CF Industries Holdings, Inc. (NYSE:CF) Q2 2023 Earnings Call Transcript

CF Industries Holdings, Inc. (NYSE:CF) Q2 2023 Earnings Call Transcript August 3, 2023

Operator: Good day, ladies and gentlemen, and welcome to CF Industries’ First Half and Second Quarter of 2023 Earnings Conference Call. All participants will be in 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, CFO; 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 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 the 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 half of 2023, in which we generated adjusted EBITDA of over $1.7 billion. Our trailing 12-month net cash from operations was $3.2 billion and free cash flow was $2.1 billion. These results reflect outstanding execution by the CF Industries team against the backdrop of robust demand. Our plans ran extremely well and we leveraged our unique system flexibility to maximize results, given the high volume of just-in-time purchasing that took place. We sold more product than we produced and ended the first half with low inventories. As you will hear from Bert in a moment, we believe we are really well positioned for the remainder of 2023 and into 2024.

While our safety performance remained good by most measures and comparisons, it is not where we expect it to be. Our 12-month rolling recordable injury rate at the end of June was 0.54 incidents per 200,000 labor hours. Ashraf and his team are focused on this, not to manage the number, but to ensure that all of our people go home in the same condition as when they came to work every day. Looking forward, changes in the energy markets have steepened the global nitrogen cost curve and extended the margin advantage available to our North American manufacturing network. As you can see on Slide 7, we enjoy a $300 to $400 per ton margin advantage versus European and high-cost Asian production. Given the structural advantage as well as our industry best operating rates and unique network flexibilities, we expect to drive strong cash generation in the years ahead.

This will enable us to make disciplined investments in growth opportunities, while also returning substantial capital to shareholders. In that vein, we remain focused on our clean energy growth platform, which has been well served by the collaborations and partnerships we have developed. We expect to make a final investment decision on a newbuild clean ammonia plant later this year in conjunction with our partners in that project. This approach significantly reduces risk to CF and ensures that the new production volume is consumed in new sources of emerging demand rather than creating an overhang in the market. We also continue to return significant capital to shareholders. Over the last 12 months, we returned $1.3 billion to shareholders through dividends and share repurchases, which was more than 60% of our free cash flow.

Looking ahead, as we continue to execute on our current $3 billion share repurchase authorization, we are committed to taking advantage of dips in our share price opportunistically, amplifying the rewards to our long-term shareholders. With that, let me turn it over to Bert, who will discuss global nitrogen market conditions in more detail. Bert?

Bert Frost: Thanks, Tony. CF Industries experienced a very positive spring application season, that we believe points to a strong global demand dynamic in the second half of the year. Our challenge in the spring was managing through peak application season, with customers deferring purchases until the last possible moment. Despite delayed purchases, demand in North America during the spring was substantial, with planted corn and wheat acres up significantly compared to 2022. Even with this high demand, net imports were lower than the prior year. As a result, we believe that inventory in the North American supply chain is extremely low compared to historical norms and will need to be replenished. At the same time, India and Brazil will need to compete for urea tons in the coming months as they prepare for their upcoming planting season.

As you can see on Slide 6, we project that Brazil still needs to secure 5 million to 6 million more tons of urea and India, another 4 million to 5 million tons of urea, by the end of the year. Farm economics continue to be robust and supportive of strong demand. Consensus estimates project that global grain stocks will improve slightly in 2023, but drought in the United States and ongoing impacts from the war in Ukraine are keeping grain prices attractive for farmers. The global nitrogen market has responded to these dynamics with rapidly rising urea spot prices through July with other products following. We saw a strong demand for urea. And in July, we built an order book of domestic and export sales that takes us into the fourth quarter. We also quickly achieved our goals for our initial UAN fill offer in North America and have been able to raise prices for subsequent layers.

Against this backdrop of strong demand, the global supply response is somewhat muted. We do expect China to participate in the upcoming India urea tenders, with strong prices for nitrogen in China indicate that domestic demand is competing for the volume available for shipment. Russian tons continue to reach the global market, but willing buyers are limited to a few areas of the world, such as Brazil and the United States. Additionally, European ammonia production volumes remain well below normal due to natural gas prices that make the region uncompetitive globally. As we look at our own operations, our network continues to benefit from low-cost natural gas. Forward curves suggest natural gas values in North America will be $2 to $4 per MMBtu lower than last year in the second half, keeping our production costs firmly in the first quartile globally.

