CF工業控股 (CF) 2024 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to CF Industries first half and second quarter of 2024. (Operator Instructions)

I would now like to turn the presentation over to the host for today, Mr. Martin Jarosick with CF Investor Relations. Please go ahead.

Good morning and thanks for joining the CF Industries earnings conference call. With me today are Tony Will, CEO; Chris Bohn, Executive Vice President and Chief Operating Officer; Greg Cameron, Executive Vice President and Chief Financial Officer; and Bert Frost, Executive Vice President of Sales, Market Development and Supply Chain.

CF Industries reported its results for the first half and second quarter of 2024 yesterday afternoon. On this call, we'll review the results, discuss our outlook and then host a question-and-answer session. Statements made on this call and in the presentation on our website that are not historical facts are forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict.

Therefore, actual outcomes and results may differ materially from what is expressed or implied in any statements. More detailed information about factors that may affect our performance may be found in our filings with the SEC, which are available on our website. Also, you'll find reconciliations between GAAP and non-GAAP measures in the press release and presentation posted on our website.

Now let me introduce Tony Will.

Thanks, Martin, and good morning, everyone. I'm going to start with a big welcome to Greg Cameron, who joined the CF Industries team as our Chief Financial Officer in June as being his first earnings call with us. Greg brings a strong background in executive leadership finance and clean energy. He is succeeding Chris Bohn, who was promoted to Chief Operating Officer. So welcome, Greg, and congratulations, Chris.

Turning to earnings. Yesterday, we posted financial results for the second quarter of 2024, in which we generated adjusted EBITDA of over $750 million. This brought adjusted EBITDA for the first half of this year to $1.2 billion. We're very pleased with our performance during the quarter, both in terms of how well we operate and also the progress we have made on our decarbonization and clean energy projects.

With that, Chris is going to provide more detail on our operating results as well as on our strategic initiatives. Chris?

Thanks, Tony. The CF Industries team delivered outstanding operational performance during the second quarter. We operated our ammonia plant at 99% utilization rate in the second quarter following a challenging first quarter of production outages. This utilization performance includes the Waggaman ammonia production facility which has been operating approximately 10% above nameplate capacity following its first significant CF led maintenance event.

Most importantly, we operated safely. Our 12-month recordable incident rate at the end of the quarter was 0.17 incidents per 200,000 labor hours, significantly better than industry averages and one of the company's lowest incident rates ever. We continue to advance the series of strategic initiatives. These include our industry-leading carbon capture and sequestration projects that will generate low carbon product and significant 45Q tax credits.

The Donaldsonville project is on track with sequestration expected to begin in 2025. We also recently announced the carbon capture and sequestration project at our Yazoo City, Mississippi complex. We will invest approximately $100 million in the site to enable ExxonMobil to transport and sequester up to 0.5 million metric tons of carbon dioxide annually. We expect sequestration at Yazoo City to begin in 2028.

Additionally, commissioning for our green ammonia project at Donaldsonville is ongoing as we work to integrate safely, the electrolyzer into our ammonia operations. We continue to evaluate construction of a greenfield low-carbon ammonia facility in Louisiana with Global Partners. We have made additional progress on our auto thermal reforming ammonia plant FEED study, which should be complete before the end of the year. We remain focused on a disciplined approach based on the return profile of new capacity, the technologies needed to meet customers' carbon intensity requirements and the global demand outlook.

With that, let me turn it over to Bert to discuss the global nitrogen market.

Thanks, Chris. The North American spring application season saw strong demand for urea and UAN driven by higher-than-expected planted corn acres in the United States. This demand absorbed urea and UAN imports that were significantly higher in 2024 than the prior year. Spring ammonia applications were low this year following a strong fall 2023 application season. However, industrial demand and exports offset the lower spring volumes. As a result, we believe the North American nitrogen channel exited the spring application season with low inventories across all products.

This supported our ammonia and UAN fill programs, which achieved prices that were well above last year's programs, but also represent value for farmers despite lower corn prices. Corn prices have been declining due to anticipated high production of corn in the United States and Brazil this year. As a result, the outlook for farm economics is softer compared to recent years. We have begun to see this ripple through different parts of the agricultural value chain. We don't expect to see a major impact for nitrogen given the non-discretionary nature of our products, but we may see changes in buyer behavior.

Globally, the nitrogen supply demand balance tightened as the second quarter progressed. Natural gas curtailments in Egypt resulted in widespread nitrogen production outages from late May to early July, reducing global supply. The continued absence of urea exports from China also helps tighten the global market. We expect exports from China to resume at some point in the second half. However, we believe total volumes for the year will be much lower than the 4.3 million metric tons of urea exported in 2023, given the Chinese government's focus on domestic fertilizer availability.

