CF工業控股 (CF) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2008 CF Industries results conference call. My name is Becky and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions). I would now like to turn the presentation over to your host for today's call, Mr. Charles Nekvasil, Director of Investor and Public Relations. You may proceed.

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; Tony Nocchiero, our Senior Vice President and Chief Financial Officer; and Dave Pruett, our Senior Vice President Operations.

Yesterday afternoon CF Industries holdings Inc. 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 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 conditions, 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 statement. 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 results that reflected the quarter's strong pricing and margin environment for all of our products. We reported a 75% increase in net sales registering our second consecutive $1 billion quarter. This during a quarter that, as usual, saw a seasonal lull in fertilizer demand.

There certainly wasn't any lull in activity at our Donaldsonville Nitrogen Complex during the quarter. Our team there did an excellent job dialing down the complex prior to landfall of Hurricane Gustav, then safely bringing its first production unit back on line just three days after the local utility restored electrical power to the region.

Our supply and logistics team merits recognition for keeping our supply chain moving despite the disruption to our transportation network caused by two Gulf hurricanes. As the news release detailed, all of our employees contributed to yet another excellent safety performance, achieving several significant milestone.

For the quarter net earnings totaled $47.1 million or $0.82 per diluted common share, that compares to $86.5 million or $1.52 per diluted share in the third quarter of 2007. I'll remind everyone that our third-quarter 2008 results include $2.88 per share in non-cash unrealized losses that arise from mark to market adjustments on the natural gas swaps we use to lock in margins under our forward pricing program on a significant portion of our nitrogen sales.

We focus on the locked in economic margins that those FPP orders ultimately produce as they flow through our P&L, not on the quarterly noise that arises from the requirement that we mark that swap portfolio to market. Tony Nocchiero will provide more details on the quarter's financials in just a minute.

There's a lot of fear and loathing in global fertilizer markets today. The third-quarter seasonal lull in demand often leads to sloppiness in fertilizer prices. This year I believe that sloppiness has been exacerbated by an unprecedented series of global events ranging from forced liquidation of financial and commodities portfolios to substantial swings in grain prices, especially for corn, the Midwest's primary crop.

That said, we manage our business on fundamentals and the underlying fundamentals for coarse grains driven by low worldwide stocks, increasing population and improving dietary habits and consumption that has exceeded production for six out of the last eight years suggest that once we get through this sloppiness the underlying strong demand for crops and the fertilizer required to grow them will reappear.

We're looking forward to a good fourth quarter and healthy core acreage next spring. More on the outlook shortly, but first Tony Nocchiero, our Chief Financial Officer, will provide some added detail on our third-quarter performance.

Thanks, Steve, and good morning, everyone. CF Industries' third-quarter net earnings totaled $47.1 million, or $0.82 per diluted common share. That compares to $86.5 million or $1.52 per diluted share in the third quarter of 2007. Reported gross margin totaled $120.9 million, down from $151.3 million in last year's third quarter. Gross margin more than doubled on our phosphate business, but reported gross margin was negative in our nitrogen business.

The quarter's falling natural gas environment, a positive development for a nitrogen producer like CF Industries, gave rise to $251 million in non-cash pretax unrealized losses or $2.88 per diluted share on an after-tax basis in mark to market adjustments on our FPP swaps portfolio. For comparison purposes results for the third quarter of 2007 included $1.9 million in non-cash pretax unrealized gains or $0.02 per diluted share on an after-tax basis from such mark to market adjustments.

As Steve said, we make our FPP decisions on the basis of economic margin we can lock in at the time we take an order. It is those margins which generate our ultimate profitability in cash flow and the basis on which we judge our nitrogen segment performance. Next I'll review financial highlights for the quarter, comparing third-quarter 2008 performance to last year's third quarter.

Net sales increased by 75% to $1.02 billion our second consecutive $1 billion sales quarter achieved in what was a seasonally weak period. Volume totaled 1.7 million tons, down 6% from 1.8 million tons last year. Nitrogen volume declined by 5% in part due to the hurricane-related outage at our Donaldsonville complex. The nearly two-week loss of electrical power shut down production and shipping.

In phosphate, soft demand in the domestic market was partially offset by increased exports, but total volume was down 8%. We sold 75% of our nitrogen under our forward pricing program during the quarter compared to 53% in last year's third quarter. In line with our announced decision to reduce phosphate forward sales in a rising production cost environment we sold 52% of our phosphate under the FPP compared to 72% in this year's second quarter and 45% in the year earlier quarter.

