CF工業控股 (CF) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the CF Industries second quarter 2010 results conference call. My name is Noelia, and I will be your coordinator or for today's call.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Terry Huch, Senior Director of Investor Relations and Corporate Communications. Please proceed, sir.

Thanks, Noelia. Good morning and thanks to everyone for joining on this call for CF Industries Holdings, Inc. With me today are Steve Wilson, our Chairman and Chief Executive Officer, and Tony Nocchiero, our Senior Vice President and Chief Financial Officer.

CF Industries Holdings, Inc. reported its second quarter 2010 results yesterday afternoon, as did Terra Nitrogen Company, LP. On this call, we'll review the CF Industries results in detail and discuss our outlook for industry and company performance in 2010. At the end of the call, we'll host a question-and-answer session.

As you review the news releases posted on the Investor Relations section of our website at www.CFIndustries.com, and as you listen to this conference call, please recognize that they contain forward-looking statements, as defined by federal securities laws. All statements in the release and on this call, 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 yesterday's 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 CEO.

Thanks, Terry and thank you all for joining us this morning.

For the second quarter of 2010, CF Industries reported net income of $105 million, or $1.54 per diluted share. Down from earnings of $213 million or $4.33 per share, in the same period last year. The quarter included some significant one-time costs, related to our acquisition of Terra Industries and some other unusual items which Tony will discuss later in the call.

We came into this acquisition with a vision of the great company we could build by bringing these two businesses together. Now, we have the chance to make that vision a reality, and we like what we're finding every day, as we do that. Of course, it's a lot of work to integrate the business practices, systems, and organizations of two public companies. And we'll be at it for some time to come. But that effort is energizing those of us who are working on it, because we can see the benefits and opportunities available to us.

Briefly, those benefits and opportunities come in two forms. First, is a set of synergies we've outlined in past discussions, which we've targeted at $105 million to $135 million per year. Since April 5, teams of employees with the CF Industries heritage and employees with the Terra heritage, have identified scores of individual initiatives that add up to an amount greater than the high end of this targeted range. Over the coming quarters, we'll continue our rigorous process to implement these actions and make sure that these savings, and more, are realized.

Second, we've always believed that as the integration proceeds, we'll find that we have better market intelligence. And that we'll identify expanded capabilities and a host of new options available to us. While we're far from completely optimizing the combined manufacturing, logistics, and sales organizations, we are finding new improvement opportunities in rapid succession. Some of these can be implemented immediately, while others require modifications to business processes and systems. We're focused -- we focused our attention on the low hanging fruit now, even while we're finalizing plans for the future state.

This allowed us to make some successful tactical moves in the second quarter and into July, that wouldn't have been possible for either of the legacy companies alone. We told you in our first quarter report, that our first priority through the spring, would be serving our customers without any gaps or missteps. I'm proud of the way our team performed to make sure that this was the case. And I'm happy to report that we didn't drop the ball for any of our customers. The extremely strong ammonia season challenged our ability to meet all the demand. And employees from all parts of the Company responded, delivering more ammonia to our customers than many of us thought possible, in a single quarter. As an example, one of our ammonia terminals, which had extended to 24-hour operations, emptied half of its 30,000-ton ammonia tank in just three and a half days.

For the industry, this turned out to be the highest volume spring for direct application ammonia volume since 1994. Surpassing our industry expectations by approximately 600,000 tons. The favorable weather for ammonia application, changed more than just the mix among nitrogen products. It also raised the total amount of nitrogen applied in the fertilizer year, by a meaningful amount. However, it wasn't until late June, early July, that the marketplace fully appreciated this fact and realized its implications for urea and UAN inventories throughout the distribution chain.

Prices of those two products, and especially of UAN, drifted lower during the second quarter, because of the weather-impaired first quarter application season in the Southern plains and the mix shift toward ammonia. The recent trend of reluctance to hold inventory downstream seemed to peak at the end of the spring season. Which kept additional pressure on domestic urea and UAN pricing, at a time when global prices also were in decline. By the end of June, supply and demand factors collided, to spur a global rebound in prices. On the supply side, the summer maintenance schedules pulled production off the market in central Europe and other locations. On the demand side, India and Pakistan came into the market for large nitrogen purchases, which they had deferred relative to past years' buying patterns.

As global prices moved up, the extent of the destocking in North America became apparent. And price increases here outpaced those in the international market. While that upward move reinforces our confidence about what we can do in the second half of the year, it came too late to help second quarter results for these products.

