CF工業控股 (CF) 2008 Q2 法說會逐字稿

Good day ladies and gentlemen. And welcome to the Second Quarter to dial-in CF Industries Results Conference Call.

My name is George. I will be your coordinator for today. (Operator Instructions)

As a reminder this Conference is being recorded for replay purposes. I would now like to turn the presentation over to your house for today's Conference, Mr. Charles Nekvasil, Director of Public and Investor Relations from CF Industries. Please proceed.

Thank you. Good morning and thanks 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, and Tony Nocchiero, our Senior Vice President and Chief Financial Officer. Dave Pruett, our Senior Vice President, Operations, who normally joins us on these calls is traveling on business in Peru.

Yesterday afternoon, CF industries Holdings Inc. released its second 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 laws.

All statements in the release and oral statements in this call or other discussions, other than those relating to historical information or current condition are 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 and do not place undue reliance on any forward-looking statements.

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 second-quarter sales and earnings that are our best ever as a public company. Robust global demand for major crops and the fertilizer required to grow them created the opportunity for a strong spring. Our operating performance at our Nitrogen Phosphate and Distribution facilities permitted CF Industries to capitalize on that opportunity.

The cold, wet spring did lead a few of us to wonder if it ever would stop raining. But it did. And by and large, farmers did get their crops planted but with less fertilizer applied than they and we had expected. Nonetheless, for the quarter we delivered record net earnings of $288.6 million or $5.02 per diluted common share, up sharply from the $93.6 million or $1.65 per share that CF Industries earned in last year's second quarter.

The primary factor in that improvement was strong pricing for all of our products, more than offsetting volumes that were somewhat lower than those in last year's second quarter.

Second-quarter net sales totaled $1.16 billion, a 37% increase over last year's second quarter and the first time that our sales have topped the $1 billion mark for a quarter. That is an impressive performance, especially when you consider the serious weather challenges, including flooding and persistent rains of that faced much of the Corn Belt this spring.

Looking at the tight global supply/demand balance for crops, it's clear that this year's harvest won't be enough to refill the grain bins here and around the world. That suggests a likelihood of robust grain prices going forward, which should produce a strong increase in planted corn acreage next spring, with positive implications for fertilizer buying and prices beginning this fall.

More on that shortly, but first Tony Nocchiero, our Chief Financial Officer, will provide some added detail on our second-quarter performance.

Thanks, Steve, and good morning everyone.

As Steve pointed out, CF Industry's second-quarter net earnings were $288.6 million or $5.02 per diluted share. Those results compared to $93.6 million and $1.65 per diluted share reported for the second quarter of 2007.

Gross margin rose substantially to $470 million, up from $178 million in the second quarter of 2007. Gross margin almost doubled in our Phosphate business and nearly tripled in Nitrogen.

Second quarter gross margin included the effect of $83.2 million of mark-to-market gains on natural gas derivatives. By comparison, in last year's second quarter, we recognized $36.3 million of unrealized mark-to-market losses on derivatives.

On an after-tax per share basis, the gain was $0.92 in this year's second quarter, compared to a loss of $0.41 in last year's second quarter. The mark-to-market adjustments on natural gas derivatives are reflected in Nitrogen business results.

Let me review some important financial highlights for the quarter, compared to last year's second quarter. Net sales increased by 37% to $1.16 billion. As Steve pointed out, that was our first billion-dollar sales quarter ever.

Volume at 2.6 million tons was down by 6%. Nitrogen volume declined by 5%, due to a combination of factors, including weather and our decision to reduce low-margin sales of purchased UAN.

In Phosphate we saw some timing issues with export sales. India and Brazil, major phosphate purchasers, delayed spot market purchases for Phosphate for their spring planting season. The net effect for CF Industries was an 11% reduction in Phosphate volume compared to the second quarter of last year, with the entire decline coming in export sales.

We saw India, Brazil and other Southern Hemisphere nations enter the Phosphate market more actively in July.

Selling prices were substantially higher for all products. Average Nitrogen Fertilizer prices increased by 34% from the year earlier quarter. Average Phosphate Fertilizer prices almost doubled compared to the same quarter of 2007. The second quarter also saw substantial price increases on a sequential basis, up 16% in Nitrogen and 40% in Phosphate from the first quarter 2008 levels.