With that, let me turn the call over to Chris.

Chris Bohn: Thanks, Bert. For the first half of 2023, the company reported net earnings attributable to common stockholders of approximately $1.1 billion, or $5.55 per diluted share. EBITDA was $1.8 billion, and adjusted EBITDA was over $1.7 billion. At the end of June, cash on the balance sheet was $3.2 billion. Since that time, we paid CHS semi-annual distribution of $204 million from our CF Nitrogen partnership. Additionally, $1.25 billion of cash is earmarked for our acquisition of the Waggaman ammonia facility, for which the regulatory process continues. We expect to close the transaction before year-end. As a result, our pro forma available cash at the end of June was approximately $1.75 billion. Looking ahead, we expect the rest of 2023 and into 2024 to be favorable based on the global nitrogen industry dynamics that Bert just described.

The second half typically starts with lower production due to maintenance activity as well as seasonally low prices that should rise as we move towards spring. We expect company-wide gross ammonia production to be between 9 million and 9.5 million tons. As you know, we recently proposed to permanently close the ammonia plant at our Billingham complex in the U.K., due primarily to the structural disadvantage that European ammonia production faces from high energy and carbon costs. We have been importing ammonia since the fall of 2022 to produce UAN fertilizer and nitric acid at the site, which we expect to continue to have a positive impact on gross margin compared to producing ammonia at Billingham. Our capital expenditure requirements for the remainder of the year remain modest, with capital expenditures expected to be in the range of $500 million to $550 million.

This includes our blue and green projects at the Donaldsonville complex, which continue to progress. We continue to advance the front-end engineering design study for the proposed joint venture low-carbon ammonia facility with Mitsui. We expect to make a final investment decision later this year. Alongside our clean energy initiatives, we remain committed to returning excess capital to shareholders, given our free cash flow generation outlook. In the second quarter, we repurchased two million shares, at an average price of approximately $64 per share, compared to an average share price in the quarter of almost $70 and to a share price that has recently been trading above $80 per share. We expect to continue to favor opportunistic purchases layered in at attractive levels.

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 all that they did during the first half of 2023. Our teamwork continues to deliver outstanding results. We remain very excited about the future for CF Industries. We have a large structural cost advantage that provides substantial margin opportunities, coupled with industry-leading operating expertise and unmatched network flexibility. This should continue to drive significant free cash flow. We will deploy that cash to both grow our business and return capital to shareholders. We have significant decarbonization projects in flight with industry leaders, such as ExxonMobil. The Waggaman ammonia complex will fit seamlessly into our network and enhance our ability to serve customers, and we are positioned at the forefront of low-carbon ammonia into new clean energy applications, supported by collaborations with global leaders such as JERA, Mitsui and LOTTE.

As a result, we believe CF Industries is well positioned to create substantial value for our long-term shareholders. With that, operator, we will now open the call to your questions.

Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Christopher Parkinson with Mizuho. Please go ahead.

Christopher Parkinson: Good morning. Thanks for taking my questions. So I think when most people step back, Tony, I think on normalized EBITDA, we could have a debate on this all day, but it could be low, mid-2s, somewhere in there in terms of billions of EBITDA. But you do have, I’d say, at least three, perhaps four moving variables, which are pertinent for the next two to three years in terms of what you’d add to that. I’d say Waggaman plus, obviously, carbon optionality, you have the additional 45 queues for various projects you’re working on. And then on top of that, you have a nice energy transition theme, which perhaps is a little bit later outside that time frame. But it does seem like these three buckets, which could materially add to the perception of normalized EBITDA.

And I was just hoping perhaps if you could add color on those three buckets and perhaps add anything else you think is important and how the investment community should be thinking about those? Thank you.