Brazil and India will be a key focus of the global nitrogen market in the coming months. We continue to project that urea consumption and imports in Brazil will grow in 2024. Imports of urea to India will be lower than in previous years as domestic production has ramped up. However, India has imported less than 2 million metric tons of urea so far in 2024. As a result, we believe substantial import volumes are required in the coming months to meet urea demand in India.

On a longer-term basis, we anticipate growing demand for low-carbon ammonia and low carbon nitrogen fertilizers for traditional applications. We've had a growing number of conversations with customers who want low carbon versions of the products they buy today. This is because the consumers of agricultural and industrial products, including ethanol producers such as POET are increasingly focused on reducing the carbon footprint of their supply chain, which lower carbon fertilizers will do in a quantifiable and certifiable manner. We expect even greater interest as we bring low carbon ammonia and fertilizers to the market.

With that, Greg will cover our financial performance.

Thanks, Bert. For the first half of 2024 the company reported net earnings attributable to common stockholders of approximately $614 million or $3.31 per diluted share. EBITDA and adjusted EBITDA were both approximately $1.2 billion. For the second quarter of 2024 the company reported net earnings attributable to common stockholders of approximately $420 million or $2.30 per diluted share.

EBITDA and adjusted EBITDA for both $752 million. As you can see on slide 5, the largest driver of adjusted EBITDA variance between these periods in the same periods in 2023 was lower product prices, partially offset by lower realized natural gas costs in our cost of sales. Our trailing 12 month net cash from operations was $2 billion in free cash flow was approximately $1.2 billion.

We continue to return substantial capital to our shareholders. Over the previous 12 months, we paid $341 million in dividends. We also repurchased 13.1 million shares, approximately 7% of outstanding shares at the start of the period for $1 billion. We have approximately $1.9 billion remaining on our current share repurchase authorization, which we intend to complete by the expiration in December of 2025. Share repurchases, coupled with disciplined investment in growth, continued to offer strong returns for our shareholders.

We believe our enterprise value remains significantly undervalued. This is reinforced by two recent acquisitions in our industry. The first one focused on traditional nitrogen products in the last driven by low carbon ammonia that transacted evaluations consistent with our view of our assets, but significantly above our current enterprise value.

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

Thanks, Greg. A year ago on our second quarter earnings call, I expressed dissatisfaction with our safety record as we had experienced an unacceptable number of very preventable injuries. I am really proud of the team for their response and focus on this front, and we have achieved fantastic results both on safety as well as our asset utilization and onstream factors. So, really well done to Chris, Ashraf, Sean, Kelvin and the entire manufacturing team.

I also want to recognize the rest of the organization. We are operating extremely well, not only in manufacturing but across the whole company. Our price realizations were strong. We ended the quarter in a fantastic position from an inventory perspective and we are doing a great job on the supply chain side of logistics and gas procurement.

Before we turn to your questions, I do want to highlight one other thing that Greg touched on during his remarks. We have seen two significant transactions recently by knowledgeable successful companies acquiring production assets in North America. One transaction, as Greg mentioned was by a long-term entrenched industry participant in the agriculture side of the business, the other by an energy company looking to capitalize on clean energy attributes of low carbon ammonia.

Both transactions place values on production assets in North America, roughly new build or replacement cost of those assets. So it is clear that knowledgeable companies looking at the space see higher cash generation and more persistence of that cash generation than the general market recognizes. With our operations really hitting on all cylinders and our world-class EBITDA to cash conversion efficiency, we are in a unique position to continue creating significant value for our long-term shareholders.

In fact, over the last 15 years, we have leveraged our cash generation to buy back half of the outstanding shares of the company, while increasing our production capacity by over 1/3. This formula of adding capacity in a disciplined way, while reducing the outstanding share count has driven the best total shareholder return results in the industry. As we look forward, we see the opportunity to continue with this winning approach, providing superior returns for our shareholders.

With that, operator, we will now open the call to your questions.

(Operator Instructions)

Andrew Wong, RBC Capital Markets.

It sounds like you're receiving more interest in low carbon ammonia from the agriculture side of things, which I think is a bit of a shift from about a year ago when we were all kind of talking about more interest on the industrial side of things. So can you talk about that shift and what that might mean for pricing of low-carbon ammonia?

Good morning, Andrew. This is Bert. And I think the question is a focus of where we are driving our business and all different formats. So energy is a focus, industries is a focus, and ag is a focus. And because we're netback driven or value-driven, we're going to pursue each of those vectors with bigger in the context of what it can do for the company to move these products.

As Chris mentioned in his remarks, we're leading the industry in bringing these products to market and also discussing that with our customers. And as I said in my remarks, the feedback is folks and customers are looking at their scope emissions and their process where they'd be CPGs are an industry or Azure ethanol. Low-carbon products will play a valuable part of that solution.

And so that's where we're talking about increased activity. Regarding pricing we believe we have already been discussing that in the context of those discussions that valuable part of our component not only will we receive from the tax credits, but as we put these products to market, we're expecting to receive a superior value to conventional.