Selling prices were substantially higher for all products, but especially for phosphate. Average nitrogen fertilizer prices increased by 62% while average phosphate prices increase by any been stronger 136%. As we've discussed on previous conference calls, we continue to see price increases roll through our financials as our FPP orders are shipped.

We enjoyed a $120.3 million increase in phosphate gross margin in the nitrogen segment gross margin, which included the effect of the $251 million in mark to market adjustments, swung from a positive $80.2 million last year to a negative $70.5 million in this year's third quarter. The overall weighted average cost of natural gas, including realized gains and losses on derivatives, increased by 37% in the quarter compared to third quarter 2007. Early in the quarter natural gas prices were higher than those in the year-earlier quarter, but by quarter's end declining crude oils prices, mild weather, and strong production caused those prices to decline.

SG&A expenses were up by less than 1% totaling $16.7 million. Cash flow from operations totaled $97.4 million down from $201.4 million last year due primarily to a higher inventory build in this year's third quarter. The increase reflects the larger inventory of volumes for ammonia and phosphate fertilizers valued at today's higher costs and our purchase of approximately $100 million of potash for resale.

Looking at our liquidity and financial position as of September 30, 2008, the Company's cash, cash equivalents and short-term investments totaled approximately $1.15 billion. In addition, we held investments and auction rate securities as of September 30, 2008 valued at $190.2 million resulting in total cash and investments of more than $1.34 billion. This compares to total investments in cash, cash equivalents, short-term investments and auction rate securities at September 30, 2007 of $730.4 million.

Yesterday we reported that the Board of Directors had declared the regular quarterly dividend of $0.10 per diluted common share. The dividend is payable December 1, 2008 to shareholders of record November 14, 2008. To wrap up then, our underlying performance during a traditionally slow quarter was strong reflecting improved pricing for all of our products. We stand positioned for a strong fourth quarter and spring of 2009. Steve?

Thanks, Tony. Yesterday, reflecting our commitment to act as careful stewards of shareholders capital, we announced a plan to repurchase up to $500 million of the Company's common stock. We consider every company investment in the context of an investment in our own common shares and continue to develop our strategic investment opportunities, both announced and unannounced, which will utilize our capital in profitable growth oriented projects. That said, the positive long-term fundamentals we see in this industry and for this company make an investment in our own common shares an attractive opportunity for the Company at this time.

In yesterday's release we also announced that we have suspended work on a proposed gasification complex at the Donaldsonville Nitrogen Complex. In view of the uncertainty over capital costs and future government policies on carbon dioxide emissions our leadership team determined that we cannot justify this project economically in the present environment. And our strategic attention is better focused on other opportunities such as the world-scale nitrogen project we are developing in Peru.

So far in 2008 we've produced strong financial results as demand for grains and the fertilizer to grow them has helped generate what is expected to be record farm income. Currently the combination of the normal seasonal lull in fertilizer markets and the volatility in the financial and commodity markets has raised questions about the upcoming spring season in North America.

We believe the underlying fundamentals remain strong; the basic drivers of long-term food and fertilizer demand remain in tact. Populations are growing and dietary habits are improving, especially in developing countries where increasing amounts of grain are needed to feed the livestock that are becoming an ever larger part of the food supply. Achieving the crop yields necessary to feed those populations demands more fertilizer.

Earlier I talked about fear and loathing in fertilizer markets, we don't think it's justified. For example, we don't think farmers make their planning decisions for 2009 based on the October 2008 cash price for corn. This is typically the low point in the year for crop pricing. The December '09 futures price is a far better indicator and that price provides a clear incentive to plant corn next spring.

Yes, we are seeing price weakness for some fertilizer products, especially urea, and, to a lesser extent, UAN. It's the off-season and even modest changes in supply can significantly affect prices at this time of year. After all, fertilizer is still a commodity. That said, corn belt prices for ammonia remain at strong levels even though the fall application season is just beginning. But don't forget that this country depends on imports for more than half of its nitrogen fertilizer needs. Once demand kicks in prices here will need to reach levels that attract millions of tons of urea away from other markets.

