CF工業控股 (CF) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the CF Industries Holdings first-quarter 2016 earnings conference call. My name is Liz, and I'll be your coordinator for today.

(Operator Instructions)

I would now like to turn the presentation over to the host for today, Mr. Dan Aldridge, Director of Investor Relations. Sir, please proceed.

Thanks, Liz. Good morning, and thank you join us on this conference call for CF Industries Holdings Inc. I'm Dan Aldridge, Director of Investor Relations, 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 Manufacturing.

CF Industries Holdings Inc. reported its first-quarter 2016 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'll host a question-and-answer session.

As you review news releases posted on the Investor Relations section of our website at cfindustries.com, and as you listen to this conference call, please recognize that they contain forward-looking statements as defined by federal securities laws. Actual results may differ materially from those projected as a result of certain risks and uncertainties, including those detailed in the accompanying 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.

This conference call will include discussion of certain non-GAAP financial measure. In each case, a presentation of the most directly comparable financial measure, calculated and presented in accordance with GAAP and coinciding reconciliation of the non-GAAP financial measure to the most directly comparable financial measure calculated and presented in accordance with GAAP, is provided in the earnings release and the slides for this webcast presentation on the Company's website, cfndustries.com.

Before I turn the call over to Tony, I want to highlight the scope of today's call. On this call we will be focusing on CF Industries and our first-quarter financial results. We do not intend to take comment on or take questions related to our pending transaction with OCI. We will provide updates on the OCI transaction when appropriate through filings with the Securities and Exchange Commission, Company press releases and/or other appropriate communications.

Now, let me introduce Tony Will, our President and CEO.

Thanks, Dan, and good morning, everyone. Last night we posted CF Industries' 2016 first quarter results, in which we generated EBITDA of $207 million. Adjusted EBITDA was $300 million, after taking into account net foreign currency losses, mark-to-market hedges losses, transaction costs related to CHS it OCI, and expenses related to the capacity expansion projects.

The difficult market conditions in North America from late last year persisted into the early part of this year. However, as demand developed with the onset of Spring, prices quickly moved up into the range we believe represents sustainable prices for the industry. Although industry publications reported January and February year repricing and Nola well below $200, our realized price for the quarter was $256 a ton.

Our reported gross margin was $217 million, or 22% of approximately $1 billion in net sales. What I want to focus on is the strength in the underlying fundamentals of our business. To really understand those fundamentals, it is necessary to strip away the noise and short-term timing issues and look at just the core business.

Excluding the impact of our natural gas hedges, consolidated gross margin would have been $294 million, or around 30%. The unrealized mark-to-market derivative loss was $21 million, and the realized natural gas derivative loss was $56 million, for a total impact of $77 million associated with natural gas hedges. Over time, as the hedge position roles off, that noise will disappear and the core business will shine through.

As we talked about in our last call, and as shown on slide 12 of our materials, even at our urea price of $200 per ton, a typical US Gulf producer generates roughly 50% cash margins on each incremental ton. And it is into this attractive environment that we are bringing on our new capacity additions. Our new urea plant at Donaldsonville was placed into service last November and is reliably operating 10% to 15% above nameplate capacity.

Our new Donaldsonville nitric acid and UAN plants were placed into service in March and are reliably operating 15% to 20% above nameplate capacity, and we haven't even pushed them to the limit yet. We are mechanically complete on the Donaldsonville ammonia plant and are in the process of pre-commissioning and commissioning activities, so the burn rate spend there has wound back considerably. And we expect to be fully mechanically complete at Port Neal by the end of the second quarter, meaning our spending on the new projects will largely be wrapped up in the next two months.

Finally, during the first quarter our strategic venture with CHS commenced. We received $2.8 billion in cash and began selling urea and UAN to them at market prices.

On a global basis, capacity additions, along with lower feedstock cost and cheaper ocean freight, have led to a widening and flattening of the global cost curve over the last year. However, due to sustained annual growth in nitrogen demand, even with all of the additional capacity, during periods with more robust demand, higher cost tons must be bid into the market.

We believe the Chinese anthracite coal-based facilities will continue to be the marginal cost producers for the foreseeable future, setting the global cost for. In fact, Bert and I recently spent a week in China and met with about 10 different industry participants at their plants, the ports and their offices, to gain additional insights into the evolving dynamics in China.

Over the course of several days and over 1,000 Miles traveled, we came away with a few key themes. One, there are broad-based expectations that the nitrogen fertilizer industry will continue to rationalize, closing high cost inefficient plants. It is estimated that between 50% and 60% of the installed industry capacity in China is still anthracite based coal production, and these facilities, along with certain gas-fed plants, are the ones most at risk.

Subsidies are being dramatically reduced or eliminated altogether including rail, electricity, and feedstock. One producer we spoke with suggested that meant roughly $25 to $30 per ton cost increase for them. And there's a heightened awareness and significant pressure being applied both at the central and local government levels regarding the significant environmental impact caused by these facilities. All of these points suggest, and in fact almost every group we met with expects, that significant capacity will be removed from China over the next several years.

