CF工業控股 (CF) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the CF Industries fourth-quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at the time. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Dan Swenson. You may begin.

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 Tony Will, our President and Chief Executive Officer; Dennis Kelleher, our Senior Vice President and Chief Financial Officer; and Bert Frost, our Senior Vice President of Sales, Distribution, and Market Development.

CF Industries Holdings, Inc. reported its fourth-quarter 2013 results yesterday afternoon, as did Terra Nitrogen Company L.P. On this call, we will 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 will host a question-and-answer session.

As you review the news release that is 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. Actual results may differ materially from those projected as a result of certain risks and uncertainties, including those detailed on slide 2 of this webcast presentation and from time to time in the Company's Securities and Exchange Commission filings. These forward-looking statements are made as of today and the Company assumes no obligation to update any forward-looking statements. Now, let me introduce Tony Will, our President and CEO.

Thanks, Dan. And good morning, everyone. I am pleased to be with you today and honored to have the opportunity to take over the leadership of CF Industries from Steve Wilson. Steve left an exceptional legacy of creating shareholder value, one that I am fully committed to build upon. I will come back to the topic of just how we intend to continue creating shareholder value later in the call, but first I want to view our fourth-quarter and full-year results.

We generated $643 million of EBITDA in the quarter, representing 48% of our revenues. This capped a year in which we generated $2.7 billion of EBITDA, or 49% of our full-year revenues. These results highlight the cash flow generation capability of our business even during difficult market conditions.

During the fourth quarter, our view of the global urea supply curves was yet again validated. In October, urea prices bottomed out at the global floor based on the level where marginal producers work estimated to be breakeven on a cash cost basis. In this case, that was Chinese anthracite coal-based production. This forced even higher cost producers in Europe and other regions to take downtime. Prices began to recover after the Chinese low tariff export window closed and global supply tightened as demand emerged. Prices continued to move up in December as the market needed to bid some of the high cost European production back online to meet global demand requirements.

This quarter, again, demonstrated that the nitrogen industry continues to be driven by free-market economics where cash costs force all market participants to make rational, economic business decisions.

CF Industries is able to generate significant amounts of sustainable cash flows due to three factors. The first, a structural cost advantage we enjoy based on North American natural gas cost compared to hydrocarbon feedstock costs in other production regions of the world. The second, our expansive network of production, logistical, and distribution assets, which create synergies and opportunities for us that no other nitrogen company enjoys. And the third, our experienced and high-performing team. Several people have commented in the past that we are the best nitrogen operators in the world, and that was demonstrated again this quarter as we performed extremely well in difficult market conditions and still generated $643 million of EBITDA.

2013 began with a cold, wet spring over much of North America, which led to delayed planting and application season. These conditions proved difficult for ammonia but favored our upgraded products. The delayed planting in turn led to a late harvest, which shortened the fall ammonia application season. As a result, ammonia sales volumes and prices for 2013 were significantly lower than 2012 levels.

2013 certainly had its share of challenges. A difficult ammonia market because of weather, a difficult urea environment in the second half of the year, and particularly in the fourth quarter when the Chinese low tariff export window was opened and the resulting price pressure on UAN given where ammonia and urea were trading. However, despite all of that our team here at CF Industries was still able to deliver $2.7 billion of EBITDA for the year, our third best year ever.

As I mentioned at the start of the call, we are committed to driving long-term shareholder value, which we measure in terms of total shareholder return. Our approach to this is really pretty simple. We are focused on maximizing the cash flow generation capabilities per share of stock while we seek to lower the cost of financing the enterprise. The strategic decisions we make are governed by that framework. We invest in projects to grow our cash flow generation when those projects have return profiles well above our cost of capital, while we actively reduce our share count.

So, now, I would like to highlight some of the key strategic accomplishments in both the fourth quarter and for all of 2013. In terms of growing our cash flow generation capability, in April we completed the acquisition of Viterra's interest in our Medicine Hat facility, which increased our cash flow capacity by retaining 270,000 tons of net ammonia and 275,000 tons of urea that previously went to our former partner. During the year, we completed or approved high return projects at approximately 100,000 tons of ammonia capacity across our system. All of this additional production volume will be online in 2014.

We have also made great progress on our expansion projects in Louisiana and Iowa, which together increase our production capacity by 25% when they will be completed in 2015 and 2016. During the year, permits were issued and significant progress was made on civil construction at both sites.

By the end of 2013, general construction contracts were in place for four of the five production plants and work had been started under lump sum turned key contracts for supporting infrastructure, including urea warehouses and ammonia storage tanks at both locations. We are very confident in our teams that are executing these projects, which continue to be on schedule and on budget.