Clearly shipments of phosphate were sluggish in the third quarter. Whether this decline was due to farmers reducing application rates and opting to mine the soil, or whether it was simply a shifting in demand from the fall to the spring, or just delays in purchasing due to the late harvest are questions we can't answer at this time.

We're still waiting for our fall season to begin in earnest, but we have a good forward order book for the fourth quarter with approximately 1.5 million tons of nitrogen and phosphate contracted through year end at attractive margins under our forward pricing program and we have the product to meet those orders positioned in our extensive in-market distribution network.

On the cost side there have been significant reductions in the cost of natural gas, the primary raw material for nitrogen, and for sulfur and ammonia, major cost components of phosphate, reductions with positive implications for future margins. Ultimately volatility settles out when the fundamentals kick in and the fundamentals going forward remain strong. Obviously any forecast has to be tempered by the ever present risks of weather, raw material cost increases and other unexpected developments. If the weather gods cooperate we're looking forward to a good fourth quarter and a lot of corn acreage next spring.

With that I'll open the call to your questions. Becky, will you please explain the Q&A procedures?

(Operator Instructions). Mark Connelly, Credit Suisse.

Good morning, this is Nils Wallin sitting in for Mark. How are you today? A question about farmers mining phosphate from the soil. A lot of it would seem to depend on what the forward price for corn and soy are going to be versus cost now. How would you feel or what would your crystal ball say if you had December futures staying where they are versus a decline in phosphate prices? Would farmers tend to switch or do you think they've already made their decision about mining the phosphate?

I don't think farmers have made their ultimate fertilizer decisions for next spring. There's a lot of time to pass before they have to do that. But we've actually taken a look at corn economics based upon that December '09 futures price. And while this might not be the precise price today, what we used in our model was $4.43 a bushel which I think is a reasonable price over the last couple of days.

In looking at the economics of corn at that kind of price using a yield of about Let's say 152 bushels an acre, we calculate a return over variable cost per acre of something in the range of $350 an acre. That's a very, very attractive set of economics for corn farming and it would suggest that there's every incentive to the farmer to use the recommended application rates for all three nutrients.

Now obviously if you used a different pricing assumption or a different yield you might come to a different conclusion, but it's this kind of model that suggests to us the fundamental strength of the situation right now.

Great, thanks. And just a follow-up, do you have any intention to -- some of your colleagues, competitors seem to be -- obviously have announced they're going to cut back on production, what's your sort of forecast or what are your plans on phosphate production for the remainder of the year?

Our plants are all running now and we generally report our production in retrospect rather than prospectively.

Thank you very much.

Steve Byrne, Merrill Lynch.

Good morning, Steve. Do you have a concern about the financial health of your customer this fall, particularly those, the distributors, that have already locked in ammonium and DAP at $1,000 a ton and may have significant difficulty selling it this fall at that price? Are you concerned about that?

We're not concerned about the financial health of our customers. They have enjoyed good times in the last several years, they've generated strong cash flows in their own businesses. In some cases they've certainly buttressed their balance sheets, so we don't have any qualms about their ability to meet their commitments.

Okay. And what if they are -- there is significant pushback from the growers to delay say ammonia purchases and applications until next spring? Or is that a concern to you?

Well, our belief talking to people in the field is that if the weather cooperates there's going to be a very robust movement of ammonia this fall. And obviously the season is delayed because of the late harvest resulting from the late planting. This is the time of year when I occasionally look at the 10-day weather forecast and I did that yesterday looking at the major areas where we normally move ammonia. And if the meteorologists are any good at all we should have a pretty good window coming up for the next week or so to get things kicked off. So we're keeping our fingers crossed. But there does appear to be a lot of demand out there for ammonia if they can get it to the field.

And then lastly, the mark to market derivative loss, what's roughly the ammonia volume there or the natural gas volume there that is implicit in that derivative loss?

We've given you the size of our foreword order book as of I think last week.

But that's just the fourth quarter, right?

That's the fourth quarter and I think we also have given you in the press release the amount of gas that we have fixed with swaps. Remember that the mark to market adjustment is the difference between two positions -- one position at the end of the June and the other position at the end of September. So it's a very complex calculation with a lot of moving parts associated with it and we really don't have that detail.

Thank you.

Vincent Andrews, Morgan Stanley.

Good morning, everyone. Just wondering if you could comment on how you expect to implement the buyback in terms of the pace -- it was an open-ended announcement of up to $500 million; any sense on how aggressive you're going to be?

