CF Industries Holdings, Inc. (NYSE:CF) Q4 2023 Earnings Call Transcript

CF Industries Holdings, Inc. (NYSE:CF) Q4 2023 Earnings Call Transcript February 15, 2024

CF Industries Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, ladies and gentlemen. And welcome to CF Industries Full Year and Fourth Quarter of 2023 Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the presentation over to the host for today, Mr. Martin Jarosick, with CF Investor Relations. Sir, please proceed.

Martin Jarosick: 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, and Bert Frost, Executive Vice President of Sales, Market Development and Supply Chain. CF Industries reported its results for the full-year and fourth quarter of 2023 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 the presentation posted on our website. Now let me introduce Tony Will, our President and CEO.

Tony Will: Thanks Martin, and good morning everyone. Yesterday afternoon we posted financial results for the full-year 2023 in which we generated adjusted EBITDA of approximately $2.8 billion. Net cash from operations was also $2.8 billion and free cash flow was $1.8 billion. These results reflect a healthy nitrogen supply demand balance and global energy spreads that favor our low cost production base in North America. They also represent outstanding execution by the CF Industries team. We worked safely, ran our plants well, and navigated dynamic industry conditions. Our investments in people, safety and reliability have built the industry’s highest performing manufacturing network, as you can see on Slide 6. Looking ahead, over the next four years, confirmed construction of new nitrogen production capacity is not sufficient to keep pace with the historical nitrogen demand growth rate of roughly 1.5% per year in traditional applications.

Adding to this tight supply demand situation is the risk that existing ammonia production capacity in several important regions remains on the verge of permanent closure due to constrained availability and cost of natural gas. Meanwhile, emerging demand for low carbon ammonia into clean energy applications should further tighten the already strained global supply demand balance. As a result, we are confident that our cash generation will remain strong, as underscored by the recent increase in our quarterly dividend and continued share repurchases. We look to continue to invest in high return organic and inorganic projects to grow our cash generation. As such, we continue evaluating a new low carbon ammonia production plant at our Blue Point Complex in Louisiana with our partner, Mitsui.

Our company share a belief that North America is the best location for production of low carbon ammonia, given natural gas cost advantages and access to CCS sites and expertise. As you can see on Slide 8, the economic value of North American nitrogen assets continues to increase over time, supporting returns greater than the cost of capital and new projects. We and Mitsui are targeting a final investment decision in the second half of 2024, when we have additional information on low carbon ammonia production technologies and better clarity on customer requirements for carbon intensity levels, along with regulatory developments. While taking a disciplined approach to growth, we will continue to return capital through our dividends and share repurchases.

We have approximately $2.6 billion remaining on our current share repurchase authorization and fully expect to complete it before its expiration at the end of 2025. With that, let me turn it over to Bert, who will discuss the global nitrogen market conditions in more detail. Bert?

Bert Frost: Thanks Tony. The fourth quarter of 2023 was an active period for our team, highlighted by the largest fall ammonia application season in North America in years. A strong fall application season indicates a commitment to nitrogen consuming crops on these acres and robust demand for additional urea and UAN applications through the first half of 2024. This, along with strong ag fundamentals, supports our outlook for a positive spring application season. We expect 91 million acres of corn to be planted in the United States. As we continue to work with customers in advance of spring applications, we believe supply is more constrained in the North American nitrogen channel than industry expectations. Inventories were below average entering the year and net imports of nitrogen to the region are not making up the difference.

The cold snap we experienced in North America during January has exacerbated this situation. We believe that there has been significant volume of domestic nitrogen production lost due to weather related shutdowns across the region’s supply base. We estimate that CF Industries lost approximately 150,000 tons of ammonia production in January from our own network due to the weather, unexpected supply tightness often leads to follow on logistics challenges and early spring would further strain the supply chain. We believe that our in region production and extensive logistics and distribution capabilities will serve us well in this environment. Global grain stocks use ratios have returned to normal levels after two robust growing seasons. However, we do not project a significant impact on global nitrogen demand, given the imperative to seed growing populations.