In addition to the deployment of capital to increase our long-term cash flow generation, we repurchased over 7 million shares during the year, representing 12% of our shares outstanding at the beginning of 2013. This reduction in share count increased the cash flow generation on a per-share basis to our remaining stockholders. Additionally, we increase our dividend 150% to $1.00 per share per quarter. We also sharpened our focus on reducing our cost of capital during 2013, a key step of which was our inaugural issuance of investment-grade debt.

Maintaining our investment-grade rating is a critical element of our financing strategy as it gives us access to exceptionally low cost, long-term capital while also allowing us the flexibility to pursue value-creating initiatives.

Other key accomplishments during the quarter were the strategic agreements we executed with the Mosaic Company. We are selling our phosphate business in order to redeploy that capital in ways that will create more about for CF shareholders than if we had continued to hold and operate that business.

Additionally, we have put in place ammonia supply agreements, which provide long-term steady demand for a financially strong customer. The ammonia has been priced with a defined margin that supports our belief in the midteens return profile for the capacity expansion projects.

I am now going to turn the call over Bert to provide a deeper discussion of the nitrogen market conditions and our operations during the quarter. Bert?

Thanks, Tony. Global nitrogen market conditions were challenging during the fourth quarter. The industry had to deal with declining corn prices, unfavorable regional weather conditions in North America, and excess global nitrogen supply. These factors were all weighing on nitrogen prices as they hit their floor in the October time period. The ammonia market had a difficult set of dynamics during the quarter as a late North American harvest and early cold weather resulted in a short fall application season. Inventory carryover from the spring and high production levels contributed to elevated industry-wide inventory and led to a weak ammonia pricing environment.

Coming into the quarter, the global urea markets saw prices under pressure from a significant level of Chinese urea exports during their low tariff export season. The price pressure from the high level of urea supply had an impact on the UAN market as well.

Urea and UAN prices at the US Gulf found a floor in October and moved in a narrow band through November as buyers sat on the sidelines waiting to take inventory positions. Then during December seasonal bands started to emerge. The close of the low tariff Chinese export window and gas curtailments in areas like Libya, Egypt, and Pakistan limited available supply. Given the tightening of the global supply demand situation and grower and retailer recognition of their low inventory position, prices started moving up. This was evidenced as average urea prices at the US Gulf increased from around $285 in October to nearly $330 in December and as high as $425 in late January.

We operated well in this changing environment by managing our order to maximize the pricing options available to us. The decisions we made were supported by a data-driven analysis of agricultural and fertilizer business trends, the evaluation of global marketing conditions, and the excise of management discretion. We believe that these are part of the operational excellence that continues to differentiate CF Industries from our competitors. We recognized that the weak market situation in October and November did not reflect the value of our products and the ultimate demand we were confident of seeing. So, we chose to be conservative with our order books during that time.

In anticipation of conditions for more favorable pricing, our teams positioned our inventory and logistical assets for what was a record-setting December as we made sales into a recovering market. We utilized exports to manage our inventory levels and to take advantage of sales opportunities with attractive netback pricing. This included exporting ammonia to Morocco, ammonium nitrate to Central and South America, UAN to Argentina, and urea to Chile.

As we move into 2014, we have seen pricing -- conditions continue to improve. Demand for nitrogen continues to be strong with high acres planted globally. We expect planting of 92 million acres of corn in North America will support the need to import a significant amount of nitrogen in order to meet spring demand. In that environment, we will operate our plants at full capacity and sell all of our production.

The timing of the sales will be driven by opportunities to maximize our margins. Since July, North America has had lower imports of urea compared to last year, contributing to a tight regional market. This situation has been reflected in US Gulf prices for urea, which have rebounded to around $420 a ton recently from their October 2013 average of about $285.

UAN demand is also expected to be strong. With reduced import and inventory relative to last year, UAN prices will likely have to move up in order to attract imports to satisfy overall demand. This strength in urea and UAN should also have a beneficial impact on ammonia demand as buyers recognize the compelling value ammonia provides to them. Due to oversupply, ammonia prices are much lower per pound of N, so on a value basis ammonia should have a robust spring consumption, weather permitting.

Looking farther into 2014, we expect to see a less volatile pricing environment due to the change in the Chinese urea export tariff policy. With a change in the tariff policy to reduce the export tariffs during the high season, we expect to see more Chinese product come onto the global market in the November to June time period when price is supported.

For the full year, we expect about 8 million tons of exports, which is similar to last year. While this supply may reduce some of the peaks in urea prices, we believe it will also be conducive to more ratable purchasing and a greater pricing efficiency across the market. We have seen some evidence of this already with the increase in prices following the October close of the low tariff season and with Chinese producers appearing to maximize their profits across domestic and export sales.

Now, let me turn the call over to Dennis.