Tony Will: Yes, good morning, Chris. Thanks for the question. I’d say those three are certainly important and near-term, I might add one or two others. But as Chris mentioned — Bohn mentioned in his prepared comments, we expect to be able to close the Waggaman transaction here later this year, and that should certainly be additive to our otherwise normalized EBITDA numbers, as you said, whatever people project that to be. In addition to that, we’re going to be starting up the CO2 sequestration project at Donaldsonville, the beginning part or early in 2025, and be able to take advantage of the 45Q tax credit that goes along with that. That is a substantial amount of money, given that the 45Q is $85 a ton — a metric ton, and we’re going to be sequestering two million metric tons a year.

So the margin associated with just that one project is substantial and moves the needle relative to our performance on an annual basis. And then that’s going to run for 12 years. In addition to the D’Ville project, as you mentioned, we’ve got some ongoing opportunities at some of our other facilities, and we hope to be able to announce a couple of those in the coming quarters. So we’re excited about the opportunities that we have on the decarbonization in the 45Q side. You did mention clean ammonia into clean energy applications. We think that that’s going to start taking off in reasonable volumes in ’25 and ’26 and then going from there. Fortunately, we will have the D’Ville project up and running by then and be able to begin meeting that requirement from there.

And as mentioned, we’ll evaluate the new build project, but that’s a little longer wavelength, I think than the time frame that you’re talking about. But the two other things that I’d add, really, Chris, is the first one is there is broad-based efforts right now that’s driving industrial companies to onshore into the U.S. manufacturing operations. And we’ve had advanced conversations with a number of them around ratable offtake of some of our products, both on an ammonia as well as on an upgraded basis. And that should provide attractive returns for new capital that we’d be able to deploy against those kind of opportunities, and that would be additive to our business as well as just taking more ammonia and moving it into higher-margin pieces of business on a ratable basis.

And the last thing I’d add, I’d just go back to our $3 billion authorization and the amount of free cash flow that we’re generating, we expect to dramatically reduce the number of shares outstanding over this time frame. So whatever you thought previously in terms of a mid-cycle kind of number that’s going to increase, based on the other initiatives that we talked about, on a per share basis, that’s going to be amplified as we move forward as well because of the amount of share reduction we expect to be able to accomplish.

Christopher Parkinson: That’s very helpful. And just as a quick follow-up, there’s just been a lot of, let’s say, variable change in terms of regional operating rates between anywhere from — Europe seems to be plateauing a little bit after increasing earlier this year. India has been rumored to be up, but kind of has been disappointing a little bit versus the otherwise expectations. In North Africa, down. Southeast Asia, down, now potentially up. Just in terms of just how you’re thinking about your own order books, in terms of just risk management not wanting to miss a potential for the rallying essentially what we’ve seen over the last six to eight weeks, can you just — do you disagree with any of those? And just could you help us think about how that thought process is playing into how you’re managing your book, not only to the fall application season, but also into 2024, just given all the change over the last 12 to 24 months? Thank you.

Tony Will: I’m going to give just a real brief high-level comment, and then I’m going to turn it over to Bert to kind of go into a little more detail. And the high-level comment, Chris, is we saw kind of an unusual experience over the last two years. 2022, based on energy differentials and where shutdowns were taking place, and of course, war in Ukraine, created a scarcity of nitrogen products in particular, and then that led to high cost or high prices globally, which reduced demand and consumption. This year, we saw a moderating of pricing, which, I would say, reinvigorated some of the application rates and demand, particularly in parts of the world that are more subsistence-based. But we saw a move toward just-in-time purchasing, which really stresses the network.

And I think Bert did a great job of managing kind of that stress, but it adds a lot of complexity in terms of movements. And so there’s always a balance between trying to build an appropriate book and making sure we’re able to run the plants safely and efficiently and keep them online and be able to ship against that book, but not wanting to miss opportunities when you see some strengthening in the market. And again, I think Bert does a great job on doing that. But it’s always a little bit of a tightrope act.

Bert Frost: Yes. Thanks, Tony. In terms of — you touched on — let’s talk about supply for a minute. And you touched on some of those areas where supply is constrained. It probably wasn’t considered to be a few months ago. India production has been growing in terms of capacity growth on these new and revamped operating units. And so we would project that their internal production is probably close to 29 million tons, and that then the demand for imports on an annualized basis will be between, let’s say, six million and eight million tons rather than the 10 million tons we saw a few years ago. And they’re behind. And so this dynamic that we saw in the United States of customers waiting and waiting and depleting their inventories has — that situation has been multiplied globally, where many destination markets did the exact same thing, and now they all need to step in and acquire those tons, that being South America, Asia, as well as North America and Europe.