And Andrew, I am just going to attack on one other thing with it's not that we've seen a dimunition or as we did a reduction on the industrial and energy side for these products is just what has happened is on the agricultural side. We've seen demand develop that we hadn't previously recognized what we're also seeing a lot of interest from other potential industrial companies and looking at new low-carbon intensity, the ammonia production for a variety of potential industries that they're focused on as well.

So we're not only seeing it in terms of demand across the product space, but also demand from companies that are looking for vertically integrate their inputs.

Yeah now we just add one point to that, I think the agricultural side is also seeing how they can benefit through the industrial side. So for example, with some of the incentives related to the 40B in the 45Z, how low carbon corn production or agricultural production could work into fuel standards, whether it be sustainable, aviation fuel still seeing the whole value chain and where they participate in that.

Okay. That's great. And then maybe building on top of that, then we talked a lot about the potential for more in ammonia supply in the potential for oversupply. But given for seeing building demand trends around different industrial applications and maybe on the egg side as well, like is it possible that in a scenario where maybe that the demand for low-carbon ammonia to be strong enough to maybe just taking the overall market just because of how long it takes to build some of these plants? And obviously, we know that doesn't always go smoothly.

Yeah, Andrew, I think what we're seeing right now is just based on kind of expected nitrogen demand growth even in traditional applications. Looking forward, expected new demand is outpacing the amount of new construction that is all already occurring. And so we had expected natural tightening in the S&D and the balance even before you layer on top new sources of demand for decarbonized product. So we absolutely think there's going to be a tightening in the overall S&D balance on the nitrogen side. And that's one of the reasons we're so optimistic about what future looks like for us.

Strategic.

Josh Spector, UBS.

Yeah, hi, good morning. I just want to follow-up on comment, Tony, you made towards the ending Greg talked about it with the value of transactions that are out there. And I guess the extent you're willing to kind of opine a little bit here, I mean, the OCI transaction, obviously, there's hydrogen FEED and some other shared economic model facility by, let's call it, $2,100 a ton nitrogen that the coke acquisition that was done was nearly close in the $4,000 ton. So wondering if you could talk about those two different dynamics and what you would view as the right value for your assets, given that quite a wide range that's been provided by the market lately.

Yeah, Josh, and I think it's a great question that you bring up. But I think you're thinking about this a little wrong. So the way to think about the Woodside OCI transaction, as you take a conventional plant and you basically cleave in half between the front end of the plant in the back end of the plant. And you know what's essentially happened is I think Lindy is putting about $1.8 billion in the ground to create the front end of a plant. And now you've got Woodside that's paying 2.35 for the back end of that plant. So you add those together to really look at what an integrated plant looks like in your north of $4 billion.

Now that the piece that Lindy is building is a bit larger from a capacity standpoint than just the requirements of the back end ammonia plant. But you do get efficiencies of scale when you start getting into large production volumes. And so that doesn't scale in a linear basis. If you drop that plant down to kind of just what's required on the input basis, you're still probably talking about [$13 billion to $15 billion].

So you're looking at an integrated equivalency plant that's probably pushing [375 to 4] on that basis. So you really need to think about and in terms of what the total cost of construction of that plant is and by the way, windy has got a in our take or pay on the inputs that they're providing to across the fence line to the what's now going to be the Woodside plant, and they're expecting a good rate of return on that.

So you can't just look at the back end of the plant and traded, do the math on what you really have to look at what they're paying for the hydrogen and nitrogen, the oxygen and then capitalize that back into the full cost of wood plant is.

And I think what you'll find when you do that, Josh is that it's pretty similar to what the Iowa transaction was as well. It really leads to Tony's comments that you have two sophisticated buyers who are making these investments one for agricultural one for energy, but they both see the sustainable free cash flow generation that underlies those assets. And specifically in all our assets are similar, if not identical, in some case pieces to that. But all the way on the low end of the cost curve and the first quarter.

That's really helpful and appreciated it. Definitely a different way to look at it. I want to follow up and just a little bit more longer term on the blue ammonia offtake or will your decision on FIE for the greenfield facility? Because I think you've been helpful about thinking about the milestones needed within Japan, Korea, et cetera. To kind of say when they're comfortable knowing what they're willing to pay in terms of contract for difference to really enable some of those contracts. So is there any update you can provide on the time line there beyond your FEED study that will be required for decisions to be made? Thank you.

Yeah, so many published yesterday, I would say the closest thing to the time line that we have right now, so they put out some of the requirements for the carbon intensity and then it's in public comment period right now for the next 30 to 60 days.

So if you think about it, it's really public comment is this good for Japan and total bringing in low-carbon ammonia and co-firing. It with coal, once said period is gone through a Mehdi is the Ministry of Economic and trade for Japan. They're the ones that are going to be making a recommendation to the government for the contract for difference. Just to be specific on that.