Thanks, Bert, and good morning everyone. Our financial results for the quarter and full-year demonstrate the robust cash generation capacity of our business as measured by EBITDA. During a quarter that was characterized by very difficult market conditions, we generated $643 million of EBITDA, which was 48% of our $1.3 billion of revenue. For the year, we generated $24.74 of earnings-per-share and $2.7 billion of EBITDA, which was 49% of our $5.5 billion of revenue.

This level of earnings was in part attributable to the enduring structural advantage provided by low-cost North American natural gas. We have been watching the gas market very closely given the exceptionally cold winter weather we have experienced in North America and are encouraged by the relatively stable nature of the natural gas forward curve, even with several recent weeks of record gas storage withdrawals.

We are actively managing our near-term risk exposure to natural gas prices. We have hedged approximately 75% of our first quarter NYMEX exposure and 50% of our second quarter NYMEX exposure at prices well below $4.00 per MMBTu.

Our plants are primarily in gas-producing regions, which over time helps minimize the impact on our business of differentials to NYMEX prices.

We are using the cash generated by our business on a select few strategic priorities. We spent $129 million of cash on our capital expansion projects during the quarter, which brought our total cash capital expenditures on the project to $356 million for the year. We accrued an additional $204 million at year end, bringing our total investment in the projects during 2013 to $560 million.

We also had $468 million of capital expenditures during 2013 for items other than our capital expansion projects. These expenditures have provided approximately 100,000 tons of incremental ammonia production capacity; additional transportation and logistics infrastructure; expanded storage capacity; and most importantly, have helped maintain a safe operating condition of our assets. We returned $395 million to shareholders during the quarter through dividends and the repurchase of 1.5 million shares at an average price of $223 per share.

Our financial objectives in 2014 will be focused on closing the phosphate sale, putting in place lower cost capital in the form of long-term debt, and continuing to return cash to shareholders via repurchases and dividends. We expect to close the sale of the phosphate business sometime in the first half of 2014 and to realize approximately $1 billion of proceeds net of tax.

We also intend to raise up to $1.5 billion of additional debt in early 2014. We are focused on realizing the lowest cost of capital for the overall enterprise while maintaining our commitment to investment-grade credit metrics. We believe this approach provides us with several significant benefits and a freer hand to execute a variety of strategic initiatives on a time frame that we can manage. It allows us to pay dividends; buy back shares; deploy cash towards growth opportunities, all without significant restrictions. And it allows us ready access to long-term financing for the capital markets. Therefore, we are fully committed to maintaining investment-grade credit metrics.

We are making progress in our evaluation of optimizing the capital structure of the Company including how MLPs might fit within that framework. Early indications suggest that the sale of existing operating assets to an MLP does not look terribly compelling to other alternatives, such as additional low-cost debt. Our existing assets have low tax bases which would create tax leakage, significantly reducing the net proceeds realized from selling them to an MLP.

Additionally, the cash flows from these operating assets supports CF's investment-grade metrics and our current and planned borrowings. However, our analyses are not complete, and we continue to evaluate alternative funding options for the Company.

Another of our key objectives is to continue to buy back shares and return cash to shareholders. To that end, through Friday we have purchased approximately 700,000 shares at an average price of $230 per share for a total of $162 million since the beginning of the year. We currently have approximately 55 million shares outstanding and $1.4 billion of remaining repurchase authorization. In addition, we will continue to evaluate the appropriateness of a dividend level over time. With that, Tony will provide some closing remarks before we open the call to Q&A.

Thanks, Dennis. We recently announced entering into a long-term agreement with Orica to be their primary external supplier of in North America for industrial grade ammonium nitrate and AN solutions. This agreement will provide an offtake for about 70% to 80% of the AN production from our Yazoo City complex and shifts our customer base more heavily towards industrial AN and away from agricultural AN. The agreement is structured in a somewhat similar way to the Mosaic ammonia supply agreement in that we have a defined margin structure with an attractive return profile and a steady long-term customer that is a leader in its industry.

This agreement will help us to realize significant value from our Yazoo City complex. I also want to provide some insight into other work we are currently doing. We realized a significant premium per unit of nitrogen urea compared to ammonia, particularly in the region served by our Medicine Hat facility. Combined with the difficult ammonia market conditions presented by the shortened application season this year, this has us evaluating options for upgrading more of our ammonia at Medicine Hat. It is still early stages at this point, but as our analysis progresses, we will provide you updates.

I would like to thank all our employees, especially our sales, sales support, and logistics team for doing a truly great job in December. Their efforts allowed us to end the year on a high note. With that, we will now open the line to answer your questions. Nicole?

(Operator Instructions). Vincent Andrews, Morgan Stanley.