So now you have this dynamic that has taken place where we’ve had a falling market, let’s say, really since February. And in June — the end of June and early July, we started to see this recovery, and it’s been more pronounced than I think the industry had anticipated. And that’s also predicated on the lack of supply, like you mentioned, with lack of gas in Nigeria and Egypt, and as well as Trinidad, Europe, the European Union gas prices, Pakistan, Brazil, many places that have produced tons in the past are not producing today. And so when we look at our order book, Tony is right, we have to go into the forward market with an order book that’s shippable. We have to rely on our rail partners, truck partners and moving product by vessel and barge and pipe to keep our system balanced.

And so I’m pleased with our order book for what we have for Q3. And as I said in my prepared remarks, some of those products extended to Q4, and we’ve been able to move product pricing up along the way. So I think you’ll see we’re going to perform well as we always do.

Christopher Parkinson: Thank you so much.

Operator: The next question is from Andrew Wong with RBC. Please go ahead.

Andrew Wong: Hey, thank you for taking my questions. Good morning. So CF made the decision to permanently closed Billingham for economic purposes, which I think makes a lot of sense. We’ve seen maybe one or two of these announcements in Europe, but maybe not as much as some might expect, given the economics for nitrogen today in Europe and potentially looking forward. So what do you think is keeping some of these plants operating? And do you expect more permanent shutdowns in Europe going forward?

Tony Will: Great, Andrew. Good morning. I think we have an interesting situation of Billingham, and that we’re able to import ammonia and then still upgrade it to nitric acid and ammonium nitrate. And there is a pretty substantial upgrade margin that’s available between at least over the last couple of years, the deepwater price of ammonia and what the upgraded products are selling for as fertilizer and intermediate chemicals. And so for us, the option was pretty apparent. As Chris mentioned, it is margin enhancing for us not to incur kind of the relatively high and volatile gas costs as well as the relatively high carbon costs associated with operating in that region, but still be able to get the upgrade margin by bringing in ammonia.

I think some plants in Europe don’t have access to be able to bring ammonia into their facilities and/or they may be making urea-based products that require the CO2 in order to be able to upgrade them as opposed to the nitrate-based products. So I think for some producers — if you look at the gas costs versus the margin available for ultimately, upgraded product, you can probably still see some level of operation during times of the year. And I think that’s probably why you see this variability in operating rates for those that are able to import ammonia. And I think there are several plants out there that have done that. They’ve turned off ammonia production in the near-term. We’ve just made a decision based on the age of the equipment, the amount of CapEx required to keep it running in the ongoing carbon cost that it made sense for us to be focused purely as — in the import ammonia and upgrade facility there.

Andrew Wong: That’s great. And maybe just kind of following up on that. There’s a few plants that are in the planning stages for the U.S. Gulf on blue ammonia and there has been some concern that there might be too much ammonia that gets brought online over that three to five-year time frame. But there are some plans to import ammonia coming from different places into Europe, and one of your peers have mentioned something like that as well. So do you look at that be a way to balance some of these new ammonia projects that we’re seeing coming online potentially over the next few years?

Tony Will: Yes. I mean I think just like happened in 2012, that there’s very likely a slew of announcements about projects. And I think back in 2012, there was something like 26 projects that were announced, of which only four got built. And I think you probably saw some of that exuberance last year and into this year as well, where you’re seeing a lot of announcements. And then when people really put pen to paper and need to go out and begin construction, there’s a little more cautiousness that goes into it. It’s easy to announce something. It’s a lot harder to build it. And I think one of the interesting things about our potential new build project is that we’re partnering with ultimately, folks that are going to be end users of the project from a volume standpoint and putting it into new clean energy applications.

And so it’s production that’s not going to create the kind of overhang situation that you were just talking about. Now that’s very important for us. The other piece of that is we’re still collecting data on the cost side of the equation, and it’s got to make economic sense for us and earn a fair rate of return for us to move forward with it. But I think that between some of the shutdowns you’re seeing in high-cost places in the world, and some new demand centers that are springing up, particularly for clean energy applications, I’m pretty optimistic that we’ll end up with a balanced to tight ammonia market going forward to the balance of this decade.

