CF工業控股 (CF) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2012 CF Industries Holdings earnings conference call. My name is Gesenia and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

(Operator Instructions)

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

Good morning, and thanks for joining us on this conference call for CF Industries Holdings, Inc. I'm Dan Swenson, Senior Director, Investor Relations and Corporate Communications, and with me are; Steve Wilson, our Chairman and Chief Executive Officer; Dennis Kelleher, our Senior Vice President and Chief Financial Officer; Bert Frost, our Senior Vice President of Sales and Market Development and Tony Will, our Senior Vice President of Manufacturing and Distribution. CF Industries Holdings, Inc reported its second quarter 2012 results yesterday afternoon, as did Terra Nitrogen 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 release as 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 Safe Harbor Statement 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, Dan, and good morning, everyone. Yesterday afternoon, CF Industries reported earnings of $606 million and diluted earnings per share of $9.31. Both records for any quarter in the company's history. We also generated over $1 billion of EBITDA during the quarter. These results attest to the earnings power of CF Industries, the execution of our business plans, and very favorable market conditions.

With the early start to the planting season, strong corn demand, and attractive farm level economics, over 96 million acres of corn were planted, a post-World War II record. The high corn acreage, along with ideal Spring weather conditions, created strong nitrogen demand that continued through the planting season. As a result, for the first six months of the year, we sold a record volume of nitrogen products, driven by ammonia and urea. During this time period, we sold nearly 75,000 tons more ammonia than last year and about 120,000 tons more urea. The increase in urea sales was possible due to our flexible configuration that allowed us to cut back UAN production in order to maximize higher margin urea.

Market demand in the second quarter was strong for all nitrogen products. Although we sold less nitrogen in the second quarter of 2012 than in 2011, this was primarily due to demand that was pulled forward to the first quarter. The strong demand and movement through distributors and retailers during the quarter resulted in exceptionally low North American nitrogen inventories at June 30. Using our own inventories as proxies for those across North America, we believe that producer inventories of nitrogen products were at, or near, historical lows. Throughout this period of high demand, our team worked diligently to meet our customers' needs. This is evidenced by the record 95,000 tons of ammonia that we shipped through our Velva North Dakota terminal in April and May.

To put this movement in context, we have only 30,000 tons of storage at Velva, which means that we turned the inventory in that location three times during those two months. Our employees demonstrated terrific execution, which allowed us to capture incremental sales and margin during a peak period. The application season demand was evident in the prices we realized during the quarter. Urea prices increased 34% compared to a year ago, driven by strong demand and tight North American inventory. Ammonia prices increased 7% due to high demand for direct application. UAN prices were essentially unchanged from the second quarter 2011, but were up sequentially, as customers came into the market after delaying purchases earlier in the year.

It was not until the application season came to an end that urea and UAN prices began their normal declines from seasonal highs. However, ammonia prices remained high at the end of the quarter due to ongoing demand for direct application in phosphate production, tight worldwide supply, and low inventories throughout the distribution channel. During the quarter, we continued to benefit from low cost natural gas, as increased gas production kept prices in check, even with the demand created by hot weather and the associated increase in electricity consumption. In our phosphate segment, export sales were up 21%, as international markets continued to provide us with the best margin opportunities. Additionally, during the quarter we started manufacturing sulphur-enhanced MAP, or MAPS, which was moved into inventory in preparation for sales in future periods.

During the quarter CF Industries generated exceptional earnings and operating cash flow. We utilized some of that cash to complete the remaining $500 million of our share repurchase program at an average price of $163.89 per share. Under the full $1.5 billion repurchase program, we bought back a total of 9.6 million shares at an average price of $156.80. We are pleased to have completed the program. And, I will have additional comments on our capital allocation plans after Dennis provides more financial highlights from the quarter and first half.

Thanks, Steve, and good morning, everyone. During the second quarter of 2012, the company reported net earnings attributable to common stockholders of $606 million, or $9.31 per diluted share. This compares to $487 million, or $6.75 per diluted share, in the second quarter of 2011. Our second quarter 2012 earnings included a non-cash marked to market gain on natural gas derivatives of approximately $78 million, and $15 million of amortization of capitalized financing fees related to the termination of our prior credit facility. The net impact of these two items was to increase -- was an increase of $0.60 in after-tax earnings per diluted share.

