CF工業控股 (CF) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2015 CF Industries Holdings' earnings conference call. My name is Carmen and I will be your coordinator for today.

(Operator Instructions)

I will now like to turn the presentation over to the host for today, Mr. Dan Swenson, Treasurer. Sir, please proceed.

Good morning and thanks for joining us on this conference call for CF Industries Holdings, Inc. I'm Dan Swenson, Treasurer. And with me are Tony Will, our President and Chief Executive Officer; Dennis Kelleher, our Senior Vice President and Chief Financial Officer; Bert Frost, our Senior Vice President of Sales, Distribution and Market Development; and Chris Bohn, our Senior Vice President of Supply Chain.

CF Industries Holdings, Inc. reported its first quarter 2015 results yesterday afternoon as did Terra Nitrogen Company, LP. On this call we'll review the CF Industries results in detail and discuss our outlook, referring to several of the slides that are post on our website. At the end of the call, we'll host a question and answer session.

As you review the news releases posted on the investor relations section of our website at www.cfindustries.com and as you listen to this conference call, please recognize that they contain forward-looking statements as defined by Federal Securities laws. 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. Yesterday we posted our financial results for the first quarter in which we generated $486 million of EBITDA and $4.79 in earnings per diluted share.

Our first quarter was about three things, great operations, a strong order book and cash deployment. This enabled us to deliver roughly $500 million in EBITDA even in a quarter characterized by cold, wet weather which delayed applications and abundant nitrogen imports which put pressure on prices. The global cost curve continues to demonstrate its reliability and CF Industries continues to deliver significant cash flows.

Now, let me provide a little more color on our execution this quarter. We had a really strong operating quarter with our ammonia plants running at a system wide capacity utilization rate of 99%, even with a major turn around at our Verdigris, Oklahoma facility. While delivering strong production numbers, importantly, we ran our business safely, achieving an all-time record safety performance with our 12-month reportable incident rate falling to 1.1, its lowest level ever and well below the industry average of 2.8.

We had a strong order book coming into 2015 which enabled us to realize attractive average prices for our products relative to market conditions. Our average ammonia price was 15% higher than last year due to a tighter market and our decision to forego some less attractive sales in the middle of winter in order to have inventory available for spot sales in spring.

Our UAN prices were relatively unchanged as once again we held back from less attractive winter and early spring sales, choosing instead to wait for the application season demand to emerge. And while our urea prices were lower on a year-over-year basis, we were pleased with the decision we made in the fourth quarter to lock in forward sales at prices that were very favorable compared to how the market developed in the first quarter.

We continue to have a cost advantage from low prices of North American natural gas. Although the weather wasn't nearly as cold as last year's record-setting winter, natural gas prices have continued a downward trend. With production growth and an abundant level of gas reserves, both spot prices and the NYMEX forward strip are well below where they were this time last year.

Accordingly, we have decided to lock in 50% of our total gas needs at these low prices through the end of the year, and have hedges in place for roughly 15% of our gas requirements for the period January to October of 2016. Dennis will provide additional color on our gas hedging in a moment.

Work is progressing well on our expansion projects at Donaldsonville and Port Neal. Our urea plant at Donaldsonville is expected to begin production during the third quarter of this year. The structural steel and vessel installations are essentially complete along with over 70% of the piping.

The vast majority of steel for the UAN plant has been erected and the piping is well under way. And we are confident of a fourth quarter start of target for that plant. Work on the projects continues to be in line with our last cost projection of $4.2 billion plus or minus a few percentage points.

Additionally we invested in share repurchases during the quarter. We became more comfortable with the projected timing and levels of our cash outflows for the balance of the year on the expansion projects. This allowed us to comfortably restart our share repurchases which was timely given that our share price had dropped below $300, even further below our view of intrinsic value.

We repurchased 812,000 shares during the quarter and an additional 493,000 subsequent to the end of the quarter. Additionally we increased our revolving credit facility from $1 billion to $1.5 billion providing us further liquidity.

As indicated on slide 12 of the deck, these repurchases have contributed to an increase in our nitrogen capacity per 1,000 shares which was about 53 tons prior to the Terra acquisition and stands at 143 tons today. By the middle of 2016, including the production from the expansion projects, this will increase to 180 tons with additional upside from potential future share repurchases.

Now let me hand the call over to Bert to walk through our sales results for the quarter. Bert?

Thanks, Tony. We are pleased with our sales results for the first quarter of 2015 as they showed the benefit of how we manage our business, depending on varying market conditions. Our ammonia segment had lower sales volume when compared to the first quarter in 2014.

Since we had lower inventory available coming into the quarter, we decided to maintain some of it across the seasonally weak months of January and February. That decision benefited us in April as we saw strong demand emerge and we were actively shipping ammonia to customers during that time period.

Although our sales volumes decreased, we had a much stronger average sales price this year due to the industry having a tighter North American inventory balance than in the first quarter of 2014. We sold a significant amount of ammonia into this market, and as a result we were able to realize an average price of $542 per short ton this year compared to $472 last year.