We enjoyed a $239 million increase in Nitrogen gross margin, including the mark-to-market effect and a $53 million increase in Phosphate gross margin.

The overall weighted average cost of natural gas for our Nitrogen complexes increased by 22% compared to last year's second quarter, with the higher cost driven by lower natural gas inventories coming out of a colder-than-expected winter. However, our cost of natural gas for the quarter was well below the average daily market prices at both the Henry Hub and AECO, thanks to natural gas costs locked in under our forward pricing program.

SG&A expenses were up by a modest 3%, compared to last year's second quarter, totaling $18 million. Cash flow from operations totaled $219 million, up from $111 million in the year earlier quarter, due primarily to the quarter's improved earnings.

Looking at our liquidity and financial position, at June 30, 2008, the Company's cash, cash equivalents and short-term investments totaled approximately $1 billion. Additionally, we held investments in auction rate securities at June 30, 2008, that were valued at $221 million, resulting in total cash and investments up more than $1.2 billion.

This compares to total investments in cash, cash equivalents, short-term investments and auction rate securities at June 30, 2007, of $566 million.

The net unrealized holding loss on our portfolio of auction rate securities increased by $2.2 million in the second quarter to $10.8 million, as credit spreads widened compared to last quarter. During the quarter, $36.6 million of our investment in these securities was sold or redeemed at par value. We continue to have the ability to hold these securities until market liquidity returns and we presently intend to do so.

On July 23, the Board of Directors declared the regular quarterly dividend of $0.10 per diluted common share. The dividend is payable September 2, 2008, to shareholders of record, August 15, 2008.

To summarize then, we completed a record quarter, delivering significantly improved earnings to our shareholders and further strengthening the Company's financial position. Steve?

Thanks, Tony. Looking ahead, we are very excited about what this fall and next spring could deliver. The big difference between today's strong fertilizer market and the strong markets we have seen in the past is that this one is demand driven, not supply driven.

Despite planted corn acreage this year well above recent averages, USDA numbers suggest we will end with corn stocks near historically low levels, roughly one third of what they were as recently as 2006 and barely above what you would call pipeline levels necessary to keep grain distribution markets functioning smoothly.

You see a similar situation if you look at overall world coarse grain stocks, for good reason. Global consumption of grain has outpaced production for six of the last eight years and when this year's supply/demand balance is calculated, that's likely to become seven out of the last nine years.

The tight supply/demand balance for corn suggests that next year we could see corn acreage that exceeds the blockbuster 93.6 million acres we planted in 2007. With memories of this year's challenging spring field conditions fresh in farmers' minds, we can also expect a robust fall ammonia application season to prime the land for next spring.

From a longer-term perspective, we are optimistic about the progress we are making on a number of strategic initiatives. As our news release pointed out, we have signed a natural gas term sheet for our proposed Nitrogen Complex in Peru, an important element in our strategy to grow and to expand our role in the global fertilizer industry.

With the term sheets signed, we are turning to negotiations on the natural gas contract itself and have engaged Technip to assist us with preliminary engineering, procurement and construction work on the Ammonia Urea Complex. Technip is a global leader in engineering and project management and has designed and built more than 400 fertilizer production facilities throughout the world.

We still have work to do before we make a final decision on Peru. But I am very pleased with the progress we are making.

Speaking as the CEO of a company that depends upon natural gas as a feedstock for nitrogen production, I am encouraged that today's high oil and gasoline prices have sparked a welcome discussion about the need to open up more of this country's vast energy reserves to exploration.

That said, I'm troubled by the political gamesmanship that is making it difficult for Congress to focus on the simple fact that a growing nation is not taking advantage of its own substantial oil and natural gas resources.

So we are optimistic going into the second half of the year. Admittedly the third quarter is a seasonally slower in terms of volume, given the limited field work that takes place during that period. But we are well-positioned in terms of our order book, a book that in Nitrogen provides us with extremely strong, assured margins in the months ahead thanks to the natural gas cost locked in under our forward pricing program, and in Phosphate, an order book that reflects the strong upward price trend for this important nutrient.