Our nitrogen business performed exceptionally well during the second quarter. We delivered 3.5 million tons of nitrogen products and achieved a gross margin of 66%, which you can see on Slide 6. The increase in segment gross margin reflects realized natural gas costs of $3.13 per MMBtu during the second quarter of 2012, as compared to $4.32 a year ago. It also reflects a non-cash marked to market gain of $78 million on natural gas derivative contracts in the second quarter of 2012, as compared to a loss of $14 million in the prior period -- prior year period. At the end of the quarter, we had hedge positions for approximately 60% of our expected natural gas purchases for the remainder of 2012.

During the second quarter of 2012, we sold 793,000 tons of ammonia at an average realized price of $600 -- $635 per ton. Ammonia volume for the second quarter of 2012 was 19% lower than a year ago, primarily due to the early start of the application season in 2012 that pulled ammonia demand into the first quarter of the year. Our average realized sales price for ammonia was 7% higher than in the second quarter of last year due to tight industry-wide inventory and strong demand. Second quarter sales of granular urea decreased by 5% year over year to 694,000 tons. Our volume decreased due to lower sales into the Northern tier of the US and lower inventory available for sale at the beginning of the quarter due to the strong sales volume in the first quarter of 2012. Our average realized price of $522 per ton was 34% higher than in the second quarter of 2011 due to tight North American product inventories and robust demand through the application season. During the second quarter of 2012, we sold nearly 1.63 million tons of UAN compared to approximately 1.65 million tons in second quarter of 2011. Average UAN price realizations were $324 per ton, essentially unchanged from the second quarter of 2011.

As shown on Slide 7, our phosphate segment achieved total revenues during the quarter of $232 million, down about 22% from the second quarter of 2011. Total sales volume was 493,000 tons, 8% lower than in the second quarter of 2011. Exports increased from 45% of our phosphate sales volume in the second quarter of 2011 to 59% this year because of stronger buying interest and more attractive net prices outside North America. Average phosphate price realizations during the second quarter were about 15% lower than 2011 due to muted global demand. And, the segment generated 22% gross margin, down from the 29% gross margin reported a year ago due to lower average selling prices. Net cash provided by operating activities was $446 million in the second quarter of 2012, an increase of $195 million from 2011, primarily due to higher net earnings and lower accounts receivable. These quarterly results contributed to a record-setting first half for CF Industries.

For the six months ended June 30, 2012, the company set records across a number of financial metrics, including revenues, EBITDA, earnings, and earnings per share. Total first half revenues were a record $3.3 billion compared to $3 billion in the prior year. First half volume was a record 7.7 million tons compared to 7.6 million tons the prior year period. Total EBITDA for the six-month period increased 19% to $1.8 billion, while total gross margin as a percentage of sales increased to 54% from 47% driven by both higher selling prices and lower natural gas costs. These items contributed to a 27% increase in net earnings to common stockholders to a record $975 million. And, along with share repurchase activity, increased earnings per diluted share by 39% to $14.81 per share.

The repurchase program lowered our weighted average diluted share count in the second quarter by 1.3 million shares, which had the impact of increasing our earnings per share by $0.19. Total repurchases made under the program approved in August of 2011 reduced weighted average diluted shares for the six months ended June 30, 2012 by 7.2 million shares, which increased our year-to-date earnings per diluted share by $1.46.

Finally, I want to highlight the recent move by Standard & Poor's to upgrade our credit ratings to investment grade. This is the latest recognition by the rating agencies of the strength of our business model and our successful track record in executing our business plans and maintaining an investment grade credit rating profile. Now, let me turn it back to Steve.

Thanks, Dennis. Long-term trends in population growth, higher protein diets, and the use of crops for renewable fuels continue to drive demand for plant nutrients. Tight global grain and oil seed supplies have driven crop prices higher and created the incentives for farmers to plant a large crop again next year. Natural gas prices are in a favorable range for us and have contributed to a strong earnings profile for the company.

