CF工業控股 (CF) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 CF Industries Holdings Earnings Conference Call. My name is Carmen and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. (Operator Instructions) Later we will conduct a question and answer session.

I would now like to turn the call over to your host for today, Mr. Terry Huch, Senior Director of Investor Relations and Corporate Communications. Please proceed.

Thank you, Carmen, and good morning, everyone and thanks for joining us on this call for CF Industries Holdings, Inc. With me today are Steve Wilson, our Chairman and Chief Executive Officer; Rich Hoker, our Vice President and Corporate Controller; Bert Frost, our Vice President of Sales and Marketing and Tony Will, our Vice President of Manufacturing and Distribution. CF Industries Holdings, Inc. reported its second quarter 2011 results yesterday afternoon, as Terra Nitrogen Company, LP. On this call, we'll review the CF Industries results in detail and discuss our outlook, referring to several of the slides that are posted on our website. 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 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 forward-looking statements included in yesterday's news release and the slides accompanying this call. 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. Last night, CF Industries reported second quarter net earnings of $487 million or $6.75 per diluted share on sales of $1.8 billion; all records for any quarter in the Company's history. For a commodity producer to generate such outstanding results, it needs an outstanding business environment. Clearly, we're enjoying an outstanding business environment right now. But the second quarter also was remarkable because of the challenges farmers face in applying crop nutrients and the challenges we and our customers face in getting our products to the farmers who needed them. The way our team collaborated to maximize the throughput of our plants, terminals and transportation assets enabled us to capture the opportunity presented by strong market demand and prices.

I'll have more to say about demand and the pricing environment later. But first, I'd like to mention a few of the challenges we faced and how our team rose to meet them. High water on the Mississippi River slowed traffic and made it difficult to load barges and ocean-going vessels at Donaldsonville. Still, because of a good configuration of equipment and a lot of hard work, we were able to load barges throughout this period and to operate the facility at full capacity. Next, high water on the Arkansas River did halt barge shipments from Verdigris for 3 weeks. We responded by increasing rail and truck shipments. Third, high water on the Yazoo River in Mississippi threatened some inventory in Yazoo City, but we were able to relocate it to higher ground.

Fourth, anticipation of flooding along the Missouri River led us to build protective berms around our Port Neal complex and a neighboring terminal and to call a precautionary halt to production at the plant. But because of a light planned maintenance schedule and good uptime performance at our other nitrogen plants, we were able to make up for all lost production at Port Neal and run our total domestic ammonia system at full capacity. By focusing our attention on the precautionary measures, we were able to avoid any damage to the plant and start back up much faster when conditions allowed. While we were down, we also completed an inspection and enough maintenance to allow us to postpone the next turnaround at Port Neal by a full year.

It wasn't just our plants that face challenges due to flooding. All across the central US, high water closed many sections of railroad track and several river locks, slowing traffic and requiring us to reroute deliveries or ship them from different locations. Our team was very resourceful. Our extensive network of plants and terminals gave us a lot of levers to pull in order to satisfy customer demand. In many cases, we were able to offset lower rail and barge capacity with increased truck shipments because of a flexible loading capability of our locations.

So, demand and prices gave us a great opportunity this quarter, weather and flooding tried to take it away. But good execution won the day and allowed us to deliver outstanding results. I'm grateful to all our hard working employees who made that happen. In the second quarter, we reported earnings before interest, taxes, depreciation and amortization of $889 million, which equated to a 48% gross margin. At the time of the Terra acquisition, I remember discussion about whether the combined company could earn $1.5 billion of EBITDA in 2010 and going forward. If we had made the acquisition on January 1, 2010, we would have met that expectation for the year 2010. And now we've done the same in 2011, in just the first 6 months of the year.

That kind of profitability and the corresponding cash flow have given us a great opportunity to invest in our business. We have approached that opportunity the same way we approach every important decision at CF Industries; as a chance to maximize shareholder value. We have concluded that the best way to do that is to quadruple our regular dividend, invest in domestic projects that we believe are clear winners and repurchase shares. Quadrupling our dividend to $0.40 per share is an expression of our ongoing confidence in the business. Investing in domestic projects allows us to leverage our excellent operating platform in North America and take advantage of the favorable natural gas market we enjoy here.