With the usual caveats, we are upbeat about our prospects for the fall 2008 and the next spring. With that, let's open the call to your questions. George, please explain the Q&A procedure.

(Operator Instructions) Our first question comes from the line of Mark Connelly from Credit Suisse. Please proceed.

Thank you. Just two quick things. First, we are hearing lots and lots of talk about demand destruction, both in the US and abroad. I was wondering if you could share with us what your customers are saying and what they might be saying about next season.

And my second question was with respect to Peru, whether you could just give us a sense of what the milestones we should be looking for as we track the progress of that.

Okay. Good morning, Mark.

With respect to demand destruction, we are in uncharted territory here, with fertilizer prices in a range that no one has experience with. From a domestic standpoint, we have got crop prices that are also in that sort of range. Certainly we believe from an economic standpoint, farmers in this country have every incentive to continue to plant substantial acreages, particularly in corn.

The December future today I think is around $6.00. That provides a good incentive for farmers to plant. It actually puts the economics of ethanol back on the positive side.

So we don't see signs of demand destruction. Particularly they are not present on the Nitrogen side. When the economics of the spring come forward a bit and the farmer has a better idea of what he is likely to get for his crop next spring, he'll have to make some decisions about his mix of nutrients. We think that the return on each nutrient is significantly positive. But the farmer may make a different decision when the time comes.

With respect to Peru, I mentioned that we are now working on the gas contract itself. Mark, I think you can look at that particular task as a milestone. We are likely to make an announcement when we get to that point.

Other important tasks that we have here are to identify a site to work with another group that is putting a pipeline in place to take the gas from where it meets the coast, the Pacific Coast, to our chosen site. That's another task that has to take place. We have to get contracts in place that will bring the gas to our site. Of course all the work that we are doing now with Technip to identify the costs of the project, and we will have to bring all those economics together in appropriate time to evaluate, in order to make a go/no-go decision.

Okay. That's helpful. Thank you.

Your next question comes from a line of Steve Byrne from Merrill Lynch. Please proceed.

Hi, Steve. You just mentioned that your Phosphate order book reflects strong demand. Have you pulled back any on your forward pricing program in Phosphate, given the uncertainty in sulfur, your sulfur costs? Or do you have a pretty good idea where your sulfur costs are going to be in the second half of the year?

Well, Steve, when we had our call at the end of the first quarter, we made some comments about pausing in our look at the forward pricing program in Phosphate because of uncertainty in raw material costs.

And as we did that, of course, we wanted to make sure that if we booked forward orders that we booked them at prices that were sufficiently high to make sure that we could handle the raw material cost increases that might materialize. I think we have taken that sort of look going forward.

We certainly are willing to book forward business. We book forward business when we like the margins. It's pretty well publicized that third-quarter sulfur prices have settled or are in the late stages of settling. So we have a pretty good idea right now of what our third-quarter sulfur price will be.

There is a high degree of uncertainty with respect to fourth quarter and beyond. No one knows where the peak will be in sulfur costs. The supply situation hasn't really resolved itself and some number of months are going to have to go by before we see those sulfur costs coming down.

So with respect to our forward position or our forward offerings in Phosphate, we take into account the cost structure that we know. And when we get beyond the time period when we have that knowledge, our expectations increase in terms of the price it might take in order for us to lock in an order, given the uncertainty on raw material costs.

I recall the discussion you're referring to about this whole issue. I had thought that your second quarter Phosphate prices would be-- would track spot prices a little more closely. But it appears that they did lag quite a bit. They were much more representative of, say, early first quarter spot prices.

Is that a function of some forward sales you made in the fourth quarter in Phosphate that were into the second quarter?

It's a function of the order book that we had in place at the end of the first quarter. I would point out, of course, that our DAP price is up $203.00 from the first quarter on a sequential basis. That's a pretty substantial increase. It does not reflect the spot price. We didn't have an expectation that we would be getting to the spot price for the quarter.

And then, just lastly on the forward pricing program, the 2.7 million tons that are in your program now as of, what, the 24th of July, is some of that extending into the beginning of 2009?