With that, I'll hand the call over to Bert and Dennis to go through the details of the quarter, then I'll wrap up with a few final thoughts. Bert?

Thanks, Tony. The first quarter was definitely a tale of two very different time periods. Entering the quarter, pricing and demand were low, and the industry outlook wasn't very positive. As Tony mentioned, in North America urea traded at less than $200 per ton in the US Gulf at the beginning of the quarter, which we considered unsustainable.

As such, we decided to position the Company for improved forward market. As Spring weather broke early in many parts of the country, we began selling into the market as prices quickly rebounded. Prices began to rise in mid-February and continued rising through March, with urea at the Gulf topping out at $270.00 per ton, and prices in the corn belt trading about $300.00 per ton.

In addition to the earlier arrival of Spring weather, low prices at the beginning of the quarter did not attract a high level of imports of urea and UAN to North America, which also aided the rebound and led to nitrogen Q1 supply being short in the corn belt. Shipment and application activities were strong in March for ammonia, urea and UAN, but especially for ammonia. Warm dry weather came early, and farmers in the Southern Plains and Midwest were prepared, and ammonia sales in those regions marked one of our best starts to a Spring season.

To put this into perspective, the previous record shipment for March out of our Blair, Nebraska terminal was 38,000 tons. In March we surpassed 62,000 tons. That means that the terminal had to, on average, load four trucks an hour, 24 hours a day every day of the month.

Our consolidated sales volume for the quarter was very strong, up approximately 39% year-over-year, aided by the addition of CF Fertilizers UK and our capacity expansions. We also logged a record quarter for the production of urea at approximately 819,000 tons.

Looking to the global markets, production and feedstock costs continue to have a big impact in the first quarter of 2016, along with currency devaluations. However, global costs appear to have hit floor levels in the first quarter of 2016.

Though coal supply is long, coal prices found a bottom in December and have remained stable since. Similarly the global oil situation is still long supply, but prices have begun to recover from the lows in January. Ocean freight rates have declined substantially, due to oversupply of both vessels and lower fuel prices, but it appears that after two years of decline, these cost have hit a floor as well.

Export activity from China was down almost 38% year-over-year for the first quarter of 2016. As global prices continued to fall, high cost Chinese anthracite coal-based producers began curtail production and limit the sons shipped to the ports for export. In addition, Chinese fertilizer industry publications recently stated that several urea producers in China were permanently shut down in 2015, which was the first time ever that reductions have exceeded new production coming online.

Additionally, the Chinese Nitrogen Fertilizer Association's 2016 through 2020 develop plan calls for more of the smaller, old plants to be phased out by the end of the decade, reducing the country's ammonia capacity by an estimated 10 million metric tons per year, and urea capacity by 13 million metric tons per year. All of these data points lead us to believe that our view of the global cost curves is reasonably accurate.

Moving onto North American natural gas. The market began the first quarter with an unexpectedly cold January that changed the gas market's focus from how low prices could potentially fall to how quickly prices could climb. Henry Hub gas daily was trading at $1.54 on December 28, 2015 and reached prices as high as $2.53 only 15 days later on January 12. This price rally was short-lived, as prices declined through the latter half of January and into the beginning of March.

The declining price was due to a collapse of gas weighted heating degree days that far exceeded even the mildest projections, underperforming industrial demand and slower than anticipated LNG exports. The combination of these factors led to an end-of-March storage balance just under 2.5 TCF, 54% higher than the five-year average and more than one TCF higher than last year. We believe this abundant resource will continue to provide CF with a competitive advantage over other global producers for the foreseeable future.

The nitrogen outlook for the remainder of 2016 and into 2017 remains positive, but with new capacity coming online globally over the next 12 months, we expect nitrogen pricing to remain under pressure. We expect urea demand at the US Gulf to continue to be relatively firm through the Spring application season.

On the agricultural front, economics continue to support planting corn over soybeans, and our planted corn forecast is 92 million acres, with further upside possible given a favorable USDA survey for Spring planting intentions. Corn use growth is forecasted at 2% for the fertilizer year 2016 and 2017, as demand is expected to rebound near 2014 levels. and December corn is currently trading at $3.90 per bushel, all positive signs for the farmer and for our business.

Now let me turn the call over to Dennis.

Thanks, Bert. In the first quarter of 2016, we generated $217 million EBITDA and earnings per diluted share of $0.11. Included in these results were, on a pretax basis, approximately $42 million of net foreign currency losses, $21 million of unrealized mark-to-market losses on our natural gas derivatives, $16 million in expansion costs for our Donaldsonville and Port Neal facilities, and $14 million in transaction costs related to the OCI transaction and the CHS strategic venture.

When taking these items into account, our adjusted EBITDA for the first quarter was $300 million and our adjusted net earnings per diluted share was $0.40. Included in these results, they realized loss of $56 million or $0.79 per MMBTU on our natural gas hedges for the first quarter of 2016. This compares to a realized loss of $32 million, or $0.52 per MMBTU, on natural gas hedges for the first quarter of 2015.