It also enables us to produce more value-added products for the world's best crop nutrient market. Although we're not presently studying any greenfield ammonia plants in North America, we have the ability to increase our nitrogen nutrient capacity by eliminating bottlenecks at our existing plants. We also have opportunities to upgrade more of our free ammonia to urea and UAN, where we can earn higher margins per unit of N and to optimize our plants in other ways. We expect to spend as much as $1 billion to $1.5 billion over the next 4 years on these actions. And frankly, should we identify more of these kinds of projects, we would have more capital available for them.

Our plan to deploy up to $1.5 billion to repurchase shares between now and the end of 2013 recognizes that the Company is overcapitalized and that the Company's shares represent good value. We don't believe these actions will hamper our ability to consider other opportunities to increase shareholder value through investment or acquisition when they arise. We're announcing this plan at a time when we have a large cash balance, low debt and the expectation of high continuing operating cash flow.

This quarter's operating cash flow was a record for the second quarter. Strong demand in prices for our products set the stage for this quarter, with the global urea market leading the way. The price of urea at the US Gulf rose by more than 50% from its low point in mid-April to the end of June. Understanding why this happened is important in evaluating our results and the sustainability of current market conditions. The key factor in urea's run up was the market's recognition that export availability from China was going to be much lower than it was last year. The sliding scale tariff that was announced in December and became effective in July, seems to be doing exactly what it was designed to do -- limit exports of a key energy-intensive resource and keep nutrient prices within China lower than they otherwise would be.

Although the details are likely to vary each year, we don't expect these overriding goals to change. The market coming to grips with lower export availability from China is the thing that changed most during the quarter. But it wouldn't have had nearly as great an impact in a weak demand environment. We're in a period of high global demand for urea and nitrates driven by low global grain stocks. North American demand for urea contributed to global strength, due to large plantings and spring weather conditions that seemed to favor upgraded products over ammonia. Low inventories also played a role in urea's price rise and they continue to play a role in sustaining prices at high levels. This is especially true in the US where we saw some localized shortages that sent growers scrambling to find urea or to substitute other nitrogen products.

To round out the discussion of issues that propelled urea prices this spring, I point to unsatisfied demand in India. It seems that each time a factor arises that might be [barrage] for crop nutrient prices, market participants are reminded that India has delayed purchases and eventually will need to catch up. Something I find interesting about this list of supportive factors for urea is that it could be repeated almost word for word in explaining the current strength in phosphate market prices. China's export tariff has reduced export supply. Strong crop plantings have increased demand. Global inventory levels are very tight and delayed shipments to India put a floor under world demand and price. CF Industries was able to take advantage of this price environment, realizing average prices across all our products that reflected market strength.

Ammonia provides a good example. We sold ammonia at an average price of $596 per short ton in the second quarter. As you can see on slide 5, the Green Market's published ammonia price has been flat for most of the year. Yet, our realizations were up 17% from the first quarter to the second. In part, this reflected our normal lag because of forward sales. It also reflected a very high portion of our sales being made into agricultural markets and a large percentage of those ag sales being made in the corn belt where demand is strongest in the second quarter.

Our price realizations for phosphate, which are shown on slide 6, also were strong compared to market benchmarks. Our average selling price for DAP was $555 per short ton, which is equivalent to $610 per metric ton. Our phosphate business benefits from seamless flexibility between domestic and export sales, due to our strong distribution network in the corn belt and our collaborative relationship with Keytrade.

Demand was strong throughout the second quarter, but the month of June was especially noteworthy. While we were focusing on overcoming the challenges the weather presented to transportation and application of crop nutrients, farmers were busy planting as many acres as possible. Supplies of urea and UAN ran very low, renewing the attractiveness of ammonia, which was readily available and priced at a large discount to the upgraded products on a nutrient basis. Because of the late start, application continued all through June, and even into July, which helped us ship almost 1 million tons of ammonia in a quarter that didn't appear to have favorable weather for direct application. The late ammonia season translated into a long ammonia season which allowed us to leverage our re-supply capability.

The cost picture continues to be bright for us as well. Our average natural gas cost in the second quarter was $4.32 per MMBtu, equal to the first quarter and lower than the year-ago quarter. Now, I'd like to turn the call over to Rich for a few more comments on our financial performance.

