CF工業控股 (CF) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the CF Industries third quarter 2010 results conference call. My name is Regina, and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. (Operator Instructions) As a reminder, today's event is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Terry Huch, Senior Director of Investor Relations. Mr. Huch, you may begin.

Thanks, Regina. Good morning, everyone. Thanks for joining us on this conference call for CF Industries Holdings, Inc. I'm Terry Huch, Senior Director, Investor Relations and Corporate Communications. With me are Steve Wilson, our Chairman and Chief Executive Officer; Rich Hoker, our Vice President and Corporate Controller, and Bert Frost, our Vice President of Sales and Marketing. CF Industries Holdings, Inc. reported its third 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, 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. Thank you all for joining us this morning. For the third quarter of 2010, CF Industries reported net income of $48 million, or $0.67 per diluted share, compared to earnings of about $39 million, or $0.78 per share in the same period last year. Our results benefited from our very timely acquisition of Terra Industries, and certainly we're looking forward to showing how the integrated Company can perform when we have the full benefits of the increases in product prices that unfolded throughout the third quarter and have continued into the fourth quarter, as well as the reductions we've seen in natural gas costs.

Our operating earnings were up 52% year-over-year, to $137 million. Operating-related cash flow was almost $600 million, which allowed us to repay $350 million of debt during the third quarter, and still exit September with $650 million of cash on the balance sheet. We're in a great period for fertilizer manufacturers, especially for those located in North America. Industry conditions improved dramatically during the third quarter, driven by the interplay between significantly higher agricultural commodity prices and constrained availability of fertilizer. Higher crop prices were prompted first by an intense drought in the former Soviet Union, which led to Russian grain export controls and tightened world grain trade, especially for wheat. This was followed by significantly lower yield prospects for this year's US corn crop, which pushed domestic crop prices to two-year highs. The dramatically higher crop prices, coupled with low fertilizer inventories worldwide, stimulated fertilizer product purchasing, which tightened fertilizer balances. At the same time, world production was limited by higher than expected plant outages. All of these factors combined to drive fertilizer prices higher during the quarter.

Domestic urea prices followed global markets upward. In the Midwest ammonia market, factors specific to North America added upward pressure on pricing, including limited supply availability after the exceptional spring application season, strong demand for fall application, and pipeline maintenance affecting the western corn belt. The UAN market also tightened, as nitrates were in high demand in Europe, reducing UAN production and available export supplies from the Black Sea region. US Gulf UAN prices yielded lower netbacks to European producers than were available to them in other markets, resulting in low US imports and extremely low US inventories.

Phosphate markets also strengthened considerably due to surging international demand. Higher crop prices stimulated purchasing to restock and to meet higher projected farm demand. Export commitments to India continued to underpin the market and spot purchasing remained strong through the summer. US demand was particularly strong, which drove NOLA barge prices above Tampa export prices. This set the tone for the world market and even resulted in attracting some imports into the US. Additional market strength came from reports of delays at Saudi Arabia's Ma'aden Project and challenges in raw material supply.

With this market backdrop, we found eager customers for all of the product we offered for sale. Of course with prices rising as much as they did throughout the quarter, we do wish we had more product available now than we do. But we're generally pleased with the way our book of business has evolved. Our third quarter prices were significantly lower than average spot prices published during the quarter. Significant differences are not unusual during periods of rapid price movement, whether that be up or down. In this case, there were a few noteworthy factors at work.

We had export shipments of phosphate, urea, and UAN that had been priced in the second quarter. Industrial sales represented about half of ammonia sales in the quarter, a seasonally slow quarter for ag sales of ammonia. And at the beginning of the quarter, customers had very little purchase volume booked. When they realized how tight the market was becoming, they began making commitments, in effect, chasing prices higher. So the full impact of the higher prices won't be felt until the current quarter and beyond.

Throughout the quarter, we made excellent progress on our post-acquisition integration and related initiatives. We feel very good about where we are operationally. Our internal coordination within and across functional areas is becoming a strength, and that will help us capitalize on more opportunities to optimize our production, transportation, distribution, and sales. We continue to be on track to deliver more than $135 million in annual savings, the top end of our predicted synergy range, with a run rate of about $100 million implemented by year-end.

A good example of our improved coordination is the alignment of product managers and sales with their counterparts in logistics. This enables us to take the day to day actions that optimize our business for each major product, such as maximizing the value of our ammonia production, transportation, and distribution system. We also have shifted more of our business to delivered pricing rather than FOB plant. This provides better visibility to regional market conditions. Our primary interest in pursuing Terra was expanding our North American production of nitrogen fertilizer. With the integration of that business well in hand, we've been able to focus more attention on the other parts of Terra's portfolio, and familiarity is breeding enthusiasm. The GrowHow venture in the UK is performing well and is benefiting from an extremely strong nitrate market. The Trinidad ammonia plant has become a great partner for our phosphate operations in Florida, and the diesel exhaust fluid business is proceeding the way that the Terra Environmental Technologies team had planned.