That, what we reported as 2.7 million tons is for commitments through the end of this year.

Okay. Do you have some sales into 2009?

We do have interest in 2009.

Okay. Thank you.

Our next question comes from the line of [Edmond Rodriguez]. Please proceed.

Thank you guys. Good morning, Steve.

Good morning.

A quick question, just for follow-up on the sulfur prices. Are you expecting DAP prices to move sufficiently to offset the incremental cost in sulfur because activity has been pretty quiet recently? Should we see DAP prices move up soon?

Well I don't have any way of knowing that. The market will determine what the price is.

I will just tell you what our attitude is and that is that we make every attempt to make sure that future prices reflect our cost structure. But we can't control that situation. That's going to be determined by global supply/demand factors as they materialize over the coming months.

Of course. Another quick question on the corn prices -- I mean they have come down recently. I mean yes, the farmer is still doing extremely well. Do you expect the mindset of the farmer to start changing as he sees corn moving from $7.00, $8.00 to $5.00, $6.00?

Well, I think we need to keep in mind that the farmer really hasn't realized those $7.00 plus corn prices in their own sale of corn. They are selling at the farm level. I think a $6.00 price at the farm level is something that most farmers would welcome if they could lock that in.

One of the benefits of corn coming off its all-time high is that it is likely to spur on the margin more demand for corn because some of the ethanol facilities that couldn't make money at the higher prices will be back in the game at this price. So $6.00 corn, I think, is a really strong pricing level and one that provides good fundamental support for our business going forward.

Okay, thank you.

(Operator Instructions) Our next question comes from the line of Michael Pekin from Cleveland Research. Please proceed.

I just wanted to touch base in terms of China and what you guys are hearing in terms of the export tax there. If in fact China were to lower the export tax, say, back to the 35% level in early 2009, what do you think? How much product would be available, particularly on the urea side to be exported?

Well, there are all sorts of rumors about what China might do. They range from reducing the tax to increasing the tax.

I don't think anybody outside the authorities making those decisions knows at this point what the situation is. Obviously, the reason the tax is in place is that they want to make sure that Chinese farmers are provided adequate supplies of product in the home market.

If the tax were to come off, that's a sign that their demand is being met internally and they have got excess product. But I really don't have visibility in terms of how much product might become available at what point in time because it's really a function of their own production and their own consumption internally. And that's data that we just don't have.

Okay. Fair enough. Do you have any sort of estimate in terms of how much raw production may have been lost as a result of the earthquake?

I don't think we have. I don't think we have quantification of it. But it's -- to know the full amount, it's probably not a substantial percentage. But I don't have the number for it.

Okay, great. And then lastly, if you could provide an update on the gasification and uranium projects as well, that would be great. Thanks.

Well, we have really nothing substantive to report on either project. We are still working hard on that. On uranium we are working to try to get contracts in place, long-term contracts for the sale of the output. That's a difficult process because we have multiple potential customers. We're trying to align them all in a way where those contracts are consistent and compatible as a group.

On gasification, we mentioned at the end of the first quarter that we're working on an alternative approach to the capital cost. That work continues. We think that we are going down a path that has a reasonable likelihood of being successful. But we haven't come to the conclusion yet.

Our next question comes from the line of Brian Yu from Citi. Please proceed.

Great. Thanks guys. On Peru, it does appear that site selection is becoming just as important as securing advantageous gas, as evidenced by your own experiences in Trinidad and one of your peers in Egypt.

Can you discuss how this has altered the way you are negotiating site selection in Peru?

Well, we have always, since we began the initiative in Peru, been very sensitive to local issues, whether they be local to the country of Peru or local to the specific areas in which we might have an interest in building a plant.

And we know that ecosystem preservation is very important in large parts of that country. While we are not prepared to make an announcement about a site, we have identified an area which we believe is a suitable area to host a large industrial complex. It's suitable for hosting a complex bigger than just our plant.

As we continue down that path, we will be working as closely as possible with all the local authorities, community groups and so forth in order to assure people that we will be good citizens, good neighbors of theirs. And our hope would be that they would be a willing host for our plant.