Thanks, Steve. Good morning, everyone. In the second quarter of 2011, CF Industries recorded net earnings attributable to common stockholders of $487 million, or $6.75 per diluted share. This compares to $105 million, or $1.54 per diluted share, in the second quarter of 2010. Our second quarter results included a $14 million non-cash mark-to-market loss on natural gas derivatives and other items detailed on slide 7. Our second quarter results a year ago included $114 million in business combination and integration costs and a $15 million non-cash mark-to-market gain on natural gas derivatives.

Our nitrogen segment had an outstanding second quarter. We delivered 3.8 million tons of nitrogen products and achieved a gross margin percentage of 52%, which you can see on slide 5. The significantly increased gross margin reflects higher nitrogen selling prices and slightly lower realized natural gas costs compared to a year ago. During the second quarter of 2011, we sold 981,000 tons of ammonia at an average realized price of $596 per ton, compared to 1.2 million tons of ammonia at an average price of $380 per ton in the second quarter of 2010 when conditions were ideal for pre-plant application.

Sales of granular urea were 727,000 tons during the second quarter of 2011 compared to 779,000 tons in the second quarter of 2010. Our average realized price of $389 per ton was 31% higher than last year. The tight availability of urea in some areas of North America during the quarter added a short-term boost to in-season prices. Looking now to UAN, we sold more than 1.6 million tons during the second quarter, an increase of 6% compared to the second quarter of 2010. Average UAN price realizations of $323 per ton increased 47% compared to the second quarter of 2010. UAN prices were stable at high levels throughout the second quarter, which we attribute to high US demand, the extended application season and a strong global market for nitrates.

Ammonium nitrate sales of 268,000 tons in the quarter were about even with second quarter 2010 volume. As with our other nitrogen products, average price realizations for ammonium nitrate were strong at $260 per ton, an increase of 22%. As shown on slide 6, our phosphate segment, like our nitrogen segment, had a terrific second quarter. We achieved a 29% gross margin, nearly double the 16% gross margin reported a year ago, reflecting strong demand and prices.

Total sales volume for DAP and MAP was 17% higher than the second quarter of 2010. Exports of 240,000 tons represented 45% of our phosphate sales volume, attributable to seasonal strength in South and Central America, tight supplies in International markets, generally and attractive net prices. Second quarter net sales of DAP and MAP were $297 million, an increase of 60% from last year, due to higher sales volume and higher average selling prices. The average price realizations for DAP and MAP were $555 and $544 per ton compared to $400 and $414, respectively, a year ago. The Company's effective tax rate for the second quarter of 2011 was 34.5%. This rate remains consistent with our expectations for the year.

During the second quarter, we generated $251 million of net operating cash flow. Our customer deposits declined by more than $340 million in the quarter as we shipped orders that had been prepaid and counted in operating cash flow in earlier quarters. Even after the reduction in the second quarter, our customer deposit balance still totaled more than $400 million as we entered the third quarter. Operating cash flow and the reduction in customer deposits combined to reduce net debt by $567 million to $661 million at June 30, 2011. During the quarter, we also redeemed $24 million in auction rate securities at par, leaving a balance valued at just under $82 million.

Now, let me turn it back to Steve.

Thanks, Rich. We're very pleased with our second quarter results and the way things appear to be shaping up for the rest of the year and into next spring. Farm income is expected to set a new record this growing season and we believe farmers are going to plan a very large corn planting next year. We expect the corn stocks use ratio to remain in the mid-single digits for the 2011 marketing year, supporting elevated corn prices. This should provide growers with compelling incentive to reinvest some of their harvest income in crop inputs. If it's up to the farmers, we'd expect a large fall application for all 3 primary nutrients. Of course, it's not always completely up to them.

Weather can have a big impact on the share of nutrients that gets applied in the fall of any year. The industry has been concerned that late planting this year could translate into a late harvest and therefore, a compressed fall application window. Those fears have diminished somewhat over the last two weeks, as hot weather has caused the corn and soybean crops to mature faster. Forecasts of corn production this year still are punctuated by big question marks around the percentage of plated acres that will be harvested, and potential yield reduction from high heat during pollination. We believe the corn supplies will continue to be tight. Plantings will remain high and farmers will make every effort to apply nutrients optimally.

Wheat supplies are also below normal, sustaining attractive prices for farmers. We're keeping an eye on the drought conditions in parts of Texas, Oklahoma, and Kansas which could restrain fall nutrient application for winter wheat in those areas. As I mentioned in my earlier remarks, the global supply demand balance for all of our products continues to be tight and supportive of high prices. Price trends have been unseasonably strong this summer.