We recently completed a thorough study of the DEF market and our position in it. This review validated the approach that the legacy Terra team had taken to this great opportunity and answered our questions that were prerequisites for making further commitments of capital to DEF. Many of you are familiar with the UAN expansion at the Woodward facility, which will add 500,000 tons of annual UAN capacity this quarter. That project also includes modifications that will add 30 million gallons per year of DEF capacity. We expect to embark on projects at other facilities in the future. Our customers know they can count on us for reliable supply and for leadership in this growing market.

To sum up the business conditions in the third quarter, I don't think any of us could have foreseen how the market would unfold when the quarter began. It seems like a distant memory now, that nitrogen prices were somewhat depressed at the end of June, particularly for UAN. Our results in the quarter only begin to reflect the impact that very tight grain balances are having on fertilizer demand and prices and the impact of declining natural gas costs in North America.

Now, I would like to ask Rich Hoker to provide more detail on our financial performance in the third quarter. Rich is our Corporate Controller and Principal Accounting Officer. He has played a key role in maintaining coordination and business discipline in the Terra integration process. A role that has taken on added importance as we conduct our internal and external CFO search. Rich?

Thanks, Steve, and good morning, everyone. As Steve indicated earlier, CF Industries reported net earnings of $48 million, or $0.67 per diluted share, compared to earnings of about $39 million, or $0.78 per share in the same period last year. Third quarter earnings included an unrealized mark-to-market loss on natural gas derivatives of $26 million pretax, $23 million of business combination and integration costs, and Peru project development costs of less than $1 million. In the third quarter of 2010, net sales of $917 million included nitrogen segment sales of $735 million and phosphate segment sales of $182 million. Nitrogen volumes for the quarter were 3 million tons compared to 1.2 million tons in the year-ago quarter. Incidentally, on this call and in our filings, the word "tons" refers to short tons unless otherwise noted.

Nitrogen sales were 166% higher than in the third quarter of 2009, due to the acquisition of Terra, stronger demand, and higher average prices. Our average price realization for ammonia was $394 per ton, which was about $40 higher than the average price last year. Ammonia sales volume was strong at 513,000 tons. Urea price realizations were about the same as the third quarter of 2009, but volume of 713,000 tons was much higher. UAN price realizations were 21% higher than the third quarter of 2009 with volume of 1.4 million tons. DAP and MAP average price realizations for the third quarter were 43% higher year-over-year, and volume was 3% higher.

Gross margin of $170 million was up 37% from the year earlier quarter. Gross margin for the nitrogen segment was up $39 million from the third quarter of 2009, due to much higher volumes from the inclusion of Terra's results and higher average pricing, offset partially by higher natural gas costs, including the impact of mark-to-market adjustments. Gross margin for DAP and MAP were up 34% year-over-year due to higher average prices.

Steve indicated that our cash balance at the end of the quarter was about $650 million. We also held $122 million in auction rate securities. Net debt, including the liability for customer advances, but excluding the auction rate securities, was $1.9 billion. Customer advances grew by more than $300 million during the third quarter, as we resumed forward-selling activity. We paid back $350 million of our bank term loan in the third quarter, which resulted in accelerated amortization of previously incurred loan fees, similar to what we saw in the second quarter. Also, there are two new tables in the back of our press release that show how this accelerated amortization impacted interest expense and DD&A. Approximately $650 million of the original $1.2 billion term loan was outstanding at September 30.

We also mentioned in the press release that we're in a period of strong cash flow. We'll continue to use available cash flow to pay down our bank debt in the fourth quarter. Now, let me turn it back to Steve.

Thanks, Rich. I would like to discuss our outlook for the next couple of quarters. The fall fertilizer season is off to a great start. As anticipated, the early corn and soybean harvest is providing a long window for fall field work, and farmers are taking advantage of it. The temperature drop we've experienced over the last two weeks allowed agricultural ammonia movement to get underway earlier than normal in the upper Midwest. And we are in the midst of a period of ideal conditions for ammonia application. Available supply is expected to remain very thin, although we may have some volume available in the late fall if the current excellent weather pattern extends the application season.

Corn and wheat crop prospects both improved over the last few months with very tight balances, suggesting that planting for each could expand by about four million acres next year. The tight domestic grain market and the Russian export ban are expected to support crop futures and cash prices at historically high levels. With favorable prices, US farmers will enter the 2011 planting season in an excellent financial position, which should encourage complete fertilizer application. Longer term, the EPA's announcement in mid-October that E15 blends are approved for model year 2007 cars and newer will provide additional support to corn planting. The EPA is expected to announce its decision with respect to model years 2001 through 2006 some time this month.