Yes, we have watched what has happened in Egypt. That's an important lesson for us to keep in mind as we go forward on this project. Developing a project like this in an evolving economy is a challenge. We will do everything we can to make sure that not only are the relationships good but that we have whatever protections we can put in place to preserve the value of that complex for our shareholders, presuming that our decision is a positive one about going ahead.

Okay. And then switching subjects a bit, with regards to Medicine Hat, if I do some pretty simple calculations of the minority interest charge, it does suggest very little year-on-year improvement in profitability at Medicine Hat. Is this correct and if so, can you kind of discuss what is happening there?

No. This is Tony Nocchiero. That's actually not correct. One of the things you can't see looking at the minority interest is the impact of locking in gas prices at that level. Any gas price lock-ins that we do for CFL are settled on the CFI balance sheet and settled on the CFI P&L.

So there is actually quite a big impact associated with those gains and losses, which you would see if they went to that account. But they don't. So that gives you a misleading indication of what that value actually looks like.

Okay. Can you give us a sense of how much of the gains is attributable to Medicine Hat?

Yes. I think it's around $20 million, but let me check.

Okay. All right. And then, while Tony is checking on that, just back to the whole Phosphate pricing question, is the view that we are still on a one quarter pricing lag correct? Or has this expanded by more than one quarter by now, just looking at realized versus spot? Or is the lower price in this quarter simply a function of some of the missed export shipment opportunities that you highlighted in that press release?

Do you want to go back to that, Tony?

Yes, the amount was $23.8 million.

$23? Great.

Okay. With respect to Phosphate, Brian, I don't want to specifically predict the rate at which our prices are going to show up in our financial statements. But suffice it to say that we have aggressively pursued pricing and margins in our Phosphate business and that I'm quite pleased with our order book today. As things evolve, I think you'll get some clarity on this in the quarters ahead.

With respect to the actuals in the second quarter, export business comes in big chunks. So if a shipment that might have gone on the 29th of June ends up going on the 2nd of July, it goes from one quarter to the next. That is the kind of situation that we were referring to in our comment in the release.

When you have a relatively small amount of export business, which we do, one shipment of 25, 30, 35 thousand tons can have a big impact on the average price for the quarter.

All right. And then last one -- can you just comment on the customer inventories at the end of the spring season? Were they higher or lower than last year around this time? And do you think we are going to see quite a bit of restocking throughout the summer?

We don't have visibility into customer inventories. But I can comment on where we were coming out of the spring.

We normally, our aim is to get to the end of the fertilizer year if you will, June 30th, with very, very, very lean inventories. In recent years we have been very successful in getting to those targets.

This year, because of the wet spring, we didn't quite get down to the levels that we wanted to, particularly with respect to UAN and Ammonia. Those volumes are committed volumes. The UAN -- most of that is probably going to move during the fill season. The ammonia will be moving in the fall application season.

And, Brian, if you look at what has happened to industry prices in the last month or two, I think it's reasonable to conclude that the appetite on the part of customers remains high. Prices have been sustained and in the case of urea, they have shot way up. So I think that whatever inventory is in the channels is where it doesn't create a digestion problem going forward.

Thank you.

Our next question comes from the line of Paul D'Amico from TD Newcrest. Please proceed.

Good morning, gentlemen.

Hi, Paul.

Steve, just a few questions first on the FPP and I don't know if you are able to give this or not. Are you going to tell us the assumed ammonia cost structure in the FPP that exists for the remainder of the year?

Would you repeat --?

Sorry, with respect to Phosphate, on the FPP for the Phosphate.

The short answer is no, we don't provide that kind of forward-looking visibility.

Okay. On the 2.7 million tons, could you give a split between Q3 and Q4?

Well, I'll just characterize the way our business goes, okay? You're going to see very light ammonia movement in the third quarter, heavy ammonia movement in the fourth quarter. So it's reasonable to conclude that ammonia is weighted to the fourth quarter.

UAN moves a little more ratably. I don't have numbers in front of me but it does move more ratably and so it's certainly not going to be weighted in the fourth quarter direction. Beyond that, I don't think I have any comments.