We expect continued supply constraints in key producing regions, most notably ammonia production economics in Europe remain challenging. Global ammonia spot prices continues to align with the full cost of European ammonia production, confirming Europe as the industry’s marginal producer. This continues to support elevated imports of nitrogen products into Europe compared to a decade ago. Beyond Europe, natural gas availability continues to affect ammonia and UAN production in Trinidad. And based on its actions in the fourth quarter of 2023, we believe the Chinese government will limit exports through the first half to ensure supply availability and urea price stability for the Chinese domestic market. Looking ahead, forward energy curves suggest continued favorable energy spreads between low cost North American production and high cost production in Europe and Asia.

We believe this will support sustained margin opportunities for our low cost manufacturing asset base. With that, let me turn the call over to Chris.

Chris Bohn: Thanks Bert. For the full year 2023, the company reported net earnings attributable to common stockholders of approximately $1.5 billion, or $7.80 per diluted share. EBITDA was $2.7 billion and adjusted EBITDA was approximately $2.8 billion. In the fourth quarter, we completed the acquisition of Incitec Pivot’s Waggaman ammonia production facility. After adjustments and accounting for the value assigned to a long term supply agreement with IPL’s Dyno Nobel subsidiary, our cash purchase price was approximately $1.2 billion. The Waggaman facility has operated as expected since closing and has generated margin commensurate with our existing ammonia segment. Looking ahead to 2024, we expect capital expenditures for the year to be in the range of $550 million and for gross ammonia production to be near 10 million tons.

As Bert said, we experienced unplanned weather related outages in our network during January. During these outages, we pulled forward some planned maintenance activities. This should reduce scheduled downtime later this year, mitigating some of the production loss in January. As a result, we expect gross ammonia production for the year to be near our projection. Commissioning of our green ammonia project at Donaldsonville is underway. We are currently evaluating the purchase of renewable energy credits to pair with the start-up of the electrolyzer to enable green ammonia production and maximize the value of the 45B production tax credit. We expect that the CO2 dehydration and compression unit at Donaldsonville will be ready for start-up in 2025.

This will enable low carbon ammonia production and generate substantial 45Q tax credits. We are also making progress on other CCS opportunities with returns above our cost of capital. Turning to the potential new low-carbon ammonia plant at our Blue Point complex in Louisiana, we completed our FEED study on a conventional steam methane reformer ammonia plant with CCS technologies. The FEED study estimates the cost of the ammonia plant at approximately $2.5 billion, we estimate another $500 million for scalable infrastructure, such as storage tanks and loading docks. Our FEED studies focused on autothermal reforming or ATR ammonia production technology and flue gas capture are progressing well. Alongside disciplined clean energy investments, we are committed to returning capital to long-term shareholders.

In 2023, we returned almost $900 million to shareholders through share repurchases and dividend payments despite being locked out of the repurchases for part of the year. We expect share repurchase activity to increase over the two remaining years on our current authorization. As you can see on Slide 7 and 8, on both a free cash flow yield and a precedent transaction basis, our enterprise value is significantly undervalued, supporting continued share repurchases. With that, Tony will provide some closing remarks before we open the call to Q&A.

Tony Will: Thanks, Chris. Before we move on to your questions, I want to thank everyone at CF Industries for their contributions to an outstanding year. I especially want to highlight the progress our team made in the second half of the year regarding our safety performance. After a challenging start to 2023, we ended the year with a 12-month recordable incident rate of 0.36 incidents per 200,000 work hours, in line with our performance in recent years and significantly better than industry averages. Our operational excellence and significant structural advantages underpin our cash generation. This enables us to invest in the business to further increase cash generation and drive increased shareholder participation in our free cash flow.

In the last three years, we acquired the Waggaman ammonia production facility, advanced high return clean energy initiatives, increased our dividend by 67% and deployed $2.5 billion to repurchase more than 31 million shares which represented approximately 15% of the outstanding share count at that time. Additionally, we have strengthened our balance sheet to provide us tremendous flexibility as we are able to grow our business at the same time as return significant cash to shareholders. This approach has had a dramatic impact. As you can see on Slide 10, shareholder participation in our business has increased 80% in the last 10 years. We’re excited about the opportunity ahead of us to build on this track record. In the near term, we expect industry fundamentals to remain favorable to our low-cost production network.