For the 2011 fertilizer year in total, we expect increased planted acreage and higher nutrient application rates to lift nitrogen demand to over 13 million nutrient tons, the second highest on record. Urea prices have strengthened recently. If reports that China's high export tariff season will start at least two months earlier this year prove to be true, global urea supply will be reduced. UAN prices are also expected to be supported by low domestic inventory levels and international availability and should get further support from the increase in urea prices.

In addition to these favorable fertilizer market factors, the outlook for our nitrogen segment is supported by low forward natural gas prices. 12-months natural gas strip averages about $4.10, and our future financial results also will benefit from prices below $4 in both October and November of 2010. At today's product price, $4 natural gas supports very high margins.

Phosphate demand for fertilizer year 2011 is projected to increase 8% from 2010, which will return it to the ten-year average. Domestic shipments in the fourth quarter are projected to remain strong, due to the robust acreage forecast and recovering application rates. Product availability across the US supply chain remains tight, which may limit new export sales. Indian import commitments continue to underpin international pricing, while favorable crop prices encourage spot prices in other major markets. Global supply is expected to be constrained by a tight domestic Chinese market and potential supply controls there, as well as continuing delay in the Ma'aden Project startup.

So the outlook for our business is clearly, very positive and should sustain strong profitability and cash flow in upcoming periods, assuming weather and other uncontrollable factors are favorable. When we embarked upon the Terra initiative in January, 2009, we envisioned a stronger and larger, but nimble, North American fertilizer producer with a skilled team dedicated to serving customers in an effective and profitable fashion. It was just for this type of market that we sought the combination. I believe we're just beginning to realize the earnings potential of CF Industries. With that, let's open the call to your questions. Regina, please explain the Q&A procedures.

(Operator Instructions) Your first question today comes from the line of Vincent Andrews with Morgan Stanley.

Thank you, and good morning, everyone. Maybe two questions. The first, on your ammonia volume in the quarter and [the type actually] so said Steve was a little lower than we thought and just want to try to get an understanding. You said you might have some supply late in the fall. I know you -- there's a contract --- an industrial contract that changed during the quarter. But was part of the plan maybe to have some ammonia for sale at spot prices going into the fourth quarter? Or can you help us reconcile that?

Well, we certainly like having some volume available to take advantage of spot opportunities. But one of the major factors at work this fall is that with the long window for field work, we have the opportunity to resupply our system to a certain extent. And so if the window remains open, we'll be able to get more ammonia to our terminals, and therefore have more available to customers. That's the general paradigm there.

Okay, and then my other question would just be on the tax rate. The tax rate came down materially in the quarter. And my understanding of the accounting rules is that's sort of a true-up for what you think the full year is going to be. And that typically takes place when earnings in the forward periods are going to be less than previously anticipated, which is really hard to imagine is the case here. But then you've got $300 million of forward sales. So can you give us a little bit more color on that? And how it impacts the fourth quarter? Or am I completely off-base?

Sure, I'll let Rich handle that. I think it's actually the reverse of that.

Vincent, it's actually the reverse of what you're describing. What we do is we project out the full-year earnings. What happened in this particular case is that we increased our estimate of full-year earnings. So when those extra earnings get built into the calculation of the tax rate, they come in at a 35% rate. Now, the previous rate was higher than 35%. So the 35% reduces the rate down. And then that reduced rate gets reflected in the third quarter. And so the full impact of the lower rate on the year-to-date earnings goes through the third quarter earnings. So if you want to get a feel for what our full-year rate estimate is, just look at our third quarter year-to-date results, and you'll see that, excluding noncontrolling interest from pretax income, it is about a 44% rate.

Okay, all right. Thanks so much. I'll pass it along.

Your next question comes from the line of Mark Connelly with CLSA.

Thank you. Good morning, Steve.

Good morning, Mark.

Just two questions. I wonder if you could talk about, in general terms, the way you're thinking about the industrial part of your portfolio in terms of its strategic significance in the mix. You talked earlier about taking some business away there. But when you do have a quarter like this, it is an important piece. And I'm just curious if you could give us a little bit of a sense of how you're thinking about that. And secondly, when we think about synergies, you've taken a lot of costs out already. When we get to the operating side, how much progress have you made there? And how much more is there to come in 2011?