During the first quarter of 2016, the Company did not enter into any additional natural gas hedges. Additionally, in the first quarter of 2016 the Company placed into service the new UAN plant at Donaldsonville. We expect to place into service the new ammonia plant at Donaldsonville and the new ammonia and urea plants at Port Neal later this year.

As we mentioned on our last call, most of these assets will qualify for the 50% bonus depreciation for FY16 as a result of the passage of the PATH Act by Congress last year. As a result of these additional assets being placed into service, the Company expects to have significantly reduced cash tax payments for the year.

I want to take a brief moment to describe the mechanics of the CHS strategic venture. At February 1, 2016 we received $2.8 billion in our cash account related to this investment.

Each quarter we recognize a non-controlling interest amount related to this investment, which for the first quarter was $17 million. However, the cash distribution payable semiannually to CHS may be different from the amount recorded as non-controlling interest in any given period based on the terms of the agreement, which in effect provides a boost in economics to CHS. The estimate of this distribution pertaining to the first quarter is approximately $30 million.

Moving on, for 2016 the Company expects to have total capital expenditures in the range of $1.8 billion to $2 billion, of which $1.3 billion to $1.4 billion will be used for the capacity expansion projects and the other $500 million to $600 million for sustaining improvement at other projects.

With that, Tony will provide some closing remarks before we open the call to Q&A.

Thanks, Dennis. I want to summarize why we continue to be so excited and optimistic about our business. The fundamentals of our business remain strong. There is a growing demand for our products, and we benefit from low-cost North American gas.

Our consolidated gross margin was 30%, axe the impact of gas hedges, and our cash margins for incremental production are 50% or better. Our plants are running well. We had record production for urea in the first quarter, and one of the top three quarters for ammonia production as well. We fully expect to hit an all-time record for UAN production here in Q2 with the new diesel plant online.

The expansion projects are almost done. We are mechanically complete on the Donaldsonville ammonia plant and within two months of being mechanically complete at Port Neal, so the spending is quickly coming to an end. When those plants are online they will increase our productive capacity by more than 25%, and along with it, our corresponding cash flow generation as well.

Our balance sheet, credit metrics and liquidity are all strong. We have a solid investment-grade rating. We have a $2 billion undrawn revolver, and we have $2.7 billion of cash on the balance sheet at quarter-end.

Finally, bonus depreciation will provide a significant cash flow benefit to this year and next. So although the pricing environment is weaker than we'd like, nonetheless we are extremely excited about the bright future ahead and what the next few months hold for us.

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

(Operator Instructions)

Joel Jackson, BMO Capital Markets.

Hello, good morning. First question, I appreciate your remarks and to not want to talk about the OCI transaction. Can you just talk about why you can't comment on the OCI transaction today?

I guess there's a new S-4 coming out after OCI reported, maybe you're renegotiating some of the terms? Just maybe high-level why you can't talk about it?

Hello, Joel. You know -- look, we have tried to make it a hallmark to be as transparent and communicative as possible, and we're just not in a position where we going to be talking about OCI today.

Okay, the second question is, don't you have the lowest customer advances for Q1 you've had since a public Company. Can you maybe talk about if you had a lot of, I guess, volumes stronger in Q1 than Q2? Would you expect a little bit of softness in Q2, because you have a strong Q1, maybe more in the urea side?

Joel, this is Bert. Good morning, and looking at Q1 and the start of Q1 and the low level of customer advances, was a direct reflection of our view of the market that at that time, going out of Q4 and into Q1, that prices that were at that point available to us in the North American market just were not attractive, and we were bid at probably levels even below that.

And we decided at that point it more appropriate for us to utilize our storage capabilities and our terminal system, and that as well as our plant space. Prepare for a market that we believed would come later in Q1 which was then materialized -- or started to materialize in February, as prices started to improve going into Spring.

So you've seen us over the years take different tactics into the market, sometimes we have sold forward in previous years. We don't do as much of that anymore, and we are playing in a global market where we look at opportunities both inside North America and outside to different markets.

We have relationships around the world, and we intend to utilize those capabilities as well as flexible production options, because that's how we've built these plants. The new plans that are coming online, to be tremendously flexible for us in terms of going full UAN, full urea or even full ammonia, as we have during this Q1 period, to satisfy the high ammonia demand we had. Thank you.

Chris Parkinson, Credit Suisse.

Hello, thank you. This is Graham Wells on for Chris. First question, was just wondering if you could help us to think about what the effect of your mark-to-market hedges will be once nat gas starts kind of rebounding off of its lows. Just any help on how the realized and unrealized gains or losses will flow through the P&L from that. And then second question is just on your realized ammonia prices in Q1, they're a bit lower than we were expecting. We were just wondering if you could help us parse out kind of where those tons were going and why that kind of came in at a slightly lower level than we were expecting. Thanks.

Why don't I start with the natural gas hedge and how to sort of think about that, without getting into specific numbers. I think it's really easy if you think about the disclosures that we made the past. We've disclosed how many MMBtus we had hedged going forward. There was a graph I think that we put out in as part of the 4Q earnings release that basically mapped out exactly what those hedges are going through time and where they're priced.