Vincent, I think I'll let our press releases speak for themselves and we'll be reporting progress, as we do other things, in the normal course of our business.

Okay. And could you maybe comment on I guess two kind of interesting dynamics. First was that the USJ revised its estimates this morning of production. Do you have any thoughts on what's been taking place with those numbers moving around? And what are you hearing about the size of the harvest for both corn and soybeans at this point?

I had two thoughts about this announcement this morning and one of them got negated. My first thought was, geese, they're issuing something between normal reporting dates, maybe there's a directional signal here in what they're going to be doing the next time around. Then I found out that this was a technical correction due to an error in the way they calculated acreage. So I guess at this point I don't make anything more of this announcement than it's a technical correction to the analysis that they get a couple of weeks ago.

Okay. And then I guess lastly, the last thing I want to ask you about is just how are you thinking about the Chinese export tariff which is set to expire at the end of this year? And if it were to be reduced or if it were to totally go away, what do you think the impact would be on the spring season?

Well, first of all, we don't know what's going to happen in China and we probably have as good a visibility into what's going on there as anybody in our business because KEYTRADE has an office in Beijing. And when those decisions are being made we poke around and try to find out what's going to happen just like everyone else does.

There's a fair amount of stress right now in the Chinese phosphate industry. And so I suspect it may be more likely that they do something with those tariffs relating to phosphate than they would do with nitrogen where they don't have the same level of stress. But in terms of any more specific thoughts on that, I just don't have the insights to go beyond that.

Sure. But if there were to be a reduction in phosphate for example, do you anticipate that a -- would you anticipate that a substantial amount of phosphate would leave the country again or how are you thinking about Chinese demand at this point?

Obviously if they reduce the tariff then there would be some leaving the country that hasn't been leaving the country. Whether that would be actually adjusted, put in place production plans and transportation that were set up to get product into the market in time to affect this spring I think is questionable. But we'll keep our eye on it and I can't speculate beyond that, Vincent.

Okay, thank you very much. I'll pass it along.

Brian Yu, Citi.

Thanks. Good morning, gentlemen. My first question, Steve, you mentioned that you're expecting farmers to plant about 90 million acres of corn. Is this just based on some of the anecdotal feedback you've received from some of the dealers or do we need to see higher corn prices than what's out in the market right now to hit that 90 million mark?

I think that number in part is -- it's a function of both of those factors actually. The corn price that we see, that I quoted earlier for December of next year, is a very strong price. If we look at that price compared to the soybean price we're looking at about a 2.1 ratio which would lead you to strongly prefer corn over beans. So we think there's a fundamental support for that. Whether there's some kind of emotional resistance or whatever I really can't guess about. But I think the table is set pretty well and the demand that we've seen for our own products, ammonium in particular, suggests a very strong corn planting next spring.

Okay. And in your remarks I think you mentioned that part of the reason why inventories were higher in the third quarter is due to about $100 million worth of potash for resale. Can you comment if that's a product that you're exporting from North America or importing into North America?

It's product that we brought into our marketplace in order to capitalize on the warehouse system that we have. Our warehouse system has excess capacity. We, in working with our partners at KEYTRADE, decided that this was a good market scenario in which to see if we can make a significant margin by moving product through our distribution system out into the field and we'll see this fall and next spring how successful that is.

Okay. And then just a last one, with regards to the third dragline. If I recall, CF has more mining capacity than processing capacity. So can you elaborate on the thoughts behind the additional dragline?

Well, we have modestly more mining capacity than we have P205 capacity. We talk about mining at a rate of 3.5 million tons of rock a year configured to serve about 2 to 2.1 million tons of P205. We could probably run the mine at 4 million tons a year, but we a don't have the chemical plant capacity to use all of that.

The primary driver for adding the third dragline is I guess both efficiency and effectiveness. Efficiency in terms of getting the rock expeditiously, minimizing movements of draglines and so forth. Effectiveness is to make sure that we have the right composition of our feed into the chemical plant by managing the quality spectrum that we have coming from different parts of our property. So it's really a -- and I guess a third benefit of it is simply just to make sure that we have enough capacity in case we were to have one go down for a while.

Okay, great. Congrats on a good quarter.

Michael Piken, Cleveland Research.