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

Joel Jackson: Hi, good morning. It seems you did a very good realized gas cost this quarter in Q2 — excuse me. There were concerns that some of the inventory overhang higher cost gas when your winter hedges may have pushed the realized cost close to around $4. Can you talk about what happened positively to not have such a high gas realization?

Chris Bohn: Yes, Joel, thanks. This is Chris. There’s really two items that occurred that allowed us to have lower gas than what we were projecting when we talked about some of that overhang from production in Q1 being sold into Q2. The first being, as Tony and Bert mentioned, we sold more product than we produced. So we went into inventory deeper than what we had anticipated doing during the particular quarter. So we bled through that overhang more quickly. And then additionally, instead of doing first of month purchases, Bert’s team that was purchasing natural gas did more of the daily buying, and the daily numbers were quite a bit lower than what the first of month would have been. So I think those higher prices that we saw in, call it, March and April, have bled through.

And as you look at the strip right now, it’s relatively flat kind of in the $2.50 to $2.75 range. And that’s what we’ll expect going forward. But you’re right, we were expecting slightly higher natural gas costs, but sort of those two points mitigated that a bit.

Operator: The next question is from Josh Spector with UBS. Please go ahead.

Josh Spector: Yes, thanks for taking my question. I wanted to ask on just project returns broadly. So — I mean as you’re investing more in clean ammonia in various other applications. How do you think about the rate of returns on those projects that are required versus your historical investments? I’m just thinking if you’re looking at these differently, particularly if they have offtake in stability to use a lower return versus some of the historical maybe FERC market focus, which could have more cyclicality, but also periods of much higher earnings, if that requires a bit different return level. So is there any way to think about how you and the Board are kind of working through those decisions would be helpful?

Tony Will: Yes. I mean I’m certainly happy to give my perspective on this, and I encourage Chris to also jump in to the extent I step out of bounds on it. But we typically target at a minimum, a low teens kind of return, and that’s been fairly consistent with how we’ve thought about things in the past. That tends to be well above our cost of capital, but it also takes into consideration some things like — particularly if you’re talking about construction-based projects, potential contingency on overruns and a few other things. I think the benefit of years like last year is that it meant that any of the projects we had done historically ended up looking like they were absolutely fantastic from the standpoint of capital deployed versus returns that we’ve been looking at.

And I do think that as we talk about bringing partners in that are both adding equity into the equation in a proportionate way, but then also taking guaranteed offtake of it and moving it into non-traditional applications that de-risks the project substantially. I don’t think it fundamentally changes the return profile that we expect for the capital that we put into the project.

Chris Bohn: No, I would agree with what Tony said there. That as we look at these projects, we do look at them all as risk-adjusted returns. And given what Tony said with a ratable offtake, that has — allows us to have better working capital from receivables to inventory to all of that. Obviously, that enhances the return profile and puts it in line even if it is slightly lower to begin with, commensurate with what our other projects are sort of in the mid-teens.

Josh Spector: Thank you.

Operator: The next question is from Steve Byrne with Bank of America. Please go ahead.

Steve Byrne: Yes. Thank you. Do you expect ammonia pricing to remain well below the unit nitrogen pricing for urea, just because of less industrial demand? And if so, do you think that that combined with what could be a relatively early harvest, might lead to a very strong ammonia application season this fall? And if so, are you planning accordingly to have a strong fall through your network of storage tanks in the [indiscernible]?

Tony Will: So Steve, almost every point in time, barring maybe a blip here or there, ammonia tends to trade at a pretty substantial discount on a margin per unit of nitrogen basis to the upgraded products. And that’s just because it requires more capital to build the upgrades than it does the ammonia. And really direct application ammonia is almost limited exclusively to North America. So because of that, you generally see a pretty big margin enhancement by upgrading ammonia into other forms. And that — I don’t think that’s going to substantially change. But you’re certainly right and that there has been a reduction in industrial demand for ammonia over the last year. And just given sort of energy costs in other parts of the world, and what looks like is — whether you call it a soft landing or a slow recovery or wherever we are in terms of the global economic condition, I think ammonia is going to continue to be a very attractive product from a price per unit of nitrogen.