So once they have that time line applications and submissions will go into, that will be like the end of October, November for our projects with our partners, Mehdi, then we'll have probably three to four months to choose which projects both from a hydrogen side and a low-carbon ammonia side that they would give the contract for difference for.

So we're looking now at a more, I would say, more clarity on call it mid Q1 for that to be determined. But as Tony mentioned, I think the one thing that we're seeing is a little bit more interest around from other industrials globally on this low carbon front, both from an agricultural but also from industrial applications as well. So a lot of activity that we're feeling pretty good about with our project. But again, all this is based on waiting for the FEED study to be completed by the end of the year.

Great. Thank you.

Steve Byrne, Bank of America.

Yeah, thank you. Bert, you were talking about the strong ammonia applications last fall. I would like to drill into your brain on what your expectations are for this coming fall. You got the outlook for gross margins looks tighter. You know, you got the soybeans corn ratio. Looks like there might be a shift back to soybeans. Do you have a view on whether ON the strength of the fall season or could the uncertainty lead to kind of shifts more towards the next spring?

Good morning, Steve. So regarding the fall of 2023 was a big season for us. And then the spring this year, as I mentioned, was lighter. However for the fall programmes, but the urea, UAN or ammonia. There has been very good uptake and it's a good value. The value that we put out for the fall application program was well received from abroad array of customers.

And so we're expecting a solid fall application, weather, permitting. And the outlook, the yes, the grower outlook at $4 corn today were sub $4 in the cash market forward market for these 2025 is in the 450 range, which is acceptable. And so it's a question of how farmers are managing their economics.

But fertilizer in general, that's NP and K on a revenue basis is still in that 20% range, which is acceptable. We think nitrogen is a good value today and will be well uptake. And we're expecting 90 million plus acres of corn for next year, which will then support, I think, not only ourselves, but the imports that come in. And so we're positive for 2025 in the fall application of 2024.

Very good. And Chris, I wanted to just drill into the FEED study is a little bit with you. You have the FEED study further for a new SMR plants, which you know that technology well, and you're working on one with an ATR you need, but you know, of carbon capture control technology add on to the SMR. Is it fair to assume that what you're looking for there might have something like a 75% control, just so that the overall carbon capture is roughly the same as the ATR approach? And are you looking at a variety of technologies and maybe even something that would be more modest and control, maybe lower CapEx? If Japan authorities don't require 90% to 95% to qualify as blue?

Yeah, good morning, Steve. I'm going to start now I'll hand the questions over to Chris. So we are going through a up flue gas capture of FEED study right now. And part of that is does it make sense if we were going to do a new build on it and SMR. But a part of it also is informing us in time terms of the path forward of how we're going to long term approach getting to net zero by 2050.

And there's definitely going to have to be a flue gas capture component of ultimately how we get there in order to make it work. So this is not only good for the current, but good for the long term as well. As you say, I think you can design these things at different levels of carbon reduction coming out of the flue, the problem is that sort of thing affects the geometries of the vessels.

And so if you were going to go to all of the pain and hassle of an expense of putting in flue gas capture, it's fairly short sighted, I think, to undersized that unit or to make it so that it's not not terribly efficient because then ultimately, if your goal long term is to get to net zero, you're going to have to mostly replace or rebuild all of that capital you've already put in the ground.

But it is certainly something that we're looking at and evaluating. We actually believe that the value of in our superior decarbonized product is going to be such in the marketplace from a demand standpoint that extracting as much carbon out of it as you can, is going to pay for itself, not only do you get to 45Q benefit, but also the market demand for and premium that would be accompanying a decarbonized product, I think will carry the day.

Yeah, really not much that from that. But just to agree with Tony, that I think over time, the carbon intensity and the more you can reduce it for me, more incentives or the more premium you'll get for that. If you look at the C-band that will be going in place are really at the end of 2025 here beginning in 2026 with some of the carbon charges to it is going to be based on carbon intensity and how much to get charged based on that. So having the lowest you possibly can and will be better. Same thing as we look in Asia, primarily is for the biggest reduction of carbon is going to be the most beneficial for us.

Chris Parkinson, Wolfe Research.

Thank you, let's switch it up a little bit, when I'm thinking about the second half of 2024 and into 2025. Can you just update us on your current views of both, let's say, the production rates in both India and China as well as our import trends in India and export trends or lack thereof in China? Just what is your latest thought process based on the developments over the last few months? Thank you.

When you're looking at India there has been, as we've communicated, a growth in domestic production, which has been made in India movement by Prime Minister Modi and they've been successful in that. However, taking a step back and looking at those investments with the cause of LNG being 60% of their gas needs, those are expensive operations, not only from a CapEx exposition, but from an operational and delivered basis.

But doing what it is, that's what they've chosen to do until exports or imports to India have declined over time. And we're projecting those to be in the 5 million to 6 million ton range for 2024 to date, and that's a January to date. India is imported about 2 million tons, including there on the nisco tons. And so we would expect over the next several months, September, October, November, December, you would probably see approximately 3 million tons.