Our acquisition of Terra was very timely in helping us respond to somewhat unusual buying patterns. Reluctance by wholesalers to take large positions this spring, increased the portion of business transacted in relatively small lots. This pattern favored inland distribution points. Including our new plants in Oklahoma and Iowa. We took that opportunity to switch the plant sourcing for some other, more distant customers, that those plants had served in the past, to Donaldsonville. That enabled us to focus Oklahoma and Iowa production to close-in, regional customers. It's precisely this type of opportunity, that we intend to exploit in the months and years ahead to benefit both customers and investors.

The story for our Phosphate business was very different. I would characterize the sales volume in the quarter as normal. Although it suffered by comparison, to last year's elevated volume. 2009 phosphate volumes were high, because we were working off an excess inventory position, after the collapse of the 2008 commodities bubble. Which also led to depressed phosphate prices at the time.

Our average selling price for DAP this quarter was $400 per ton, about $100 higher than in the 2009 quarter. Gross margin rose to 16% for our Phosphate segment. With more normal industry supply and demand conditions, we focused more on the domestic markets, compared to last year. Domestic sales of DAP and MAP were about 4% higher year-over-year, whereas exports were 33% lower. Tampa contract sulfur prices decreased from $145 per long ton in the second quarter, to $95 per long ton in the third quarter. Ammonia costs for our Phosphate operations have risen by $25 per ton, for the current period.

Natural gas prices got below $4 per MMBtu in April, with the warm end to winter. Hot summer weather eventually led to rising natural gas costs, as demand for electric power surged and perceived hurricane risk increased. On top of that, the Gulf oil spill presented the possibility that drillings would be curtailed in the Gulf. As a result, natural gas costs rose above $5, before again retreating. Our average North American realized cost was $4.42 per MMBtu during the quarter.

As we look back on the second quarter, we feel good about the way we responded to these conditions in natural gas markets. We didn't panic, which could have led us to lock in higher gas costs. We kept an even hand, because our long-term outlook that gas costs will remain advantageous for North American buyers. The one move we did make, was to cap our pricing risk against possible hurricane-related spikes over the next three months. Which we think was a prudent thing to do.

At this point, I'll turn the call over to Tony, to review our second quarter financial performance in more detail.

Thanks, Steve, and good morning, everyone.

As Steve indicated, CF Industries reported net income of $105 million or $1.54 per diluted share in the second quarter. Down from earnings of $213 million or $4.33 per share in the same period last year. Second quarter earnings included $114 million of business combination and integration costs. And unrealized mark-to-market gain on natural gas derivatives of $15 million. And Peru project development costs of almost $2 million. Second quarter EBITDA of $392 million, included the $55 million of business combination and integration cost, unrelated to accelerated loan amortization. $15 million of unrealized mark-to-market gains and $2 million of Peru project development cost. In the second quarter of 2010, net sales of $1.3 billion, included Nitrogen segment sales of $1.1 billion and Phosphate segment sales of $185 million.

Nitrogen volumes for the quarter were 3.9 million tons, compared to 1.9 million tons in the year-ago quarter. Nitrogen sales were 49% higher than in the second quarter of 2009. Both segment volumes and sales were, of course, boosted by the acquisition of Terra. Our average price realization for ammonia was $380 per ton. Which was up about $60 sequentially, but was lower than the average price last year, which benefited from FPP sales booked near the peak of the market.

Sales volume of 1.2 million tons of ammonia, exceeded all expectations. Comparing that to our terminal storage capacity, of about 650,000 tons, illustrates how fast product was turning in the quarter. Urea price realizations were about the same as the second quarter of 2009, but down slightly, sequentially. UAN price realizations were 30% lower than the second quarter of 2009, but 7% higher, sequentially. DAP average price realizations for the second quarter were 32% higher than the second quarter of 2009, and 11% higher, sequentially.

Gross margin of $397 million was down 7% from the year-earlier quarter. Gross margin for the Nitrogen segment was down $36 million. With the inclusion of Terra's results failing to offset the significant year-over-year decrease in average prices for ammonia and UAN. Gross margin for the Phosphate segment was up, largely due to the increase in pricing.

