CF工業控股 (CF) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2008 CF Industries results conference call. My name is Katy, and I'll be your coordinator for today. At this time, all participants will be in a listen-only mode. We will be conducting a question-and-answer session towards the end of this conference. (Operator Instructions).

I would like to now turn the call over to your host for today, Mr. Charles Nekvasil, Director of Investor and Public Relations. Sir, you may begin.

Thank you. And 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, and Tony Nocchiero, our Senior Vice President and Chief Financial Officer.

Yesterday afternoon, CF Industries Holdings, Inc., reported its fourth quarter and 2008 results. The purpose of today's conference call is to discuss the record financial performance we achieved for the fourth quarter and for the full year of 2008, as well as our outlook for the upcoming season. We will not be commenting on our proposal to acquire Terra Industries, so please focus your questions accordingly.

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 our 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. Please 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 record fourth quarter and 2008 earnings, driven by our third consecutive $1 billion sales quarter. For the fourth quarter, net earnings totaled $190.1 million or $3.59 per diluted share, well above the $135.4 million or $2.38 per share that we reported for 2007's fourth quarter.

For the year, net earnings totaled $684.6 million or $12.15 per diluted share -- again, significantly higher than the $372.7 million or $6.57 per share that we reported for 2007. Results for both the quarter and the year include the effects of the mark-to-market adjustments on our natural gas swaps and inventory write-downs detailed in the news release.

I'm proud of this performance and of the employees at CF Industries who achieved it. Despite the fourth quarter's challenging environment, our 2008 sales and net earnings reached levels that few, if any of us, would have considered achievable not that long ago.

Looking at the forces that drove fourth quarter performance in the North American fertilizer industry, the weather, for the second application season in a row, refused to cooperate. Weather-delayed spring planting meant a late fall harvest throughout much of the Corn Belt. And while we eventually got off to a pretty good start on the fall ammonia run, the shortened season simply didn't allow farmers to complete all anticipated fieldwork before Mother Nature brought things to a halt. Beyond that, uncertainty over 2009 crop economics, as well as the widespread expectation that fertilizer prices would be lower come springtime, further dampened demand.

Looking beyond North America, demand was negatively affected by credit availability, concerns over crop economics, and delayed purchasing by India and some other major international fertilizer purchasers. Reduced demand produced an inventory build throughout the supply chain, significantly depressing prices by year-end.

One positive has been the industry's response to today's marketplace. Unlike the situation in some past downturns, fertilizer producers around the world, including CF Industries, reacted quickly and brought production down to levels appropriate to demand.

As I suggested in the news release, the first production cuts came in Europe and other (technical difficulty). For the most part, North American producers remained cash positive, even as fertilizer prices declined significantly. That certainly supports the new paradigm for nitrogen I discussed at our Investor Day last November. North American capacity is increasingly competitive in serving North American customers, and the changing global natural gas dynamic suggests to me that this improved competitiveness is sustainable.

So we're proud of a record quarter and a record year. And we're optimistic that after the current adjustment phase, the demand for agricultural commodities and the fertilizer needed to grow them will resume their long-term growth. More on that later when I discuss the outlook for spring.

Now let me introduce Tony Nocchiero, our Chief Financial Officer.

Thanks, Steve, and good morning, everyone. CF Industries' record fourth quarter net earnings were up 40% from net earnings in last year's fourth quarter. For the year, our record net earnings were up 84% from 2007. For the quarter and the year, strong pricing more than offset volume declines in both nitrogen and phosphate.

I'll highlight some quarter-on-quarter comparisons for you. You'll find year-on-year detail in our news release.

Net sales increased by 26% to nearly $1.1 billion, up from $853 million in last year's fourth quarter. Volume totaled 1.9 million tons, down 23% from 2.5 million tons last year. As Steve pointed out, we got off to a late start on the fall nitrogen season, and adverse weather conditions limited farmers' ability to complete fieldwork.

The nitrogen segment volume was 1.5 million tons, down 23% from 1.9 million tons in last year's fourth quarter. Phosphate segment volume was 404,000 tons, also down 23% from 526,000 tons last year.