And so India is still a significant importer, but has now fallen to the second place, as Brazil has taken over the lead for the largest importing country at approximately 8 million tons. That's been a tremendous growth of demand reflected in their exports of corn and other products. So Brazil is the agricultural powerhouse we've been projecting for years and will continue to grow and their imports of nitrogen.

When you look at China, just the second part of your question, that has been a great moderator to the demand or the supply of urea for the world. China has been in the 3 million to 5 million tonne export range for the last several years. And this year there, it's almost insignificant because it's almost zero other export to date. We have talked about them being the 2 million to 3 million ton range. I even think that's it in a questionable volume.

And so when you put that in perspective of if the world export vessel traded market is approximately 55 million tons, taking 3 million to 4 million tons out of that supply is a great supporter of the current price structure where we are that as well as the Egyptian loss of production in May through July has what has been supporting the price structure that we have today.

Just a quick follow-up. You know overtime you've traditionally converted, correct me if I'm wrong about 70 and if you adjust for attaching a few years ago probably you know close to 80% of you know evidence for cash flow. Can you just help us you know especially given your remarks about some transactions in the space, can you give us how the market should be thinking about? You know buyback activity versus potential CapEx outflows in terms of the cadence not only in '24? But also when you know CapEx could even rise in the future. So just help us think about the balance of capital allocation over the next 18 months or so just given that conversion rate. Thank you so much.

All right. I'll start with the CapEx part, Chris, you know our CapEx that we have and is right now in the range of $550 million is, you know, having followed our company long enough that Q3 is when we do a lot of our planned maintenance. So we'll see probably a little heavier spend in Q3 here along with some of the production being a little bit lower, but with the full year still being at gross ammonia production of 9.8 million tons, we talked about as we get into an FID and say it's a positive FID to move forward with a new plant.

The spending really occurs over five years. And it's almost like a step distribution a little bit with the beginning spending were relatively thin and then getting into years back half of the second year, third and fourth-tier heavier and then the tail back on the 50. So a bit a bit longer of a spend trajectory than the actual construction of the plant itself is how we plan that out based on whatever our share component of that will be.

I'll let Greg talk about maybe share repurchases.

Yeah. So as I said in my remarks, we have about $1.9 billion left in our current authorization. And we plan to complete that opportunistically by the end of December of 2025.

And I would just add one thing, Chris, which is the good news you mentioned, are best in class EBITDA cash conversion and I think somewhere fairly traditionally in the 60% to 70% range is pretty normal for us. We were a little lower on a given kind of some of the operating challenges we had in Q1 with the weather-related outages and then the red line in terms of what that meant from some of our industrial ammonia contracts.

But, but I would expect us to kind of get back into that range, that's pretty pretty normal for us and that that kind of conversion efficiency and cash generation, it's not an either or question it's a both. And you know, even if illustratively you're talking about a, you know, greenfield project, if we decided to go forward with it, that in the range of what the Woodside flash Lindy project is trading at.

If we're only doing kind of 50% of the capital on that spread over four or five years, not such a heavy capital load on us, given our cash generation, that we can't continue to do pretty significant share repo at the same time. So our view is it some the formula that we have used in the past of disciplined and the addition of capacity, while reducing our share count, we think works on a go-forward basis. And we expect to continue to generate superior returns.

Thank you.

Adam Samuelson, Goldman Sachs.

Yeah, thank you and good morning, everyone. So Bert in your prepared remarks, you alluded to potential changes in buyer marketing patterns over the balance of the year. And just wanted to clarify that a lot of the global pieces that you are just dancing in response to Chris's question or was there shifts you're seeing amongst US domestic customers in the fertilizer space? And if so, if you just elaborate a little bit on what is changing in terms of how people are buying fertilizer for the second half of the year?

Yeah. Good morning, Adam. There's been a trend with buyer behavior of deferring or delaying purchases over the last couple of years and I think is a reflection of the ag market cycle and lower corn prices to farmers and therefore, lack of farmer liquidity or maybe financially stressed, those purchases could be delayed to the retail sector.

And so based on that, we've gone into little more of a defensive mode. We've worked on our we've kept our inventories low. We have moved our programs forward as a successful launch of our fall infill programs, as I mentioned. And so how we're operating is in the context of if that eventuality of delayed purchases were to happen, we will be constrained as a company.

We've leveraged the utilization that's at our fingertips of exports distribution, modes of distribution production allocations as well as our communication with our customers to make sure we always position CPS industries in the most opportunistic way.

That's helpful. And if I guess I ask a follow up. I believe you had the supply agreement for ammonia at Mosaic firm most of the last decade. We believe that you exercise your right to terminate that supply agreement beginning in January. And just how we think about it's a non-trivial amount of your own ammonia volumes that we think about that. Are you thinking of marketing that next year? Are you working to renegotiate the terms of that agreement? Thanks.