Our urea volume increased in 2015 compared to 2014. We believe prices were attractive early in the quarter, so we took advantage of available inventory and sold it during a time of favorable pricing conditions. Throughout the quarter urea prices declined at the US Gulf in association with high global supply and a notable increase in Chinese exports.

In response, we use our logistical assets to move products through regions we felt offered the most attractive pricing opportunities. The strong order book we had coming into the quarter and the decisions we made about when and where to sell our products allowed us to realize an average urea price of $344 per short ton.

Our UAN segment had sales volume that was slightly lower than the prior year period as we had fewer attractive sales opportunities where product was readily available. Our average realized price was in line with last year as the UAN market was relatively stable and traded at strong unit-level premiums to urea.

As we look to the second quarter, we're enthused about our prospects. Shipments have been brisk during the past several weeks as farmers progress with field work. Ammonia demand has been strong as farmers seek to make up for a shortfall in fall 2014 ammonia application. Pricing conditions have been attractive in association with this strong demand.

The urea market saw reduction in global prices from January through April due to continued high production and exports from China. With US gulf pricing -- prices trading down to an average of $280 per ton at the end of March, we believe a significant number of marginal producers, especially in China, are not able to cover their cash costs.

This view held true as shown in the April Indian urea tender where Chinese producers did not offer supply at prices they deemed too low. Urea pricing recovered somewhat after the tender moving up to $300, maybe even to $325 per short ton in NOLA by early May. We believe that the cost curve continues to hold and observed that occasionally prices will dip below the theoretical floor, similar to what we saw in October of 2013. As then, when those marginal producers slowed down shipments, it creates the condition for a price recovery.

UAN shipments should be robust this spring due to good overall nitrogen demand. With deferred fall ammonia applications and the relatively tight ammonia market, we expect that UAN will be the product of choice for farmers' nitrogen needs. However, the decline in prices in the urea market is expected to weigh on UAN prices as well. We entered the second quarter with a favorable order book and will continue to take new orders as we progress through the quarter and into the fill season.

We normally don't speak to the second half of the year on our first quarter call, but I will make the observation that with the startup of our new urea and UAN plants in Donaldsonville, we will have less net ammonia available for sale in Q3 and Q4. This will allow us to make decisions with our customer and sales mix to make sure we are realizing the highest value available for our ammonia inventory. As always, we will balance our production mix based on product prices in order to maximize our earnings. Now let me turn the call over to Dennis.

Thanks, Bert. We had a good operating quarter as evidenced by our 43.6% nitrogen product segments combined gross margin, $486 million of EBITDA and $4.79 of diluted earnings per share.

A few discreet items impacted the year-over-year comparability of our EBITDA. These include the losses we had on foreign currency derivatives this year compared to the gains we had on those items last year. Largely offsetting these was the swing from a mark-to-market unrealized loss on gas derivatives last year to an unrealized gain this year.

Our ammonia segment cost of sales is reflective of the price of natural gas that we purchased and used in the fourth quarter to produce ammonia inventory that was sold in the first quarter as represented on slide 6. Our reported ammonia segment gross margin percentage was also negatively affected by ammonia that repurchased at market prices from our Trinidad joint venture and then resold to Mosaic at similar market-based prices.

We had a full quarter of these sales in 2015 compared to only a partial quarter in the prior-year period. The profit from the production of this ammonia continues to reside in the equity and earnings of operating affiliates line of our income statement.

In the first quarter we realized losses on gas hedges of $33 million. These hedges were entered into during the third quarter of 2014 when gas prices were near $4 per MMBtu. However, as gas production increased in spot and NYMEX prices decreased, we benefited as the first-of-month settlement prices dropped to around $2.50 per MMBtu at the beginning of April and May.

We believe North American gas producers have exceptional efficiencies and are driving innovations to increasing their production capacity while decreasing their costs. However, as Tony mentioned, we also believe that the current gas price environment presents a good opportunity to take some cost risk off the table for the rest of 2015.

In accordance with this view, we decided to hedge 50% of our total gas needs for April through December with 4.2 million MMBtus per month, or about 20% of our needs hedged with collars between $2.30 and $3.20 per MMBtu, and 6.5 million MMBtus per month, or about 30% of our needs swapped at $2.86 per MMBtu.

Additionally, we believe the forward curve outed to 2016 also looks compelling at this time. We have chosen to hedge about four million MMBtus per month for January through October 2016 with an average strike price of $3.04 per MMBtu. We continue to monitor and evaluate the gas market and will look at appropriate additional opportunities to hedge our gas exposure.

The decline on our gas costs has been coincident with the decline in oil-based energy costs worldwide. Oil prices have since stabilized around $65 per barrel Brent. While the decline in oil price is providing some cost relief to producers buying gas on oil link contracts, these producers are not the marginal production for urea. That continues to be Chinese producers using anthracite coal, which at recent mine mouth average prices of about $130 per metric ton has been relatively stable.