Good morning, everybody. I think I just heard Dennis make a comment about not dropping down existing plants into an MLP, which I assume meant TNH. You didn't mention anything about what you might do MLP wise with the two new facilities, or if you are not going to do additional drop downs into TNH, what you might do with the general partner interest there or with the substantial amount of common units that you own there. So, maybe you can give us some preliminary thoughts on how you are thinking about all those things.

Thanks for the question, Andrew. What I would point out is in our prepared remarks what I stated was our analysis is going to be -- the detailed analysis that we are doing is not yet complete. If you go back to what we have talked about in the past, we are doing a detailed analysis that will involve looking at everything on an asset-by-asset basis and looking at all the options, potential contract structures, and the like that one could use to do an MLP. So what I have given today is really just a preliminary view of where we come out on some of the existing assets. We will, of course, be looking at all of those things over time.

With respect to the assets that we are building at this point in time, again, that will be part of the analysis as well. When we have our conclusions later in the year, we will have conclusions at least on a preliminary basis on those. But I think it's worth pointing out that with respect to the new assets there isn't anything to do with those things until sometime in 2016 or 2017 when they are completed. So, it would be difficult to have a final conclusion on those until such time as they are ripe to be sold to an MLP if that were an option we wanted to pursue.

The other thing that I would throw in there, Vincent, is relative to the TNH position that we currently hold, we've got much lower cost ways currently of generating additional liquidity in the business. In particular, we are talking about raising $1.5 billion of additional debt here in the short-term, the cost of which is pretty minor on an after-tax basis. For us to sell additional TNH units, we are really selling cash flow from the C Corp shareholders. So, we are absolutely looking at that like any other divestiture. And can we realize more value by selling that cash flow out into the market versus keeping it for our shareholders? And right now, as we look at on a net realized cash basis, the answer is no. It makes sense for us to keep that cash flow and deploy it against our business priorities. So where we stand today we have no real interest in selling TNH units into the market.

Okay. And as a follow-up, any idea -- not sure what your goal is, but any idea how much of your volume you think you can transition into the type of structure that you have done with Mosaic and with Orica?

Vincent, this is Bert. I think where we are with that -- I would carry out with what Dennis presented relative the MLP. We are looking at various options for our product flows and, again, to maximize the return to the Corporation over time. Yes, there are opportunities out there for us, but we have to still review those and come to a conclusion as a management team the direction we will go. I would just say more as it develops.

Vincent, from a philosophical standpoint, aligning our production with leaders in the industry spaces that they occupy that are high credit, long-standing, strong participants in their industry, to us makes great business sense. Then we are really locking up some strategic partnerships. As Bert said, we will have to evaluate these on a case-by-case basis, but where we've got those intersections of interest in value delivery that we can provide, I think it is a win/win for both sides.

Great. Thanks very much. I'll pass it along.

Kevin McCarthy, Bank of America Merrill Lynch.

First of all, on ammonia I think you indicated that you ran at an operating rate of 107%. It is not often we see rates that high. Can you comment on why you ran so hard and how the incremental 100 tons is factoring into that calculation? And also why you would run that hard limit when it sounds like producer inventory of ammonia is a bit elevated. And then secondly, I was just wondering if you could comment on inventory levels for UAN solutions and urea, please.

I will take the first part of that, Kevin, and then I will turn it over to Bert. When we report ammonia capacity, we do it on an average over the cycle -- and by a cycle, it is usually a four-year cycle because most of our ammonia plants are point a four-year turnaround cycle, which means that you sort of have a one-week outage per year. And so, that is factored into the average capacity numbers that we report. And so, in a quarter when we don't have significant downtime or turnaround activity and we are able to run at something above 100%. But it is also true that some of the debottleneck projects that are adding 100,000 tons of ammonia capacity were completed during the year, and some of that additional capacity is showing up in our production numbers.

In terms of why we would want to do that -- even though producer inventories are historically a bit higher than they have been the last couple of years, the margin structure that is available to us is still extraordinary. When our cash cost of ammonia production is in the neighborhood of $150 to $170 on a Gulf basis and we are selling products in the interior north of $500, we want to produce every ton we possibly can because we are very comfortable with that those tons will eventually find their way the ground. And when they do, we will have made great margin as a result of that. Relative to the inventory position, I will turn that over to Bert.

Where we ended up the year, as we mentioned in our release as well as during this discussion, ammonia was challenged throughout the fourth quarter. I'd say really challenged since the start of the fertilizer year. We did well in terms of moving our product and recognized the difficult environment that we entered in November, and that is why you saw us export ammonia in the fourth quarter. We ended the quarter -- or ended 2013 relatively solid on our inventory levels for ammonia but probably higher than we would prefer. For urea and UAN, they were both below our three-year average. And again, we think we managed that well through various options that are available to us in order to end up in an acceptable position to start 2014.

