And can you provide an update on your Plant City DAP plant debottlenecking project and the engineering for uranium extraction?

On the uranium project, we are pretty much on schedule with Newchem. They are continuing their investigation of market capability. And our hope is that early in the first quarter, we'll have a sense as to whether the uranium market will support a capital project at Plant City in uranium recovery. With respect to projects at Plant City, Dave do you a comment on that? Dave Pruett.

Yes, we have actually an ongoing series of debottleneckings alternating basically between the sulfuric acid plants and the phosphoric acid plants. Those are all on schedule. Everything's going fine. We completed one early in the year. We have another one scheduled for early next year.

And how much of a capacity boost could that be, Dave?

I don't remember the numbers off the top of my head, but we can get those for you.

Okay. Thank you.

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

Yes, good morning.

Good morning, Mike.

I think you mentioned that you didn't think that there had been any, or had been much, if any, build up of inventories in the Mid-West in ammonia and the various derivatives. Now, I was just wondering if what kind of evidence do you have that inventories are not being built up? I mean, because often what you find is with most chemical products is that it's just a series of inventory builds and depletions. And I'm just wondering -- get a little bit more comfort over the various product areas, what, specifically, you're seeing in terms of inventories?

Well, there's not a lot of specific data beyond the producer level. So a lot of this is anecdotal. But let's start with ammonia. There is little, very little, customer storage in the market for ammonia. And so the way ammonia seasons run, the producers build up inventory in anticipation of the season. And if you have a strong season, the inventory is depleted. And we had a strong ammonia season last spring. The system was pretty dry, at least our system was pretty dry by the end of the year. And I suspect our competitor's was also.

In terms of the other products, when you saw what happened through the spring as prices were quite strong. There was concern about availability of product. The market met the demand and, especially, as we came out of that season, we had very low -- the reason that I think is best supported on low inventories is the fact that we had only a brief pause in prices and then prices strengthened over a concern about availability.

UAN, in particular, was, and has been, in short supply. That's, I think, supporting strong, not just North American prices, but international prices.

And just I understand you (inaudible) the history, but, I mean, obviously, the volumes have been very strong in the third quarter and, obviously, you have a better view of the types of volumes that we've seen in October. And I'm just wondering whether you think there is, actually, some inventory being built up in the chain or not?

Well this is a time of year when inventories are built. And we're among those who are building inventories. We're, obviously, building -- continuing to build or maintain inventories in ammonia because we're in the middle of the ammonia season. And we have an eye on the spring. And we begin to position product to meet spring demand for all of our products. So this is traditionally an inventory-building season.

That's fine. I'm just curious, relative to last year, are -- and, obviously, demand was very strong this year. But are inventories higher or lower than last year?

Well, I think the general view is maybe the same or perhaps lower. I mean, we -- everyone talked last year about inventories being low. I think that what happened last spring kind of confirmed that inventories were low going into the season. Then with strong demands, a lot of product moved and we seem to have come out of the season, again, with low inventories.

Thanks for the help.

Thank you.

Your next question comes from the line of Brian Yu with Citigroup. Please proceed.

Thank you. Well, Steve and team, congrats on the great numbers.

Thanks, Brian.

A question for you. You touched on this a little bit with regards to freight and how that has escalated over the year. Can you give us a sense of what is the premium that's necessary now in order to support Urea and ammonia imports into the U.S., freight plus [traveling] cost?

Well, our view today is that it's roughly kind of an equilibrium point where the manufacturing costs for our off-shore urea plus the freight to get it here -- I'm sorry, not the price, let's say the Black Sea price --

Yes.

-- plus freight to get it to the Gulf is roughly the value of Urea at the Gulf regardless of where it's produced. So we're right around an indifference point.

Okay. And is that the same for ammonia, too, because it looks like the Black Sea and Gulf premium is lower than what's necessary to support transportation?

Well ammonia is a different phenomenon. Liquid freight is not as expensive as dry freight.

Okay.

And so you've seen that reflected in what's happened in ammonia prices, with the global ammonia price.