Our capital expenditures during the quarter totaled $445 million with $318 million spent on the expansion projects. And as Tony highlighted, as of May 1, we have repurchased about 1.3 million shares since the beginning of the year. We returned $377 million to shareholders through these repurchases and further increased our nitrogen capacity to about 143 tons per 1,000 shares. With that Tony will provide some closing remarks before we open the call to Q&A.

Thanks, Dennis. We delivered strong results in the first quarter despite difficult weather and market conditions, and we are well positioned for another strong quarter in Q2. The global cost curve continues to provide an accurate model of how the industry operates and North America is clearly the advantaged location for nitrogen production.

We are executing well and our business is producing reliable, sustainable cash flows. We are delivering on our strategy to increase cash flow per share by increasing nitrogen capacity per share which will see a dramatic increase as we bring on our new capacity additions beginning in Q3 of this year. Although our shares have dramatically outperformed all of our peers, as shown on slide 13, given the substantial growth in nitrogen capacity per share we are about to experience, there is still an awful lot of runway left for us.

Finally, I would like to congratulate and thank our operating team in the plants and distribution facilities for keeping their eyes on the tasks at hand and keeping themselves and each other safe. It is a great accomplishment to work safely while running our facilities as hard as we are. Keep up the great work.

With that, we will now open the line to answer your questions. Operator?

(Operator Instructions)

And the first question comes from the line of Vincent Andrews from Morgan Stanley.

Can I ask you, as you think about what's happened with Chinese exports this year and the change in the tariff policy or the lack of a seasonality to it, right so it's flat all year long, do you envision, one, that exports will be accelerated as we move through the year?

And two, just as we saw probably weaker pricing in the first quarter as a result of an increased amount of exports, if we see fewer exports year-over-year in later periods and I'm thinking maybe during fill season, do you think we'll have less of a price decline during seasonally weak periods of time? I hope that makes sense.

Good morning, Vincent, this is Bert. And so it's been an interesting development over the last several years as the Chinese exports have consistently ramped up, peaking last year we believe. And then the changes that are taking place within China relative to the tariff change, electricity costs, freight costs and then currency issues.

And so when we look at -- when I look at what could happen in the coming months with exports being stable with 4.4 million tons coming out in the first quarter, I would expect it to be a little more stable and probably less with their lack of participation in the tender and then now trying to set a price floor. It looks like there's some probably more ratable nature taking place within the Chinese production community.

And so in terms of fewer exports, or in the later periods in supporting a fill price, I think you're spot on. I think from what the expectation was probably in March, which was the floor of the market to what fill would be to probably what reality will be in Q3, will be at a higher level.

Okay and if I could ask you, I picked up from one of the trade publications that maybe some of the rainy weather near Donaldsonville had maybe pushed back the start time of the urea facility, is that correct or incorrect?

Well good morning, Vincent. Obviously when it's real soupy in D-ville, it's hard to get as much progress as we'd like. But we are still absolutely committed to a Q3 startup and there's nothing out there that would suggest anything different than that to us today.

It might have moved it a week or two later in the quarter than what we had originally desired. It doesn't change the overall rough timing of a Q3 start.

Okay, great to hear and great job on the execution. It's really great. Thanks.

Thanks.

And our next question comes from the line of Don Carson from Susquehanna Financial.

Bert, a question on your forward order book. You mentioned that your book is well priced and certainly above some of the lows that we saw in New Orleans, I think you mentioned $280 short ton NOLA on urea. We've obviously seen a nice rebound in pricing. I think there was a barge yesterday at $335.

So how does your book compare to current spot prices? Is it reflective of those current spot prices? And it sounds like you position yourself so you got a lot of inventory to take advantage of the spot uptick.

Yes, so probably not going to give exact numbers, but we're pleased about order book because as I mentioned in my prepared remarks that we did stay out of the market and sat on the sidelines during the market lows. And we've seen I think an unexpected relative to the industry and where inventory was positioned a nice price increase. And so the price that you quote at $335 is reasonable for a spot barge in May and we're even seeing positive pricing out into June and into late June.

And so how does our book compare with the current market? I think favorably. And we do have inventory and we're selling into this market and anticipate it to continue probably through June and a little bit later, especially into Indiana and some of the pivot areas through UAN.

This is a follow up for Tony on share repurchase. Last quarter you were a little hesitant to repurchase shares until you felt better about the expansions which -- or at least that's what you said on the call, but as you felt better about the completion. Does that mean we can look forward to an acceleration of share repurchase? Or are there any other constraints such as debt levels and ratings that would cause you to hold off on the rate of share repurchase in the current quarter and the balance of the year?

Morning, Don. So as you know, the latest repurchase authorization that we're operating under was put in place last July and it was for $1 billion that ran through 2016. We've got about $250 million left on that authorization today.