Mosaic has been a fantastic customer. That was a partnership, there was a result of us selling the assets, the phosphate production assets to them in Florida, which they were of, I think, a more economic owner as well as then associating the ammonia contract, a long term of very large supply contract, which was beneficial to CF when we were starting up our new production assets and Donaldsonville to have an outlet.

As we've rolled forward I think both companies realize that we were over the one to execute the contract and terminated, but we're in negotiations and conversations with them to continue to supply. And we anticipate Mosaic to always be a fairly large customer of CF Industries, and we have a great relationship with them and they're doing a good job.

However, there are additional tons which we have been working on over the years to market, but we do have additional outlets. We've been active in the export market, both with moving ammonia to different locations as well as augmenting our industrial contracts and customers have a more balanced portfolio.

And I think it is Europe implements the financial aspects of the C-band going forward to there may be more alternatives that provide a higher netback for that low-carbon ammonia that will be in production next year for Bert and his team to evaluate as well.

That's very helpful color. I'll pass it on. Thanks.

Ben Theurer, Barclays.

Yeah, good morning, gentlemen. First of all, congrats on a very strong second quarter. Just wanted to give you a thought around just the cost piece of it gas pricing and obviously what it potentially does in Europe right now from a capacity point of view, you've highlighted that in your prepared remarks it was a offsetting a little bit the price decline clearly during the quarter from an EBITDA perspective and also on the first half basis. So as we see it right now, where do you think the spreads are going to trend out? Just also given the geopolitical tension in the Middle East and have you done any sort of like a contracting, hedging, et cetera, just to lock in those lower costs that are prevailing right now in the North American market?

So Ben, I'll just, Chris. I'll start with the European side. So as you mentioned, we continue to see Europe being challenged by the energy costs even before some of the geopolitical events that have happened over the last few days in Ukraine and also in the Middle East. So that's something that we see continuing. And then on top of that, we've done a pretty in-depth analysis of the European assets, and we're seeing pretty large maintenance events that are going to be coming forward for some of these plants.

And they have to make the decision whether you make significant capital investments or whether you curtailed or shut down completely. I mean, as we've talked about before, the best example of that is what we've done in the UK, where some of those capital expenditures we're going to be so large, we are better off importing ammonia and then just upgrading it from there.

So our expectation is for between now and 2030 that we see even more tightening in the supply market in Europe related to those two factors, both the energy and then just the additional capital cost it's coming. And that really is what we see as an opportunity for us out of Donaldsonville, where we have the export capability and will be the first to have low carbon ammonia and low-carbon products.

So we almost see it as a carbon arbitrage opportunity, given that will be the first mover on low carbon to Europe. But I'll let Bert talk about our hedging strategy.

Where we are on gas. And you see it reflected in our due to exceptional performance. And great job to the gas team is were wide to open in the cash market. And we're believers in the future of North American production. Today, we're running at a rate of about 102 Bcf and with exports still in the 12 to 13 Bcf per day. And the spreads, you're still injecting and building inventory, and that's what's driving it, keeping the Henry Hub price lower.

And so the spread against the international market and ETF or JKM, the Europe and Asia is over $10 and that's an exceptional place for us to be as operators of these assets. But when you look at the trends, you've seen what happened in Egypt when it turns to summer and they want the gas for electricity or the purposes they're now a large importer of LNG or Trinidad on the gas constraints that we're experiencing with our own assets.

And so it will happen when you combine the EU and North Africa and Trinidad combined with their production assets and the global S&D for the products that those plants produce it placed again, like Chris said, next quarter or producers like CF Industries and a fantastic place outside of what could happen in the Middle East with all of the disruption in Gaza and the Red Sea. So I think we're well positioned.

I'd also add that what we're seeing in some of this is being driven by machine learning and AI applications. And the proliferation of that is the number of data centers that are going up globally. There is significant and the expected energy draw against those per data center installation is really large. And I think some of the estimates that we've seen is by the end of this decade, there's going to be about four Bcf of incremental gas conversion into electricity just for data centers in the US alone.

And so that the energy is not or the world is not reducing the electricity demands. To the contrary, it's going up quite heavily. And so to be in a place in that environment where energy is short and time where we have the kind of resource base that we do have in the US, you really couldn't be in a better place. And I think that's one of the reasons why assets over here are trading the way they are.

Perfect. And then just following up, but you've talked a little bit about the Vagamon integration, but just wanted to understand where you're at in terms of like efficiency at Vagamon versus your own legacy assets. Was still the potential and done just by from an operating run rate perspective, where are you at right now? And where do you want to be maybe by year end and the first half of '25?

Yeah. So what I would say, Ben, is up right now, the plant is currently operating at about 10% above its nameplate capacity. And that's pretty much in lockstep with a lot of legacy plants that we have in the CF network. We haven't really evaluated doing any de bottlenecks there at this particular time. I think our goal is just to have upstream on time to be the plant operating more consistently, which it has been since we took it down.