As you would expect, the price of urea did come off its in-season high, but it has bounced up again and appears to remain resilient in a range around $500 per short ton at the US Gulf, supported by the factors I stated earlier and by strong demand in India, the rest of Asia and South America. UAN and ammonia prices remain strong and phosphate prices continue to rise due to low inventories and production challenges. CF Industries has a good forward order book with attractive margins. Most of our current order activity is for late fall. But we have kept enough uncommitted product to benefit from attractive spot demand.

We feel good about the natural gas environment. The July heat wave caused a spike in electricity demand, but gas prices remain tame due to strong production. The August future closed at $4.38 per MMBtu and this morning, the September contract is trading around $3.95. We expect our strong cash flow to continue. The strategic actions we were pleased to announce today allocate a portion of our present cash balance and future operating cash flow, but in no way exhausts resources that may be needed to expand our capability and our Company. They underscore our priority to generate as much cash as possible for the benefit of our shareholders, followed by a disciplined approach to invest it in new assets and/or to distribute it to them.

With that, let's open the call to your questions. Carmen, would you please explain the Q&A procedure?

(Operator Instructions) Edlain Rodriguez, Gleacher and Company.

Steve, question on the share repurchase, can you talk about the timing and what will trigger the purchase? Is it going to be opportunistic marketwise? I remember the last time you announced a share buyback, you got it done very quickly. Can you talk about the timing in there?

Our authorization to purchase shares is a significant authorization. We do intend to buy the shares back. We will buy them based upon our own assessment of the market as the days and weeks go by. We'll let you know what we do periodically after we've done it.

Okay. That's fine. Next question on forward pricing, as you know, prices have been on an upward trend, an [upstate] high. Unless you pre-sold products last year, can you talk about, under what circumstances would realized prices in the second half of the year be lower than 2Q prices?

Bert, you want to address that question?

If I understand the question, what would drive second half to be reflective of Q2 pricing and where we are today, we've seen substantial recovery in urea as we mentioned earlier from the lows of Q2 of $312 up until almost $500. We had a little bit of a movement back in July and today we're close to the $500 level. That is supporting the end products. In regards to our forward book, we have taken some sales and we continue to take sales every day. We're pleased with the margins and we're going to be active and continue to be active for the rest of the year.

Okay. Thank you.

Don Carson, Susquehanna.

It's actually Sandy Klugman sitting in for Don. Quick question on phosphates -- you talked about your flexibility between the domestic and the offshore phosphate markets. Question is, how exposed are you to the lower price Indian market? And even if that exposure isn't particularly high, what's your outlook for where the contract settles when it gets renegotiated over the next month or 2?

We believe that our location and our relative size are advantages for us in the marketplace. We have a number of relationships in other countries, notably Central and South America, that we enjoy. Those are markets which don't require the huge tonnage that India requires. So, we are able to operate opportunistically, not just between domestic and export shipments, but among export opportunities. India is clearly a major player. They have been in an interesting position this year with a huge demand. They were reluctant to meet the price that the market seemed to require and they have kind of grudgingly moved up to come close to where the market was. In terms of going forward, it's a supply/demand situation. Supply generally seems to be tight.

Okay, great. Thanks. Just to shift to nitrogen. I know following the Terra acquisition, your exposure to the industrial markets increased rather meaningfully. Could you comment on how you see the ag/industrial mix shaping up going forward? Also if you could make a comment on the DEF market was previously a focus, where you see that business going in the future? What the potential is for that market? Thank you.

Sure. Sandy, I have just a general comment about the ag/industrial mix, and that is that we don't have an objective for that. It's really not a distinction that really matters for us. What we're looking for is to find the pieces of business that yield the highest margins to us and whether that's in industrial or ag doesn't matter to us. As we have operated in the market in the last year, I think you're aware that we've had industrial contracts come up for renewal. In some cases, we've continued to do business on the prior basis. In other cases, we've changed the basis on which we do business and in other cases, we've decided to part ways. That's just part of the normal evolution of our business mix. We're looking to put our products to the highest and best use.