So as you think about the forward curve through that period, as that forward curve rises -- if it in fact rises, it may fall as well, we don't know. So as we think about where that forward curve is when we valued it at quarter's end here. March 31 versus where it may move to through time, the quarter. That will have a change on sort of the mark-to-market, because the mark-to-market stuff that you're seeing is in relation to hedges that have not been realized, that is they've not closed out.

So as we go through time, two things are happening. More of those things are been realized, so they're effectively falling off the forward map, and at the same time, the curve is rising and falling versus the price on those curves. You sort of add up the MMBtus, and then the difference between where any given point is on the curve and where we are in the hedge curve, which we've disclosed, you can kind of come at it that way mathematically.

On the second question -- this is Bert -- regarding the ammonia pricing and what was expected or what was possibly put out there by different groups. You have to understand that Q1 is not necessarily an ammonia application period, although as we stated in our prepared remarks, we had record pull out of our Blair terminal and that was a phenomenon in Q1 that was predominately in that Nebraska region.

However, just as prices were very low in January for urea, they were also very low for ammonia. We had not only on the import market, which is Tampa-driven, which is that $310 a metric ton, or about $280 a short ton. That number got pulled into the United States in several regions and prices were low, and we took the same tactic that we did with urea. We decided not to sell into that market.

The industrial percentage of our business in Q1 is higher, and that's -- most industrial contracts are gas based, during that period you had $2 gas. Again Tampa Bay, and so I already gave you the Tampa number.

We also had an export vessel, 25,000 tons that we exported at Tampa, equivalents were a little bit below that. All that to say that the weight of the Q1 number was pushed more towards the industrial side of our business. You'll see that revert back to more of a traditional strip for Q2 as that's more of an Ag-base quarter.

Perfect. Thank you, guys.

Brett Wong, Piper Jaffray.

Hello, guys. Thanks for taking my questions. Bert, you spoke about expected production phase-out in China over the coming years. I was just wondering if you could talk about how much of that relates to kind of economics and how much to environmental.

From your trip, are there environment pressures in China that could result in faster phase-out of capacity there?

Yes, so Tony and I did -- as Tony said in his remarks -- spent a week, a little over 10 days in Asia. We went to some other places, and the consistent message coming out of China for us was one of, they're going through a change. And as we've said in the past, each year seems to be a different economic year coming out of China.

Incentives are different, subsidies are different, taxes are different, production levels are different. Today they're really struggling trying to find their way, and trying different steps in order to maintain profitability. Last year that step was record exports.

We just don't see that going forward. It's unsustainable. And what they were doing last year was just sending product to the ports.

Yantai, where we visited last year, there was probably 2 million to 2.5 million tons sitting in bags at the part ready for export, unsold. What were seeing as a transition to more market-based decisions, is we've heard from several traders and participants that until they sell those tons, they're not going to move them to the port. A great economic decision, which we think will prevent some of the low prices that were coming in last year.

So economics are driving a lot of decisions on how they look at efficiencies, how they look at investments, how they are looking at shipments. This year, first quarter and into the second quarter, the domestic market was much more profitable than the export market, and you saw a lot of producers pull away from the export market.

So I think it's a maturing, and they're understanding what their options are. In 2011, 2012 and 2013, when urea was over $400, everybody made money. It was an easy decision to participate and produce. That's a longer going to be the case for several of the high cost producers, those anthracite coal producers, and we think rationalization will continue.

On an environmental front, all I can tell you is it's dirty. And we drove through several places and several studies, and both Tony and I were amazed. You see the pictures in the newspapers. It's a different in real life.

And you almost could cut through it, and you could see maybe a half a mile away. You drive by rivers, you drive by piles of garbage, that can't continue.

Just as we had rivers burn in the 1960s and 1970s in Wisconsin and Lake Erie, we had to make the same kind of changes that they're going to have to make. They're going to have to change their effluent streams, they're going to have to capture some of these gas streams, and that will all come in with investment, and environmental awareness will take place.

What we heard specifically on the environmental side is the central government has put in place certain parameters and thresholds, and then local governments are able to put tighter ones in place, they can't put more lax ones. And so it really depends upon the region that you're in, but there's certainly some areas for which significant capital is required in order -- going to be required in order to keep running those plants. Based on the current economic outlook, we just don't see that capital beings spent, and we heard that loud and clear.

That's helpful. Thanks. And just one more from me, as you look to export more out of the D-Ville, and I get that will be in time. But do you have plans to access the Brazilian nitrogen market?

And how do you expect to kind of do that? Is there a large capital need there or partnership to gain access to that market?

I'm going to let Bert answer the question, but let me just talk philosophically about it for a second. Which is, we have always tried to stick with our knitting in terms of things that we do really well, and then find partners to participate in the areas of the channel where they do things well.

We are not interested in taking on receivable risk from farmers. We're not interested in taking on currency risk.

So when we participate in these markets, it tends not to be with owned assets on the ground in those locations where we are exposing ourselves to those kinds of risks. It tends to be with partnering with other people and selling it either on a delivered basis into their tanks or on an FOB basis, but Bert, why don't talk specifically about --

Yes, so we're active in Brazil today. We were when KEYTRADE was with us, and we'll continue to be probably more involved as we do have the volume of exports that are available to us, but it will have to be net-back driven. Brazil has tended to be a very low price market in relation to the rest of the world's options.