Okay. If you don't mind, Mark, we'll take those in reverse order. I'll talk about the synergies. We are very, very pleased with our progress on synergies. The focal point of that work is in the whole interplay between production, sales, supply and logistics, looking for opportunities to take distribution and transportation costs out by manufacturing closer to the customer, eliminating movements where we can, or shortening movements where we can't eliminate movements. And those have proven to be very successful. We are on track to be at about $100 million per year run rate by the end of the year. That's -- we feel more confident of that, of course, than we did three months ago because we're closer to the end of the year. And we're well on our way to achieving in excess of the high end of our synergy target. So we're -- obviously, the rate at which we discover opportunities is slowing down as we move into the process. But we're still finding new opportunities. And I would like to have Bert respond to the question on industrial ammonia.

Good morning, Mark. The industrial section or portion of our business is a critical part of how we differentiate and how we move our industrial -- our ammonia tons throughout the market. We have stationary business to power plants, and we have industrial customers at our chemical plants and such. And so it's a consistent business. It's ratable. We're able to maintain that flow. So it's a valuable part of our mix that we take to the market. We're working to improve that section, whether it's through pricing or logistics that improve our returns. But we do need to utilize those customers for our system.

Okay, thank you.

Your next question today comes from the line of Jeffrey Zekauskas with JPMorgan.

Good morning, Jeff.

Hello, good morning. In your $310 million of customer advances, is a lot of that volume for the fourth quarter? Or is it for the first or second quarter of next year? Can you give us a little bit of a feel of what's in there?

It's all of the above. As we move through the third quarter, certainly we are booking business for the current quarter. But also interest was sparked for next spring because of the robust planting intentions that we feel are underpinning the whole market right now.

Okay, and you said in your press release commentary that US Corn Belt prices for ammonia had reached about $650, which is really up quite a bit from the $394 that you reported in the quarter. Is there, all things being equal, much change in that ammonia price for the fourth quarter? And so we really see the large changes in the first quarter of next year? Or is it more graduated?

Bert?

Good morning, Jeffrey. I think that there are several components to this question also. The $650 ammonia price that you stated was more pulled into October. And so the third quarter numbers, as they were rising, we were reaching closer to $600 by the end of the quarter. The $394 that we reported, like we stated, includes a significant portion of industrial that's a contractual based on a Tampa or a gas calculation. So that brings down that average. I think you'll see in the fourth quarter, we don't talk too much about our book. But you'll see the agricultural percentage more weighted in the fourth quarter, and then we have the first quarter to report.

So just lastly, if in your $394 price, was there a large difference between your average price and the price that you booked for the agricultural ammonia? Or what would be that magnitude roughly?

Well, there is a differential between the Midwest agricultural numbers and the Tampa plus calculation that generally the industrial businesses is calculated on. I don't have that specific number for you.

Okay. Thank you very much.

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

Thank you. Good morning. Steve, can you remind us again on your nat gas hedging strategy, given your bearish view on gas. And also, if the forward strip stays where it is at, let's say, for the next 12 months. Would your average cost be that much different from that?

Edlain, our view on gas purchasing is that it is a raw material for our fertilizer production, and we tend to want to match our gas purchase price -- fixing the gas purchase price to our fixed price nitrogen sales to take the risk out of the equation. So we continue to be on a track where when we book a forward sale, we will do a swap transaction to match the quantity of gas acquired with the quantity required for the nitrogen product. We do that on a disciplined basis. Obviously, the margins that are available to us today are quite attractive. On occasion, we will take a position beyond that when we see gas prices that are particularly attractive. Given where the strip is today, and given, frankly, the relative stability of that that we've seen recently, we are not really looking to lock in gas now in excess of our fixed price nitrogen needs. But that could change if we had a significant downward move in gas cost -- gas price.

Okay. Can you give us an update on the Peru project. When would you have to make a decision, and where are you from there? Can you update us there?

We made a brief comment on Peru in the press release, and I really have no -- no gloss to add to that. We have a couple of very important infrastructure issues. Two pipeline issues that need to be resolved before we would be in a position to do our final analysis and come to a conclusion on it. And just to remind you, the first issue is the expansion of the pipeline that goes from the Camisea region over to the Andes to the Coast. That's the main pipeline. That doesn't have enough capacity today to meet the needs of our plant. And then, the second need is to build a pipeline from the intersection point with the Coast down to our plant site. That's about 120 kilometers of pipe. That project has not been started. And so until those issues are resolved, we certainly wouldn't commit our stockholders capital. And we wouldn't be able to find lenders that would finance it.

We're -- it's still an interesting and intriguing project. Our spend rate on it has been reduced considerably. We basically are spending the minimum amount necessary. It's almost, it's almost a de minimis amount at this point. And, we hope that these issues get resolved, and we can bring the decision forward. But we're not there now. And I can't predict when others will get those other two things taken care of.

Okay. Lastly, on your cash flow generation and cash balance. Now, of course your first priority is debt repayment. Can you talk about where does share repurchases would fit into that strategy going forward?