Thanks. That's helpful. And then as a follow-up, if I may, on natural gas, do you have any hedges in place for the back half of the year? And then I just had a -- I guess a clarification. Your press release it indicates that you have exposure to floating basis differentials for gas at some production points. I was just wondering if you could elaborate and explain the impact of that or implication could be.

With respect to the hedges that we've got on, Kevin, what we explained in the press release was we had the first quarter hedged at 75% and the second quarter hedged 50%, and that's our disclosure. That's what we have on. With respect to basis differentials, really that affects us principally -- and this is only at times at two plants that is in Iowa and also at our Courtright plant in Canada. We've got some hedging with respect to basis differentials at the Canada plant, but at the end of the day, this isn't a big deal for us because over time like I said in the prepared remarks our plans really fit in gas producing regions. Basis differentials as a rule generally don't get terribly out of line. And so, consequently, although, yes, this does affect our results to a degree, the effect on our results is not gigantic, by any means.

Kevin, the mechanism around basis differential is the NYMEX is basically priced at Henry Hub. So when we are buying gas, we are buying it at the hub, and to the extent that there is transportation differences, to then swap that for gas delivered into Port Neal, Iowa -- that basically transportation costs is not hedged. That is what the basis differential is.

I see. Thank you very much.

Don Carson, Susquehanna Financial.

A question for Bert -- you talk about a strong outlook the spring, especially for urea and UAN. I am wondering why you were so active in the export market in the fourth quarter. Wouldn't you have been better off inventorying that products and selling it into the domestic market, especially given the potential for logistical constraints and how that works your advantage? And one longer-term question, slide 9 you've got your projection of the North American nitrogen import situation through 2018. How many new greenfield plants and or major brownfield expansions are you putting into that supply/demand import balance outlook?

I will take the first question. Regarding the spring outlook, obviously today it is fairly rosy. We are pretty confident in what we have positioned and what we believe will materialize through the second quarter. Hindsight is 20/20. We did not have that view in the fourth quarter, which was a fairly challenging environment where you saw urea -- I think in the release is at $275, maybe $285 for an average. But the floor was fairly low and with the outlook that continued production would be coming to the United States.

And so, you have to take and balance -- what we do, at least -- is balance our options. And so, during that time period, in order to be prudent with our order book we decided to export through key trade to a number of countries throughout South America, Central America, and Europe to move our products on, I would say, a judicious basis, which allowed us to maintain our inventory levels to an acceptable position. But in -- during that time period, also building inventory to allow us to capture the December increases as well as the Q1 pricing environment that we have today.

So when you look at the exports and how we acted in the market, it was with that intent to balance the options available to the Company and position it and what we thought would be the best position.

Regarding the greenfield and the brownfield, Don, on the new plants what we are assuming is that there's basically four new greenfield plants, including in that our -- the projects at Port Neal and Donaldsonville that we are doing, even though those are brownfield. And then we've got several capacity expansion projects embedded in there from the majors. It is principally Agrium, PCS, Koch that have announced, and we believe those are real projects that are moving forward.

Most of the other projects that have been talked about, at this point we don't see having any sort of significant production volume even were they to occur in the 2018 time horizon. So, if they show up, their impact is really going to be 2019, and beyond.

I wanted just to follow up on that -- you show about 5 million nutrient tons of net import demand in North America in 2018. How would you see that unfolding by 2020? Do you think it goes away by then or do you think that we remain -- or North America remains a net nitrogen importer?

We believe it will be -- remain a net nitrogen importer. What you have seen are the people that are already in this business that have assets and networks that they can leverage to get the most bang for new steel on the ground are the ones most likely to make investments. You have seen projects canceled by a number of those participants. And so, our view is while there may be one or more projects that eventually show up, it is a pretty long pot for a lot of new entrants to get there. And so, we believe North America will continue to be a nitrogen import region for the foreseeable future.

Thanks.

Matthew Korn, Barclays.

Good morning, everybody. Ask a little bit of a market question. I can just wondering if farmers, given the turn that we have seen in expected income levels going the next year, is there anything behaviorally changing as to how they are buying? Are there being more aggressive on that last $5, $10 a ton? Are they being much more discretionary in their purchases at all, that you can tell?

That is an interesting question because, yes, that has taken place with buyer behavior. We see the farmer behavior represented in the retailer ability or desire to take positions. And so what you have is the market is operating today with a very short cycle. The farmers have not stepped in, and for fall, feel like -- we think they bought a portion of their requirements, but there is still a high percentage still to be purchased. But what has happened is the retailers are backing up; they haven't been buying as much as what we've seen in the past. And so, we believe that that will show itself or materialize in a very active April -- maybe March and April period where people will have to step in and cover their spring requirements.