But we know those people down there. I spent eight years in Brazil. I'll be down there next month with a group and intend to connect with some of the industry participants.

As Tony said, we don't necessarily desire to be -- matter of fact, we do not desire to be asset owners in that market -- and do not believe we need to be. We think the channel is well served, there are good partners down there.

We desire to monetize our position immediately and not take the risks that Tony mentioned. I do think there changes to Petrobras' asset base that are coming. I don't think they're -- I think they're on the high-end of the cost curve. I don't think where their assets are located and what they're doing today make a lot of sense.

So you have a 5 million ton urea market that's available, a lot of the international producers are participating. We are developing UAN. We've shipped several cargoes down there, and we think that will grow. I think it has a very good growth pattern, so you'll see is down there more and more.

Great, thanks a lot guys.

Vincent Andrews, Morgan Stanley.

Thanks, just a question on Chinese imports to the US. And I recognize the 2015 date is a little bit skewed by the size of the exports from China channel. But I'm just curious, of the 12 months of the year in the United States, how many of those month do you think we still need to actually physically have Chinese product come in?

And how's that changed over the last couple of years? Do you think the risk is that in those months we really just don't need to cover that cost at all in the US and therefore any Middle Eastern company can come in and sell at that price?

Traditionally, Chinese product has been perceived as lower quality. They're granular products -- because how they move it to the port, how it's loaded onto vessels, and the time sometimes it sits in the port, it degrades.

Then it arrives because of a long voyage into the United States, and a lot of the comments we get back from our customers is they prefer not to buy it. So what you see today is there are two price levels in [NOLA], for Chinese and non-Chinese.

But we are an important market, and an import market will draw tons from everywhere. Middle East, Russia, Asia. And today Chinese product trades at a discount, and I think as long as it trades at a differential low enough people will buy it. That being said, Chinese participation and Chinese product participation in the North American market looks to be declining.

You have a few that bring it in and blend it. And so what we see going forward, I think, this story, this broad story we're communicating today is that a part of these changes is probably Chinese product will remain more and more in Asia, maybe go into South America a little bit, but you'll see declining exports, which mean fewer imports into North American most likely.

So does that mean that we don't necessarily need to have -- I guess what I'm trying to ask is there not going to be a more localized cost curve based on where product is distributed to rather than sort of the global cost curve?

So Vincent, I think even at the high watermark there wasn't more than about 1.5 million tons from China that ever found its way to the US. Generally speaking, its Arab Gulf tons, this find -- and Canadian tons that's come into the US marketplace, but from the North American perspective it's mostly Arab Gulf.

And the Chinese stuff is more around the fringe, so we see most of those tons being backed out. North America's going to -- even after our projects come online and the other ones that are in construction today, North America will still import roughly 34% of its total nitrogen requirements. So we've heard this noise about, oh it's going to become a balanced market, but the people that say that include Trinidad tons as part of the North American balance, and the last time I looked on a map, Trinidad wasn't part of North America, at least the way my geography teachers taught it.

So this notion somehow that the in-market premium is going away, you know I'd say show me where the production is that's going to make that happen. Someone still has to bid those tons into the marketplace in order for there to be enough nitrogen to hit the ground at the corn belt, and that's not happening organically from new steel in the ground in that region.

So we don't see that happening. Now yes, there is going to be a shifting trade balance as the new capacity comes online. We don't think Chinese tons make sense here anymore, but we're still pretty substantially an import marketplace.

Okay, that's very helpful. Thanks very much, guys.

Sandy Klugman, Vertical Research.

Thank you, good morning. You mentioned the favorable start to the ammonia application season. Do you see this in any way detracting from later season demand for urea or UAN?

No. Actually the total nitrogen need is still there. We had a very strong quarter-end pull of ammonia, and then we kind of went into a wet and cool period.

You have to also remember, we had a poor Fall. So the net and need for Spring is fairly large, and application tendencies have changed a little bit. I think there's a push to get your Spring ammonia down.

There is also going to be a spring side-dress ammonia season that's going to come, but a lot of folks are moving -- a lot of farmers are moving towards split applications with either UAN and urea or going over the top with urea by plane. So what we see today, and what we anticipate, is a full utilization of the products that have made it into the market and low inventories coming out of Q2.

But we have a lot of applications ahead of us. The Northern market, North Dakota, Canada, are just kicking off now and going strong. We still have the side-dress season in Indiana and Ohio. This is all for ammonia.

And then applications on top, so we anticipate this season running a little bit longer, a little bit bigger, with 92 million to 93 million acres of corn, and don't anticipate that fill season will begin until later in the year.

Bert -- and Sandy, on that question -- Bert, jump in here, but for 92 million and 93 million acres, we would normally anticipate about 4 million tons of ammonia hitting the ground.

4.5 million.