Longer term, disciplined investments in low-carbon ammonia production can provide a robust growth platform for the company. Taken together, we expect to continue creating substantial value for long-term shareholders. With that, operator, we will now open the call to your questions.

See also Top 16 Aircraft Manufacturers In The World and Top 20 Most Valuable Blockchain Companies in 2024.

Q&A Session

Operator: [Operator Instructions] The first question is from Adam Samuelson with Goldman Sachs. Please go ahead.

Adam Samuelson: Yes, thank you. Good morning, everyone.

Tony Will: Good morning, Adam.

Adam Samuelson: So I guess, Tony, I guess the first question is we think about the decision to pursue additional FEED studies on the Blue Point complex evaluating the different technologies. Just help us frame the increment on carbon reduction that could come from either ATR or the flue gas capture? And maybe any additional color on the policy drivers of your potential offtakers as they evaluate what threshold is needed to commit to taking the blue ammonia volumes longer term?

Tony Will: Yes. Adam, so one of the reasons that we’re evaluating all the different kind of possible paths forward is to really have a comprehensive set of solutions depending upon the carbon intensity levels that are ultimately demanded by customers. And conventional CCS, the way that we’ve implemented it in Donaldsonville today allows for the process CO2 to be stripped out and sequestered, and that means you can reduce the carbon intensity by about almost 70% versus kind of conventional ammonia, particularly given that the plant that we’re talking about having implemented that on is among one of the most efficient newest plants in the world. So it already is a fairly low footprint relative to older plants. If you look at doing flue gas capture in conjunction with processed gas, CCS we think we can get rid of in excess of 95% of the CO2 emissions coming out of that particular plant.

If you look at autothermal reforming, the estimates are you can get to the 90% to 95% reduction level. But the problem with that is because of the way that the technology works, you have to have a very, very large air separation unit to introduce the nitrogen back into the process that you don’t get when you’re — because you’re not doing steam methane reforming. And the electricity draw on a large AirSep unit like that is a tremendous adder to cost of the project as well as op cost. And based on the grids where we’re thinking about, the Scope 2 emissions become substantial. So that means you’ve got to do a bunch of things in order to potentially limit the emissions of Scope 2 that you’d otherwise pick up in order to get to the 90% or 95% reduction levels.

And that brings with it all of its own set of costs and OpEx, CapEx in. So that’s really why we’re looking at kind of all of these different possible paths to give us kind of the full suite of optionality and really understand OpEx, CapEx costs in order to hit certain thresholds that the customers may ultimately demand in terms of the product. But the other point is we have a very large network longer term that we are focused on getting to carbon neutrality in the next 25 years. And so flue gas capture is going to play an important role in that process as we continue to move forward. And so us kind of getting more heavily involved in that and really understanding the different potential paths is an important thing for us longer term strategically anyway.

And this is a good time for us to really kind of dive in as we’re contemplating making an investment decision in new production.

Adam Samuelson: All right. That’s very helpful. And if I could just squeeze a quick market question just on natural gas. As you think about the decline recently in TTF and LNG prices broadly, it doesn’t seem like you expect quick restart of idled or high-cost European production? Just how are you thinking about that over the course of the year?

Bert Frost: Yes. Adam, good morning. This is Bert. When you look at the spreads, what’s going on in the world with Henry Hub trading today at $1.60, $1.65 and NBP and TTF in Europe, trading in the, let’s say, $7 to $8 range and so you have a pretty big spread. And as I mentioned in my prepared remarks, where we are in the ammonia supply chain, you’re bidding close to that full cost range for European and some high-cost Asian producers especially when you consider carbon costs. And so the competitiveness, we’re still in our position of the European producer is the marginal producer, and that will set the cost floor or the price floor. And we don’t see in the short term an improvement in gas supply taking place to lower that value.

ChrisBohn: Yes. And I would just add to that, that the decision goes beyond just the cash cost immediately goes into the idea of cycling these plants is not necessarily good additional maintenance that may be needed prior to starting those back up or turnarounds that are coming forward or even holding inventory at certain periods of time that have a working capital cost to them. So I think gas is obviously the primary driver, but there’s a lot of other ancillary drivers that go into factoring whether you restart.