While it was great weather for Spring planting and fertilizer application, it turned into very difficult growing conditions in many areas. The dry and hot weather has reduced expectations for yields, harvested acres, and, therefore, crop production. This naturally should lead to very low stocks to use ratios for crops, corn being the most significant. We currently estimate US corn yields will be approximately 135-bushels per acre, which would be the lowest yield since 2002 and that number could go even lower. Given their poor condition, crops in many fields will be abandoned and harvested corn acres will likely be 2 to 4 million acres lower than the latest USDA forecast.

This significant decline in corn production will be partially offset by reduced demand due to high corn prices. But, still could result in a stocks to use ratio of just 5.5% for the 2012 to 2013 marketing year, which would be the second lowest level in 40 years. Reduced corn supply is creating the need and high corn prices are creating the incentive for farmers to plant an estimated 96 million acres of corn again in 2013. This expected large planted crop supports our expectation of significant demand for nitrogen, the nutrient that must be applied every year.

We are aware that good Fall application conditions require additional moisture. And, of course, we don't know whether sufficient rain will arrive. However, regardless of Fall conditions, high grain prices and expected Spring planting should result in strong nutrient demand. We expect phosphate demand to be strong for the rest of the year. Increased demand in Latin America is expected to develop, as tight worldwide course grain stocks and associated high grain prices motivate farmers to plant significant acres of all crops, especially soybeans. India still needs to purchase additional phosphates, which would also provide support to the market through the balance of the year.

These near-term dynamics are representative of the long-term fundamentals that support our belief in the value of CF Industries. And, the cash generation capabilities of our business give us confidence that we can both invest for earnings growth and return cash to shareholders. Our recent announced agreement to purchase Viterra's interest in CFL, our jointly-owned nitrogen production facility in Medicine Hat, Alberta, is a key part of our strategy to invest in projects that have attractive risk-adjusted returns. We have operated the Medicine Hat complex for 35 years and know the asset inside and out. The facility is located in one of the lowest natural gas cost regions in North America and serves a key agricultural area. We look forward to having access to all of Medicine Hat's production and to being able to make investment decisions at our sole discretion.

As noted in our earnings release, we recently reviewed and updated our potential North American nitrogen investment opportunities. We now anticipate spending approximately $2 billion between 2013 and 2016 on capacity expansion and product upgrade projects. These projects, if all are approved and executed, could provide us with approximately 1 million additional gross tons of ammonia and 3.5 million tons of combined UAN and urea capacity. We expect that the bulk of these investments will be made from 2014 through 2016. And, that meaningful amounts of additional ammonia capacity could come on-stream beginning in 2015. The nature of these Brownfield investments should enable us to bring additional product to market well before a Greenfield complex could be permitted and constructed. We expect to announce some specifics of this program before year end.

While we are making these investments to enhancing earnings capacity of our business, we will continue to return excess cash to shareholders. As part of our plans to do so, we have approved a new program to repurchase up to $3 billion worth of our common shares through December 31, 2016. We believe a judiciously executed share repurchase program is the most appropriate means by which we can return excess cash to shareholders, yet retain the flexibility to invest in value-enhancing growth opportunities such as the acquisition of the interest of CFL and our capacity expansion projects. We completed the prior repurchase program within 10 months, a full 19 months before its expiration. And, we executed the program in a measured and disciplined fashion. Given the size and duration of the new share repurchase initiative, we believe it should be viewed as a long-term program rather than as a single event. We will continue to carefully weigh our options and invest cash when and where we feel it will provide the best returns.

Before taking your questions, I would like to reflect on our strategic positioning. Our company has developed, and successfully executed, a sharply focused strategy based on our operating strengths and our commitment to shareholder value. The Terra acquisition in 2010 more than doubled our capacity in the North American nitrogen industry, creating the largest presence in arguably the best market in the world and with the best cost profile from which to serve that market. Both our upcoming Medicine Hat acquisition and our Brownfield investment program are completely aligned with that strategy. This focused growth strategy has been complimented by returning to shareholders capital that is not needed to execute our investment program. The new $3 billion share repurchase program is an extension of that commitment to our shareholders.