Phosphate volume in domestic markets fell by almost 50% from last year's fourth quarter, but we were able to offset a substantial part of that decline through a 70% increase in phosphate exports from fourth quarter 2007 levels.

We have begun importing potash in order to offer our customers the convenience of sourcing all three nutrients from one distribution facility. There were no potash revenues in the fourth quarter, but going forward, results will be included in our phosphate business segment, with details broken out.

We sold 75% of our nitrogen under our forward pricing program in the fourth quarter, compared to 80% last year. In phosphate, we sold 51% of our volume under the FPP, compared to 39% in last year's fourth quarter. Keep in mind that under the FPP, we don't recognize sales until the customer takes delivery of the product. Some customers deferred shipment of FPP orders scheduled for fall until the spring of 2009, with positive future pricing implications for our spring sales.

Selling prices for all of our products were higher than in last year's fourth quarter, and for ammonia and UAN, higher than in 2008's third quarter. The substantial volumes sold under our FPP, generally booked and priced in earlier quarters, certainly had a positive impact.

Gross margin in nitrogen was $281 million, up from $153 million last year, driven by increased prices. As we reported, nitrogen gross margin included $34 million in non-cash, pretax, unrealized gains from mark-to-market adjustments on natural gas derivatives. Last year's fourth quarter included $13 million in such gains.

Gross margin in the phosphate business segment was $79 million, down from $83 million in last year's fourth quarter. Phosphate gross margin was negatively affected by higher input costs and by inventory write-downs of $30 million related to phosphate products.

We took an additional $27 million write-down related to potash inventory, as expected selling prices fell below our acquisition cost. There were no inventory write-downs in 2007's fourth quarter.

Our overall weighted average cost of natural gas, including realized gains and losses on derivatives, increased by 17% from fourth quarter 2007.

SG&A expenses of $15 million reflected a decline of 14%, due to lower transaction costs and lower incentive compensation costs. As you'll recall, there were transaction costs related to our investment in KEYTRADE in last year's fourth quarter.

Cash flow from operations totaled $25 million, down from $187 million last year, primarily due to higher inventories, reflecting both increased volumes and unit costs. Looking at our liquidity and financial position, as of December 31, 2008, the Company's cash and cash equivalents totaled approximately $625 million. Keep in mind that in November, the Company completed the repurchase of 8.5 million shares of common stock for $500 million.

The company also held investments in auction rate securities valued at $178 million, resulting in total cash and investments of $803 million. This compares to investments in cash, cash equivalents, short-term investments, and auction rate securities of $861 million at December 31, 2007. The auction rate securities remain illiquid.

Last week, we reported that the Board of Directors declared the regular quarterly dividend of $0.10 per diluted common share payable March 2, 2009 to shareholders of record February 17, 2009.

So, despite uncooperative weather and uncertainty in agricultural markets, we delivered record financial performance for both the fourth quarter and the year. We remain financially strong and well positioned to meet expected spring demand and further advance this Company's growth initiatives. Steve?

Thanks, Tony. Going into the spring of 2009, there are certainly some unanswered questions in the agricultural and fertilizer markets. These include -- how much inventory remains in the fertilizer supply chain and how long will it take to work through it? When will farmers and dealers find a middle ground on pricing, breaking the impasse some people see today? When will farmers make their crop mix decisions and what will those decisions be? And when will major international buyers re-enter the market in a big way?

These are all important questions; but from our perspective, they relate more to the timing of demand, not the ultimate level of demand. The underlying demand for grain and the fertilizer to grow it remains strong.

Two consecutive seasons of lousy weather in North America, crop and fertilizer price volatility, and any number of other factors have temporarily slowed agricultural markets. But because of continued growth in global population and improving diets in developing nations, such as China and India, we see today's situation as a temporary pause in a fundamentally strong long-term growth story.

Recent input cost reductions in North America for natural gas and nitrogen, and sulfur and ammonia and phosphate, further strengthen our competitiveness.