Edlain, I guess I just would remind those of you who have been following us for a while and perhaps let those new investors know that exactly, or almost exactly, two years ago, we had our Board approve a $500 million share repurchase program after a lot of thought and careful consideration. We executed that in about 12 or 13 trading days. We bought the stock back somewhere in the mid-$50s, I believe it was. So that turned out to be, I think, a good use of our cash. As we go forward and assuming that the cash generation continues to be as robust as it has been, and we believe it will be. We'll have the wonderful problem of figuring out how to deploy that cash and returning cash to shareholders will be prominent on the list of things that we consider. And I think that our investors should feel comfortable that we will be prudent stewards of their capital given our own history in that regard.

Okay, thank you.

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

Good morning. I had a couple questions. First, if you could talk a little bit about your cost of production on the nitrogen side of the business. It seemed like the production costs, maybe your nitrogen margins were a little bit lower than I would have anticipated. And then specifically, I think on the urea side as we do more DEF and urea liquor, how that might impact your P&L?

Okay. Mike, I know, certainly, our gas cost is a major cost on the nitrogen side. I think our gas costs have been roughly with the market. We have some increase in noncash costs. We have higher depreciation due to the acquisition of Terra, and we had a bit more turnaround activity in the third quarter than normal. So that would have increased some of the fixed costs associated with our nitrogen business. Those are the factors that come to mind right now.

Okay, great. And then you talked a little bit about how some of your international commitments maybe -- that you made in second quarter hurt the third quarter pricing. Can you talk about how much is remaining on some of those international commitments? And if so, is it just in phosphate? Or are there also some of those lag 2Q contracts that are still going to flow into 4Q?

Right. I believe I'm correct here that we had -- we still have some phosphate to ship offshore this quarter or have shipped it this quarter. Beyond that, we don't have any, or any meaningful amount of export commitments at this point.

Okay, great. Last question is, could you give us a relative mix of what we should expect between domestic and international in your phosphate business? Would it be the same ratio as the third quarter, or should we see a higher percentage domestic?

Oh, I think it's likely we'll have less export business, given the strength of the domestic market.

Okay, thank you very much.

Thanks, Mike.

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

Good morning, Elaine.

Good morning. How are you?

We're doing great here.

In the phosphate business, has CF faced any plant issues or issues securing raw materials? The reason I ask is the costs seems to be a little bit higher than I expected. I think in the press release, it was mentioned that domestic production could have been impacted by a couple of factors.

Well, we've -- I think our production in the third quarter was around 89% of capacity. That's a fairly typical run rate for us. Maybe a little lower than the range we would like to have, but I think it's within the range of normalcy. We've had, certainly, increases in sulfur costs. Sulfur has been particularly tight. It's getting tighter. The cost is going up. The published price for the fourth quarter is about $160 a metric ton. That's a significant increase. That will be feathered into our mix through the quarter. That's not -- we're not paying that as a blended price in the fourth quarter. We have not had production disruptions due to insufficient sulfur supply. Our team and our supply chain group has done a great job of maintaining relationships with suppliers. That isn't to say that they haven't sweated a little bit in the process, but that's okay. That's what they get paid to do.

Okay. Then with regard to CapEx, I think it was mentioned in the release that you're raising your spending estimates in 2010 and likely spending even more in 2011. Can you comment on what's driving that?

Sure. And Elaine, I'll be a little verbose here because this is part of the whole Terra acquisition story. In March of this year, when we stepped up to the plate with our increase in our offer price, it was based upon having done a lot of homework in terms of our financial profile and the amount of debt we would be taking on. We did a base case analysis, and we did a stress test. And in the stress test, we looked at a prolonged downturn. What that impact might be on our cash generation ability, and backed into a capital expenditures number that we believed was appropriate in light of the stress test case. So the $205 million or so that we had talked about was based upon the stress tests -- the stress case.

So now we're seven months into the combination, and there are two obvious factors that have changed the need for that kind of discipline, tight discipline. The first is that seven months have passed, and we haven't been in the stress case. We have generated a lot of cash, and our outlook through the fourth quarter and into the spring is quite robust. So the need for that kind of very, very tight control overspending is not necessary.

So what are we doing? Well, we're not opening the cash drawer and letting people come in and grab as much as they want at the plant level. We're going through the same disciplined analysis that we always do. There are some projects that we suspended back in April that we felt was necessary to suspend in order to conserve capital. Some of those have been released for completion. And then some very good projects that we think will provide increased production and/or efficiency, and projects that support the DEF business we're going to be undertaking. So this isn't a -- these aren't major projects. But they are very attractive projects and very good for the business.

Okay, great. Thank you very much.

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

Good morning, guys. A couple questions, if I may. First of all, a lot of questions have had to do with the search for higher netbacks. There was a question on industrial. Any other things you're doing with respect to getting higher netbacks, either emphasizing more domestic sales? Could this DEF opportunity be material enough in terms of volumes to raise netbacks in the urea business? In general, can you talk more about what you're doing to raise your overall average selling price?

