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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.

Aerial view of a vibrant wheat field, a representation of the fertilizers and crop nutrients this company provides.
Aerial view of a vibrant wheat field, a representation of the fertilizers and crop nutrients this company provides.

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.

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