How about in terms of Phosphate?

I'd just as soon not go there.

Okay. And this is -- I couldn't look it up fast enough, but in terms of -- okay, so Q2 overall volume, about 72% was FPP. I couldn't find the Q1, so if you were to sort of consolidate that with Q1, H1 '08 was roughly as a percentage of volume under FPP.

I don't have --.

69% in the first.

69% in the first quarter.

Oh, okay. So it was still around 70% in H1 '08.

Yes.

Okay. Sorry, is that Chuck?

Steve.

Oh, Steve. Sorry. And in terms of the year-over-year, H1 '08 versus H1 '07, I'm just curious about the FPP allocation there.

Well, in the first quarter of '07, Nitrogen was 70% and in the first quarter of '08, 72%. For Phosphate, the first quarter of '07 was 43% and the -- I'm sorry the second quarter of '07 was 43% and the second quarter of '08, 72%.

Okay. Well I was actually looking for the first half for '07. My question I was trying to get at was in terms of -- Steve, you particularly mentioned demand destruction not present in nitrogen. I'm just wondering, with respect to phosphate, I know we are not really seeing that.

But given that the FPP percentage of phosphate sales going forward, or at least in Q2 was materially higher year-over-year, are we supposed to be reading into that that customers are getting that much more sensitive to phosphate pricing versus nitrogen because nitrogen was basically --?

No. No. I wasn't asking you to read anything into that. But I will elaborate a bit on the phosphate situation.

The Phosphate business is a little more complex than Nitrogen from the perspective of a North American producer because of the high percentage of North American production that goes offshore. So we have to look at individual markets around the world, Brazil, India for example. Even when you look at a country like India, who has their own DAP production, you've got to look at how much acid they might be buying compared to how much finished product they might be buying. And, of course, you have got different seasons at work at the same time.

Clearly phosphate prices shot up dramatically in the late winter and through the spring. They have been trading within a fairly tight range recently. But these are prices that are very, very attractive prices and certainly ones that yield high margins to integrated producers like ourselves. So it's a good situation to be in.

Whether the price might go up from here is just something that I don't have the ability to answer. The price has been really set by the whole combination of supply/demand factors. Certainly it's uncoupled from costs in the US but it bears some relation to the cost structure of the non-integrated producers, India being perhaps the best example of that.

I appreciate that. Okay. And the last question in terms of the balance sheet being as strong as it is, aside from Peru going forward, how should we be looking at potential usage of the balance sheet? What sort of one or two things might be, should we be looking at in terms of being big usage of the balance sheet aside from Peru?

Well gasification is a big ticket item, which I am not prepared to quantify at this point. But it's certainly north of $1 billion.

The Peru and the gasification items are in the same ballpark in terms of potential cost. We are moving along in that process. We are not ready to make a decision there.

The uranium recovery is not in that same league although that would be measured in a couple of hundred million dollars or something like that. So we have other things on our radar screen that we are not in a position to talk about publicly.

We do all this in the backdrop, with a backdrop of recognizing that that cash belongs to shareholders and we have to be prudent deployers of that capital, whatever direction we go. We have robust discussions at the Board level on this subject every time we meet.

Okay. Thanks, gentlemen.

Thank you.

Your next question comes from the line of [Majid Khan] from Coldwell Capital. Please proceed.

Hi, guys. Given what is happening in the Eastern Europe gas markets and just the Chinese tariffs, could you talk a little bit about the long-term changes in the economics of the Nitrogen business for you?

Well, one of the big changes in this business in the last year to a year and a half has been the whole competitive landscape as it relates to North American nitrogen. A couple of years ago, maybe three years ago the question was really, "How soon are you going to be going out of business?"

Today, being in North American Nitrogen is a pretty good place to be. Is that sustainable? I don't know. But when you look at the cost of natural gas in Eastern and Western Europe, the fact that suppliers of that gas are using it as certainly an economic if not a political weapon, those gas costs are unlikely to come down.

We have many players in the world now whose gas costs are tied to the price of crude oil. With $130-ish crude oil, that has helped increase that gas cost. I never thought that I would be in a position of saying I thought that $9.00 gas in the Gulf of Mexico would be a good thing. But on a relative basis, today our competitive position is a pretty good one.