With respect to DEF, the market is shaping up pretty much the way that we expected it to shape up. Our volumes, this year, are roughly 4 to 5 times what we were a year ago. That's consistent, generally, with what our expectations are. This is a very, very high margin business. We love the margins. It is not large enough yet to be meaningful within our financial results. But it's on its way to becoming so.

Okay. Great. Thank you very much.

Vincent Andrews, Morgan Stanley.

Can you just give us a sense of where North American producer inventories are for urea? TFI hasn't put them out in a couple of months. And maybe where you think they are relative to the 5-year average? Maybe just talk about your own inventories, however you can do it.

Sure, Bert, you want to comment on that?

I would probably expand it to inventories overall. You're right, TFI hasn't released those. I can tell you anecdotally and from our conversations with retailer dealers and wholesalers, the inventories are low and they're low throughout the United States. We saw that reflected in a scramble in June and into July for the price movement for urea tons from long distances. But I would also expand that to other areas of the world. Urea, around the world, is tight. You're seeing Brazil, as well as India, every 2 to 3 weeks announcing a tender and a difficulty of pulling that urea out of China and the Arab Gulf staying out of some of those tenders and movements. As you see that reflecting with [eugenie] being the balance, it's operating very well. As we've mentioned earlier, a very good operating environment for CF.

Okay. Steve, can you give us an update on where you are in terms of a CFO and maybe tie that into the decisions that the Board made on return of capital? Maybe talk a little bit about what you're going to do with the balance sheet from a debt perspective? I know from the release, you've changed some of the provisions in your credit agreement, but how do all those things come together relative to decisions that were made?

Sure. With respect to the CFO search, I'm very hopeful that we'll be making an announcement in the near future. Please stay tuned for that. With respect to the actions that we announced last night, we a deep team here. The guy who is speaking to you now used to be the CFO here, so I've had to re-learn a few functions that I hadn't spent some time with. But the issues that we're dealing with in terms of capital structure, uses of cash and so forth, we've had the appropriate amount of analysis and consideration. We've had great discussions and support by our Board. We'll move forward. When the new CFO comes on board, that person will be picking up the baton here and running with it. Frankly, I can't imagine there being a better time to be coming on board our Company. You asked about the credit agreement.

We did redo the credit agreement to provide us significantly more flexibility with respect to our balance sheet and our uses of cash. The agreement that we had a year ago was perfectly appropriate for more highly leveraged company undertaking a large acquisition. Now that we've digested that, we've paid down the debt, we're generating the cash at the rates that we are and our balance sheet is in the shape it's in, it's time to redo it. We've added the flexibility and we reduced the cost by doing that.

Okay. Thanks very much. Congratulations.

David Silver, Bank of America Merrill Lynch.

I had a question about marketing and the prepay programs. If I look at the June 30 balance sheet in the customer advances column, its a number just over $400 million and that compares 12 months ago with a number of $11 million. I'm not 100% sure but I think that $400 million largely represents maybe 20% or 25% or 33% deposits. Could you comment on, in light of the customer advances total on your balance sheet, what does that imply for prepaid business for fall or next spring? What does that $400 million figure, 40 times a year go? What does that imply?

I'll ask Bert to perhaps elaborate on this. But in general, it implies that we and our customers have come to a meeting of the minds that the availability of product and the price at which we're offering it makes sense on a forward basis. It's a different situation than we were in a year ago when there was a lot more uncertainty in the market. Anything you would want to add, Bert?

I think it's a reflection also of two different, obviously, calendar years, but markets. If you remember last year in June, we just brought the companies together and the price expectations for UAN, specifically UAN, were around $155 [NOLA]. That was unacceptable to CF and so we decided to continue with our consistent program of offering products that were needed and going on for top dress. We built our inventory and took our order book down to a very low level, I think of $12 million. Today, it's very different. We have a very positive market, very strong grain market and oilseeds that are driving not only the United States, but the markets around the world.

So, our customers, and their customers, which would be the farmer, has come in, has contracted some of those tons, and that has worked its way up through the value chain to where we're selling and have an acceptable book on of $400 million plus. We're very encouraged by that. But coupled with that are the gas markets. And the Nymex has been extremely positive, as we mentioned earlier, $3.95 for September. When you put all that together, we have a nice forward book, but a nice call on our raw material costs and a nice outlook for the grain markets.