It is my hope, and our team's shared objective, that our shareholders recognize the operating, investment, and financial discipline that has led to these decisions and the resulting actions and performance. This focus and discipline will continue to characterize all of our activities. With that, we'll now open the line to answer your questions. Gesenia?

(Operator Instructions)

Kevin McCarthy, Bank of America Merrill Lynch.

Yes, good morning, Steve. Congratulations on the quarter and the various actions that you've taken. You've had a busy three months here. Quick question on your nitrogen capital projects in North America. You've raised that number to $2 billion from $1 billion to $1.5 billion previously. I was wondering if you could provide a little bit more color on whether or not the cost per unit of capacity is rising? Or whether it's the case that you're simply looking at more incremental capacity now than you might have been in the past or perhaps some combination of those two?

Good morning, Kevin. Essentially what we found is more opportunities than we thought we had when we last talked about this. In other words, more capacity and upgrading capability than we originally thought.

Okay, and then, just maybe a broad question, Steve, with regard to the way this crop is shaping up and the epic drought everyone's experiencing. You threw out some numbers on yield and a forecast that the harvested acres would decline as well. If we have a more extreme scenario where production comes in, say, less than 11 million-bushels as an example, can you speak to how you think corn demand will be backed out in terms of animal feed, exports, and whether or not you think the ethanol mandate will be addressed at some point in terms of a waiver?

Well, we think in general the market will take care of rationing itself. Everyone knows that livestock herds are being thinned as we speak. That's the first piece of demand to go away. Certainly, it's possible that export volume could go down. And we've seen some economics at work in the ethanol market, capacity being throttled back and then coming back in and so forth. So, I would expect to see that continue. Whether the ethanol mandate might be suspended or waived is obviously a political decision. The political winds go in various directions during an election year. So, it's hard to predict whether that might happen, but it's certainly a potential tool to ration corn demand.

Okay, thank you, very much.

Don Carson, Susquehanna Financial.

Good morning, Steve. Question on your nitrogen capital plans. First, on greenfield, I know you've been a little more cautious on the ability to get permits for greenfield nitrogen. Some of your competitors don't seem to think it's an issue, so maybe you could just update us on permitting status for new plant and why you're still not considering a greenfield plant. And on your increase in capacity, is that partly due to Medicine Hat, that now you've got more flexibility once you'll own 100%? Do you think you can put more capacity north of the border, which is I guess somewhat friendlier permitting environment?

With respect to your second question, I don't think the, acquiring the Medicine Hat interest impacts the generally look at this portfolio of opportunities. Medicine Hat was in the mix of sites being considered all along and continues to be certainly on the table for us. With respect to greenfield versus brownfield and related permitting issues, permitting is a challenge in industrial businesses in America broadly.

Fortunately for us, we operate at seven sites in North America. We have brownfield opportunities in many of those locations, and so we're really not faced with the challenge of greenfield citing. The brownfield opportunities are much more economic. We believe they can be permitted, designed, and built much faster than a greenfield opportunity. So, we're very pleased with the position that we're in. But permitting is a challenge, and I certainly would caution anybody who is thinking about building capacity in the US who doesn't have experience here, it's a hell of a challenge to get a complex permitted.

Steve, just to follow up on that greenfield permit, does that mean that you have no plans at this time for a greenfield plant, or are you just waiting till November 7 to see whether there's a friendlier regulatory environment in the US?

Well, the menu of opportunities that we're looking at that are under the $2 billion that we've talked about are all brownfield opportunities.

Thank you.

Thank you, Don.

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

Sure. Thank you. Good morning, everyone, and congratulations again on lots of great news over the last week across the board. Steve, I just wanted to follow up on your last comments regarding the share repurchase. And I think I heard something, so I just want to clarify it. You seem to indicate that this repurchase would be -- I think you said something more long-term in nature and less a function of sort of singular events. And I just wanted to maybe try and understand that, how you're going to allocate all this capital under the scope of the idea you obviously want to remain investment grade. So, were you trying to say we should look to you or we should model share repurchases happening rateably a quarter, or do you think it would still be more opportunistic relative to where the equity value trades?