4.5 million tons. And so given the poor Fall, you have to have all of these tons go down, otherwise there's a nitrogen deficit. And it is tough to get enough urea/UAN to make up for the quantum of molecules that'll be impact you have in ammonia tons.

What's going on with weather today in Brazil, with the impact -- the negative impact for Brazil, on their second crop corn -- you've seen the rally in corn now up to $3.90 today. I think December's at $3.85. But you're going see farmers fertilize for yield, and that extra bump, 4,5,6,7,8 bushels is money in their pocket. We anticipate that will come from nitrogen.

Great, thank you. And then when you think about the medium term supply demand balance for the nitrogen industry, what's your approximation where benchmark global urea operating rates could be in 2020, and how does this compare to your expectations for the level at which CF will be able to operate its facilities?

So, you know, look we're one of the lowest cost producers globally, and given North America is in the import marketplace, we're going to run 24/7, 365. And I think the question isn't quite as easy as what's the aggregate operating rate, because I think what happens is those people that are comfortably cash flow positive are going to run near 100%. They're going to keep their plants running.

Those that are on the fringe are going to try as hard as they can to continue to run, and it's those that are really -- the high cost ones -- that are going to ultimately shut down permanently, and we see most of those shutdowns happening in China, maybe some in Eastern Europe, but -- (multiple speakers)

Then the announcements out of Kuwait. Egypt's been having gas --

Trinidad's got some curtailment problems and others, so there are some disruptions in other parts of the world, but in terms of permanent shutdowns, most of that a think is going to be China and the Middle East. Or I'm sorry, and the Eastern Europe. And otherwise you're going to see a very high operating rate for those assets that are a bit cash flow positive.

Thank you very much.

John Roberts, UBS.

Thank you. On Chinese coal prices on slide 9, you indicate no perceptible response to oil price changes. Do think that's a lag issue and it still coming? Or do you think the linkage is now much weaker than it's been in the past because of the global oversupply in coal?

No, I think that the dynamics around where the coal price change in China are not related to the oil price at all. It's absolutely related to, you know, when we were over there, one of the things Bert and I consistently heard was the domestic coal price, the domestic coal price, and where that's sat.

And it's not directly linked to external energy sources that you can track back to. A lot of it has to do fundamentally with just what's the cost of production and distribution within the country, and that's been relatively firm. As Bert says, if anything we see that likely ticking up instead of staying flat or going lower.

So we don't see that being directly connected necessarily with the external energy environment, which is why when gas or oil price was $90 or $100, you didn't see coal price in China running way up, and as oil prices come down it has had really a muted affect on internal pricing.

Thank you.

Steve Byrne, Bank of America.

Hello, just continuing on with the discussion here about Chinese coal, do you have an estimate of what fraction of China's anthracite-based nitrogen industry receives financial support from local governments and/or is back integrated into the anthracite coal production?

I'll answer the second half of that and let Bert talk about the first half. We did explore sort of the question of how much is integrated, and the estimates that we got from people there -- and also looking back at our previous analysis and work in China. Suggests it's maybe in the -- it's somewhere in the 10% plus or minus range, that's actually integrated with coal production.

Other than that, they tend to be more standalone facilities not integrated with coal mining or ownership activity.

So Steve, on the question of -- I'm a little uncomfortable giving an exact percentage. I just don't have that today.

Okay. And on -- in the US markets, wanted to drill in a little bit about a precision Ag trend, and that is there's a couple of software programs out there in the corn belt to predict residual nitrogen mid-season. Wanted your view on those as to whether they might have an impact on nitrogen use trends and/or maybe a shift towards UAN?

So we're a big proponent of precision Ag and work with a lot of our larger more sophisticated customers to how we can help serve that whole trend. Because coupled with precision Ag and the 4R's and the proper utilization of our products, only lead to good outcomes. Which is higher yield, more efficient use, more environmentally friendly practices, and we're a big supporter. And yes, that is the trend you're seeing, is that UAN over time, we believe in split applications coupled with possibly other products or adding different products along with UAN, ammonium sulfates continue to grow, because of the need for [S].

So a lot of these coupled together, you'll see the better -- and this is why you're seeing consolidation in this space -- that the better, more financially solid retail groups are moving towards the service providing and value creating aspects of precision Ag for the farmer.

And Steve, to tag along with Bert's answer there, ultimately where we see that headed is higher crop density. The more precision the improvements in the feed, you get higher densities of crop which then -- actually the way we project it -- increases the amount of nitrogen per unit of land as opposed to the other way around. So in aggregate, we think this is a very favorable trend, not only because of the environmental and social aspects of what Bert talked about, but also just because we've view consumption and demand increasing in North America as a result of that.

Thank you.

Matthew Korn, Barclays.

Good morning, everybody. Thanks for taking my questions.

Is there anything -- I was very curious about your commentary around the distribution assets and how hard that they're running. I'm curious whether there's been anything meaningfully that's changed with your costs on the distribution and transportation side. And also, I guess similarly, have ramp up operations at Donaldsonville caused in other kind of near-term inefficiencies?