Responding to the downturn in demand, CF Industries entered 2009 operating at approximately 75% of capacity in nitrogen and 40% of capacity in phosphate. Industry-wide, the pattern of the capacity cutbacks in nitrogen, while initially centered in regions such as Eastern Europe, confirms our view that North American capacity is increasingly competitive in serving North American customers.

Once we overcome near-term challenges, this industry is well positioned to meet future growth in demand. Looking ahead to the spring, we project that US farmers will plant approximately 86 million acres of corn. And assuming the weather cooperates, put down a lot of nitrogen and other fertilizers in order to optimize yield.

We're already seeing signs that the recovery has begun. In nitrogen, prices for urea have recovered significantly from fourth quarter lows; UAN pricing has also begun to improve.

Looking at ammonia, it's too early to call the spring season demand, but we're very well positioned to meet our customers' ammonia needs.

There is more near-term uncertainty in phosphate than in nitrogen. Inventories throughout the supply chain are high. We see somewhat stronger phosphate demand in export markets and, as we demonstrated during the fourth quarter, we can take advantage of our relationship with KEYTRADE to increase our phosphate export sales significantly.

In North America, the issues for phosphate are spring demand, buyer psychology, and current high supply chain inventory levels. Current crop economics support application of all three nutrients this spring, but whether farmers will do so remains to be seen.

To wrap up the outlook, there are questions going into this spring season, but we view them as short-term issues. We're upbeat about the supply and demand fundamentals for crops and the fertilizer required to grow them here in North America and around the world.

We're also upbeat about the progress we're making on our proposed nitrogen complex in Peru. The favorable initial cost estimates developed in our recently completed pre-FEED study have allowed us to proceed with the full FEED study. This should provide definitive costs and project economics by early in 2010 and position us to make a final decision on the project. Capital costs are definitely moving in our direction in the current economic environment.

Before I open the call to your questions, I want to remind you that the purpose of this call is to discuss the Company's performance and prospects. We will not comment on our proposal to acquire Terra Industries, so please focus your questions accordingly.

With that, we'll open the call to your questions. Katy, will you please explain the Q&A procedure?

(Operator Instructions). Steve Byrne, Merrill Lynch.

Tony, can you help me understand why you had a mark-to-market gain in the natural gas derivatives?

Yes. I mean, it relates to where we were over our swap program as a function of our forward sales program.

But at the end of the calendar year, wouldn't your -- wouldn't the forward strip have been at levels below where you locked in gas?

Yes, you've got to look at the -- remember, you have to look at the inventory balances. And what it was, was a positive change in two loss positions. It's the difference between two loss positions on the balance sheet; and the loss decreased, so it was a gain.

Okay. And then regarding the write-down on the potash, it would suggest that your write-down here is roughly $160 a ton. Does that suggest that, given where Corn Belt potash prices are now, that you secured those imports of potash last summer somewhere near the $1,000 a ton price?

Well, no, Steve, we prefer not to give you the specific prices, but we have marked them down to what we view to be the market price at which we'll move the product. We did buy the product in the fall.

But the acquisition costs, Steve, weren't that high.

Okay. And then just looking at your forward pricing program that you had at the end of -- when you reported third quarter results versus where they are now, and how much gas you had locked in at the end of the year, it looks like your order activity really slowed to a crawl in November and December and may have picked up in January. Is that a fair characterization?

Well, it certainly slowed to a crawl near the end of the year as we saw the freefall in prices. Customers were exhibiting rational behavior. They were waiting to see what was going to happen, when things would get to the bottom; and when things get to the bottom or customers perceive that the bottom is nearby, then they become interested in committing.

And have you seen a pickup in order activity during January?

Well, I'd just say that you have seen, as an industry observer, increases in prices. And price increases usually indicate increases in demand.

But it looks like what you had locked up in terms of natural gas at the end of the year was very modest. It looked like six weeks' worth of gas, versus how much you have in your FPP program as of a couple of days ago, is a little more robust than that. So, does that suggest you took more orders -- your order activity picked up too; not just pricing, but --?