Well, thanks for the question, Vincent. What I was hoping to do was sort of broaden the look at this activity that people -- that investors and analysts give it. You know, we've done two repurchase programs since we've been public. They were understandably the focus of attention by investors. And I believe they were viewed as events. Given now that we've put in place a $3 billion purchase program with a window that's multi year window, we would hope to reduce the focus on the frequency and magnitude of share repurchase as being a quarterly event and hope that you would view -- you and others would view what we've done in the past as an indication that we are very prudent Employers of capital, that we make good decisions, whether they are investments in capital expenditures or investments in our own shares, and that we, you know, we have a good track record of doing that and intend to continue.

Okay. Thank you. I think that's very clear. And then just as a follow-up, could you just discuss a little bit anything you're hearing from customers on cash flow issues or maybe also what's happening with the river system, given the low levels of water, and if that poses any -- means anything in terms of the second half?

I'll talk briefly about the river system. Then I'll ask Bert Frost to comment on the customer side. We do have low river levels. It's created some, some challenges. The challenge for us in the fertilizer business is not quite as great as it might be, for example, for people moving grain, because the number of barges in a tow of fertilizer is much smaller than the number of barges in a tow of grain. But it has -- it is slowing us down and it adds a little bit of cost in the process.

We believe we're in a good position to meet all of our customer needs. That's assuming that, for example, customer docks are accessible and things like that and those can be issues in individual locations. But I would say so far, we're coping reasonably well and we have a very skilled supply chain group. This is what they do for a living. They have got their thumb on the pulse of all of this and are working hard to make, to make this a non-event. Bert?

Regarding customer I think cash flows, you have to remember, our customer base is broad. We are exporting product through our key trade arm. We're working with wholesalers, retailers, and traders in the United States, and so if you're narrowly looking at a cash flow issue, you would probably go down to the retailer. But we've had several very good years in the United States, with fertilizer input and seed movement, and so I think today, everyone in the value chain is doing well. What you will probably see as we go through the drought and the harvest and ramifications of that, you'll have to see -- or will see the revenue guarantee programs, crop insurance kicking in and so they will be an average of the harvest month and then the farmers will then be getting that cash. And that's why I think it begins at that level of the cash flow and then that will work its way back up the value chain and those farmers will then start purchasing their crop inputs and we will see a more normal, probably movement or purchasing and movement to the field in the fourth quarter.

Thanks very much.

Thank you, Vincent.

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

Yes, congratulations on a good quarter. I just wanted to circle back and talk a little bit more about some of the international events happening. One, I was wondering what your expectations are for Chinese urea and phosphate exports in the second half of the year. And then secondarily, when you think some of this new capacity in the Middle East is now going to come online. Thanks.

Well, our view on urea exports out of China for this year is down from last year, something in the range of 2.8 million tons or thereabouts. Last year I think it was about 3.5 million tons, so that's a significant drop. Of course, we don't have any direct insight into how they manage this specifically. We just watch the flows like everyone else.

With respect to capacity expansions, every year we go through a cycle of looking at all of the new capacity that is looming on the horizon and then we watch as the year unfolds and invariably, a number of projects are delayed and that has been the case again this year. There have been delays on projects, either the construction or the ramping up. For example [Cofco 6] is up, but it's not running at capacity. We have projects in Egypt that are delayed and so forth. I think by and large, what has happened again this year is that we roughly have capacity coming on in roughly in line with the growth in demand, and we're certainly comfortable with that global situation. Operator, I think we're ready for our next question.

The next question comes from the line of P.J. Juvekar from Citi. Please proceed.

Yes, hi, good morning.

Good morning, P.J.

So Steve, you mentioned 96 million acres of corn again in 2013. Do you have estimate -- your economic estimate for soybeans? And then secondly, just on this acreage issue, Latin America acres are likely to go up. But do you have any -- what's your thinking about how much could it go up?

Our number for soybeans for next year is about 77 million acres, and I'm sorry, what was your second question?

How much could Latin American acres go up next year to compensate for the lost production in the US?

I'll ask Bert to comment on that. He's our Latin American veteran.