Oh, great. And then with regard to your FPP sales, you've indicated that you expect continued margin expansion into the fourth quarter. Looks like you're pretty well booked into the first quarter of next year, too. Can we expect sequentially stronger margins in the first quarter of next year versus the fourth quarter, too?

I just as soon not go out that far, Brian.

Okay. All right. And then, last question. Since you do have so much material booked and earnings visibility is pretty clear, what are you going to do with all that cash that you've continued to build?

Well, one of the things that we talk about, as a management team, is that when times are generating the kind of earnings that we're generating, we need to be looking to the future. We have not repealed the business cycle. We have not repealed the cyclical nature of this business.

We still have the kind of issues that we've been talking about since we became a public company of being heavily reliant on North American nitrogen; on North American natural gas costs; and the need to diversify our risk profile. So we have some projects under consideration; a couple of which we've talked about, gasification at Donaldsonville and so forth.

And so this certainly gives us a lot more optionality with respect to exploring alternatives for capital deployment. And we are always mindful that those investments need to generate returns that are accretive to shareholders, shareholder value.

Okay. Well, thanks.

Thanks, Brian.

(OPERATOR INSTRUCTIONS). Your next question comes from the line of David Silver with JPMorgan. Please proceed.

Good morning, David.

David stepped away for a moment. We'll jump back in the queue if that's possible.

Okay.

Your next question is a follow-up question from the line of Brian Yu, with Citigroup. Please proceed.

Thanks. Can you give us a sense of the impact of the Medicine Hat turnaround? Any period expenses that might have weighed down on the results besides the opportunity loss associated with volumes?

Brian, we handled the turnaround at Medicine Hat the same way we handle all of our turnaround expenses. This just happened to be a little bit longer, a little bit more extensive project than our typical project. It was a one, we hope, a once every 30 year project to replace the electrical system and do other normal kinds of maintenance that we do. So I wouldn't characterize it as anything other than a longer, but normal, turnaround.

Okay. Thank you.

Your next question comes from the line of David Silver with JPMorgan. Please proceed.

Hi, David.

David is still out of the building.

Mr. Silver, your line is open.

Let's go to the next question, Eric. We can get him back later.

Your next question comes from the line of [Harlen Darniyak] with [Center Capital]. Please proceed.

Hey, guys. Good morning. How are you?

Good morning, Harlen.

My phone may have cut out on the response to Brian's question regarding what you intend to do with all of the cash today as well as all the potential cash build, I guess, over the next six to 12 months.

Is there anything out there from a strategic alternative perspective, either in the way of projects on the diversification side and/or potential M&A opportunities either within phosphate, within nitrogen or perhaps sort of on the potash side that makes sense?

We have a list of projects that are in various stages of evaluation or development, which we've talked about a few of them. We haven't talked about others. Obviously, the KEYTRADE one was one that came up pretty quickly and we announced it in the third quarter.

We know that our -- that we need to work on diversifying our risk and getting a little bit bigger because we're small relative to other players in our space. As we have projects that reach fruition, we'll be talking about them publicly and we're ever mindful that we have -- we're dealing with our shareholders' cash and it's incumbent upon us to invest it wisely.

And sort of a side, away from sort of the Plant City project and potential [petcoke] gasification plants and upgrades here in the U.S., would you be looking to diversify both geographically from a product mix perspective or, when you say diversification, are -- is that specifically from a gas input and raw material cost risk? What do you mean by that? Could you elaborate a little bit more?

Sure. Well the risk that we're looking to diversify away from is the nitrogen margin risk associated with North American nitrogen pricing and North American natural gas cost. Now how we might address that diversification is pretty wide open. Although, I would reiterate what we've said before and that is that we're going to stay within our core competencies. I like to say within one degree of separation of what we do. We're not going to do something that we're not capable of executing just for the sake of diversification.

Yes. Okay. Thanks very much. Great quarter, guys.

Thank you.

We're showing no more audio questions in queue. I would like to turn the call back over to Steve Wilson for closing remarks.

Okay. Thanks, Eric. As always, thanks to all of you for your continued interest in CF Industries. We look forward to talking with you again in the future.

Thank you for your participation in today's conference. This concludes our presentation. You may now disconnect and have a good day.