Well, we are pretty closely matched in our gas positions and our forward order book. But I think that's a relatively direct answer to your question. We intend to be matched on an ongoing basis unless we see a particular bargain available to us. And also, we can hedge our positions, either by matching inventory that we might have acquired in the open market or by buying gas.

Okay. And then just the last one for you, Steve. The DAP price fell during December to below-breakeven economics for the marginal producer. Are you -- do you view CF as of sufficient scale and size to influence the market in a way that it doesn't make sense to sell below those prices? Or do you view that as a favorable margin opportunity and continue to sell?

I don't think I'm going to respond to the scale question. What I will say is that we track our economics on an ongoing basis and we attempt to sell, certainly, at a positive cash margin all the time. And as conditions improve, we look to get above accounting breakeven. So we're driven totally by economics and we always have been.

Michael Piken, Cleveland Research.

A couple of questions for you. First of all, you talked about kind of running your plants at that sort of lower operational rate, 75% in nitrogen, 40% in phosphate. Can you talk about what that might do in terms of your fixed costs? If you could provide any quantification, that would be great.

Well, as we reduce rates, we do have issues with respect to fixed cost absorption. Tony, do you have any --?

Yes, I can tell you what the impact would have been in the fourth quarter -- I'm sorry, I can tell you what the impact would have been in the fourth quarter. It was relatively minor for the fourth quarter results. It was about $1 million pretax for nitrogen and about $5 million pretax for phosphate.

Okay. So it would be safe to say that going forward, given that we're at these lower operating rates, that that number should ratchet up in the first quarter?

I don't know whether that's the case or not.

Well, yes, you --

We actually don't know what our operating rates will be throughout the quarter. We're only in the middle of the quarter.

Okay. Fair enough. And then just kind of taking a look at your phosphate results, and based on the numbers that you reported in phosphate, it would seem to imply that you've still got a fair amount of higher-cost sulfur and ammonia inputs that are still flowing through. Can you talk about where you are with respect to working through, particularly those higher-cost sulfur inputs and when we might expect to see the full benefit of some of the lower input costs?

Sure. The sulfur market works in a way where we don't recognize changes in sulfur prices immediately. They're kind of blended in over a period of a couple of months. So it will be two, three months before the sulfur, the current sulfur market gets fully reflected in our cost structure.

Okay. Perfect. And then last question is -- with respect to your outlook for corn acres and for this spring, from some of the recent survey work we've done, the farmers have sort of indicated if crop prices remain at today's level, we might see a bit of a decrease in corn acres.

And are you basing your 86 million on talking to farmers or are you expecting a rally in grain prices? Or if you could just give us a little bit more clarity. And if, in fact, corn acres do come in below, what type of impact do you think that would have on domestic nitrogen consumption? Thanks.

Well, we look at crop models, farmer economics. And looking at a model, even using $3.90 corn, it looks like the crop to plant is corn over beans. Today, we see the futures price for December corn is around $4.20. That adds a little upward nudge to those economics, assuming that that price holds.

In addition, we think we had a lot of farmers last year on the margin who planted beans rather than corn, and it's likely that they're going to have to rotate back to corn. So, we think it's economically and agronomically favorable to plant corn.

Now, a lot of things can happen that can make 86 million unachievable, not the least of which is weather. We do believe, from an overall standpoint, there's pent-up demand for nitrogen, because all the nitrogen that would normally have been put down in the fall, was not put down. And so there are some -- there's probably a sizable amount of acreage that will need nitrogen absolutely that didn't get any in the fall.

So we think it will be a good to very good nitrogen year, weather permitting.

Vincent Andrews, Morgan Stanley.

Steve, in some of your closing comments, you raised a lot of the key questions in terms of how 2009 is going to progress, as it relates to channel inventory, farmer sentiment, application rates and so forth. But as we go into the spring season, can you give us a sense of the timing of what you think we need to see in terms -- when do we need the channel to empty out in order to have a normal spring season? And when would you begin to be concerned that that's not going to take place?

Well, it varies product by product, and I'll start with the easiest one, which is ammonia.