If you recall, in the first quarter, was one of the sites where we've had now each of our team pulled forward some of the work and got in there and accomplished a significant amount of maintenance work during that particular timeframe. And since then, the plant's been operating fantastic. So from that integration standpoint, we feel very comfortable that we're running now is where we'll run for the remaining part of the year. As time goes on, we'll look at other projects that may involve a debottleneck and definitely it will involve the carbon sequestration.

The other thing I'd just add is from an efficiency standpoint, I think I'm right in saying that is the most efficient plant we have in the entire network. And we're running at, I think, under 30 MMBtu per ton of ammonia where the legacy systems that including the recent expansion plans, but the legacy systems are more like 33, 32 and even the expansions are in the 30 range. So not only is it a fantastic plant from being able to operate above nameplate, but it's the most efficient plant in the system, and we've got to really engaged in our workforce. And on that, we could not be happier with that acquisition.

Awesome. Thank you very much for the color, pass it on.

Richard Garchitorena, Wells Fargo.

Good morning, everyone. So I was wondering if you could maybe give us an update in terms of how you're thinking about the market environment for clean ammonia today versus when you started your process to build out the strategy. Obviously, the recent OCI transaction would confirm, I guess value that's out there. And then also just had conflicting views out there in terms of the viability of more green ammonia, then the blue ammonia demand, just some updated thoughts would be great.

Well, I'll start one. We're extremely positive We think the transaction I should say is positive for the industry with Woodside because it pretty much, you know, validates not only our clean energy strategy, but the conversations they're having globally, they're seeing the sort of the same type of demand shoots and new centres starting to evolve, whether it be in power generation or in just marine fuel or just in really subclassing or supplanting higher carbon nitrogen today.

So very positive on that. I think what we've seen change over the time is what Bert talked about in the beginning is that we are largely industrial focus. And we are seeing the pull happen more from power Gen and marine side and even sustainable aviation fuel. Now what we're seeing is the agricultural side is probably seeing where they fit in into that. And then there's also the demand pull side that's coming more from the CPG's who want to lower carbon product as they're moving forward.

I agree with Chris. In terms of where we are in our evolution in this process, we're focused on the business and where we can generate higher revenues and higher profitability and clean products are going to be a part of that. And it's amazing the receptivity from the processors.

Again, when you look at the core and value chain in and of itself of what low-carbon product can -- low-carbon ammonia into the upgraded as UAN or as ammonium nitrate, what that can do and that value chain for corn or wheat, as you take it through to the farmer and the farmer does beneficial practices that are being focused on today to the processor. And as we sequester that CO2 from, let's say, the ethanol producer, you have a very low carbon is very low carbon finished product that can go into sustainable aviation fuel or ethanol. And those that's where we're focusing our attention on the ag cycle.

And I would say the discussion about blue and green, I would just call it, it's all going to be, as I mentioned earlier, on a carbon intensity. I think to get to zero carbon even as we start to commission our particular plant down there, which is about only 20,000 tonnes a year, the cost, the green is just very significant and the energy pull on that would not.

It was out having the renewable energy sources in place is going to be very difficult to leapfrog low carbon and get right to zero. I think as time goes on and by time, meaning decades, you'll start to see it up to that. But today when you can get to 65% to 95% carbon reduction, and that's what's going to lead the day today.

And I think that's where you see the stalling globally, the green projects where you see CF and others leaping ahead with low-carbon products.

Okay, got it. And they during the quarter, we also moved forward with, Yazoo City at ECS, given how well Waggaman is running a key need, talk about potential moving forward with other projects on CCS maybe in that regard.

Yeah, as we've talked about all along. We have a hierarchy of plants that we were hitting that where the most attractive and the soonest to execute. So we could move on those. The first being Donaldsonville, the second being in Medicine Hat, Yahoo city. So we've executed Yazoo city. So we're working on Medicine Hat.

Waggaman you know, our initial goal there was just the utilization rate and getting that stable and moving forward with the projects we have in place from a maintenance standpoint. But that definitely is probably the next on the list after our Medicine Hat that we have begin to look at CCS in that particular region.

Edlain Rodriguez, Mizuho securities.

Thank you and good morning, everyone. Tony is less of a quick question for you. You talk about like the stock being undervalued and those two transactions. Clearly prove the right question is how do you unlock the value like what do you need to do? Or what can you do to make investors see the light?

Yeah. I mean, I think from our perspective, I'd like to note that we're going to continue to do what we have done, which is just continue to buy the shares out of marketplace. We've taken 50% of the company is outstanding share count out already, and that has benefited significantly the long term shareholders that have been with us on that journey and we're going to continue to do that and you know eventually those that are left.