Part of that behavior is represented in risk. That's both farmer and retailer in not desiring to take on a tremendous amount of risk. And we happen to participate in a very volatile market these days with urea prices spiking $50 a week, at times. And so, we understand that, and that's why we prepare in the way that we do to utilize our inventory space; as I mentioned earlier, our export options; and the various methods that we come to the market.

Got it. Thanks, Bert. Following up, for Dennis, back in December you put out a really nice chart outlining for 2014 and 2016 your kind of available capital versus your expected uses of capital. If I read that correctly, that implied maybe around $2 billion, $2.5 billion of capital above and beyond your current commitments. You talked a little bit about the opportunity may be to do some upgrading at Medicine Hat. When do you think we would hear more over the course of the year about whether we would see a lift in repurchase expectations or any other type of growth investment?

Thanks, Matthew. I would say -- again, the framework that we use is to the extent that we have got projects that return well above our cost to capital, then we are interested in deploying cash again. And to the extent that we don't we are focused on returning cash to shareholders in the form of dividends and share repurchases. As mentioned, we are still sort of early stages on the Medicine Hat analysis. But we will be providing regular updates to that on calls as we go. I don't want to put a time horizon on it, a definitive decision on that. But we should be able to make some pretty good significant progress on that during the course of the year.

All right. Thanks, Tony. Congrats again on the quarter.

P.J. Juvekar, Citibank.

Your customer advances on the balance sheet were much lower than last year. I was wondering if you could explain that. Part of that could be price of urea and other products. Can you break down the decline with how much is lower volumes versus how much is lower price?

PJ, we usually don't get into disclosing what we have in terms of volume in respect of our customer advances. But I would say this here is that we have a significantly lower volume in terms of our forward price program, which is what generates the customer advances than we have had in previous years. And obviously you've got price pressure, too, this year versus the in end of the year last year. Bert, if you have got anything more you want to add in terms of color on the market?

I think it is both, Dennis. I think what you have seen is -- just to take ammonia, for example, we were last year around the $700 level, and that is today around the $500 level. And that is representative of each of the products, as well as volume is probably a little bit lower, but not much as compared to previous years. You have to prepare for spring ammonia by prepurchasing or preallocating where those tons will go and that takes time for us, as well as the other producers. And so, in order to prepare for that, we have to sell. And I think we are adequately positioned on our order book with UAN and urea, but there is a reflection as I said earlier that customers have been hesitant to take, I would say, three to four months out forward positions. And we are okay with where the market is today (multiple speakers) that decision.

PJ, part of that, too, is a very conscious decision that Bert and his team use to manage our forward order book. To the extent that we believe we are moving into a period of relative strength, our appetite for taking on a lot of forward orders is diminished. And when we find levels that we are very happy with in terms of our margins that are available to us, then we will go ahead and take more of that. So as we were coming out of the pretty difficult environment in the fourth quarter, moving into what we expected to be a brighter spring, it's not surprising that our forward order book would be lower.

Great. Thank you for that. And then secondly, the Chinese exported over 8 million tons of urea last year. So, Tony, when you look at 2014 given the changes in tariff structure, how much exposure do you expect? Is there a bottleneck in their [port]? Can they export more from their existing infrastructure?

We are expecting somewhere in the same ZIP Code -- about 8 million tons again. I would say to the extent that prices on the global market rise significantly above what their other alternatives are, you will see them find ways to get around port congestion and so forth. And those tons will find their way out on the market. As Bert mentioned in his prepared remarks, that may put a little bit of a ceiling just on how high urea prices rise during the year. But even with that out there we are still generating a huge amount of cash based on our business model with the advantages that we have. So, we feel very comfortable with the marketplace and the environment we are operating in.

Adam Samuelson, Goldman Sachs.

Maybe first, Bert, reflect on the recent move in urea prices; UAN has moved up as well, maybe not as quickly, and narrowed some of that premium that you saw really develop over 2013. Can you give us some thoughts on how you think that is going to play out over 2014? What, if any, premium UAN can carry over urea as you go into the spring?

I think where we are today relative to the imports that have come in, the demand we expect from 92 million acres of corn, as well as other feed grains and fiber, we are expecting healthy demand, and that needs to be met by a combination of important and domestically produced product. So, urea prices today, as I mentioned, are around $420, for spot products even getting as high as $430. You can read different industry projections or predictions, but we do see a healthy the urea environment, and if we are under -- and continue under the import level, we could even see a spike.

UAN will accompany that. They do trade in relation to each other, but at times they separate. As you mentioned, last year that was the case where UAN traded at a healthy premium. We expect those premiums to be maintained. I won't give you an exact range, but UAN is a preferred product. It's a great product for corn. And we are expecting demand to be solid.