On June 30, 2010, the Company's cash and cash equivalents totaled $600 million. We also held $125 million in auction rate securities. Net debt was $2 billion. And we made good progress in paying down debt. We'll continue to use available cash flow to pay down the bank debt, moving us toward our net debt to EBITDA target of 1 to 1.5. Operating cash flow in the quarter included a seasonal outflow of $378 million for a reduction in customer deposits. We ended the quarter with $11 million in customer deposits.

Finally, I'd like to announce that we have agreed on the terms of a consent decree with the EPA and the Florida Department of Environmental Protection. To resolve a notice of violation issued by the EPA in 2005 over phosphate industry water management practices. We've disclosed the enforcement matter in our securities filings, since the issuance of the notice of violation, including our ongoing negotiations to resolve it. The US Government and the state of Florida are filing the consent decree with the Federal District Court in Tampa this morning. And it won't be final, until it's approved by the court. Because the settlement's considered confidential by the Government, until it's lodged with the court, we won't be able to disclose the specific terms on the call this morning. I will say, that we anticipated and planned for this outcome. And we're pleased to have resolved this issue through a negotiated settlement.

Now let me turn it back to Steve.

Thanks, Tony. Now, I'd like to discuss our outlook for the remainder of 2010.

The conditions in agricultural markets always provide the basis for our outlook, and those conditions remain positive. Global grain prices dipped during the second quarter. But have moved up strongly in the third, because of drought conditions in the former Soviet Union and parts of Europe. We expect to see corn prices well above historical averages through the marketing year. As already tight conditions receive additional support from export demand and the renewable fuels standard. You can see the strength of the demand environment, when you consider that despite a forecast for one of the largest US corn crops of all time, the stocks to use ratio is still projected to fall.

Financial markets will watch yield projections for the 2010, 2011 crop carefully, over the coming weeks. Our base forecast assumes that this year's corn yield will be in line with the trend. With some areas producing very good yields, but others suffering from excess moisture received in the spring.

Farmers should enter planting in 2011, in a strong financial position. Crop budgets continue to favor corn planting next year. With variable returns for corn expected to be at about $100 per acre, greater than for soy beans. We expect 2011 to surpass 2010, as the second highest corn planting of all time in the US.

In addition to higher planted area, we expect nitrogen and phosphate fertilizer demand in the US to benefit from higher application rates as well. In the fall, we expect Midwest ammonia shipments to rebound 9%, from last year's weak weather, depressed season. That rebound, and the very low ammonia inventory position in the Midwest right now, should support attractive Corn Belt pricing. Also note, that a couple of ammonia upgrading projects are slated to come online, including our own project at Woodward.

US Gulf urea prices rose by about 15% during July. The global supply-demand balance will depend, in part, on supply outages, which are difficult to predict. But the tone of the market now is positive. The domestic urea market should be supported by the planting and application outlook I just discussed.

US Gulf UAN prices rose by about 40% in July, as customers rushed to restock severely depleted downstream inventory. US phosphate producer shipments are expected to remain strong through the fall. Underpinned by continued recovery in the domestic market and strong offshore demand, mainly from India.

Many of you probably noted that we did not specify our forward order position in our release. We've decided to end that practice for several reasons. First, our Forward Pricing Program has served us well during its seven-year history and continues to be an important marketing tool. The original reason for disclosing our FPP position, was to provide investors with insight into our risk mitigation actions, in the context of high and volatile natural gas costs. As a new public company, we wanted to assure investors that we practice margin discipline in this commodity-price-driven business. I believe that the need to provide quantitative assurance of that discipline, has been diminished over time, as we've compiled a track record of demonstrating it.

Second, we're now a much larger company with a very different, more stable risk profile. FPP is just one of several tools we have available to manage our margin. And we have decided that highlighting just one tool, gives it undue prominence in our discussions with investors. And finally, we simply believe that our forward order position is competitively sensitive information. Consequently, we've dropped discussion of the FPP order book from our routine disclosures.

To summarize where we stand for the second half of the year, our outlook for demand and margins is very favorable. Which should sustain strong profitability and cash flow and allow us to pay down our bank debt quickly. Beyond the market factors supporting our success, I feel great about what we've accomplished in our integration. We're ahead of our original synergy plan. Our team is energized and working effectively to blend the best of both legacy companies' approaches to the business. I'm very confident in our ability to optimize North America's largest nitrogen system.

Next week, we will mark our fifth anniversary as a public company. It's very gratifying to look back at what we've accomplished over those five years. As we made the transition from a Corn Belt co-op, to a successful public company and now a much larger enterprise. A lot has changed in those five years. But our team believes that we're just getting started down the path of establishing CF Industries as a global leader in the Nitrogen and Phosphate businesses and building long-term value for investors.

