CF Industries Holdings, Inc. (NYSE:CF) Q1 2024 Earnings Call Transcript

CF Industries Holdings, Inc. (NYSE:CF) Q1 2024 Earnings Call Transcript May 2, 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: Ladies and gentlemen, and welcome to CF Industries’ First Quarter of 2024. All participants will be in a listen-only mode. [Operator Instructions] 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 first 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 will find reconciliations between GAAP and non-GAAP measures in the press release and 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 results for the first quarter of 2024 in which we generated adjusted EBITDA of $460 million. Our performance reflects a challenging quarter for our production network plant outages caused by severe cold in January as well as other unplanned downtime, resulted in a significant loss of production and maintenance activity. Even with the production outages and associated expenses, our business generated strong cash flow for the quarter. Net cash from operations from the first quarter was $445 million and free cash flow was approximately $200 million. Longer term, we expect the global energy cost structure to continue to provide a significant margin opportunities for our North American production network and for clean energy to provide a growth platform for the company.

As a result, we expect to have significant free cash flow available to both invest in growth and return capital to shareholders. We remain focused on disciplined investments in clean energy that offer returns well above our cost of capital. These include decarbonization projects within our existing network and potential new low-carbon on capacity. We also remain committed to returning capital to shareholders through our dividend and share repurchases. In the first quarter, we returned $445 million, including repurchasing 4.3 million cars. We have approximately $2.2 billion remaining on our current share repurchase authorization, which we intend to complete by the end of next year. 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 global nitrogen market has experienced rapidly changing dynamics throughout 2024, including in North America. The spring application season began earlier than normal in late February with demand for ammonia applications brought forward from the second quarter into the first or weather at the end of March, subsequently stalled field work and fertilizer purchases with the region now on a normal application and planting pace. Overall, we expect nitrogen demand in North America to be positive with approximately 91 million acres of corn planted. Good soil moisture supports higher application rates than in previous years, and farm economics remain constructive, but weaker than the record highs from previous and recent years.

We believe the spring ammonia season will see fewer tons of ammonia applied this year. However, total ammonia application volumes for the fertilizer year, which runs from July 2023 through June 2024, should be comparable to previous years, given the strong fall ammonia season. As the pace of spring application season has normalized, the lineup urea and UAN imports for the region has grown. These tons will be necessary to meet expected demand, given low inventories in the region to start the year and production disruptions in January. Even with the imports, we expect that inventory in the North American nitrogen channel across all products will be low at the end of the season. This activity is occurring as the global nitrogen market supply position has loosened, leading to lower global prices than we saw earlier this year.

Lower imports of urea to India, including the impacts of lower volumes taken in the recent tender, lower-than-expected deferred demand in Europe and other countries and good production from the era Gulf in North Africa all played a role. We did not believe demand during the spring season in North America will resolve the length in the global nitrogen market by itself. As North America hits its traditional pricing reset in the summer, Brazil, India, and China will provide the most important signals regarding the state of the market. We project that urea consumption and imports in Brazil will grow in 2024, maintaining that company’s status as the world’s largest importer of urea. India will remain a major importer urea, though they have lower requirements today, reflecting their commitment to increase domestically produced urea.

China continues to prioritize lower fertilizer prices for their farmers with export restrictions playing a significant role in that effort. We expect China sold export approximately 4 million metric tons of urea this year, but actual volumes will depend on the timing and duration of when exports are allowed. Even with these sources of near-term uncertainty, North American producers remain firmly positioned on the low end of the global cost curve. Forward energy curves continue to show spread between North America and Europe, which is home to the industry’s marginal high-cost production remaining wider than historical averages. As a result, we expect attractive margin opportunities for our network in the near and longer term. With that, let me turn the call over to Chris.

Chris Bohn: Thanks Bert. For the first quarter of 2024, the company reported net earnings attributable to common stockholders of approximately $194 million or $1.03 per diluted share. EBITDA was $488 million, and adjusted EBITDA was approximately $460 million. The production outages that we experienced earlier this year affected our results in two significant ways. Maintenance expenses were approximately $75 million higher in the first quarter of 2024 compared to the first quarter of 2023. Additionally, we had approximately 160,000 fewer tons of ammonia available to upgrade in the quarter compared to the same quarter last year. This equates to approximately 275,000 tons of urea that we would otherwise have been able to produce and sell at higher margins.

The production issues were continued through the first quarter, and our network is operating at our typical high utilization rates today. We believe we currently project that growth ammonia production for 2024 will be approximately 9.8 million tons, which reflects normal asset utilization rates moving forward. Our forecast for 2024 capital expenditures remains approximately $550 million. Capital expenditures were higher in the first quarter of 2024 compared to the first quarter of 2023, primarily due to a large planned turnaround event. We are making continued progress on our clean energy initiatives. Commissioning activities for our green ammonia projects are nearing completion. We intend to purchase 45 compliant renewable energy certificates to pair with the startup of the electrolyzer to enable green ammonia production and maximize the value of the hydrogen production tax credit.

Additionally, construction of the carbon dioxide hydration and compression unit at Donaldsonville is progressing well. We believe it will be ready for start-up in 2025, at which point our partner, ExxonMobil will be to begin transportation and permanent frustration of up to 2 million tons of CO2 from the facility per year. This will not only significantly reduce our carbon emissions, but also enable low carbon ammonia production and generate substantial 45Q tax codes. Our evaluation of low-carbon ammonia capacity growth continues with potential partners and offtakers. We have made additional progress on our auto re-thermal reforming ammonia plant and flu gas capture FEED studies. These should be complete before the end of the year and will be an important component of our final investment decision.