Are there other any costs that might be rolling on or rolling off? Because really what I'm try to figure out is, ex the natural gas noise that you all are delineated, are there any shifts in your cost structure, kind of product by product, that I should notice going into the second quarter or the third quarter?

Matthew, a couple things. One of which is, as we announced relative to the [TNH] business, we had an unscheduled downtime in Verdigris for one of our ammonia plants, and that also carried on to one of the UAN plants there as well. So as a result of unscheduled downtime, we ended up with a fair bit of fixed overhead absorption into that business without the corresponding production tons that go along with it.

On the distribution side, Bert has really led some investments that we've made at the distribution terminals to allow them to both receive inbound and also export outbound ammonia more quickly. Which allows us to have the kind of results we did at Blair and in the first quarter leading into the second quarter.

And so as, there's some of the initiative like the 4R's that Bert talked about, means that we feel likely less ammonia going down in the Fall, being able to really pump it out hard in the Spring is a critical thing. And that's part of the reason why we've made the investments that we had, is to really shift and be able to move those tons quickly.

The other thing that you have to look at I'd say, Matthew, is we do have now both the urea and UAN plant at Donaldsonville operating, and so we do have quite a bit more depreciation expense that's going to be rolling through the P&L than what we've had in the past. And as we bring on the D-Ville ammonia plant and then Port Neal, you'll see those depreciation numbers continue to climb.

So while that's an important thing to look at, again we really focused on cash flow generation. So our focus and the thing that we would point you to is, really take a hard look at how much operating cash flow we're generating going forward. That's a much better metric than the distortion of what the new depreciation is going to be in terms of the underlying health and economics of the business.

Thanks, Tony. That's actually very helpful.

Let me then follow up with another question regarding your China trip. I'm curious whether you got a sense that there was indeed much better than expected Chinese domestic demand for nitrogen over this past season? Whether you sense any risk that as that demand dries up over the next several weeks, that there's expectations that the exports could see an uptick later on into the Summer?

So we did see the domestic demand, but a lot of changes are taking place in Chinese agriculture, and you've been reading about these and seeing pictures. We still have a lot of smaller operations in the South. As you go North, you're seeing a lot of bigger -- some of state-owned operations are fairly large, and so we do see some positive trends.

There's a huge domestic market. Estimates are -- when you include industrial demand as well as agricultural demand for urea, and ammonium sulfate, it is large. And I do think it's going to grow. The change in crop subsidies for corn and how that's going to impact probably will have some change, but I don't think as much as people are anticipating.

So relative to as they roll off their domestic demand period and enter Q2 into Q3, we think exports, we've said, are going to be around 10 million tons for the year. We are still with that number, so off about 4 million tons from last year.

I think there's going to be some prolonged downtimes at several plants. I don't think you're going to see the push to stuff the ports for exports. We have to see this develop and see if our hypothesis holds true.

Great, and thanks guys. Good luck for the rest of the season.

Thanks, Matthew. I want to highlight that last point that Bert mentioned, and he mentioned earlier, and I think it's a really good one. Which is everyone we spoke with, and in fact the general manager of the port operations at Yantai called this out as well -- which is the producers are not just blindly shipping product into the port.

Then have it available for the traders to kind of cover short positions into India on tenders the way they used to. They're being much more rational about only taking product to port, and they've made some investments on rail load-out and load-in infrastructure, and so forth, in order to be able to move quickly.

And so they're waiting until they actually see business that they want to take before they start moving product to port, and that's one of the reasons that they claim anyway, that they've had some better discipline in terms of pricing into some of these tenders this year than they have in the past, which is it's fundamentally different behavior on the part of the producers. And they're getting away from letting the traders just short these tenders like crazy and then go into the overflow in ports to cover. And so we think not only is the rationalization of capacity improving kind of the overall market dynamics, but the behavioral aspect of it is really important as well.

Mark Connelly, CLSA.

Thank you. Tony, I want to be respectful of not commenting on OCI, but if I remember correctly you said that OCI would be very helpful in your Latin access for Donaldsonville, and I think you're saying today that you're doing pretty well without it.

So can you just remind us what the difference is? And then second, the easy question, can you remind us where you are with Weaver?

Mark, one of the benefits in terms of the OCI transaction is the trading entity that they have in Dubai. It allows for very efficient trading of products out at Donaldsonville with other parts of the world. That's not to say that we don't have access to those markets, and in fact Bert and his team has or have developed those relationships all across the globe, and it's not an issue of access to those demand centers or ability to get product there, it's more the efficiency and -- (multiple speakers)

The efficiency of how you do it. Okay, super. That's very helpful, and can you just give us an update on Weaver?

I'd say, Mark, OCI is a publicly traded Company. Weaver is their project. It's much more appropriate to allow them to answer any questions related to Weaver.

I wouldn't want someone else answering a question about how Donaldsonville -- I don't feel appropriate answering questions on Weaver.

That's fair. Thank you.

Adam Samuelson, Goldman Sachs.

Yes thanks, good morning, everyone. A lot of ground has been covered, but I wanted to return, Bert, I guess to the comment you made about the subsidies in China on the demand element medium-term. You just said you don't think the impact is as big as some people think. And I maybe wanted you to expand on that a little bit.