With that, let's open the call to your questions. Noelia, please explain the Q&A procedures.

Thank you. (Operator Instructions)

Your first question comes from the line of Elaine Yip from Credit Suisse.

Hi. Good morning.

Good morning, Elaine.

You mentioned that you've identified synergies above your targeted range. Can you elaborate on that and where the additional synergy opportunities are coming from?

Well, we're finding synergy opportunities in every area that we delineated in our comments that we made over the last year and a half. They're in the transportation area. They're in the distribution area. They're in the area of our mix of business. They're certainly in the SG&A area. And we're making progress on all fronts, and we feel good about every aspect of our synergy delivery.

And then I understand that you don't wish to disclosure your FPP positions, but have you seen any change in customer interest in the program in the recent weeks, with nitrogen prices coming off its bottom and corn prices rising? And then if you can talk about your natural gas hedging or how you think about it, you know, how much do you hedge outside of the FPP?

Well, first of all, with respect to recent business, we've mentioned that we launched our UAN fill program in July. That's been very well received. The market is strong, and that's obviously evidenced by the rising prices that we've seen. So we're very comfortable with where the market is and where our position is in the market.

With respect to natural gas, we maintain our discipline of essentially backing forward orders with committed gas, so that we have -- we lock in our margin and we mitigate the risk associated with being exposed on one side or the other. We have the ability under our natural gas policy to take gas positions outside of that. We do that sporadically when we believe the market is in a good place and we're comfortable taking a gas position. We would never get into a gas position that exceeded our physical needs for gas. It's a pretty tightly controlled process, and our policy is Board approved. With respect to recent activity, we mentioned in our release and I mentioned a couple minutes ago that we did -- we bought some options to cap our gas exposure in the months of August, September, October, just to be prudent with respect to the hurricane risk.

Okay. Great. Thank you very much.

Thank you.

Your next question comes from the line of Charles Neivert from Dahlman Rose.

Good morning, guys. Just a quick -- couple of quick questions.

One, on the interest rate, or the interest expense side, the number was rather large and we saw the early extinguishment number. But excluding -- if we exclude that from the reported number, is that -- would that be the right way to take the number going forward from there? Or are there other things in there that I have to deal -- we have to deal with?

The regular amortization charges related to the existing debt after all those prepayments that we reported this year is going to be about $5 million a quarter.

Okay. And then in addition, looking at that tax rate, again, it was a little on the high side. Anything, again, going forward for the remainder of the year, what we should use?

We have those nondeductible transaction related costs, the biggest one of which is the Yara breakup fee. And that's going to work its way through our P&L for the rest of the year. We're going to stay at a tax rate of about 47%. And as we go into next year, we expect to be back in the range of 33% to 35%.

Okay. And lastly, the depreciation number was fairly high. And again, if I looked at it versus the pieces that you reported for the two separate segments, what's the big difference? You guys report that depreciation and amortization for nitrogen, for phosphate, you take the sum of those two and put it against the number and there's a fairly significant leftover.

The total DD&A we reported was $149 million.

Right.

Of that, $59 million was the accelerated amortization related to the repayment of the bridge loan and the B2 term loan. There was another $5 million related to the regular amortization that I just mentioned. We had $40 million related to the stepped-up basis of the Terra values and then $45 million or $46 million related to legacy depreciation on the existing assets and the carryover assets from Terra.

Got it. Okay. Thanks very much.

Your next question comes from the line of David Silver from Bank of America, Merrill Lynch.

Good morning, David.

Yes, hi. Good morning. I wanted to ask you a question maybe about synergies, and then maybe pick up on a part of your answer to an earlier question.

But if I look at some presentations you've made, including your presentations at the Southwest Conference, you tend to focus solely on the cost side of synergies in your pie charts, et cetera. But you did mention product mix, and just based on what I hear from folks in the field and the marketing tone, it seems like you are -- the combined CF is marketing somewhat differently than I guess the separate companies pursuing their own strategies.

So I was wondering if you could just take a moment and talk about where you might see revenue based synergies coming from the combination that might be above and beyond, or coming from different sources, than the cost based synergies targets that you have laid out.