And we're going to go ahead and continue to make as rapid of progress on that as we can, given threading the needle on the issues that you talked about which is maintaining appropriate liquidity and getting through the discussions with the agencies.

As Dennis mentioned last call and we continue to be focused on, we'd love to go ahead and take out some additional debt associated with the new cash flow that's coming on stream with the expansion projects. And put that to work at share prices that are woefully low right now and vacuum up as many of those as we can. So we haven't changed our strategy with respect to that.

Thank you.

And our next question comes from the line of P.J. Juvekar from Citi.

Last quarter and even this quarter you talked about stability in Chinese anthracite coal prices, but the data I looked at, year-to-date I think anthracite coal is down 10%, thermal coal is down even more. So maybe there's a difference in data. But what do you think is the cash cost of anthracite coal, urea cash cost of anthracite coal-based producers? Thank you.

Yes, P.J., this is Dennis. We're looking at about $130 at a mine mouth cost right now.

And if you look at the slide I believe it is on page -- just grab it here for you. Look at the slide on page 10, okay? What it shows there is it's about $130 -- this says $132 per ton.

It takes approximately 30 to 35 MMBtus per ton of urea of anthracite coal to make it. And our view is that at the transport costs from mine mouth to the plant is probably on average around $15 per ton. So if you look at the mathematics there and you add all that up plus the transport to the coast, it's probably going to come in around $310 per short ton NOLA would be the cost of Chinese producers at the current coal prices that we see.

Okay, thank you. That's very helpful -- go ahead, sorry.

No, go ahead.

Yes. So my second question was, you guys make a lot of money by making this in-market decisions about when to sell ammonia, urea, UAN, what to sell, the basis differential, all that stuff. That expertise allows you to make more money than you would otherwise make.

How do you make those decisions? Is that institutionalize the process or is that just Bert making all the calls?

That's why Bert gets the big money. (laughter) So Bert and his team, and I'll turn it over to him just momentarily here, but we take a very analytical approach to understanding where the market sits. So we try to understand all the factors that go into it.

What cash costs are in other parts of the world, what import levels look like coming into the US, what demand centers there are outside the US to soak up some of those tons that are moving around the globe, what producer and downstream inventory positions are. And what -- how many acres are going to be planted and what demand looks like and how we see it developing.

And so Bert and his team take all of that information and put together their view of demand and where they think prices will settle. And then they build the book around and take our positions based on that information. And it's turned out to be prophetic in that approach. It's easier for me to complement you than for you to have to --

Very nice. I think we have a very good team and the team is united around many of the same issues.

And we have a process that's been developed over the years where it is -- it's a quantitative view of the market. And it's -- the market is an international market, it's not a market share issue, it's not a North America market, but we're playing in a world market and the team is broad. We have people all around the world through key trade as well as with our domestic team with different levels of experiences.

But it starts with supply and demand, and then you work your way through from distribution to the international markets to storage assets and distribution capabilities with different modes and freight options and arbitrages that are available. And then you have to bring in the whole customer dynamic of psychology and thinking around and risk and reward as well as timing with what they're thinking, acres.

And then the last one is probably our production options. We have many different products or legs of the stool that our Company stands on with urea, ammonia, UAN, ammonia nitrate, DEF. And so when you look at the production mixes, that gives us a lot of optionality and we're building even more advantages into the Company with these new production plants. And so when you put that out all before you and you have those types of choices, it allows us to be successful and we're -- we've enjoyed the position that we have.

Thank you for the detailed color. Thanks.

And our next question comes from the line of Adam Samuelson from Goldman Sachs.

Maybe first a question for Dennis on the gas hedging. Going a bit further out on the gas hedges both in 2015 and 2016 than has been the recent experience. And maybe at a higher level walk-through the institutional approach to gas hedging and is it just a market view on the natural gas market or the risked approach on your cost base? Walk us through the considerations you make when you step further out on the hedging.

Adam, I'm going to go ahead and ask Chris Bohn who's with us on the call today who handles all of our gas procurement and supply logistics to address that one.

Yes, good morning, Adam. As far as our philosophy on natural gas hedging, it really hasn't changed. We believe that there's still very strong North American natural gas fundamentals and that's due to the immense resource base we have. And then the declining production costs that we're seeing, specifically over the last six months.

And if you recall, our strategy is really underpinned by two points. One, is to mitigate risk, and we did a lot of the hedging we did last year was to mitIgate the weather risk when we saw some of those drastic spikes. And then additionally was to lock in attractive prices.

And I would say that's really where given the strong fundamentals and the flattening of the curve where we're participating today, the positions we have in place for 2015 we feel very comfortable with where we have. We're participating all the way down to $2.30 for 70% of our production requirements, so that's great. Looking out into 2016, we just saw some very attractive rates at the $3.04 and decided to move into those.