And based on where we think grain prices are going to trade if you’ve got conducive weather, we’d expect to see a pretty strong ammonia season. But there is a limit to how much ammonia goes down, and a lot of that is driven by what’s the storage capacity of end-market tanks. And in the fall, it’s pretty hard to dump them and then refill them and dump them again. You typically want to get one dump in the fall. So there is a limit to availability of ammonia for fall application.

Bert Frost: Yes. Just following-up on Tony’s comments that I do believe, based on the pricing structure of ammonia. And based on the opportunity — the revenue opportunity by planting corn for harvest in 2024, we’re going to see a positive uptake in the ammonia demand. Now Tony’s point of you basically have a month to move that product through the system, and that’s weather dependent. So if we had an early snow or too much rain, then you would just carry that inventory and that demand into spring. But the fall pricing has basically been set, and then we see it going up from those levels that were initially offered, but I think demand will be robust given all the considerations and if we have good weather.

Steve Byrne: And just wanted to follow-up on the blue projects down in Louisiana. Is there anything that you can do to pull forward that Brownfield project in Donaldsonville ahead of what you’re guiding to early 2025? Anything that you could do to create shipments and start to fulfill some of this demand before there. I don’t know what the rate limiting factor is, is it your engineering? Or is it your plastics, injection, well partner? Or whatever it is, is there any chance you could pull that forward and start fulfilling these — the interests from the low case and the JERA rather than 2027?

Tony Will: Well, certainly, we’ll have blue ammonia or low carbon ammonia available by 2025. And as that demand starts developing, we — one of the value propositions that we offer companies like that is we’ll be able to service their needs as it’s developing in advance of a potential new plant start-up. And so we’ve got supply for them. In terms of when we’re able to begin sequestering the CO2, we should have the compression and dehydration equipment on-site and commissioned and ready to go probably by the end of ’24. but part of the challenge has been getting Class 6 permitting for the injection wells and getting all of that done and pipeline connections built and so forth. I think ExxonMobil has done a fantastic job of managing kind of that piece of the equation, and it’s very helpful that Louisiana has been granted primacy from the EPA over their ability to permit those kind of wells.

So all of those things are big steps forward. But as you know, anything around this particular area takes time and requires permitting. And I think we’re all trying to push forward as fast as we can because we see the economic value of getting it completed and beginning to inject, but we’re targeting right now kind of first quarter, maybe beginning the second quarter at 25% is likely when we’ll begin doing that.

Operator: The next 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: Maybe first, a little bit more on clean ammonia, but maybe on the sales side. And as you work towards FID, help us think about where the key kind of pain points are still on kind of setting the contractual terms for those kinds for that kind of product? Would you be looking to FID that with a take-or-pay kind of agreement in hand with a major off-taker? How are you — how are those getting structured? Or what are the parameters by which you’re still negotiating? Just framing those discussions would be helpful.

Tony Will: Yes. So look, let me talk a little bit about the new project, and I’ll throw it over to Bert to talk about some of the interest that we’re seeing from European users and others in terms of just decarbonized products. In terms of the new build projects, what we’re — the kind of operating model we’re going into is the equity participation is going to be proportionate to your offtake from that project. And so that’s — call that effectively a take or pay, if you will on that piece of it. And then it looks like demand, if everything that we’re hearing from our potential partners around the expected growth in demand and the volume that they’re looking at is going to well exceed what their equity participation is. We would be looking to try to enter into a back-to-back kind of take or pay for the rest of it.

So our approach is going to be very much one of trying to de-risk this project and have it done back-to-back and not have it be a speculative kind of investment, but one that you can pretty much bank on the return profile.

Bert Frost: Yes, Adam. Good morning. And we’re seeing, it’s interesting how this area is developing and how we’re looking at it holistically and to our point of de-risking and how we manage the business. So we are in conversations with a lot of different end users and applications, but as various companies and industries look at their scope emissions and their needs to improve their profiles, low carbon products as a feedstock or as a fertilizer, adds value. And so we’re in conversations and we have requests on the table today for when these products are available, that we would supply them not only to the United States, but to our European customers as well. So we’re excited about the future and how we’re building this capability, both with people, process, equipment, plants and customers for — to be ready to go.