Sure. David, I guess I would prefer to look at the kind of synergy pot that you're referring to as market based synergies in kind of a broad sense. Revenue would be part of it, but there are also cost synergies that come with taking the kind of actions that we'll take. CF traditionally has had a focus on large wholesale customers where we've been relationship-driven. We value those relationships. We'll continue to value those relationships in the months and years ahead. They're a very important cornerstone to our business.

Terra had a different approach. Terra had substantial number of smaller customers downstream, further than the wholesalers. Those relationships were a set of very, very strong long-standing relationships, and we value those relationships. And so we will continue to take a position with respect to our customers where we want to have long-standing, good relationships, but we also are making enough product that we like to have product available to take care of -- to respond to opportunities that arise in the marketplace on occasion.

So we will be working in the following fashion. We'll be trying to optimize how we serve those customers. We will be working to make sure that we have the right mix of domestic business and export business. We have established ourselves quite well in the export market with respect to both phosphate and more recently nitrogen. And so with Donaldsonville where it is, and the legacy Terra plants where they are, we have a tremendous opportunity to, on a continuous basis, optimize what business we serve from what locations and take advantage of export opportunities.

And then I guess the other leg I would add to that is that Terra had a substantial percentage of its business in the industrial market. We had some of that at legacy CF, but not nearly as much. So as we look at industrial customers and, frankly, all of our customers, we need to be cognizant of the fact that we should be putting our product to its highest and best use. And that's, frankly, what will drive our whole marketing strategy going forward. We have the full range of nitrogen products now, and we have multiple locations at which to produce them, and we'll be looking to put every ton to its highest and best use.

Okay. And I guess, I was glad to hear that last point, where you focused on maybe agricultural sales versus Terra's historic emphasis on industrial, because I know you -- in the past you've indicated that you thought agricultural-based sales have higher netbacks or higher realizations than the average industrial sale and that -- am I correct? Is that part of your thinking, overall?

Certainly that's been the case with respect to ammonia.

Okay. I'd like to ask you a question about phosphate. One of your competitors in central Florida has a legal and regulatory issue that's limiting their ability to mine in Hardee County. And your operations, mining operations are in Hardee County.

And I'm just wondering if you see any opportunity for productive collaboration in that you have rock available in the exact location where they were hoping to have rock available but don't, and would their potential curtailments -- looks like the market is short and we just heard that people are importing DAP into the United States from Morocco, something I personally never thought I would hear.

So, it's an unusual market. You seem to be well-positioned opportunistically to do something. Is there a potential for any collaboration, or do you think you're pretty much just going to stick to your knitting there.

Well, it's an interesting subject, David. I guess I would reinforce a comment -- comments that we have made I think consistently to investors, and that is that we have a -- pretty much a perfect match between our mine capability, our mine production and the needs of our chemical plant, and we designed it that way. We do not have excess rock production. And certainly the production that we have right now is earmarked for Plant City and on to our customers.

I would like to, if I may, just make a comment on the situation that Mosaic has. We don't take any pleasure in watching that happen. We operate in the same state. We operate with the same set of regulators. We operate with the same permitting practices. And we've watched that situation over the years. Certainly I don't know the details of the case, but I certainly know, in general, that they seem have followed all the prescribed procedures and done it in a good faith way and obtained their permit. And I think it's unfortunate that they're not able to mine their property.

In respect of our own situation, we do have 12 or 13 years of fully permitted reserves in Hardee County today, but down the road, we have plans to mine some more rock. And so we look at the experience that Mosaic has had, and we'll certainly learn from that experience and build as many bridges as we can to various constituencies along the way. But it's certainly a troublesome situation.

Okay. Thanks very much.

Your next question comes from the line of Michael Piken from Cleveland Research.

Hi. Good morning. Just wanted to touch base on a few things. Just wanted to get your sense in terms of where we are in terms of outlook for nitrogen imports. I mean, at this point what is the longest that maybe some of your customers could wait to potentially bring in imported product for the fall? What is your outlook for nitrogen imports over, let's say, the next 60 to 90 days?

Well, it's now August. Bringing in nitrogen for the fall would be challenging. I think it's probably still possible, but it's getting pretty late to be -- to bring in new supply. But remember that half of the nitrogen consumed in this country, roughly half, is imported, and so there's a pretty continuous flow of imports already. It has its spikes and troughs, but it's pretty continuous.