Good morning. I was wondering if you could talk about the urea markets and your view on whether we're close to reaching a bottom and kind of what you estimate as sort of the breakeven cost for a high-cost producer in Eastern Europe.

Well, that's certainly a timely question and it's a question that we spend a lot of time thinking about here because we're a big urea producer. Urea prices ran up pretty quickly and to stratospheric levels due to the Chinese export tax principally. And it even got to the point where urea prices on an equivalent nitrogen basis were higher than UAN, which is a very unusual situation.

We've now seen the spiraling down -- India has delayed purchases, Brazil's inventory situation is pretty full -- and we now have a whole bunch of buyers sitting on the sidelines around the world waiting for prices to reach bottom. So your question is have we gotten to the bottom? We really don't know, but there are some indications that we may be, we may be approaching, we may be there.

And the best indicators to us are that we have seen capacity shut down in response to the price levels and that capacity had been in Europe and the Ukraine and other places. And obviously this reflects some changing dynamics in our own business from a North American standpoint because our gas costs now put us in a position compared to the rest of the world where the marginal player is someplace else. I don't know whether this is the bottom; it's beginning to feel like it is.

Okay. And then with respect to ammonium, this week, particularly the international ammonium price, has really started to fall. Do you anticipate that that's going to hit the corn belt prices? Or do you think that given the logistical constraints that we're going to see the ammonia markets in the corn belt hold up a little bit better than the international ammonia price?

Well, I don't have a crystal ball looking at prices going forward. Certainly the price spreads that we've seen between the value of ammonia in the Gulf and the value of ammonia in the Midwest suggests that the distribution assets are fully utilized and that the holders of those assets are being rewarded. There doesn't seem to be a lot of excess capacity in the ammonia distribution system into the Midwest.

Okay. And then my last question is on your [FTP] volumes. Last quarter we were looking at 2.7 million tons versus 2.1 million tons that was forward booked and now this quarter we're sort of in line with year-ago levels at 1.5 million tons. Should we read anything into that beyond just this was a delay in the season or is this any sort of sign in terms of a bigger slowdown? How should we interpret those numbers?

Well, we have seasonal factors at work. We have the prices moving here and around the world. And I just would remind you, Mike, that we manage our forward pricing program based upon the margins that we expect, that we aim for. We don't have a particular volume target with respect to forward business. And when we find attractive margins available out on that forward curve we will seek to get commitments at those levels. Other times we'd be a little less aggressive in our expectations.

Okay, thank you.

Edlain Rodriguez, Goldman Sachs.

Good morning, guys. A quick question (inaudible) your view on DAP prices going forward. I mean, do you see it moving in lockstep with the decline in raw materials or will you see pricing support from producers as they curtail production?

Well, if I knew that I would know exactly what you do in my business every day. We really don't know and we actually have debates in our own shop about whether the DAP price is a function of the cost profile or the marginal producer, those being the nonintegrated producers, or whether the price is being determined by the basic supply/demand dynamic. And I think we're just going to have to wait for this to shakeout in the months ahead to see which model prevails. In the long run it's clearly supply/demand that's going to establish the price.

Okay, thank you.

Dave Silver, JPMorgan.

Good morning. First thing, I'm surprised nobody commented on this yet, but I appreciated the Hunter S. Thompson reference to fear and loathing and I'm trying to figure out which one of you is responsible for that. First question -- so, let's see.

Capital allocation decision -- so, Steve, over the past year or so you've opted not to pursue different projects, Trinidad, uranium. Today you seem to link the decision not to do the gasification project with the decision to move forward on a long anticipated repurchase program. Should we put a link between those two? And if we should or shouldn't, how should we think about your Peruvian project? In other words, if that project is delayed or scaled back in any way should we anticipate an increase in the funds available for repurchase?

Dave, you've given me a lot of things to comment on, so I want to make sure I remember them all. In your intro you mentioned a couple of other projects. The Trinidad project I believe was terminated probably two years ago, so that really isn't a recent phenomenon. That's one that went away a while ago and it wasn't because our appetite wasn't there, it was because we couldn't find a site on which we'd build an ammonia plant.

The uranium project is very much alive in concept. Like the prices of a lot of commodities, the price of uranium is lower than it has been. And so, while we continue to be interested in that, we continue to work on the technical side of that project, we are just waiting on the commercial side to see what happens to uranium prices and if they move back up into the range where they had been previously that project is very much active.