Okay, that's very helpful. And then maybe second question on UAN and I think earlier this spring you saw pretty wide price disparity on an unequivocal basis from UAN and urea, that's since narrowed somewhat. Maybe talk about what you're seeing with customers if that price spread is really driven some switching between the products and how you think about that premium moving forward.

So the spread that we saw was driven by a couple of different issues. And ammonia stayed fairly steady from Q4 into Q1 and now through Q2, but it was urea that we saw a worldwide drop. And again, as we mentioned earlier, driven by the excess of Chinese exports and the imports that arrived into North America.

UAN with the fill programs that we put in place and then the subsequent sales I'd say blocks that we did in Q4 and into Q1, we're able to sustain the price level of UAN. We believe in UAN.

It's got we believe a pretty positive future not only for this year but in the future years just because it's such a great product in its versatility agronomically. And so we believe that the retail as well as the farmer segment will continue to be attracted to that because of the advantages it offers to the farmer, and they're willing to pay more for it.

As so yes, it has narrowed for two reasons. UAN has come off a little bit as we've gone through Q2 and urea has come up. And so -- but the premiums in market on the retail level to the farmer have stayed pretty consistent. It's really on the NOLA and the inferior production or the producer to the retail and wholesale segment that was pretty wide.

Regarding switching, we talk about this each year. We haven't seen a lot. As I mentioned, we have probably -- we will not hit the record ammonia level that we did last year just due to the fact or the impact of less inventory available to sell.

That being said, ammonia even at a price spread to urea and UAN has been -- it's been a positive six months or at least now we're into the fifth month, but a positive two quarters. And I think we're going to see that for both urea and UAN also as we go forward.

All right, great. I appreciate the color, thanks.

And our next question comes from the line of Chris Parkinson from Credit Suisse.

You started the year with lower ammonia inventories and you mentioned the first half should be lower in terms of deliveries versus the first half of 2014. But given the recent price action in Midwest ammonia and also a strong April planning some key in hydro states, can you give us color on how you're positioned to further benefit from your production versatility specifically versus urea?

Well, Chris, I'll give you some high level then I'll ask Bert to further opine on topics that I miss. But if you go into the segment results, even though there's great performance that we've had on our ammonia business this year, our profitability per nutrient ton is better on the upgraded products than it is on ammonia. So to the extent that we can upgrade ammonia into urea and then further upgrade it into UAN, every time we upgrade ammonia, we get more margin for those same molecules of nitrogen, so that's a better decision for us.

So in some ways us continuing to run our upgrade plants as hard as we can has a double benefit. The first one is we get more margin on the products that we're upgrading to.

And the second one is it means that you don't get sloppy in terms of the total amount of ammonia that's out there which means it's a tighter ammonia market and the prices than are that much higher on ammonia as well. So it's the gift that keeps on giving. Bert, any other --

I think relative to the issue of -- or specific to ammonia, this year we had just a great run in terms of how it began in the south and then we had some weather issues. But the western corn belt kick off with Nebraska running very, very hard. And then as it moved east into Iowa and Illinois, that's when the north started kicking off in North Dakota and Canada which is still going very well.

And so it allowed us for the distribution assets for that incremental ton to get it in market and focus. This is where our supply team did a great job and the distribution team running 24/7 putting the product in some specific terminals with the pipes and our barges and having product available. And that was probably one of the key success factors for this period.

Perfect. And then my second question would be when you look at the volatility of Eastern European supply over the last, let's say 12 months or so. Can you address your own in-house use on some of the oil in contracts there, the timing of it, potential new agreement as it pertains to ammonia?

I understand, obviously only a handful of these producers use those types of contracts, but any color there would be appreciated. Thank you.

So a lot of those contracts, Chris, are somewhere in the six to nine months long, a few of them a little bit longer than that. The other issue around deep water ammonia, or NOLA ammonia, that's relevant for us largely only in two ways.

And while occasionally we will do an export ammonia cargo that then has to compete on the deep water ammonia market, generally the places where it really comes into play is the price at which we buy ammonia out of Trinidad. And then turn around in the price at which we sell it to Mosaic in Tampa.

The deep water ammonia price doesn't really affect the in-market ammonia price too much because there's no availability really for traders to be able to move ammonia up and into the corn belt because they don't have the storage assets. So it doesn't affect really our ammonia business that much other than on the industrial side.

Yes, Chris. The other thing is looking at nitrogen more broadly and thinking about urea. And if you look at slide 9 in our deck, it's got our updated version of the cost curve for urea.

And what you'll notice about that versus prior cost curves that we were showing when oil prices were at $100 a barrel, is that some of the smaller columns related to Eastern Europe and Western European productions have moved left from where they had been before to reflect the fact -- or reflect the affect to the degree -- there is an effect of reduced oil prices on the ability to produce.

But when you step away from those movements, you'll see that A, those columns are not very thick on the graph. And B, at the end of the day, the marginal producer still is the anthracite coal producer in China and that remains unchanged. So as we think about oil prices and the affect that they really had on our business, the answer to that is not very much.