Okay. And then from that perspective, one of your competitors not too long ago sort of gave a view that they felt that about 60% of the dealer purchases were made for the fall in phosphate. And I was wondering kind of what you guys believe in the US, the market -- how much of the market is already bought for both phosphate and nitrogen on a percentage basis, and how much more do you think needs to be booked at this point?

Well, I actually don't have -- I don't have a specific comment on that. The market seems to be strong in all of our products today, and that's because we're looking forward to an early harvest, certainly a window that will be longer than usual for application, a longer period of time during which we could get cooperating weather. And then looking forward to next spring, we see everything lined up to having a really terrific spring planting season with good crop fundamentals. So, we think that the demand pattern domestically is real good.

Okay. Yes. And then lastly, you sort of implied that you held off your fall fill program from May to July. So even though you're not giving FPP guidance any more, would it be safe to assume that because you held off on your FPP, the introduction of your program, until July, that you would probably have had less product booked maybe than what we've seen historically and then, therefore, potentially we might see more of a benefit from the recent run-up in pricing than we would otherwise?

Well, Mike, let me just refer back to a comment that Tony made. At the end of June, we had $11 million in customer prepayments.

Okay. All right. Thank you very much.

Okay. Thanks, Mike.

Your next question comes from the line of Robert Koort from Goldman Sachs.

Hi, this is Luisa Hermann in for Bob.

Good morning, Luisa.

Good morning. Just a quick question. You mentioned that the average realized ammonia prices were lower than spot prices because of the sales that were booked in the first quarter. And I know you're not giving guidance on FPP, but could you just give us an indication of what percentage of those sales were actually booked in the first quarter?

What percentage of second quarter sales?

Yes.

Had been booked?

Just trying to get an indication, since you're saying that the prices were lower because of what you booked in the first quarter.

Actually, I don't --

I think that's -- what we were referring to was a year-over-year comparison, I think is what you're referring to that. And that related to higher prices from FPP in the previous comparable quarter. We weren't referring to the sequential quarter.

Right, but was it -- I mean, compared to historical rates, was it higher? Lower?

I don't have that information handy, Luisa. I'm sorry.

Okay. And then just another question. Can you just talk a little bit of -- just your relationship with KEYTRADE -- is the advantage that you're seeing in terms of what you're -- what's happening in the international markets?

Sure. The KEYTRADE relationship has been a very beneficial relationship for us. Our salespeople have communication with the KEYTRADE folks on a daily basis, sometimes hourly basis, working on individual opportunities. It's really a two-way relationship. We help them generate trading revenue on occasion, and they help us with export sales. And, frankly, there are times when we want to manage our supply such that we trade a little bit of offshore -- of our own production for offshore production and things like that. It's a great relationship. It brings us great market intelligence, and it's been, I think, a win-win for both sides.

Your next question comes from the line of Vincent Andrews from Morgan Stanley.

Thank you. And good morning everyone.

Good morning, Vincent.

A lot of my questions have been answered, but maybe a couple of quick ones. Can you help us sort of with what a pro forma quarter might have looked like if you had Terra for the whole quarter?

Well, we had Terra for the whole quarter except for four days.

Right.

I thought it was -- I thought the close was April 15. So you're saying you --

Well, the formal closing of the merger was the 15th or the 16th. But we incorporated Terra results from April 5 forward, and if I remember the calendar correctly, two of those four days were weekends.

Okay. I guess that takes care of that.

And then maybe I'll take a crack at the forward purchasing question. I'm just reading in a lot of trade reports that you guys are sold out on ammonia through November and UAN through December. Would you care to characterize what's being reported in the trade press?

Well, our sales department is open for business every day. We take calls. We have good conversations with our customers, and we make a lot of product. We're going to make and sell about, I think, 13.5 million tons of nitrogen and a couple million tons of phosphate. So we're open for business, and we certainly like the business environment right now.

Okay. Maybe I'll just leave it there. Thanks so much.

Thanks, Vincent.

Your next question comes from the line of Edlain Rodriguez from Gleacher & Company.

Good morning, guys.

Good morning.

Quick question. Just on nitrogen prices -- as you noted, prices have started to rebound quite nicely since the end of July. Is there any concern or fear that prices are moving up a little too fast? I mean, essentially are you seeing or expect to see any resistance from buyers because of the higher prices?

Well, I would I guess just point out that we've seen significant run-up in crop prices, and we had a spike in wheat prices yesterday or the day before. We've seen good movement up in corn prices. There's a lot of money to be made in growing crops next year. And our model, I think as I indicated, shows corn leading to about $100 an acre more value than soy beans.