Okay. Mark, good morning. First, I'll make a comment or two about DEF, and then I'll ask Bert to comment on the pricing in general. I think it's important to put DEF in perspective. This is a business that has tremendous upside potential, but it is a very new business that we are nurturing. And to put it in perspective in the first nine months of 2010, even though sales of DEF have moved up rapidly, it has only consumed the equivalent of 5,000 tons of granular urea. And if you look at our release for the third quarter, we shipped 713 tons of granular urea in the third quarter alone and almost 2.2 million tons in the first nine months of this year. So the business is a fledgling business. We think it has great potential, and certainly this business in general as it develops in North America and around the world will help with urea demand. But with respect to our own product mix at this point in average pricing, it's insignificant. Bert, do you want to comment on the more general question?

I do. In regards to margin and margin management, that is what we're all about. Always looking at the optionality that exists for our business. And that can be expressed in several different areas and in products, from urea to a UAN production point. Looking at export opportunities relative to domestic. Reviewing our network, which we're doing as through this acquisition. Looking at how we can optimize our freight system and our terminal system. And obviously as already been mentioned is the agricultural ammonia as related to the ag to industrial ammonia. And then four, the spot sales. Each of those and other components will go into making or creating the options for us for margin -- on a margin uplift in a rising market.

My next question had to do with the integration. Earlier in the prepared remarks, you talked a little bit about getting people together to source opportunities. Is another layer of synergies that may not be talked about yet, but may be an opportunity there may be more of an IT solution. Another leg in that whole synergy story?

Well, we have an IT initiative underway. It's in the early stages. We knew going in that we had two systems that were incompatible, and so we're working to resolve that. It will take some time. Our focus in the first months of the combination has been on making sure that we can operate as a combined entity with the two legacy systems. And I think we're doing that pretty well. It's not a long-term solution, but it is a -- it is one that's getting the job done today. If I look down the road a ways, if we have a -- when we have a comprehensive IT tool that's available across the Company and having better data, more timely data, more consistent data. And turning that into useful information should, of course, turn into opportunities to optimize our system. In addition to what we've been able to accomplish so far, and we envision accomplishing in the next six months or so.

Okay, thank you.

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

Good morning, Bob.

Good morning, everyone. It's actually Lindsay Drucker-Mann standing in for Bob. I was just hoping to go back to the ammonia prices you talked about in your press release, and then also on the call that you've been able to realize in the current quarter. So that $600 to $650 range, is that a level that you've actually been able to sustain into the thick of ammonia season?

Well, you have to understand that when you say the thick of ammonia season, we're currently applying or moving product out of our terminals today at a very high rate. But those positions were put in place months ago. And so, yes, we've been selling ammonia. That will be reflected as we go forward. Today's activity, you have to put these products into place July, August, and September to be pulled in October and November. And so your average price of $600 to $650, which is being realized in October and today, will not be realized in the fourth quarter.

The spot prices that are being achieved today are not representative of the average that we will actually experience for the quarter. That's an indication of how far the market has moved since the end of last spring.

Okay. And when you talk about having -- because of the long window actually being able to resupply your system and have increased availability of ammonia. Is that something that you expect to impact spot prices?

With the long window, you obviously have more opportunity, and as Steve mentioned earlier, we are attempting to resupply our terminals to take advantage of that and to move our product into position. So as product is available, we will be selling at the spot prices.

Lindsay, I guess I would turn your comment around just a bit. It is something that we believe will -- assuming that the weather cooperates and the soil conditions cooperate. It's an opportunity to take advantage of current pricing.

Great, and just curious going forward after having exited the industrial contract that you called out. How does that affect your split in terms of industrial versus ag as we look into next year?

Well, we manage our book of business on a dynamic basis, and there will be times when industrial business is very attractive to us. Times when it's not so attractive. Our objective with all of our products, but since we're talking about ammonia -- particularly with ammonia is, we want to put it to the highest and best use. So we don't have an aversion to industrial business. We're not totally wed to ag business. We want the highest margin business that we can make on a sustained basis.

Okay, thank you.

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

Thank you.

Good morning, Don.

Good morning, Steve. Still trying to get a handle on this lag between spot and what your realizations are. And obviously from the outside, it's hard to know what your forward commitments are. But is 90 days kind of a safe guide to when we see a spot price versus when you might actually realize it in your sales price?

Bert?

Good morning, Don. I think on that issue, you're going to see that fluctuate throughout various quarters because there are times when it could be 90 days. It could be shorter and longer. So I would decline to answer specifically.