In terms of gasification and the repurchase program, while they are mentioned at the same time they are not really linked. And I think the best way that I can explain that is to tell you that the cash flows associated with the gasification project were we to go forward would be out there two, three, four years from now as opposed to being spent in the near term. So it really didn't have an affect on this decision.

And in terms of our future appetite for projects and the distributions of cash, I can't speculate on that. We're looking at a whole portfolio of things on an ongoing basis and these decisions will be made in the future based upon the circumstances at those times.

Okay, thanks for that. I'd like to follow up on the question earlier about your phosphate operating rates. So if I look at your nine-month production versus sales I notice that there's a significant surplus of production over sales for the first nine months of '08; last year they were kind of in line. The previous questioner mentioned that a number of global producers have announced cutbacks. So can you maybe talk about your thinking about that market and whether you have a reason to operate differently than maybe some of the other larger players in the industry?

I would just as soon not comment on our plans for production or sales compared to competitors. We make our own plans internally, we execute and we think we execute them well. We like the phosphate business, the margins in the phosphate business are very attractive now compared to any measure of margins by history except perhaps for the last three months. So we'll continue to run the Company on an economic basis in the best interest of our stockholders.

One other thing. Regarding the hurricane, so a number of chemical companies that we follow here have identified or tried to estimate the economic impact of their hurricane affects for the quarter. And I may have missed it, but I don't know if CF, if you guys talked about either indirect or direct financial effects from the hurricane for the quarter?

I'll ask Tony to respond to that.

There were two direct financial effects associated with Gustav. We had some repair costs related to some minor damage to the assets at the site that totaled about $4 million. And then there was another $7 million in overhead cost that flowed directly to the P&L, fixed costs related to the manufacturing operations that couldn't be associated with production because of the shut in. So that totaled about $11 million in the quarter on a pretax basis.

That's very helpful. The last thing I -- it's really a comment and this would be to Steve. And this would be regarding hedging and the hedge accounting rules that you operate under which caused such a dramatic distortion to economic (multiple speakers).

I'm surprised you would ask a question or make a comment on that, Dave.

I just wanted to let you know I was thinking about it. So, Steve, look next time you're in DC, you've taken time -- you've made a priority of testifying about the need to improve energy production in the country and I think time has proven you out that it was a correct decision. Now you have the credibility and also, with the financial markets in turmoil, some of which is related to mark to market accounting at certain banks, my sense is -- just a helpful comment here -- but next time you're in DC I think your testimony should include the need to review mark to market accounting for companies such as yourself.

Are you suggesting, Dave, that because we're such great operators in fertilizer it's time for us to fix the housing business?

Honestly I was just making a comment that you've been -- you've said to me and I'm sure others that there are distortions created between the economic effects of the transactions you enter into and how they get reported on a quarterly basis. And I think the variability is at an extreme in this quarter. So I mean, I'm jumping from industry to industry and I'm a lapsed CPA I'll admit right up front. But it seems like your previous testimony has a lot of credibility and it's not an unrelated topic since it's related to energy hedges and things like that.

I do appreciate those thoughts and we're actually much more interested in the substance of energy policy than how we account for energy costs. But as the accounting profession evolves, and as this subject becomes visited again in the accounting profession, if there are opportunities for us to provide input into the process we certainly will. We have a lot of experience here.

I noted that our mark to market number this quarter is almost identical to the mark to market number that Southwest Airlines reported and it led them to their first reported loss in something like 17 years or something like that. But as we said in our comments, we believe that it can be made understandable to analysts and investors and so it isn't as big a problem conceptually as the number might indicate.

Okay, thank you for the platform.

Charlie Rentschler, Wall Street Access.

Good morning. Most of my questions have been answered, but I wondered if you could spend a couple of moments here on your capital expenditure plans going forward. Obviously the petroleum coke project has been pulled off the table. But are you contemplating say over the next four or five quarters any upgrades? Or where do you think your '08 capital expenditures will come out at? And can you give us maybe some preliminary thoughts about how your '09 capital expenditures might look, please?

Charlie, we do have a portfolio of projects that we do inside the fence in our operations and I'll let Tony comment on the numbers.

Charlie, we still expect 2008 to come into the $140 million to $170 million range we've mentioned before, so we're still in that range for 2008. We don't generally give a forecast of CapEx in the out years.