Actually, that spread's probably widened in the last few days. Whether they -- today's corn price is sustainable is, I think, open to some question, but corn in the $3.80, $4.20 range is really good for, I think, everybody in the chain. And at the farm level, I don't think today's nitrogen prices would be an impediment to planting.

Okay. And just like one quick question on your net debt. Can you remind us again what your target is for the end of the year in terms of the net debt?

Well, we haven't given you a target for the paydown of the term debt, which is the debt we're repaying right now, but we're still targeting 1 to 1.5 as the net debt ratio.

Okay. Thank you.

Your next question comes from the line of Mark Gulley from Soleil Securities.

Yes. Good morning. I wanted to follow up on the previous comment regarding the corn price. I recall that Glen Buckley had a very interesting slide in one of his recent presentations showing how we can optimize corn price, with 350 being where you get profit diminution on the farmer's side, but 450 where you get some demand destruction. With the Deese 11 contract kind of pushing 450, are you concerned about some demand destruction downstream and the livestock markets, ethanol markets overall?

Certainly, we subscribe to Glen's view that around $4 seems to be the sweet spot on a long-term basis. I don't think today's price is causing a problem, but if it gets much higher, it could become a problem.

Thanks very much.

Your next question comes from the line of Adam Goodwin from Goldman Sachs.

Hello. This is actually Kristin McDuffy. In terms of the pace of debt reduction, how quickly do you expect to use your elevated cash balances to pay down debt?

Well, as I said, we're making very good progress in debt repayment. We expect to be inside that range of 1 to 1.5 of net debt to EBITDA ratio by year end, and that's all I think I'm going to say about it.

Okay. Sure. And how do you think about the long-term capital structure of your Company? Do you plan to eventually pay down all of your bank debt?

Yes, we're focused on repaying the term debt. It has some covenants and restrictions in it that, of course, limit our ability to do other things on the investment side. They're not really significant. But we pledged to the market that we'd get our balance sheet back in shape. We'd hit the 1 to 1.5 net debt to EBITDA target and then we'd move from there. So an important part of that, obviously, is paying down the term debt.

And, of course, we do have $1.6 billion of bonds outstanding.

Correct. That's going to remain outstanding.

Okay. In terms of the typical seasonal decline that we might see going into 3Q from 2Q, it sounds like it's good to assume that this might be muted because your summer fill season was pushed back a bit. Does that sound right?

Well, this is a quarter in which the supply chain is restocked and normal kind of restocking is occurring. The fill programs that are out there really result in kind of a flow, an even flow of product back into the supply chain over a number of months.

And we do have -- we did come out of the second quarter industry-wide through the full chain with very low inventories. And so there's a lot of restocking that has to occur.

And so is what you're saying that it would be wrong to look for some kind of decline going into 3Q from 2Q based on -- from an EBITDA perspective?

I'm not going to project EBITDA. Normally, the third quarter does not have as much volume as the second quarter. I'd be surprised if that trend is not present this quarter.

Okay. And just lastly -- in the past, you've guided to EBITDA in the range of about $1.5 billion, including synergies for 2010. How do you feel like you're progressing with respect to this target?

Well, you have our first quarter results. You have Terra's first quarter results. You have our results for the second quarter. And we don't have the math for you on that. We feel very good about the cash generation capability of the Company.

Okay.

We think we've given you all the components to get to the number, and if there's any confusion about the adjustments to get to a pro forma basis, we're happy to talk to you about it offline.

Okay. Thanks so much.

Your next question comes from the line of Don Carson from Susquehanna.

Yes. Thank you. Couple questions on nitrogen. You talked about how overall US nitrogen consumption for the June 2010 year came in higher than your original expectations at 12.8 versus 12.4, and then you've talked about how you see return to higher application rates, and maybe some more corn acreage next year.

So what's your current view on the growth potential for nitrogen consumption in the June 2011 year? And then a question back to Terra's industrial mix on nitrogen. They were focused quite extensively on the opportunity for DEF going forward. Is that still a focus of the new combined Company, and how big do you see your DEF business getting in 2011 and subsequent years?

Okay. Well, with respect to sort of the next fertilizer year demand, I think for nitrogen we're looking at something like 2%, 2% to 2.5% in phosphate, maybe 4%, 4.5% or more. So we're -- we think those are reasonable estimates, and we're looking to support something north of 90 million acres of corn. So that's a pretty robust environment. I think Done is out with 91 million acres for 2011.