Heard some talk about some pretty sizable reductions in corn acres in China. They have application rates that for urea, or for nitrogen at least, that are pretty close to Western levels, and wanted to just get your thoughts on why don't think the domestic demand impact from subsidy change will be as big as people think.

So I think you're focused on the corn subsidies, not the production of fertilizer subsidy, is that correct?

Yes, on the demand side.

Okay so look, as we said about fertilizer, I'd say the same thing about corn. And China has been changing. They have subsidized corn production to the tune of $9 a bushel, we expect. And those numbers aren't coming off.

They do have -- they have had, as with other commodity products, high levels of storage and stored materials for food security. And so we'll be expecting from that is that these subsidies will -- won't protect that's good-quality, we don't think it is. And that some of that corn will be sold in different ways or possibly even dumped.

But I think we're in the middle of a changing market. And how that totally impacts the total end number, because corn we replace with another product, it's probably wheat or cotton or something else. So I can't give you what that, is it 1 million, 6 million tons of urea equivalent? I don't have that number.

Adam, the other thing that we've heard also from a number of the participants over there is, there are some subsidy things that can come in and go, but it's hard to reverse thousands of years of behavior and practice. You know the Chinese farmers sort of look at urea as being the really critical important element of fertilization for yield, and even though there's some view of balance fertilization needs to increase, the sense that we got from the people over there is they don't expect much of a change.

That's very helpful, and then maybe you talked about Donaldsonville production rates that are already running above nameplate, and that's something that you think is sustainable, maybe help size kind of the magnitude there. What kind output levels from the new plants do you think are achievable medium-term, maybe above nameplate. Thanks.

Yes, so Donaldsonville urea is running north of 10% above nameplate. So nameplate is 3,850 tons and we've seen rates north of 4,500, 4,800 tons a day. So that plan is really humming along.

And on the UAN plant, the nameplate on that is -- and everything I'm giving you is short tons -- is 5,050 a day, and we've seen rates north of 5,800. And again as I've said, we haven't really even pushed it to max rates yet, and so we think 20% is likely achievable at D-Ville UAN. So it was already the largest single train UAN plant in the world, even at nameplate.

We're getting much, much better results than that already, and the way that, you know, we went about designing these plants was understanding from a process flow perspective where the bottlenecks where, what the things we needed to upsized were. And that's the same approach we've taken on the ammonia plant as well as at Port Neal. And so while it's a little early to claim victory on the ammonia production, our expectation is that we're going to be in a same kind of region relative to production on the ammonia and also at Port Neal.

And the important thing to also highlight, Adam, is that when we did the original investment thesis and justification, it was strictly based on nameplate production. So every incremental ton that we're getting off of these plants show up at that 50% to 60% cash margin number, and all of those are just sort of free cash into the equation on the economics of the plant, so we feel very good about where we are.

That's very helpful. Thanks very much.

Don Carson, Susquehanna.

Yes, thank you. Two questions on pricing. One near-term, Bert, you talked about high mix of non-corn-belt ammonia in Q1.

How does that mix change as you get into Q2, and between having higher proportion corn belt sales and not much of a forward order book, I assume that you'll be able to capture most of this recent run-up in corn belt ammonia pricing. Then longer-term as we look in the second half of this year with more capacity coming online, are you seeing pressure from distributors to have price protection on nitrogen products like they've been getting on potash, where virtually all potash now is price protected from the manufacturer?

So for the near-term, you're correct. That ammonia in Q1 for Ag application, we did get April pulled into March, but we're still going to see a very healthy Q2 application period. We're work through April, we're into May, and again as we march forward, that northerly tier starts kicking in.

So don't have exact number for you but we're planning on a historical Spring six-month period. We look at this as a six-month cycle and for Spring. And pricing you're right, you're correct, it did rally quite a bit, $100 to $150 a ton, and we did have tons available to sell and we anticipate that we have captured a pretty good part of that.

You're correct, there is capacity coming online in UAN for us, urea with CF and some others, as well as ammonia. The price protection is not in the mix. What we have seen happen with potash and phosphate on price protection is it's really a short-term gain, long-term loss.

As you put product in the inventory for periods like the Spring when you could have had price appreciation, you do not get that. And it creates a negative dynamic in the market that the risk stays with the producer and you continue to push that product out from a logistical basis, and it just doesn't help the market at all.

We believe that we need to price our products appropriately for our retail and wholesale customers, and that the risk then stays with them. They get a reward when they sell and they provide services, they provide different products. It's part of their product portfolio.

We're just one participant in that chain. And so we just don't see that price protection has a future in North America, at least in nitrogen it doesn't.

Okay, thank you.

That said differently, being the largest producer globally and larger than the next six combined in North America, we have no interest and we're completely unwilling to engage in that kind of practice. We'll find a way where liquidity is achieved in the marketplace so that, that doesn't happen here, at least in nitrogen.

Thank you.

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

Thanks, Liz. That concludes our call for today. I'm available for any follow-up questions. Thank you, everyone, for your time and interest.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.

Everyone, have a great day.