I think you're going to see -- well, they are coming out of a difficult period where they harvested, where you saw the loss in production in Argentina. What you're going to see is they roll into their planting season in October, and Brazil specifically is a heavy influence on soybean, probably at the detriment to first crop corn. But I think you'll see a rolling off of cotton, which is planted in November, a decrease in that acreage and that rolling into second crop corn. So, we're anticipating an increase in fertilizer, both nitrogen and phosphate in South America to, one, achieve higher yields and two, due to higher acres planted.

Thank you. That's helpful. And secondly, Steve, there's been a lot of discussion about drought and the dry soil and how it relates to nitrogen application. So, can you differentiate between the gaseous ammonia that is applied in the fall versus urea that could be applied in the spring, and how does that shift occur within fall and spring?

Well, the -- just the basics here, should we get no rain or insufficient rain between now and the harvest, we would have very challenging field conditions for ammonia in the affected regions. And it manifests itself by -- in two ways, by an inability to get the tools into the soil, breaking tools, et cetera, breaking the knives and secondly, if there's a lack of moisture, an inability to effectively seal the gaseous product into the soil. If that were to happen or in areas where that happens, that will simply change the timing of the nitrogen application and the form of nitrogen -- perhaps the form of nitrogen application. It still would take a lot of nitrogen to support 96 million acres of corn, and it will eventually get applied.

Just lastly, on housekeeping, you mentioned Chinese urea export number. Do you have a similar phosphate export number for China? Thank you

About 3.5 million tons of DAP, down from around 4 million last year.

Thank you.

Your next question comes from the line of Jeff Zekauskas from JPMorgan. Please proceed.

Hi, good morning.

Good morning, Jeff.

When you think about your fertilizer production capability in 2013 versus 2012, excluding the enhanced ownership interest in Medicine Hat, is it very much different than your capacity in 2012? That is, does it grow? And if it grows, where does it grow?

Jeff, I think it's moving up a little bit. I'll ask Tony Will to comment on that.

Sure.

Jeff, I think the biggest source of increase for us '13 over '12 is that as we mentioned early in the year, 2012 had an abnormally high amount of turnaround activity. 2011 was very light, 2012 was very high and 2013 will return to a more moderate or normal year. So, that would account for a couple of percentage point increase in terms of total production for '13 over '12.

Okay, and just in terms of -- thank you very much for that. And in terms of your capital expenditures in the second quarter versus the first, you spent about $30 million more. What did you spend it on? What was the nature of the step-up?

Well, we have a variety of projects in flight, and a lot of that is just the timing of the cash flows and when the bills come in to be paid.

Sure.

As we've provided some guidance, we're still looking at somewhere circa $400 million for the year. I think the run rate is a bit below that currently, but again, that's more of a timing issue than whether we will get the projects done.

Okay, thank you very much.

Thank you, Jeff.

The next question comes from the line of Edlain Rodriguez from Lazard Capital Markets. Please proceed.

Thank you. Good morning, guys. Just quick question on your financial strategy, Steve. Now that you've put to rest the share buyback issue, have you ever thought of ways to make the dividend yield more attractive, such as establishing a base dividend and then kind of let it fluctuate up and down by linking it to earnings growth?

Good morning, Edlain. Well, we consider and debate a lot of things, and that's an interesting idea. As I commented on in my prepared remarks, we have come to the conclusion that for a company like us, the best way for us to return capital to shareholders in significant amounts is through a share repurchase program. It is a lot more flexible. It allows us to manage the outflow to shareholders along with other outflows, notably investments, either inside the fence or M&A activity. So, we will continue to look at all of these things as time marches on, but we're pretty comfortable with where we landed on this matrix of opportunities.

Okay. That makes sense. Quick other question. In terms of -- now that your debt ratings have improved, how are you going to pay for the $916 million? Is it going to be all cash, or is it going to be some debt related to that? And also just in terms of the tax rate how we should be looking for going forward, should it be that 32% you've had in the first quarter, or should it be the 36% we've had previously?

It's our intention to pay for Medicine Hat out of available cash and obviously, there will be some number of months between now and closing we'll be generating more cash, even more cash than our current position. With respect to tax rate, Dennis--

Yes, with respect to tax rate, you saw the tax rate -- whether you look at non controlling interest or not, it's around 35%, 32%, if you include the non controlling interest. We don't expect that to change materially going forward. It's about where we expect to be.