We continue to emphasize 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, 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 hard work during the difficult first quarter of 2024. In particular, the team did an outstanding job for storing our network to full utilization rates and most importantly, doing so safely. Our 12-month recordable incident rate at the end of the quarter was 0.36 incidents per 200,000 labor hours, significantly better than industry averages. Despite the challenges we faced earlier this year, we believe CF industry is well positioned for the years ahead. In the near-term, the global energy cost structure remains favorable to our North American production network. Longer term disciplined investments in low-carbon ammonia production provide a robust growth platform for the company.

Taken together, we expect to drive strong cash generation and continue to create substantial value for long-term shareholders. With that, operator, we will now open the call to your questions.

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Chris Parkinson with Wolfe Research. Please go ahead.

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Q&A Session

Chris Parkinson: Good morning, everyone. Tony, it’s been a while since I think anybody has asked you this, but what are your latest thoughts across the organization on the global cost curve? I mean, obviously, it seems things have very much normalized in Europe. It seems — obviously, you have this back and forth debate in terms of timing on Chinese markets. And then obviously, there’s been a lot going on in India as well. So, when you put all these things together, once again, I don’t think anybody is really focused on this for years and years, what’s yes, latest and greatest on how we should be thinking about this over the next year or two? Thank you.

Tony Will: Yes Chris. I think that we believe, going forward, there are some significant challenges for a number of the production facilities in Europe. And our expectation is that utilization rates there will continue to be challenging. And we would expect some of those assets to permanently close. So, I think that the combination of some challenges in Europe and other places in the world. Trinidad is both running out of gas and with gas cost climbing as each of the existing contracts roll off, you’ve got challenges in parts of Asia and Latin America as well. You look at all of that and you see somewhat of a tightening out of the existing production network — you combine that with the fact that there is not enough new production under construction at the moment to meet the traditional growth in normal applications.

And we see a tightening of the S&D balance going forward with Europe and Asia being at fairly high end of the cost curve. And so there will be periods of time where we need to bid some of that production in just to meet global demand. So, I think it provides a very constructive backdrop for our North American focused production network. And we remain excited about what the long-term holds for us and even the near-term, for that matter.

Chris Parkinson: Got it. And just a real quick follow-up, and I apologize for the ultra-short-term question, but obviously, your organization has gone through a lot during the first quarter. Can you just give us kind of a — just one additional update on just how we should be thinking about where you stand operationally? I assume Bert’s team had to move a lot of products sub-optimally towards the end of the quarter. When we think about the process back normality, are we basically already there yet, and we can — you can see the confidence that we should just be focusing on market pricing right now? Or how should we be ultimately thinking about your pathway forward for the remainder of 2024? Thank you.

Tony Will: Yes, I think as you look at the first quarter, as Chris said, there was kind of 2 primary factors that impacted us. One was because we had significant outages both weather-related and other downtime We ended up with less production of ammonia, and we have existing industrial ammonia contracts that obligate us to kind of meet those needs first. And Waggaman was one of the facilities that experienced some downtime in the quarter. And so we had to make sure that we were meeting the customer commitments out of that facility and other industrial customers as well. And so what that math was, as Chris mentioned, there was ammonia that we were producing that normally we would have upgraded to urea and/or UAN that we needed to ship out as industrial ammonia, which generally is at a bit of a lower margin than agricultural ammonia or ag-based urea.

So, the loss of production was both the opportunity cost of loss of absolute tons, but also the opportunity costs associated with being — not being able to upgrade product for higher-margin urea than we normally would. As Chris mentioned, we were able to go ahead and get the plants back up and running and have been running sort of that normal operating utilization rates since the beginning of the quarter. And so we’re back to kind of normal operations, and therefore, I think what’s been transpiring in the way of spot pricing is appropriate for — and our volumes as appropriate for the second quarter.

Chris Bohn: Chris, the only additional thing I would add to what Tony said is not only that it was discrete production issues contained but also where the product mix was and being produced, we had incremental distribution costs that went over and above. The margin loss that Tony spoke about and also the $75 million approximate higher maintenance expense. So, it was a pretty tough quarter from that, but all of that, as you said, is sort of in the rearview mirror and our distribution and production assets are back to their historical levels.

Chris Parkinson: Thank you so much.

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

Joel Jackson: Good morning. Just a couple of things you can maybe ask — sorry. Are you really open for Q2 here for gas? Maybe talk about — we’ve seen obviously, prices come down a level of — where are you standing there for Q2 into Q3? And then you talked about 9.8 million tons of gross ammonia production 2024. What is your view that what you can do in 2025 for gross ammonia production with hopefully some improvements at Waggaman and these issues from Q1 behind you?

Bert Frost: Hey Joel, good morning this is Bert. And on gas, yes, we are wide open, and we do have fixed contracts that are gas-based that will fix in the beginning of the month. And we do have basis that we’ve covered in place is more of a winter item. We’ll have some Q1 gas purchases trail into Q2. But in effect, the gas values that you’re seeing and through the various hubs, you can bleed into your model, and that’s what we’re doing.

Chris Bohn: Yes, from a production standpoint, Joel, I think you can look at 2025 and going forward similar to what we had announced earlier this year at sort of the circa 10 million tons of ammonia, gross ammonia production. And then based on where the margin potentials are that’s going to change the product mix related to the total product that we do. But give or take, 100,000 tons on either side of that is generally where we look to produce.

Operator: Thank you. The next question comes from Andrew Wong with RBC Capital Markets. Please go ahead.

Andrew Wong: Hey good morning. Thanks for taking my questions. So, my first one is really on BluePoint. I understand the plan is to go with mostly sales that are based on like a fixed margin type offtake. Just curious, how does the ammonia market pricing effect or thinking on the investment decision there?