Thank you very much.

And our next question comes from the line of Ben Isaacson from Scotiabank.

Hi, this is Carl Chen stepping in for Ben. Thank you for taking my question.

So wanted to circle back with regards to your expectation for the spring. How much of the Q4 pent-up demand do you expect to be shifted into the spring of this year? And looking forward, how should we look at the summer fill program given the limited producer inventory?

Okay. The expectation for the first half is very positive. You've got -- we're projecting 89 to 90 million acres of corn. And we're seeing healthy applications, so above 180 pounds per acre for corn.

And you're seeing possibly some switching in the southeast. It's been very wet in that area, but that corn acreage area there is pretty small. Positive rice acres coming in.

And so the expectation for us in terms of how the rest of the quarter, Q2, will progress, we believe that inventories will come out of the quarter low for all products. And we think the industry will be in the same position as well as the wholesale and retail sector, and that will set up then a positive start to the fill season. We don't really anticipate a fill season for urea, we've never really done that. It's more as the market progresses and again, as we've mentioned earlier, it's more of an internationally-driven area.

Ammonia, as I mentioned in my remarks, we are bringing on the production in Q3 and Q4 for the expansions in Donaldsonville. And so the excess ammonia or the extra ammonia that we would have put out into a fill program probably will not be put out or to the degree that we have in the past. And then we'll prepare for Q4.

For fill then focused on the last product would be UAN. And traditionally we've had very successful fill programs that are driven by the need to logistically move the product into place with our retail customer base and we're working with them. We'll start probably working on that in June with an expected later period start, and we think it'll be -- it'll go well.

Great, thank you.

And our next question comes from the line of Mathew Korn from Barclays.

Dan, congratulations again on the new title.

Thank you.

Sure thing. Couple questions for you.

First, if we're going to hover around this 89 million acre level of corn planting here in the US, and that effectively caps the total demand for nitrogen here. What steps do you need to take, do you think, to remain your edge in distribution that we've talked about if this really becomes a matter of market share, exterior expansions? Are there any partnerships or tie ups or other asset investments that you're going to need to do, particularly if we get competitors' projects in the Midwest starting up in 2017, 2018?

Good morning, Matthew. Couple of things.

So even after all of the capacity projects that are in flight come on stream, so the most notable of those are our two projects, North America will continue to import about 20% of our total nitrogen requirement. So really what we're doing is for the most part kicking out the majority of imported products. Now, we will periodically do an export cargo here or there, but North America will continue to be an import-driven market place for the foreseeable future.

We have entered into, as you said, a couple of longer term more partnership kinds of relationships with companies like Mosaic for ammonia supply and Orica on ammonia nitrate supply. And so those are things that we continue to evaluate and look at.

But day in and day out we don't see in the near term there being a dramatic change in the way that we go to market and the way that we do business. We also have the largest most expansive distribution asset base in North America, and we intend to continue to leverage that to full effect. Bert, do you have any other --

Yes, I think going back to even if acres have been capped, and actually over the last five years we've seen a fairly narrow band of corn acres from 90 million to 98 million and even in the 98 year, not all that was planted. So I'd say we're probably in a 90 million to 95 million acre band. And so we've effectively been capped.

And so where that goes then is a product mix and where we take our products, how we move our products, what product we're producing, the growth of DEF and the whole industrial side has been positive to see how we've moved our contracts with the Mosaic contract and the Orica contract moving to some long-term contracts that secure the viability of some of our ammonia as well as the ammonia nitrate movement.

And as Tony mentioned, just how we seamlessly move products through the market. How we can store and bridge different markets, it maximizes our efficiency. And the last two things are our people. We think we have a great team that are working with our customers to be able to move our products.

You mentioned distribution. Some of our industry colleagues have focused on gaining distribution in different markets in Brazil or India or different places. I'd say at this point we're not looking at that, but we have great relationships out in the world and we'll continue to move our products.

Matthew, one other thing which is global demand for nitrogen is growing at about 2% per year. A lot of that at least with respect to the US is going to be on the industrial side, in particular DEF. But there are a few other places where that will continue to grow as well.

And so even though nitrogen from an ag application perspective may be relatively constant, there are other places that we're looking to be able to move that product into. So it's nice to be participating in a market with pretty sustained overall growth characteristics on a global basis. That's a good dynamic to be in.

Thanks, gentlemen. Let me follow up with this then, how many tons of product are you currently selling into the non-ag market? Because I noticed your mention of good sales into the emissions abatement market. I was wondering if that's a short-term bump from the new mat standards or something else and whether that should be ongoing?

Think about it two-thirds, one-third in rough order of magnitude. It's about two-thirds into the ag market and about one-third into the industrial and other kinds of application.

Now embedded in industrial we would put the ammonia contract with Mosaic, we'd put the ammonium nitrate contract with Orica, those are clearly non ag-related contracts. So you bundle that all together, it's about one-third of our business.