Okay, thank you. And I must say, Steve, just remind me never to play poker with you. So, thank you.

(Laughter) I guess that's a compliment. Thank you, Edlain.

The next question comes from the line of Mark Connelly from CLSA. Please proceed.

Good morning. This is Kurt Schoen in for Mark.

Good morning, Kurt.

I was hoping that you could provide some thoughts on expanding overseas as a means of possible diversification.

Well, we have considered overseas nitrogen investment on occasion. There was a time, and it wasn't too long ago, when we felt that we had a desperate need to diversify away from North America natural gas risk, and I guess the judicious way in which we approached it played to our advantage because we didn't make any decisions to go forward in that regard. We don't have blinders on, though. People bring ideas to us on a sporadic basis. We always look at those ideas and should we find one that meets our criteria, we would be certainly interested in pursuing it. And those criteria are being close to a reliable and low cost source of raw materials, having a stable political and economic environment, having access to deep water because of the need to trade products globally and being in reasonable proximity to attractive markets. But for where we are today, the natural gas fundamentals, both in North America and around the world suggests that our North American strategy is the appropriate one. On a risk-adjusted basis, it's hard for any offshore opportunity to come even close to the kind of brownfield opportunities that we have in front of us today.

Okay, and then secondly, can you give an update on your nat gas hedging strategy with gas moving up lately?

Like it was mentioned in the text of our prepared remarks, we've got 60% of the -- of our gas purchase -- 60% of the gas we'll need to consume in the remainder of the year has been hedged in the sense we've got swaps covering it, and 40% is uncovered. Going into 2013, I don't think, Phil, we have very much -- very little hedged out into 2013. That's kind of where we are.

Thank you very much.

Thank you, Kurt.

The next question comes from the line of Tim Tiberio from Miller Tabak.

Good morning. My question is around export phosphate prices. Based on your commentary on Latin American phosphate demand, is it fair to say that you see upward risk in phosphate export prices compared to the second quarter, in the second half?

What do you mean by upward risk?

The potential for further price increases in the export market.

Okay. Well, that's a risk we would welcome (laughter). Bert, what do you want--

We see positive markets going forward. You still have significant India demand to be fulfilled and less Chinese product available, as well as a narrow window to export that product. On top of what you mentioned, the Latin American demand, and that would be Brazil, Argentina, as well as Chile and some of the other countries, Central America, Peru, which we're participating in. And so you have that, combined with low inventories around the world, Europe, as well as North America. So, we see a positive operating environment and price environment going forward.

Okay, great. And just one last question, as far as the potential impact from the timing of insurance payments this year, do you think that will have a material impact on the demand linearity compared to 2011, or do you think most of the farmers should be able to get their insurance repayments before the start of the fall ammonia application season?

Well, I wouldn't be that narrow in your view. Yes, there is the issue of crop insurance and when those payments will be made, but you have to remember, we've had several very positive years in the agricultural segment, especially in the United States where farmers are probably doing very well on a cash flow basis. And then there are other revenue opportunities or loans that are available that could be based off the crop insurance money coming in. And so a farmer's not going to miss his application of crop nutrient or applications, whether that be N, P or K, just because of his insurance payment coming in a little late. If the weather is cooperative and his field is ready and his crops have come off, he will apply his crop nutrients to prepare himself to plant in the spring.

Okay. Thanks.

Thank you.

The next question comes from the line of Ben Isaacson from Scotiabank. Please proceed.

Thank you very much. Just two quick questions. First Steve, can you talk about where the product will be placed that you've purchased from CFL? Will that go to the new owners of the Viterra retail assets or will that go into the larger distribution network?

Well, Ben, we're pleased to be able to acquire that interest and have that product to sell. All that product is going someplace today. We're going to be setting up a sales operation in that region, and we look forward to developing relationships with customers who are interested in taking the product, and we'll be open for business and have the order book in hand.

Okay, great. And then just a second question, maybe for Bert. You talked about lower granular urea sales into the northern tier of the US. Was that a strategic decision you made on a one-off basis? And if so, why? Or was that due to poor demand? Maybe just a little bit of color there.