Adam, the one other thing I would add there is we are expecting robust demand on ammonia, but the key there is weather permitting. To the extent that we have a spring like we had last year, it's going to diminish the number of tons that can actually hit the ground before the farmers want to get into the field. If that were to occur, the value of our upgraded product system is that much higher. And so, you would see in that case the premium for UAN spike even higher. So, we are well positioned whichever way the weather takes the spring application season.

And if you look at last year at the end of 2013 in Q4 for what the industry or the TFI or industry projections came out, how much reduced the ammonia application was. There is a significant amount that needs to be made up in the spring. And I think that's difficult to do because you have logistical complications, and we know how our assets run and how hard our distribution assets run during the application period. And it's a matter of days to dump those and to try fill as much as you can for the second round. But I think it is going to be a challenge to meet the ammonia demand this spring.

That's some helpful color. Maybe on Tony's point about -- we have had two consecutive disappointing ammonia application seasons in the Midwest. If the weather doesn't cooperate in the next couple of months, how does the distribution chain really handle that as you get into the summer? Is it really, product has to stay at the Gulf and/or be exported because there is just no room in the Midwest anymore to take additional tons? Can you talk through kind of the implications of if we have a third consecutive disappointing ammonia season?

I think you have to take it in a relative sense. We will have an ammonia season. And if it is difficult, it is in the margin of how much is not applied. So if we were to take, let's say, the ammonia market for the year is 4 million to 4.5 million tons. And if 10% of that is not applied, that is 400,000 tons. But that represents a lot of urea and UAN on and end basis. If we don't have -- specifically looking at CF Industries, if we are unable to maximize ammonia applications, you are exactly right; we will make decisions to balance our system. And sometimes that is bringing product in from the North, and that is one of the reasons why we are looking at Medicine Hat for upgrades because the difficulties tend to happen in the Dakotas or Canada for ammonia applications on limited seasons.

And then we rebalance. We can bring product into the Gulf, or we can bring product up through the pipe. Or we can export it, but to go for us is to maintain a balance. We are not having to dump product at an uneconomic -- in an uneconomical way.

Adam, that is one of the huge benefits that we have with our network having Donaldsonville where it is, because we can export ammonia out of D'ville in a way that very few of our competitors have the option of being able to do. Given where North American gas cost is, we can do that very profitably and still make good margin on those export tons. So, again, we've got some levers and some flexibilities that other people just don't have.

Okay, great. I'll pass it along. Thanks for the color.

Tim Tiberio, Miller Tabak.

Thanks for taking my question. I just wanted to circle back to the long-term supply outlook. I believe [PEMEX] announced that they are working to restart a brownfield site in Mexico over the next two years. I just wanted to get a sense of whether that is factored into your North American import and supply outlook.

Thanks, Tim. Generally speaking, even though from a geographic perspective, Mexico is part of North America, when we talk about North America, we are principally talking US and Canada. The PEMEX project, those tons will likely stay in Mexico and really be kicking out imports into Mexico from other areas. So, we don't see that project as having a real significant S&D impact on the US and Canada. We maybe should be a little bit more precise produce a North America and talk about US and Canada.

Tim, the other thing I would point out is if you look at the long-term globally, if you look at the long-term nitrogen, you see a growing at about 2% per year. And so, globally, you are going to need, we believe, between four and five ammonia/urea complexes to be built every year just to keep up with demand. While PEMEX may be doing that, other people will shut down. Some other stuff will get built. We would be tempted to take a look at these types of things and put them into global context.

Thanks. That's very helpful. And then secondly, can you disclose the net volume increase from this supply agreement from Orica. I believe, if I am correct, that they were an existing customer?

They are a current customer. We have an agreement with them that is winding up sort of back to back with when the new one kicks off. As we mentioned in the press release, the new agreement will consume about 70% to 80% of Yazoo City total production capacity, which is ballpark about 1 million tons of ammonium nitrate. And that is up substantially, and with this agreement we are moving more focus on the industrial AN segment and more away from the agricultural AN segment. So, this is a pretty significant increase in terms of the volume that we will be supplying to them going forward. But the terms and the details of the existing contract are confidential, so we can't really get into the volumes and so forth of the existing one.

As far as magnitude, too, could you at least give us some perspective of whether this is double volumes or some type of range so we can at least get a sense of the magnitude?

Yes. It is in that range.

Okay. Thanks very much.

Chris Parkinson, Credit Suisse.

Just very quickly, you recently executed some longer-term deals for both ammonium and a substantial portion of your nitrate production. Do you have any general long-term goals regarding your ideal mix of contract versus spot cargoes? Or are these simply opportunistic?