With respect to DEF, it's clear to us after a few months that Terra has done a great job of positioning this product in the marketplace. They have led the sector in many ways in terms of establishing a flow of product, although I suppose flow might be overstating it. It may be more like a trickle of product so far, as this DEF gets rolled out into the marketplace. But the brand is established and there's momentum there.

We are in the late stages of evaluating that business. Obviously, we're taking a fresh look here, and we haven't come to a conclusion yet. But I will say, Don, from the broadest of perspectives, we have a lot of flexibility in our production and distribution system. We make a lot of nitrogen, and we can do a lot of different things with it. We have a little bit -- we have more flexibility in that regard than Terra had. So we want to make sure that, as we make decisions with respect to DEF, that we are putting our nitrogen to its highest and best use going forward. That will drive the decision and -- but the market is clearly there for the product.

Okay. Thank you.

Your next question comes from the line of Horst Hueniken from Stifel Nicolaus.

Good morning.

Good morning.

I'd like to just touch on your customer advances. You had a significant outflow of $378 million in the latest quarter. Just trying to get a sense of what the working capital picture looks like for the third and fourth quarters. Is it normal to see a reversal? I'm just wondering whether you're -- how you're managing your working capital is going to change because you're now a combined Company, or whether we can simply look at the historical pattern?

Well, our business historically, because of the deposits we've gotten from the FPP program, has been largely self-financing. So, we expect most of the patterns from quarter to quarter to remain in place, but it will depend, obviously, on how aggressively the FPP program gets used across the new Company. We do intend to continue to use the program as a marketing tool, so just in general, I wouldn't expect the patterns we've shown in the past to be much different from those in the future.

Okay. Thank you very much.

Your next question will be from the line of Mark Connelly from CLSA.

Thank you. Two questions. Steve, you gave us some good detail on how you were able to swing things around when the UAN orders came in differently. Does that reflect, in your mind, a relatively full example of what you can do in terms of shifting production around in this system, or was it still very early in the game? I'm just trying to get a sense of what you're thinking about operating flexibility relative to what you have already obviously achieved in this quarter.

And then a second question -- your comments on Peru said your progress will depend on progress on infrastructure, which is a little bit different than some of what you've said in the past, which was more based on the cost. Do you now have the cost issue under control in Peru?

Okay. Production and distribution flexibility first. What we did in the second quarter in this area is, I would say, a hint at what we can do in the future. It was meaningful to us because we did it and we got it -- we were able to put, move the product where we wanted to move it, out of both legacy systems. And we proved to our self that what we believe is a substantial opportunity can be achieved. There will be much more of this kind of activity in the quarters ahead.

With respect to Peru, the comment on infrastructure, if I turn it into a more specific comment, is really focused on the need to construct a pipeline from where the major pipeline comes to the coast, from the Camisea gas fields, down to our potential plant site, which is a distance of about 120 kilometers. There's been no work on that, and we obviously are dependent upon that. We wouldn't make a decision on a project in the absence of that, and no one would lend us any money for the project, even if we wanted to make a decision.

In addition to that, the Camisea fields continue to be expanded. More gas must come over the Andes to the coast, and there's a pipeline expansion that has to happen in order to get sufficient quantity to the coast to feed all the needs that have been promised by the gas producers. So those are two events that -- two hurdles that have to be overcome.

These things have to be put in place before we would make a decision. We continue to do work on the cost profiles moving in the right direction. Of course, part of the reason it's moving in the right direction has been the change in the value of the currencies. The Euro has weakened, and we have substantial Euro content. That could go the other way, and it could erase it in short order. So, we don't have a definitive cost at this point, and we won't really have a definitive cost until we get to decision day.

Okay. And obviously I don't -- we're not hearing any visibility on that pipe project, so that's really sort of bottled up the whole project at this point.

Yes.

Okay. Thanks very much. And congratulations.

Thanks, Mark.

Ladies and gentlemen, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Terry Huch for closing remarks.

We would like to thank everyone who participated on the call today, and we do look forward to meeting with many of you at our Analyst and Investor Day on August 17 in New York. If you need more information about that event or about CF Industries in general, we invite you to contact Investor Relations. Thank you.

Thank you for your participation in today's conference. This concludes your presentation, and you may now disconnect. Have a great day.