Thanks very much.

And our next question comes from the line of Mark Connelly from CLSA.

Tony, as you think about the new UAN capacity and the rest of the capacity at Donaldsonville, do you anticipate having a ready market for all that capacity at the beginning? I guess I'm trying to think about the competitive dynamic with the imports, with the new OCI plant and how much the market has to adjust. And related to that, how do you think about the importance of that plant in the context of the overall expansion at Donaldsonville?

Yes, thanks, Mark. So one of the things we did at D-ville was to build a pretty big acid plant, 1,500 tons a day. That gives us an opportunity to really grow into that acid plant as the market continues on a global basis to develop and use more UAN.

And we are seeing signs of global growth in demand and acceptance of that product in Latin America and other places as well. So we expect UAN to be a product that continues to get traction on the global stage.

But we also put in the capacity to be able to granulate 100% of the new urea plant and basically turn the acid plant off if we wanted to. So we've got terrific product flexibility in terms of configuration of mix coming out of D-ville going forward. And our belief at the beginning was we won't be running the acid plant full out from a UAN perspective, and we'll be able to dial it up and down as the market requires.

But I think right now between the various UAN capacity additions coming online in the US with Weaver and then D-ville, that takes up most of what the US imports in the way of UAN. There's still a little bit of head room there, but we can dial that up and dial it down as needed.

We are also evaluating other uses for that acid plant, whether it be industrial sales of nitric acid to other people and so forth so we can get full asset utilization out of that investment. But I think it's a critical piece overall in terms of our network because it gives us a lot of flexibility to be able to go urea, go UAN and move the product into the interior and/or export is as market conditions warrant.

That's really helpful. Thank you.

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

I wanted to touch base a little bit on Trinidad and how you see -- get some of the gas availability issues playing out over the next couple of years? And then second -- the follow-up question is as your supply agreement with Mosaic kicks in, how big of a deal is the Trinidad negotiations with the phosphate manufacturers going to be in terms of determining [camp on] global ammonia prices? Thanks.

So good morning, Michael. I'll answer the first question -- the second question first and then I'll kick it over to Chris to talk about Trinidad gas.

But on the Mosaic side, the Trinidad product that we moved to Mosaic, I believe that contract runs through 2018. And there's a potential to extend that as appropriate from both sides.

Now that contract we're basically buying product out of the partnership in Trinidad at a market base price, and then we're selling it to Mosaic at a market base price. As Dennis said, we are getting 100% of the profit, it just doesn't show up in the ammonia segment, it shows up below the line in the equity interest in subs.

And so that one is very much at play with respect to what's going on in the global ammonia market place and the pricing. The agreement that we have with Mosaic for production coming out of the Donaldsonville plant is on a gas plus basis to guarantee us a mid-teens return on our investment in Donaldsonville.

So what pricing happens at Tampa or the Gulf or anywhere else is irrelevant with respect to the Donaldsonville ammonia agreement and that's the one that starts on January 1 of 2017. So that's the Mosaic piece. And then, Chris, you want to handle the Trinidad gas?

Yes, Michael, on the Trinidad gas in the near term here throughout 2015, our expectation is to see somewhere averaging around 15% to maybe 20% of gas curtailments. There'll be peaks and valleys based on that. A lot of that is based on when turnarounds are going.

If we know there's going to be a large gas curtailment, the producing players down there are managing their turnarounds to be during that period, so others aren't affected as much. But we would expect for the remaining part of the year to see that type of gas curtailment.

Okay, terrific. Thanks.

And then one last question, if urea prices do roll over in the summer and return to levels maybe we saw a month ago, what type of ability do some of the international producers have to flex capacity between ammonia and urea? Or if you think its -- the guys that produce urea are still going to remain producing urea, and I'm thinking of the non-Chinese producers in this instance? Thanks, bye.

Yes, Michael, I'll give you quick thoughts and then ask Bert to chime in as well.

Producers generally speaking always have the option of not upgrading into urea and trying to sell ammonia. The issue is there's a relatively fixed amount of demand on the deep sea ammonia traded market. And you start bringing on too much additional supply into that market place and you'll see a pretty quick price drop.

And so -- and also, again, if you go back and look at how we do segment reporting by products, we get more margin per nutrient ton for urea even at prices in the low $300s than we do for in-market ammonia at $570. So there is a pretty healthy upgrade margin for people moving ammonia into urea and then you've got a much more liquidity in terms of the urea traded market than you do in ammonia.

So our view is the people that are making urea will likely continue to make urea even at $280 a short ton NOLA. It's -- there's still more margin available there than selling it at $450 or $425 deep sea traded ammonia.

Yes, the only additional comment is you do have two different markets on ammonia with east versus west and what has been happening out at the AG with ammonia shipments in the east in different values. But you also have to factor in because ammonia is a little bit of a different bird with where the vessels are and how many vessels are committed to a certain area and there the milk runs that they run.