I would say these are more opportunistic. We had the chance to be able to align ourselves with some long-term agreements with some defined margins, irrespective of where gas traded and with some real industry leaders in the segments that they are in. When we find those kind of situations, it is really a marriage made in heaven because it is a win/win for both us as a supplier and our customer having guaranteed reliable supply. And so, if we find more opportunities like that, we will execute them. But otherwise, we feel very comfortable with our ability to participate in the stock market and take advantage of that.

And just a quick derivative question on that. If all these contracts have defined margins independent of net gas cost, lowering your volatility of cash flows, et cetera, will this eventually or potentially have any bearing on your thought of, let's say, putting out a more decisive payout ratio for your dividend going forward? I understand it's early, but just any general thoughts of how you may think about that would be appreciated.

We are constantly evaluating our dividend. It is certainly something -- when we raised it 150% in 2013, we had kind of targeted a mid S&P kind of yield, which is about 2% or just under. Obviously, our stock price has gone up considerably since then, so we are well under that, which is a good reason to be under it with our stock price appreciating. But I think it is something we continue to evaluate. And whether the S&P average is the right one or the industry sector average is the right target, we have robust discussions about it.

I would say where we are at right now, we have a lot of moving pieces this year. We have $2.5 billion of CapEx, including $2 billion towards our capacity expansion projects. We've got the sale of the phosphate business. We've got up to $1.5 billion of additional debt. So, there is a lot of in and outs, and in that context, we kind of want to get to a bit more stable place before we do something radical with the dividend.

But I think it is fair to say that over time our objectives would be to increase it. The other piece of moving ins and outs, there is the additional $1.4 billion of share repurchase authorization that is still open. There's a lot of, as I said, moving pieces, but it is a good question and one that we continue to evaluate around here.

Great. Thank you very much.

Jeffrey Zekauskas, JPMorgan.

Earlier in the call, you talked about midteens returns in your sale of ammonia to Mosaic. Are those midteens returns after-tax or pretax?

What we were talking about there was the midteens returns profiles for the projects generally. And, yes, those are after-tax. If you go back to the presentation that we gave in December, I think there was a table, I am not sure where it is, which gave a -- sort of a returns profile for the project's varying urea price and gas price. And those are after-tax returns.

Great. Tony, I was wondering if your philosophy of share repurchases is different from that of Steve. And how do you determine when you should buy more of your stock or less?

Jeff, that is a great question. I would say I don't know that the philosophy is dramatically different. The people are weighing in on that, Bert and Dennis and I, are the same group that was here before. I would say we believe that our shares continue to represent an outstanding value today. And we are happy to be buying them. As you saw, we bought quite a few of them since the first of the year at prices in the $230 range. And our outlook is certainly very robust, particularly as we are looking at having new capacity expansion projects come on.

That said, I would always rather buy more at lower prices, but we are -- as we have mentioned a couple of times now, we are really looking at completing or largely completing our existing authorization by the end of the year. Again, part of that because we believe that our shares are very attractive for our long-term holders if we are taking them out at these kinds of levels.

And then lastly, [ACO] gas really spiked tremendously at the beginning of February. I think it was up to maybe $16 an MMBTu. Was that difficult to cope with? How did you cope with the changes in Canadian gas prices?

If you look at the ACO gas differential now, as you can see it is back down. It's back down for March. In ACO, we are sort of buying daily. During that period of time, we did look at whether we should curtail ammonia production a little bit. In fact, given the difficult ammonia market, as Bert says, when there is a tough ammonia market, it's usually in Canada and the Dakotas, principally because it's already a short application window anyway. And when it was even further shortened, inventories were getting that big. So, we actively look at where gas is trading on a daily basis, where our inventory position is. And we did go ahead and turn down our ammonia plants during that period of high gas price to help cope with that.

Okay. Thank you very much.

Thank you. And I am showing no further questions at this time. I would like to hand the call back over to Tony Will for any closing remarks.

Thank you to everyone for participating in today's earnings conference call. Our business model was really tested in the fourth quarter and during all of 2013, and it was again proven to be robust. We are confident in the sustainability and magnitude of the operating cash flow generation capacity of this Company, which are underpinned by our three competitive advantages. Our cost structure compared to the industry; our operating asset network; and our experienced and high-performing team.

With the strategic advantages that no other nitrogen company enjoys, we are actively executing a strategy we believe will increase the value of CF Industries. We are investing in high-return projects that are growing the underlying cash generation potential represented by each share. We are actively reducing our outstanding share count, and we are putting in place lower cost capital for the Company. Thank you for your time today.

Ladies and gentlemen, thank you for sitting in today's conference. This does conclude today's program. You may all disconnect. Have a great day, everyone.