Okay. Thanks for that. 1 other question about your discretionary capital comment that was in the release today, about $1 billion to $1.5 billion over the next 4 years. In the past, you've discussed a potential greenfield project in terms of needing comfort or confidence in cap and trade or other environmental rules. I'm just wondering, I think a greenfield North American plant might be in that $1 billion to $1.5 billion range of discretionary capital. From an environmental risk perspective or environmental regulations, is there any appreciable difference of how existing plants that are de-bottlenecked would be treated as opposed to a new greenfield plant? In other words, is there a steeper regulatory burden or greater liability for cap and trade purposes or anything like that?

David, my general comment is yes, there is a difference and that's a significant consideration in the portfolio we're putting forward. I'll ask Tony to make a couple of comments about that.

Some of the biggest issues are when we go after some of the de-bottlenecking opportunities, it's not only capacity expansion, but there's also efficiency projects that go along hand-in-hand with that which is how you de-bottleneck the plant. So, there are natural offsets that we get from an emissions standpoint and are other things we look at throughout the entire site to offset emissions from higher production at the same time. We have a lot more levers that we can pull, maintaining an overall emissions footprint at an existing facility than we would if we were building a greenfield.

David, the other specific point I would add is, to the extent that we convert ammonia in to upgrade a product, we're actually releasing less CO2 from our ammonia plants.

Got it. Okay. Thank you very much.

Jeff Zekauskas, JPMorgan.

To go back to your share repurchase for a moment, do you expect to complete your share repurchase program by the end of 2013?

Our authorization runs through 2013. I can't predict what's going to happen in the marketplace. But I will remind you that when we did the share repurchase in 2008, and I know I've talked about this a number of times because we tend to only want to announce things we intend to do, we announced the program as a $0.5 billion program, which was a very substantial undertaking for us at that time, given our size. We completed that program in about 12 or 13 trading days. I'm not predicting in this case, but we wouldn't announce the program if we didn't intend to do it.

Okay. All things being equal, do you expect your nitrogen demand in the fourth quarter to be lower than in the year-ago period, given that we've had such a late planting this year in corn and we had such an early planting the year before?

Bert?

There are several issues that impact not only the corn coming off, because a lot of ammonia is applied on beans, but the weather when ammonia can be put down. If we have the continuation of the heat that is driving the maturation of the corn, I would expect that we would have an acceptable fall because corn acreage will be up and corn on corn will need the nitrogen. We're very positive for the fall. But I can't give you a specific number.

Thank you.

Elaine Yip, Credit Suisse.

Can you comment on whether there's a difference between nitrogen buying and phosphate buying in the marketplace? It seems that when we look at the historical relationship between corn prices and nutrient prices, nitrogen looks extremely affordable relative to corn, while phosphate is starting to look a bit expensive. Do your customers and farmers look at the prices of the individual nutrients or for the cost in aggregate?

Given where crop prices are today, I think everyone nutrient is affordable and there's every incentive in place for farmers to apply optimal levels. That may not be the case in some very, very fringe markets. That may not be the case in some other parts of the world. But in the heart of our market, that's for sure the case.

And then in phosphate, there have been reports on phosphate imports coming to the US. Can you comment on whether or not these are pretty normal or how that compares to historical import levels?

Bert?

Last year, we did receive -- I'd say last fertilizer year, receive a record level of imports from various countries and it's interesting, the impact that had and the desire of customers to purchase that imported product. But I do think we have a moving market. Just as we exported in early 2010 calendar year to China from the United States, we also had the need, due to substantial, also exports to India, to bring product into the United States. I think as you're seeing Agrifos shut down and that rock imports being replaced by DAP from Morocco, there are several moving parts to that. On a normal year, it does not make sense because we are a large producer in the United States in our competitive structure. We're going to continue as an industry to export so as we balance those through time, you'll see less imports into the United States.

Okay. And then finally, can you comment on corn use demand for ethanol and what your view is on the impact from the expiration of the ethanol tax credit and import tariff that's widely expected at the end of this year?

We believe that what really drives demand for ethanol is the renewable fuels standard. If you watch the total production of ethanol over a period of time, we have seen, actually, production in excess of the mandated amount of the renewable fuels standard, which obviously suggests that it's economic for ethanol to be blended in the gasoline mix. We don't believe that the blenders' credit is the linchpin of that support and we'd certainly recognize the political reality in Washington. I think it's likely that eventually that's going to go away and that the import tariff will go away, but it's really the renewable fuel standard that is supportive of corn demand.