As we look at our mix and where we move our products, we tend to move some of that Medicine Hat product into the northern tier where you had a lot of corn acreage this year, which for that reason we mentioned Velva and our high ammonia pull through that terminal during April and May, but that market also uses urea, as well as Montana and Idaho. And so we had a little bit of a decrease in that northern tier, but also, we had a little less production and so that factored into the mix.

Okay, thanks.

The next question comes from the line of Ian Horowitz from Topeka Capital Markets. Please proceed.

Good morning, guys. Just a quick question around the moisture necessary. Can you give us a little bit more color, I understand with some rain, the application season -- the fall application season can go as scheduled. But what exactly does that mean? We're seeing drought conditions throughout the US at significantly high levels. How much rain is necessary to keep everything on track?

Bert, do you want to --

Well, you have to remember, when we talk about the drought, it's not throughout the United States. There are some areas that are actually having fairly good yields. That would be the southern tier like Mississippi, Louisiana, as well as the northern tier, Minnesota, North Dakota. However, there are areas that are experiencing a lack of rain, as we know. And we have to -- that could be spotty. We're not climatologists. We're not weather people. We read some of these reports also. And current expectation, if you look at the trends, for example, in Boone County, Iowa, the average rainfall is 8 inches during the period of September through November. And we expect that if they were to receive 5 inches during that period, inches of rain, that would be significant enough to allow not only application, but sealing of the ammonia.

So, it's something along that kind of ratio would be necessary to be able to do a traditional complication?

I would say -- I gave you a snapshot of one county in Iowa, just to give you an indication. We do need rain. It will come in some form or fashion. And if there's not sufficient rain available, then UAN becomes a great product, and we happen to be a big producer of that product.

Great, and is there a temperature issue that we should be concerned about as well for fall?

No, I would think -- our customers, the retailers, wholesalers and traders that sell our products to the farmer, the farmer's well aware of what he needs to do agronomically to be successful. That's following the 4-R application, and there's a specific temperature of around 50 degrees that they target. And so it's not necessarily ambient temperature, but the soil temperature that they target and then obviously, like I said earlier, the ability to seal.

Great. Thank you very much.

Thank you.

The next question comes from the line of Mark Gulley from Gulley & Associates, please proceed.

Yes, good morning. I had two questions. Steve, I'm going to ask you to put on your crop economist hat for a second. If you go back and look at what demand forecasts were for corn way back in, let's say in February, we're talking about 13 billion-bushels. Do you have a view right now as to how much released semi permanent demand destruction there's been because of these high prices, demand that won't come back for a bit on a go-forward basis as we look into demand for next year?

I don't think I have such a number. I wouldn't suggest that there's any permanent demand destruction. The market will correct itself. When we get off of $8 corn, we'll have some demand come back, when it gets down to $6, we'll have more come back. It's a pretty elastic market.

And then secondly, with respect to your purchase of the Medicine Hat minority interest, I guess the good news is that you got that at very attractive EBITDA multiple. But I guess the flip side of that coin is a little bit to the extent that the seller is willing to part with that asset at such a low multiple, what does that say about the profitability prospects for ammonia going forward? It would suggest that perhaps these peak levels are peak levels and that the real multiple on a go-forward basis is somewhat higher than the one you might calculate. Do you have any observations on --

I have two comments. First of all, the seller is not in the fertilizer manufacturing and distribution business. The seller is after other assets out of Viterra. The grain assets, in particular. This is an asset that they weren't interested in maintaining. Secondly, this is a quite an attractive area. It's gas cost advantaged and I think likely to continue to be so. And I would suggest to anyone who cares to look at this more closely can simply take the volumes that we are -- the additional volumes that we are acquiring, apply an acre gas cost and market prices that are available in that region which are readily available in public sources, and I think you'll find that the EBITDA potential there is quite attractive. And we're very excited to be acquiring this asset at this price.

Thank you.

Thank you, Mark.

Ladies and gentlemen, I will now turn the call over to Dan Swenson.

We would like to thank everyone who participated on the call today. If you need any more information about CF Industries or our results, please contact me. Operator, that concludes our call.

Thank you very much. This concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.