But we do see some positive developments in the caprolactam production, phosphate production, so the demand basis for ammonia should be there for both east and west. But I agree with Tony on the upgrades and their storage facilities that they have to load deep sea vessels, it's much easier and the value is there for them to continue to upgrade.

And our next question comes from the line of Brett Wong from Piper Jaffray.

Wondering if you can talk a little bit about the ag backdrop and what you're seeing or expecting in terms of supply and demand for corn and ending stocks as we move through the year?

Bert, you want to handle that?

Yes, so some good developments in terms of our seeing planting progress and the moisture profiles that are available as well as the weather patterns that are developing look very positive for corn development as well as soybeans. We prefer corn, though, because of nitrogen demand.

And so ending stocks, we've been in a 13.5% to 14% stocks to use ratio range. We expect with the trend line yield of [165] to probably continue in that same vain staying around the 13% to 14% basis level. You see some good demand for ethanol.

We think that that will continue to move forward as well as exports, maybe 1 billion gallons of ethanol for the year, maintaining that trend 800 million to 1 billion. And so that works for good production levels.

And so when you look at the price for protein and the values for DDGs and the values for ethanol and the ability to export that incremental gallon, it sets up a very positive demand trend for corn and we think higher planting levels. So I wouldn't be surprised we've been in the 89 million to 90 million to see actual corn acres be on the positive side.

Thanks, that's really good color. Then switching to the buybacks, wondering as you get through the existing authorization, any discussions around a new repurchase authorization?

Yes, we want to finish up what we have authorization for before we get into the next chapter. But again, I think if you look at the sustainable nature of the cash flow generation that we're producing. And in fact, even if you look at the margin structure of nitrogen or said differently the margin structure of North American producer nitrogen, it's way above where the margin structure and the long-term outlook is for phosphate. And it's basically on par with pot ash.

So until we start trading at a pot ash kind of multiple, given that the sustainable nature of our cash flow and our margin structure is equal to that of pot ash, you can assume that we will be in the market place buying our shares down because we just have a different view of, again, the sustainable nature of the cash flows than other people do. So even though we haven't gotten there yet, that's probably where we're headed next.

That's great, thanks a lot, Tony. Thanks.

And our next question comes from the line of Sandy Klugman from Vertical Research Partners.

A quick question, how do you think about the impact of precision agricultural on nitrogen demand? There were some reports from the past growing season that farmers were able to be more economical in terms of their application rates by using some of these advisory services.

So Sandy, I'll give you my two cents then I'll turn it over to Bert who's got more expertise in this area. But the way we view precision ag is it's going to be more efficient use of the nutrients that are put down which doesn't necessarily equate to less overall nutrients. It just means that you'll end up getting likely less losses to the environment and you'll get more yield for the nutrients that are put down.

So what that may end up leading to is that you get crop production in those areas that are best able to produce those particular types of crops. So for instance, corn in the US will make a lot more sense when you're able to do consistently 180 to 200 bushels per acre than it does to try to raise corn in Brazil or sections of Brazil where you've got all kinds of logistical challenges and you don't get nearly the yield.

So in terms of our home demand center here and our production area, we don't necessarily see that translating into a reduction in overall nutrient use, it's more a pick up in efficiency. But Bert, you want to --

I think you're exactly right. It's a whole component for precision ag, seed protection, nutrients, timing. And we're working closely with the grow marks, the country ops, the CPSs of the world, the [Hellenes] that are intimately involved with that and it's the attempt to improve the financial performance of each farmer.

Okay, great. And a follow up on an earlier question on industrial nitrogen demand, apologize if you already answered this. But how do you see that one-third, two-thirds split evolving over the next five years? And in particular how do you think about the longer term market potential for DEF demand?

Yes, in terms of the rough as Tony mentioned, one-third, two-thirds, I think that's a good place to be. If we see a different return profile to the industrial market, we'll be more aggressive in the industrial market.

What we've done in the past in the last five years is we've moved from the Terra acquisition, we moved more into the agricultural market because that was to our advantage with our distribution assets and where our production assets were located, it was just a natural for us to leverage our platform. As we've grown and as we're adding capacity and as we've developed some relationships, again, with Mosaic and Orica, more of the industrial side was attractive. We improved that contract that we inherited from the Terra acquisition.

DEF's got a very positive growth profile both from integer and the industry forecast as well as our internals, you're seeing dosing grades go from 2.5 now after 2016 to 5.5 and projected possibly to 7.5. And so with that, with the efficiency gains that are achieved as well as the emission -- the positive emission impact, DEF probably has a very long runway.

Okay. Thank you very much.

Ladies and gentlemen, that is all the time we have for questions for today. I would like to turn the call back to Dan Swenson for closing remarks.

Thank you. That concludes our first-quarter earnings call. If you should have any additional questions, please feel welcome to contact me. Thank you for your time this morning.