Great. Thank you very much.

Ben Isaacson, Scotia Capital.

Just a quick question on urea volume year-over-year -- came in 7% lower than last year and I would have expected it to have been flat at worst. Perhaps you can just help me understand the regional differences in demand between urea and UAN? Thanks.

Just a general comment about our volumes in the second quarter -- we basically shipped everything we made. While I'd like to say we have slack in our system, we had everything running flat out. With respect to specifics and regions, Bert, do you want to handle it?

There are also times when we'll fluctuate between urea and UAN at individual plants that you may not see in the numbers. But regarding regional differences, we do have a heavy urea demand in the northern territories in Canada, as well as for the rice market in Arkansas and some for urea top dress in Oklahoma and Texas and those regions. And UAN could also be used on top dress for wheat and is, as well as in the corn markets which are the central corn states of Nebraska, stretching through to Ohio. So those would be the regional differences probably. We had a drawdown on inventory for urea and as we've mentioned we produce at a very high rate and our inventory decreased during the quarter.

Ben, to be very specific, we have a unit in Donaldsonville that has an ability to switch fairly easily between urea and UAN. We could find, even within a quarter, switching back and forth between max urea and max UAN a couple of times. It's a function of which product is the strongest and what our relative supply position is with respect to the highest valued product.

That's very helpful. Thank you very much.

Mark Connelly from CLSA.

Two questions -- first, with your system flexibility and the results you're obviously getting out of it, I'm curious if you're changing the way you manage working capital very much from the pre-Terra days? Along those lines, I'm wondering whether the strength in your marketing group now means that you have more visibility and demand to help you move faster or is there just something different in the way you're managing it?

We have a great team and our supply chain and salespeople are all located together and they have interaction with our manufacturing people on a continuous basis. We are in a constant mode of optimizing our system. I think the results that we generated this quarter is reflective of great teamwork, great coordination, good communication and ability to move very quickly. We've had to go a little bit of zigzagging here and there and I think we've done it very effectively.

With respect to working capital, we've been in a great position most of the time in recent years where our customers have provided a good support to our working capital through their customer deposits. We run, as many businesses do, with as little inventory as we can while still meeting customer demand. I think we've been pretty effective with that. If you look at our inventory levels over time, I think they're constant to declining and yet, we're not losing sales. We're pleased with our configuration and how we operate. Are we perfect? Absolutely not. We can always do better. We're working every day to get better.

Pretty good so far. 1 more question. You're in good shape on your phosphate reserves and such. But as you watch Mosaic and what's unwinding in Florida, do you see a need to accelerate your permitting process the way they do? I know you've got what, another 9 years of reserves in the process now or so.

We have about 13 years of fully permitted reserves at a current mining rate. We are well into the permitting process on our additional 9 or 10 years worth of reserves. We know it's a complex process. We know there are a lot of interested parties. We know that we have friends and we also have opponents. We work very hard to engage everyone who's interested to understand their positions, to work towards an end point where we can mine and realize the value of our resource. We're involved now in an area-wide environmental impact assessment. That is one of the issues that's prominent in the Mosaic situation. Frankly, as I've said before, we're a beneficiary of their experience and I will add what I've said before and that is we're not happy about the Mosaic situation. We think that their permit was appropriately obtained and they should be able to operate under it.

Okay. Very helpful. Thanks, Steve.

Lindsay Drucker Mann, Goldman Sachs.

On the CapEx investment, the incremental investment that you highlighted over the next 4 years, I was hoping maybe you could bucket those investments into the big areas or what the largest pieces are, whether it's bottlenecking versus upgrading? What sort of incremental capacity or even returns on investment you would expect to make?

Lindsay, we're at the very beginning of that process. We've identified roughly some opportunities at specific facilities. Now, we're going to roll up our sleeves and do some detailed work. We'll be doing feed studies on individual projects. We'll be looking at the market impact and opportunity associated with these projects. It's too early to put numbers on specific projects, but I will give you a little history to give you a sense for what we've done in the past. In 1993, we completed a reconfiguration at Donaldsonville that cost $87 million. That was in 1990s dollars, okay? We got, for that, about 240,000 tons of urea and 440,000 tons of UAN. That was strictly an upgrade project, taking ammonia to urea and UAN. 5 years later, in 1998, we spent $305 million, again in 1990s dollars. For that, we -- and this is a unit where we have the flexibility I referred to earlier, if we max urea, we can get 910,000 tons of urea. If we max UAN, we get 500,000 tons of urea and about 1.1 million tons of UAN.