And then a question on your forward sales book. What does that $321 million as of the end of September, what does that book today? Has that been growing, or are you adding significantly? I've seen some pretty high forward quotes on both ammonia and urea for next spring.

Don, if you recall, at the end of June, I believe our customer advance balance was $11 million. So it has grown substantially. It is, I think, roughly in line with some other points that we've had in the past. As the outlook for the fall turned into reality and the outlook for the spring seems to be coming together, we obviously have had a lot of interest on the part of our customers to lock in supply. And we've had the normal back and forth between supplier and customer in terms of arriving at the appropriate timing and pricing for shipments.

So that $321 million has grown significantly then in the last month and a half?

I'm only commenting on how the $11 million has grown to $321 million. I will just say, in general, that we have good demand for our product for spring shipment.

And one other question on netbacks. Were you affected at all by some of the pipeline outages over the -- in the second and that lasted into the third quarter? And that gets into a broader issue of with Terra's greater proportion of Midwest production, what benefit have you seen and have yet to see in terms of improved realizations between, say, benchmark corn belt price and your net realization?

Well, in terms of the physical side, the pipeline outage affected us. But we worked around it in a way so it really didn't impact the amount of product that we moved and who we moved it to. It was seamless to our customers. We had to do a little more work finding trucks and so forth and so on. With respect to the impact on pricing and so forth, I'll defer to Bert.

No, I think you stated it well, Steve. The impact on the pipeline, specifically, we did take some precautionary measures and move some product into position. And I think this is the benefit that we've been discussing is our agricultural distribution system and being able to place tonnage at the appropriate time and the appropriate place.

And obviously, ammonia is a product with -- that's focused on a lot. It is focused on a lot in our own shop because we think we have a great configuration to provide value to our stockholders by selling ammonia. Having the new configuration with end market production, along with the Medicine Hat and Donaldsonville production coming in from either outpost, if you will, either end of the Corn Belt. Gives us a lot of levers to pull and a lot of ways to supply terminals. In turn, a lot of points from which to serve customers. I think it has been well received, to date. And certainly has energized our own people in terms of looking for opportunities to increase our margins in ammonia.

Thank you.

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

Thank you, good morning. I'm wondering whether you could help me reconcile something. You've referenced a couple times that you're very focused on maximizing your margins. But when I look at your production profile of the latest quarter, according to my calculations, UAN, which you produced the most of, was producing the least gross profit per short ton. Certainly, one would have thought you would have focused more on ammonia and urea than UAN. Can you just help me reconcile that you produce what you produce, yet you're all about margins?

Well, personally, I don't think we've published margin by product. So I'm not sure whether I would agree with your conclusion, although I suspect if you've done your math, it's probably correct. We have substantial amount of nitrogen production. We can do 13 million tons, roughly, annually. We have the ability to shift somewhat between urea and UAN. We actually did that in the quarter. When urea gives us the best margins, we'll do as much urea as we can. And we're certainly willing to shift. I would remind you that if you're looking on a product ton basis, you may want to actually convert that to equivalent nitrogen ton basis. Ammonia is 82% nitrogen. Urea is 46%. And UAN is 28% to 32% nitrogen. So what we're trying to do is maximize the margin per unit of nitrogen produced. That's our goal. And we have models that look at that, and I think we're nimble enough to be able to shift between urea and UAN. And also frankly, when ammonia in particular is very attractive, we have the ability to bring it in from offshore and inject it into our system and enhance our margin by doing that.

So -- no, that's helpful. So I guess what I'm hearing is that if your model is telling you need to produce more ammonia or less ammonia, you have the flexibility to do exactly that?

We're actually producing all the ammonia we can produce. The question is what do we do with that ammonia. And we would certainly only upgrade it if we're going to get a higher margin by doing it. And the math on upgrading in recent years has, frankly, been a no-brainer. We get value in our upgrading, and we get value from the free ammonia that we sell as direct applications.

Thanks very much.

Thank you.

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

Morning. Just one quick question. Obviously, you talked about the shift of industrial sales toward agricultural. That's something you've got to do on a long-term decision basis because those industrial contracts, I guess, are typically annual or longer in terms of their volumes. Can you talk about how the Company combined with Terra is going to look in terms of industrial sales as a percentage of total versus what it used to be prior to the combination and the shift you're making?

Charlie, we don't have an objective. It's a little bit like asking about a mix between import -- between domestic and export sales. What we want is the best long-term margin we can generate for the Company. We don't care whether it's ag or industrial. What we want is the highest and best value for our product. So as we go down the road of talking with industrial customers and talking with ag customers, we'll find a place that works for us and maximizes the long-term margin for our production.

Okay. Then as a follow-up, does that mean that perhaps the industrial contracts might have to shift in the way they are priced going forward? Because I guess the reason you're shifting out of them is because the pricing doesn't really go well with the agricultural outlook. So if they get more in line in terms of how they are priced, would that -- obviously, that would have some influence then?