Adam Samuelson: All right. That’s helpful. And if I could squeeze a second one on just on share repurchase. And obviously, you did resume that this quarter with the Waggaman transaction announced. Should we be thinking about that more ratably? Opportunistically? How should we be considering share repo over the balance of the year given kind of the other uses of capital and potential uses of capital you’ve got on the table?

Chris Bohn: Adam, this is Chris. As Tony and Bert, and I mentioned in our prepared remarks, we are expecting to continue to generate a lot of free cash flow here. And with that $3 billion authorization open, we’re starting to move into that now. I think as we’ve talked about on other quarters, we’re going to definitely favor opportunistic repurchases more so than the ratable. It’s not to say that, that’s going to be 100% that way, but if you look at this past quarter, or even year-to-date, where we purchased over $200 million or 3 million shares, in the mid-60s compared to where we’re trading right now. We felt that that was a very efficient use of capital going forward. So I think for the long-term shareholder us being more opportunistic is going to provide much greater value as we look at our share repurchases.

But if you look at historically, we’ve had share repurchase programs in over time, and we’ve closed them out — over the last 12 months, we’ve purchased over 11 million shares for about $1 billion, as Tony mentioned earlier in his remarks. So I think it’s something we’re committed to doing. We’re just going to do it a little more opportunistically than we have in the past.

Operator: The next question is from Vincent Andrews with Morgan Stanley. Please go ahead.

Vincent Andrews: Thank you. Bert, would you mind expanding on your comments earlier, just about the order book? And I guess I’m just curious, it sounds like summer fill was very well subscribed in the industry this year. So how much of the 3Q book do you think we should think about around those summer fill values versus sort of where the market has headed? And then how much liquidity is there in the fourth quarter in terms of being able to fill up the fourth quarter book where values are today?

Bert Frost: Yes. When you look at the field programs and just the running of the business, you’re always looking forward the months, because you need to logistically be in place as well as what customer needs. And so the interesting thing I think about — let’s focus on the UAN fill program, the price that we launched at was actually higher than the spot price ending the quarter. But you’re right, we filled a book out for Q3. And the same thing with — as my prepared remarks on urea, we were booking some export values that are below the current values today. And so that’s kind of the Q3 position, and we’ll execute against that and now look to Q4 and Q1 of next year and how we’re going to put product in the market as well. It is a dynamic commodity business.

And so you’re looking at the components of gas, logistics, and then the end price and what markets you put that to. And that’s always the calculation that we look in the dynamic nature of our business. It’s on the matrix of options and how we execute against that and how you should judge us. And so we’ll see when we report results for Q3.

Vincent Andrews: Thanks so much.

Operator: The next question is from Ben Theurer with Barclays. Please go ahead.

Benjamin Theurer: Thank you very much. Good morning. Congrats on the results. Two quick ones. So one, on the regulatory approval process for Waggaman. Is there anything you can share an update? Is this coming along as you expected? Is there any potential delays or maybe an acceleration of the process? That would be my first question.

Tony Will: It’s a pretty kind of routine regulatory process, dealing with the FTC these days. And I wouldn’t say there’s anything that’s out of the ordinary compared to how these things run. As Chris mentioned, we do expect to be closed by the end of the year.

Benjamin Theurer: Okay. Perfect. And then my second question is really to understand maybe the economic background of the decision to close down the ammonia production over in the U.K. Could you maybe somehow quantitatively elaborate what you expect the benefits are going to be? Because obviously, you’re going to be able to allocate more U.S. produced ammonia, but then there’s a shipping component to it versus the cost of producing it over days. Have you done any sort of sensitivity analysis or just economic value-added analysis, so we understand better what benefits for the whole CF group ultimately is going to be from this decision?