Our system is full. That won't surprise anyone, because we had a shortened season in the fall. We are ready to go, but no ammonia moves out of our level in the supply chain until the farmer is ready to plant. So, ammonia movement, you'll be able to tell based upon weather patterns; we hope it comes soon in the South and moves to the North. That's the ideal pattern. Ammonia is very easy to watch, but it's also late starting.

The other products, we believe that there are -- yes, there's inventory in the pipeline on UAN and urea, but there's probably not enough in the system to fulfill demand. And so there's incremental product that has to come in. Some of it has to come in from overseas.

There, again, you have to look at planting patterns. And -- but it's all got to be basically anecdotal, because it's sitting through the supply chain and there's really not good data on what happens below the distributor level in our industry.

In terms of phosphate, it's no secret; there's an awful lot of phosphate sitting around. And there was product being stored every place it could be stored. To the extent that anybody has visibility into rail and barge storage activity, that would be an indicator. When that starts getting moved out, then product must be moving down to the farm level.

Okay, but -- if I could just follow up on that. In terms of -- obviously the bottleneck between the retailer and the farmer is on price. When does that bottleneck need to clear by, in order to complete this kind of schedule that you laid out? I mean, is there kind of a point of no return where we just have a war of attrition here?

Well, there isn't a magic date, because you've got different planting calendars going on in different parts of the country and different crops. I think if you look at the way the industry operates, you will get to a point of time when, if the supply chain starts moving, it is too late to get imported product in. And we made references to logistical challenges and so forth, and that's part of the basis for that observation.

Unfortunately, in this industry, there is not good data for a lot of this stuff. And in our own planning process, we just try to keep in real close contact with our customers, and make sure that our inventory positioning and our production scheduling is in tune with what they see happening. And that is a day-by-day, almost hour-by-hour kind of activity as we move into the spring.

And so, you'll just -- building on that, and that's ultimately how you will determine your production rates as well then?

Right.

Okay. Thank you. I'll leave it there.

Bob Goldberg, Scopus Asset Management.

A couple of questions for you. I was wondering if you could talk a little bit about the import activity, or lack thereof, that you're seeing in the nitrogen products, and whether -- again, maybe talk a little bit more about the logistics of getting nitrogen to the customer in the spring season, if there is insufficient import activity.

Well, first of all, as I think you know, Bob, we do some importing ourselves. And our location at Donaldsonville is very conducive to -- for us participating in that market.

So, for example, when we saw the rapid drop in ammonia prices, we elected to bring some ammonia in because we thought it was a good deal for our customers going forward. We can supplement our own production and, in some cases, substitute for production.

Ammonia -- moving ammonia into the Corn Belt is a complex activity. It's an activity that we think we do pretty well, with our 19 terminals. Bringing in additional product at the last minute is -- it depends on, I guess, the definition of the last minute.

We have an ability to re-inject product into our system, but you've got production scheduling to do. We could bring in some additional ships, for example, if the demand was there, and get it to the market in time if we have sufficient notice. If you don't have a distribution system, you can't do that.

In terms of urea, there was a lot of capacity shutdown in reaction to the drop in prices. Some of that has come back on. We don't think all of it is back on. And so, in order to get a lot more urea here, production decisions are going to have to be made relatively soon in order to meet demand for the spring, assuming that it materializes.

That is a -- it's an easier thing to do logistically once it's here, but if the production pipeline goes all the way back to the Middle East, then plans have to be made pretty far in advance in order to do that. Phosphate, of course, phosphate is here in North America. It's a little easier to move and there's plenty of inventory.

Okay. And one other question. I know it's not your policy to speculate on natural gas and hedge without -- or take positions on natural gas without having a forward purchasing business, but natural gas has fallen about $1.50 since the end of the year, at least on a spot basis in North America.

Obviously, your prices are depressed, in part because industrial demand and agricultural demand has dried up early in 2009. I'm just wondering if you're looking at all to take advantage of natural gas prices, which are well below recent levels. Or if you're going to continue the policy of matching natural gas purchases with forward purchases -- or sales, I should say.

Bob, I believe we have said periodically in our 3.5 year public company history that we do watch the natural gas market. And we would take positions in natural gas if we felt it attractive. We haven't talked much about it, because when gas is selling for $8, $9, $10, $12 an MMBtu, it doesn't really seem attractive to take the kind of risk associated with that.