We'll be able to recognize and see the amazing amount of aggregate cash flow and the few number of shares out, and that will by definition have translated into a share price. That is I would say it's more reflective of the value of the asset base. And but until that time, we're happy to be patient and continue to buy shares out and for the benefit of our long-term believers.

Okay. Thank you. That's all I have.

Vincent Andrews, Morgan Stanley.

Thank you. Can you just start off? I just want to clarify a few things that have come up on the blue project. One would be is FID still intended for later this year? Or did the Medis thing push it into 1Q? And I guess on top of that, it sounds like you're seeing a lot more demand from multiple factions versus previously. So is there any scenario where the scope of the plants increases or is there a second plants or does that incremental interest make you be willing to move forward? Maybe with ahead of many or without take-or-pay contracts, are there any change in sort of the way that you want to have everything postured before making FID?

Yeah. So I think the many decision timeframe is one aspect that's in our partnership with Jira. They would feel comfortable moving forward once they know what the contract for differences. However, in saying that what is really the gating item initially right now is completion of the FEED study and our understanding that's going to inform what is the CapEx, what is the volume we believe we can get off of that.

And then out of that, what is the return profile file and if that's significantly above our capital cost -- capital, there's other partners that we're also in discussion with that could accelerate that. So I wouldn't say it's 100% pinned to Medi, just be given some of the other activity that we'veseen around that. I think given the the size of the project, there's two ways we look at partnership.

One would be in an equity investment and one would be a long-term offtake no differently than what we've done in the past with CHS and is Bert talked about earlier with Mosaic to move to a second plant right away. I think we would need probably really to be ensured that we had partnerships and the cash flow. As Tony said, we're looking at this in a very disciplined way while continuing to capital allocation back to the shareholders, but also grow. And we think right now, our focus is on that first plant at the blue point site.

Yeah, I would just echo that, which is having partners that are in there with us not only on kind of share the capital commitment, but also take that product offtake is an important aspect of this from our standpoint, just in terms of risk mitigation. And so that maybe thing relative to Jira being a potential partner does elongate that time horizon. But as Chris mentioned, there's a lot of other interest from other parties that we feel like if if the project holds water from a return profile perspective, there won't be an issue with respect to us having others join us.

Thanks very much, and I'll leave it there.

Jeff Zekauskas, JPMorgan.

Thanks so much. I think you sold $47 million of emissions credits. It is that $47 million that benefited EBITDA in the quarter or is the number of larger or smaller?

Now that does and it's actually fairly comparable to what we did a year ago. Those were credits that were provided by the UK government as part of the overall ETS emissions scheme in the UK and we are at this point given the fact that our ammonia production is offline kind of largely through that Bank of credits. But on a comp basis quarter over quarter from last year versus this you know, that number didn't change dramatically.

Okay. And looking at the language that you described Donaldsonville and the Mississippi plant, it looks like the Deville carbon dioxide will go into enhanced oil recovery, whereas the Mississippi plant will carbon dioxide that sequestered in new plants that you want to build the new greenfield plant. Does it make a difference to the carbon footprint if you have to go and enhanced oil recovery route versus, say, a sequestration, right? Or how much of a difference does it make?

It matters a little bit in terms of the value of the 45Q tax credit payments and higher, you go into a Class six well than EOR. The agreement that we have with ExxonMobil was contemplated the on Class six well. And so that is still offer both plants, both the Deville and Yahoo cities. So that is still the expectation of where we're going to end up longer term.

There's you know, there is a question in terms of whether classics permitting will be completed by the time that we're ready to begin injection from our side. And so there may be some transition period that we are talking about whether that makes sense to accelerate and go into EOR for a period of time before classics, but more to come on that front. You know that our perspective is the world is going to continue to need that oil and whether it's our CO2 or whether it's CO2 that comes out of naturally occurring on sources like Jackson Dome and Mississippi or other places that oil is going to get produce.

This is a net reduction in the amount of emissions that we're providing that's going into the ground in staying there and the oil is coming out anyway. And so in our perspective is this is nothing but good for the environment. I think different potential customers may have different perspectives on that. And we've got to align with customer requirement. But in near term the difference really is about the value of the 45Q tax credit. But are a lot longer term the intent of all of our agreements is classics permanent.

No, I get it that there's a different remuneration and sequestered versus your. But what I was wondering is in terms of the way the carbon footprint is thought of by say, the Japanese, are they going to make a different calculation? Or do you make a different calculation?

I think that's what Tony was trying to explain that circuit customer bases are going to view. You are different than permanent sequestration. So as you look at Asia, it's more permanent sequestration is a requirement. I think as you look here, the US and some of the other regions around the world, you are given his points ready-made, it's still sequestering the CO2 will be acceptable. We look at it both on a strategic basis from that and also on the economic, as he explained, as well.

Okay. That's clear.

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

Thanks, everyone, for joining us today, and we look forward to seeing you at upcoming conferences.

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