If we had a reduction in nitrogen demand globally, and that were to occur in the near future, we would not be the marginal supplier. We would not be the ones first having to absorb any reduction in command.

And if I put on top of that the fact that we are in the best market in the world and that we have first-class facilities that we maintain quite well, our view of North American nitrogen is quite positive.

Got it. It sounds like for maybe the first time in a long time you're going to be able to make money through the cycle. Certainly next year you're probably going to post a ridiculous earnings number.

I'm looking at your stock. It's trading significantly below replacement cost. I'm just wondering, as a use of cash, you are going to be spending $1,200, $1,300 per ton of product to build new capacity versus $600, $700 per ton where your stock is trading. I would just like to get your thoughts on how you view investment in your own stock versus investment in new build.

First I just want to go back and comment on one of the points in your premise and that is I wish I were as confident as you are that we will be profitable through the cycle. This business has not stopped being cyclical. We are still manufacturing commodities. And we approach this business on an ongoing basis from the standpoint of not believing that the business cycle has been repealed and that we always have to be alert to things that might happen that would reverse the direction of the business.

With respect to your comments about the cost of new capacity and the implied value of our assets, I would just say that we take capital deployment seriously. We look at making investments that are accretive to our shareholders. I would reiterate that we know whose money it is. As a management group and as a Board, we will consider all things going forward in terms of how we use our and their capital.

Well you certainly have made good decisions so far. One quick question, how do you charge your Phosphate business for ammonia? Is it at market or is it at cost?

It is the acquisition cost of the ammonia, the way -- it's basically all imported. And the cost that we pay for the imported ammonia is what gets charged to the phosphate segment.

Got it. Thanks guys. Congratulations on the quarter.

Thank you.

Your final question comes on the line of Aaron Wittman from Appaloosa. Please proceed.

All right. Congrats on a great quarter, guys.

Thank you.

Again, going back to uses of cash, as you guys near having $1 billion of net cash on the balance sheet, other assets that are trading at the same levels as you guys, to me it appears that particularly with where current prices are, that you are the cheapest fertilizer asset out there. Why aren't you buying more stock and when do you expect the determination of that?

Well, Aaron, I don't think I have any more to say on that subject than I have said already. We are entrusted with the capital of our shareholders. We have a strategic plan that we are working diligently to implement. As we do that planning and make those decisions, we will consider all alternatives for the use of the capital that we have.

Okay. One more question -- do you think current DAP prices reflect, I guess, the current spot prices that are being discussed for phosphate rock for competitors and phosphoric acid alone?

Well, I think if you look at the international marketplace, a producer like India, I think they are in a difficult position. It is our understanding that as the Indians have looked at buying phos acid in their next increment, that's there is an impasse now between the supplier and the purchaser. So it may be that the result of that is that DAP and MAP demand increases at the expense of phos acid being supplied.

Maybe those higher DAP prices will then change the configuration of the whole marketplace going forward. I'm not an expert at what goes on in nonintegrated producers because we are an integrated producer. But we do know that that has had a substantial effect on DAP and MAP values globally.

Thank you.

Our final question is a follow-up from the line of David Silver from J.P. Morgan. Please proceed.

Good morning David. David, did we lose you?

Mr. Silver, your line is open.

He's speechless. I guess we lost David. George, let's assume that we'll follow-up with David off-line and see if we can catch up with him. So if there are no more questions, we do thank you for your continued interest in CF Industries.

I'd like to add that we hope that you'll all consider joining us in Tampa this November when we will hold our first Investor Day. We are planning a dinner on the 17th of November at the Marriott at Tampa Airport followed by presentations the next morning.

During the afternoon of November 18th we will host a tour of our Phosphate Mine and Beneficiation Plan in Hardy County. This facility is the industry's newest. It provides 100% of our phosphate rock requirements.

If you are interested in learning more about that event, please contact Chuck Nekvasil, our Director of Investor Relations, for additional information.

So thank again for joining us on our call today.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now all disconnect. Good day.