That'll give you at least a rough idea of the kinds of dollars that buy additional output. These projects, for us, have generated returns in the mid to high teens in the past. Now, at least 1 of these projects, the second 1 came on at a really bad time in the market, so the first few years, our cash flows are not what they've been in years since. The return on the second project is not as high as we would expect these projects to generate, given our outlook in the business. These are things we've done before. We look forward to scoping them out and reaching good sound economic decisions.

That's really helpful. So, is it fair to say that none of these are really shovel ready? That you're early on? It sounds like you're relatively early on in the process.

None of them are shovel ready. Correct.

And then as far as opportunities to invest in the phosphate business, is there anything there that is in your plan?

We have an allocation of about $300 million of general CapEx for our total business that includes normal -- maintain the assets and add improvements in our processes. Phosphate is included in that. We have looked at, and continue to look at, uranium recovery and it's a project that technically, we know we can do. We know pretty much what it would cost. But we need a little positive clarity with respect to the long-term price of uranium. Nuclear power generation in the US and every place in the world is being questioned. The price of uranium has suffered because of that. We're doing some product expansions within phosphate. We're doing a sulfur-added product. That's going to be brought to market later this year. It's not a major undertaking, but it's a significant expansion in our capability and it's one that the market welcomes.

Great. Lastly, just in light of some of the anxiety we've had about global risk assets, do you have a sense of how sensitive nitrogen prices are to oil?

Bert?

I wouldn't say they're necessarily correlated to oil. What you've seen in China is probably a urea correlation to coal, because you import coal, you're basically replacing that energy or turning that energy into urea that you've seen a resistance to export through the tax base. But a correlation -- I would say you have a higher correlation to grain.

Okay. Thanks.

Mark Gulley, Ticonderoga Securities.

Couple of questions -- first of all, I realize you can't allocate your $1.5 billion, thereabouts, in capacity expansions to individual products. But to put in context, Steve, what would a world scale ammonia complex cost these days in the Gulf Coast, just to try to size your expenditure relative to a benchmark?

A world scale urea ammonia complex on a developed site is probably in the range of $1.5 billion.

Okay. So your investment program is about equivalent to what that would cost if you were going to do that?

In terms of the cost.

Right. Second question is with respect to the short term, congratulations to the team for the logistics challenges you overcome. If normal weather had prevailed, how much shipments did you lose? I think your nitrogen shipments are down 4%. What could they have been had you not had those constraints?

I'm very tempted to say that we lost zero. We met every commitment we made to our customers. We ran our plants as hard as we could. We came out of the quarter with relatively low inventories. So, I view this quarter as a great success. We had to scramble to do it. It was a good test for our team and they rose to the challenge quite well.

Then lastly, I want to come back to this greenfield ammonia complex again, if I can, from a different angle. If you were to apply to upgrade a substantial portion of the ammonia all the way to urea and UAN, would that get you under the wire with respect to the carbon footprint or are you still pretty far away?

First of all, we don't know what CO2 regulation will be. For example, if we were to build an ammonia plant and not build any upgrading, we know how much CO2 we would product and we suspect that whatever comes out of the EPA would be directed at that CO2 production. If we upgrade, if we take that CO2 and convert it into urea and/or UAN, we don't know even whether that CO2 would be subject to regulation. And if it were to be, where in the process it would be regulated and where the cost would be.

The cost of that -- those credits or whatever would be incurred. It doesn't appear as though the regulators would view CO2 being captured in urea as being so-called sequestration of carbon. But we don't know that for a fact and so it's really -- there are 2 dimensions here. One is the uncertainty and the second is not being able to know even when we have certainty, what that certainty will be. It isn't timing. It's timing and substance.

Thanks very much.

We have no further questions at this time. I would now like to turn the call back over to Mr. Terry Huch for closing remarks.

Thank you, Carmen. We would like to thank everyone who participated in the call today. If you need more information about CF Industries or our results, please contact me. Thank you.

This concludes the presentation for today, ladies and gentlemen. You may now disconnect. Have a wonderful day.