All right, thank you.

Paul D'Amico, TD Newcrest.

I'll be quick, I know it's been a long call. Steve, earlier on when you were talking about assuming a yield of about 152 -- just use corn as a proxy, I'm trying to get and idea here in terms of what the December '09 futures price implies for profitability of the farmer. Are you able to tell us in terms of using urea, DAP and potash in terms of pricing to the farmer what you're looking at when you came up with that 350 variable cost?

I don't have that handy. I can tell you what total fertilizer cost is in this model.

Sure, go ahead.

It's a little more than $180 an acre used in this model.

Okay. Now just a few questions on that. First question I've got is in terms of -- because you talked a bit about in terms of application rates and so on. In terms of -- and I always see the caution in terms of the risk side, but looking at the different nutrients what is your perspective right now in terms of risk? Is it a pricing perspective on some of the nutrients one versus the others? Or is it an application rate like we talked about phosphate mining from the soil as an example? What stands out or is it a combination of all of them?

These views have been expressed by a lot of people over a lot of years. Corn farmers if they're going to plant corn are going to put nitrogen down. And in most of the area in which we do business ammonia is the form of nitrogen of choice because it's 82% nitrogen and because there's a lot of investment in the infrastructure to get it put on the ground. But the weather doesn't always cooperate and so often the form of nitrogen changes because they can't get in the fields with the heavy equipment, it's hard to put down nitrogen.

In terms of the other nutrients, and this is an agronomic phenomenon, nitrogen cannot be retained in the soil from one year to the next. However, to some degree phosphate and potash are retained. And so in years when the farmer is either financially stressed, or thinks he's financially stressed, the first nutrients that are cut back are potash and phosphate. So that's the discussion that happens every year and you really don't know what's going to happen until you're looking backwards and you see what product moved and what didn't.

Okay, appreciate the color. And the second part was the same idea. So we're talking 350 variable costs, it works out to about 230 using that yield that you gave on a variable basis. If you were to take a gauge as to -- and I'm assuming we're looking at variable costs because we're talking 100% landowner -- using the Midwest as an example what would you say is the split between 100% landowner at this point versus cash renters?

I don't have any idea and I'm not sure if there's a service out there that would be able to tell you that.

Okay. And last question -- on the 90 million plus acres, just coming at it at a different angle. Somebody asked earlier in terms of the corn price sensitivity for the farmer to get to that kind of level. A different perspective given the volatility on the fertilizer pricing side or cost side. What kind of profit margin do you think the farmer is looking at in terms of incentivizing him for that kind of level whether it be on an EBIT basis or a net margin basis? And the second part of that same question is in terms of relative to the history, where are the farmers looking for profit margin now for a 90 million acre kind of profile versus the past?

Paul, let me just go back and make sure there's a clear understanding of the model that I referred to. The model -- we used 152 million -- 152 bushel yield we used $4.43 price of corn, that comes to a total revenue, if you include little government payments which are part of the equation, around $700 of total revenue per acre. It turns out coincidentally that the non-land variable costs are about $350; that leaves about $350 of return over variable cost. That's the model that I was referring to.

It's this kind of analysis that a farmer will do in order to plant corn. Whether we have 87 million or 90 million or 93 million acres will be the result of hundreds and thousands of farmers making those individual decisions. And as spring evolves the USDA will count up the number of acres, so it's working in that direction. Economics are determining the acreage, not vice versa.

Right. I was just trying to interpret the economics with respect to a profit margin that exists now versus the past. I mean, the $350 or so variable cost is one way of looking at it. I'll put it this way, 350 variable, in the past what would've been the atypical average just for context?

I don't think we have that handy, the margin over variable cost on an historical basis.

It's quite good.

This is substantially better than historical margins, maybe not quite as good as the current year, but it is a very strong incentive to plant corn.

Is it fair to say it's at least three times bigger than history?

We'll get back to you on that one, Paul.

Thanks, Chuck.

And I'm showing there are no further questions at this time. I would now like to turn the call back over to Mr. Stephen Wilson for closing remarks.

Okay, thanks, Becky. And thank all of you for your continued interest in CF Industries. We do look forward to seeing some of you at our Florida phosphate operations where we will be hosting an investor event on the 17th and 18th of November. If you want to find information about that you can find it on our website. Thank you very much and we look forward to speaking with you next quarter.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.