That is certainly something that could happen. And may have already happened. And, I guess I would add that -- and I think we talked about this last quarter. But I don't mind reiterating it. That with the combination, there are now more options for product coming out of legacy Terra plants than there was before for ammonia. Terra did not have the extensive ammonia distribution system that legacy CF had, and limited storage at the plant sites. So now we have the flexibility to move that ammonia in more directions and for a greater variety of uses.

Thank you.

Thanks, Charlie.

Your next question today comes from the line of David Silver with Bank of America.

Good morning, David.

Yes, good morning. I have a few questions. First, I would like to ask you about your inventory levels. So when I compare 3Q 2010 inventory levels to 3Q '09, I'm struck by the fact that they seem decidedly on the low side. 3Q '09 was before the Terra acquisition. Your average natural gas cost is substantially higher this year. And I'm just scratching my head and I'm listening -- I'm recalling your comments about the fourth quarter outlook. I think your demand is going to be significantly stronger than a year ago. Yet all things equal, you seem to be running much leaner on inventories. And I guess I'm just wondering, will you be able to meet your fourth quarter demand out of production? Or does this mean you're going to have to go out in the market and maybe bring in product from offshore to meet commitments?

Well, I believe our production capability combined with our inventory is going to absolutely allow us to meet our commitments to customers. That's -- we only make our commitments after having done the work necessary to assure that we have the supply. I haven't done the analysis that you just went through in terms of our inventory position, but I feel quite confident that the work that's been done among our production supply chain and sales team is supportive of all of our customer needs through the fall and the spring, absent some kind of unforeseen event. We do have the ability to bring in product in addition to that, but that's not part of our base plan.

Okay. I would like to maybe switch over to a financial question. And in particular, you mentioned that you used $350 million of cash -- available cash -- to pay down debt this quarter. And you also talked about greater discretionary capital spending both this year and next. And I guess I'm just wondering whether you believe that now is the -- an opportune time to consider a major refinance. In other words, you spent $350 million this quarter to pay down relatively low cost debt, whereas we seem to be in an unusually favorable environment for corporations to raise capital. Wouldn't there be a better bang for the buck by just trying to do a major refinance as opposed to paying down the term loan as cash flow becomes available?

Well, we'll certainly look at capital structure as the months evolve here. We're certainly pleased to be generating cash at the rate we are. We're looking to get our debt down to a level where the debt to EBITDA ratio is 1 to 1.5 times. We just did our bond financing back in April. I think we did pretty well. If we were doing it today, would we do better? Yes, but I'm not sure it would offset the expenses involved in doing it. Frankly, we have not looked at that. When we have our next CFO in place, I'm sure that he'll spend a lot of time looking at our capital structure and along with the rest of our finance team that advise me and the Board on what we ought to do.

Okay. And I was thinking of it mainly in terms of gaining flexibility maybe sooner. Okay. I wanted to ask you another question about maybe your international market intelligence. So one of the issues you raised when you struck the deal with KEYTRADE was that it did give you greater insight into goings-on in international markets. And right now I was just hoping you could share your latest thoughts -- or their latest thoughts -- on a couple of issues, including the likelihood and the magnitude of China's export tariff decision? And secondly, how delayed does -- do you, or KEYTRADE believe that the Ma'aden Project is?

Well, Bert talks to the KEYTRADE people at least once a day, sometimes seven days a week. So I'll let Bert handle that.

Good morning, David. You're right. In terms of the KEYTRADE relationship and joint venture, that's going very well. We do rely on them for market intelligence and utilizing them to move our products into the market. They are inside the markets, and they do have a Beijing office. But I think I would rather go back to the public statements in the industry publications. There's a lot of variations on what will and can happen in China, pulling it to January 1 to December 1 and as early as November 15. And some are expecting that announcement to come today or tomorrow. We're obviously following that, and we do follow that relative to our forward prices of urea, which will have a substantial impact in phosphates. And so I do not want to speculate today on something that is pure speculation. So I'll just say that we're watching that.

And relative to the Ma'aden Project. Again, there has been reports from other companies that reported their quarterly earnings, and we read the same publications also that are projecting now that that would be delayed into the fourth quarter of 2011, possibly even into early 2012. And that also, we will watch very closely as it relates to our phosphate exports.

Thank you very much.

Thanks, David.

Ladies and gentlemen, this concludes the question and answer portion of today's call. I would like to turn the call back over to Terry Huch for closing remarks.

Thank you. I would just like to thank everyone who participated on the call today and invite you to call me if you have further questions.

Ladies and gentlemen, thank you so much for your participation in today's conference. This concludes the presentation, and you may now disconnect. Have a wonderful day.