When prices get down into the range that they're in right now, we kind of crank up our analysis. We consider taking positions. And when we become comfortable, we will take positions. We haven't taken any significant gas positions outside of our FPP to this point, but we are considering it.

Okay, thanks very much.

(Operator Instructions). Charlie Rentschler, Wall Street Access.

I wondered if you could talk about your capital expenditure plans for '09 versus '08, and maybe share with us what one or two of the bigger items are, please.

Sure. Go ahead, Tony.

Sure, Charlie. We're projecting we're going to spend somewhere between $200 million and $300 million on CapEx. A lot of that is related to spending programs for improvements, energy improvement projects, additional control systems, expansion of our gyp stack; bringing in the new dragline, bringing that up and operating -- all projects which we've talked about in the past, and continued spending is ramping up on those.

In addition to that, we have the usual number of sustaining and EH&S-related projects, and turnaround capital spending that we'll be doing over that period. So, that's basically the mix of the spending. It will be a bit higher. As I said, some of those major quick-payout projects related to energy improvements that we talked about in the past are ramping up and will increase the level of capital spending in 2009.

Okay. So, let's see. So, that's significantly higher --?

Charlie, you're kind of weak. We're having a hard time hearing you.

The $200 million to $300 million represents quite a hike over last year, does it not?

Yes, it's a bit of an increase over last year. It's been a steady ramp up, but again, these are all projects that we've been talking about in the past. So, most of the spending that I've talked about relates to continued development of those existing projects. As I said, many of them are high-payout, quick-payout improvement projects related to our nitrogen operations.

Right. And we have the continuing program in phosphate to increase our sulfuric acid production capability. Again, all of these kinds of projects where we squeeze out marginal production or incremental production are quite attractive economically.

But your release said you spent $74 million last year in CapEx, right? So this is almost a tripling?

No. The total spending last year was -- I've got the number here, I've just got to turn to the page -- $140 million.

$140 million. I was looking at the wrong number. Okay. But it's still a significant increase.

That's right, Charlie. It is going up from that number. As I said, most of the spending in 2009 relates to continued development of a long list of projects that we discussed over the last year.

Okay. And then my follow-up question. Steve, you talked about North American nitrogen industry becoming increasingly competitive. And I guess I pretty well understand what you mean by that, but can you flesh that out a little bit for us?

Sure. The best example is in a highly public event that happened over the last month. And that's the Russian discussion, if you will, with the Ukrainians about gas prices.

Today, the Ukrainians are paying about $9 an MMBtu. If they're running any production, I don't think it's very much. And it's probably going to be difficult for them to come back online with that kind of gas cost. And at $40 oil, even if oil stays in the $40 range, they're going to be dealing with much higher gas costs than they've had in the past.

When you add on top of that the relatively inefficient assets they're operating and the transportation cost required -- albeit today, that's relatively modest, but I think the days of high freight costs are not gone forever -- it is difficult for them to get product to our marketplace.

In addition, we've had just, frankly, an unbelievable supply response in the natural gas industry in the US. This gas found in shale oil was developed very quickly. The technology has been perfected. The supply is there. Obviously, today's gas costs are a function of that increased supply and the reduced demand caused by the general economic situation that we're in.

So, we've actually been pleasantly surprised that we've had several factors that have all moved in the same direction, to reinforce the point that we are a much more cost-effective supplier to the North American market than we were four or five years ago.

Very good. Thank you.

At this time, I'm showing you have no further questions. I would like to now turn the call back over to Mr. Nekvasil for closing remarks.

Well, thank you, Katy. If there are no other questions and we've taken all the questions in the queue, we will conclude our call. Thank you for your continued interest in CF Industries. We look forward to talking with you, including next week, when Tony Nocchiero and I will be at Morgan Stanley's Basic Materials conference in New York City. Thank you so very much for joining us today.

Ladies and gentlemen, thank you for your participation in today's conference call. You may now disconnect. Have a wonderful day.