Tony Will: Overall, I think, though, the message you’ll hear from us is we’re very — we’re very optimistic about what the S&D balance looks like and what the demand for our products are on a global basis. It gives Bert a lot of optionality to think about exports and satisfying in-market demand here. And we just have a lot of roads to help get us there.

Adam Samuelson: I appreciate all the color. I will pass it on thanks.

Operator: The next question is from Joel Jackson with BMO Capital Markets. Please go ahead.

Joel Jackson: Good morning. A couple of questions. I noticed in your slide deck, your new updated sensitivity table, right, that shows EBITDA for every level of gas price and urea price, it’s down in every single cell by $300 million at the same gas price and the same U.S. gas price in the same urea price versus what you had in the fall. Can you explain what’s going — and it’s that higher volume now. You’re at 1 million tons higher volume. Can you explain the drop in EBITDA at every single cell?

Tony Will: Yes. Let’s start off with the volume issue first because I think that’s an important one to kind of get on the table, and then we’ll go through kind of the table in a little more detail. But although we did add the Waggaman facility into the network, there is a maintenance turnaround event on that facility, and there’s also a couple of significant maintenance activities. One of them is on debuild number six, which is our — the largest operating ammonia plant in the world. And so when you’ve got a 40-day outage on a plant like that, that takes our production down. Now that said, as Chris and Bert talked about, we still expect to generate about circa 10 million tons of ammonia this year, which is in line with what we’ve historically done.

The big issue in terms of last year versus this year was we had — we entered into last year with a fairly high inventory level. So we had pretty substantial additional sales volumes last year based on inventory drawdown that we’re not able to tap into. So our volumes kind of year-on-year are going to be order of magnitude fairly similar last year to this year.

ChrisBohn: Yes. And additionally, Joel, I think the big — one of the bigger aspects of it is the relationship between the products on a pricing basis was updated to what 2023 was. So we always use the prior year as sort of the structure benchmark from that compared to 2022. So you saw more parity between the products than maybe what was a premium for UAN prior to that. And obviously, we do quite a bit of UAN volume. So this is just based on not only the cost structure of 2023, which we saw higher non-gas costs, primarily through logistics, but then also that new relationship that we experienced over the last 12 months on pricing.

Joel Jackson: Okay. So my follow-up will be kind of two parter because first, I just want to follow up on that. So I guess you’re saying at the same gas price and same urea price, excuse me, UAN and ammonia prices are lower at the same urea and gas price? And then my true follow-up question would be, when looking at the Blue the Greenfield Blue Project, Blue Ammonia Project. Obviously, we saw a very good valuation comp with coke and the weaver plant a couple of months ago that you obviously didn’t buy would it not make sense to just buy back stock as much as you can, just attack it authorization, don’t do any greenfield plants because the market’s not giving you the valuation that Coke is obviously giving to Weaver. I know it’s not exactly 1-to-1, but isn’t just makes sense just buy back stock as much as you can?

Tony Will: Yes. Let me take the first one first, and then I’ll come back to your second point. The first one, not really being a full-on question, more of a statement. So every year, we try to update the table based on what the relationship was in terms of margin per nutrient ton of the previous year. And so the table will naturally evolve up and down and sideways and whatnot based on previous year. It doesn’t mean that this is precise because if UAN starts on a nutrient basis starts trading at a premium to urea then the numbers are going to go up in every cell because of the volume of UAN that we sell. So this is illustrative as opposed to a point estimate. But your general comment of the relative premium of UAN versus urea dropped last year compared to where it was the year before is the right kind of takeaway, and that’s the basis and underlying the sensitivity table.

On the second question, we think that the price paid for Weaver is a fair but a full price for that asset. And our view is that at any point in time where we have made decisions to expand our network. Someone could have made exactly the same argument that you just made, which is it’s cheaper to buy back shares than it is to add capacity. Therefore, you should never add back or add capacity. That would have been true. Back in 2010 when we bought Terra that would have been true. When we acquired the Medicine Hat slice that we didn’t know and that would have been true. When we did the expansion projects at Donaldsonville and Port Neal or even probably the Waggaman asset that was just acquired. At every stage, we have been able to invest capital and earn a rate of return well above our cost of capital.