Tony Will: Yes. We always have the option of moving ammonia from Donaldsonville over to Billingham. But oftentimes, we can just source ammonia, whether it’s from Algeria or other places, and have it delivered on a lower cost basis. And we’ve got better opportunities to sell ammonia coming out of Donaldsonville at higher rates than moving it into Billingham. So the analysis really is both historically and as we look forward, given the volatile and high cost nature of gas in Europe and also given the high cost of carbon in Europe, and the age of the equipment and the ongoing cost for maintenance and turnaround of that asset. What do we look at being able to buy ammonia into the facility versus the fully loaded cost of running the ammonia plant, and it’s just cheaper for us to be able to buy the ammonia in. And so it’s just a pure margin pickup by taking costs out of the system.

Benjamin Theurer: Okay. Perfect. Thank you very much.

Operator: The next question is from Edlain Rodriguez with Credit Suisse.

Edlain Rodriguez: Thank you. Good morning, everyone. I mean, Tony, like you’ve had a very uneven and a relatively challenging first half with prices going down just in time demand. As you look into the rest of the year and into next year, like what concerns you the most in terms of volume, energy costs, et cetera? And what excites you?

Tony Will: Well, I’m going to recharacterize your question just for a moment, if I may, which is, except for the fact that we’re comparing year-on-year against an all-time historic performance in 2022, delivering $1.7 billion of adjusted EBITDA in the first half of this year is fantastic by historical standards, really by any stretch of imagination. So Bert has had to navigate an interesting market from the standpoint of delayed purchasing patterns and volatile pricing and so forth. But I think he’s done it extraordinarily well. As we look forward, we actually think inventory and supply side is pretty tight out there. And as we’ve mentioned, we think both India and Brazil as well as the North America channel that is really running low inventory are all going to be important centers for demand for nitrogen moving forward.

The forward curve on gas is very attractive for North America. So we’re optimistic about the second half of this year and into next year. We do think that grain prices will continue to have attractive farmer profitability as we move into 2024. So we’re expecting high acreage next year and strong demand on a global basis. And we’re just — we’re really optimistic about that. I don’t really have any big concerns or bogeyman man out there that I’m worried about. Our focus is we want to get safety back to the place that we’ve been operating at the last couple of years, keep the plants online and just execute the way we normally do.

Operator: The next question is from Aron Ceccarelli with Berenberg. Please go ahead.

Aron Ceccarelli: Hi, good morning. I have two. The first one is on blue and green ammonia. How do you see the potential for blue and green ammonia as an alternative fuel for marine, which is completed now with methanol? And one of your competitors in Europe yesterday was very bullish about it? The second question is on the Slide 6 of your presentation. May you help me understand a little bit better what’s the embedded assumption for the lower and the upper end of the targets, please? Thank you.

Tony Will: Yes. So we’re somewhat optimistic here about the potential for ammonia to be a clean energy source in marine applications. We do think that it’s going to take a little bit longer time, because there’s some obvious EHS concerns on board, some retrofitting and then development of new propulsion systems, they’re being driven off of ammonia. But there’s a couple of really great developments, including some engines that are in test right now. And so our belief is this will happen. I don’t think this is going to be a large center of demand in the next five years. But as you get out 10 years and beyond, I think that is going to become a real demand source for clean ammonia. I don’t know, Bert, the other sort of thoughts on — or Chris on…

Chris Bohn: Yes, I would just say there’s going to be — as Tony mentioned, I think our thoughts are this is really into 2030, where you start to see some of that demand build on ammonia from a marine. And a good portion of the reason for that is not only because of the development that Tony talked about with the engines, but it’s also just the attrition of the fleet that’s out there of the 60,000 vessels in order for those to be replaced with ammonia is just going to take time when you see anywhere from a 1% to 3% per year attrition rate on those vessels. So we’re being a little more conservative than others on the marine demand build, as Tony mentioned. We do expect it to come, but it’s probably more closer to a 2030 post time frame.

Bert Frost: And regarding your second question on Page 6 of our analysis and asking what are our assumptions, these assumptions are based on; one, our active integration and understanding of the markets and conversations with those destination consuming areas, being India, Brazil, and they’re just that dynamic of most of these markets have waited to purchase and don’t have the inventory in place, but they have the pricing structure for the feed grains that support significant consumption of urea. And so India, just by limiting their rice exports, that’s a significant move on the international market. Why are they doing that? One, to keep pricing in control, but they’re going to need the nutrients to produce that rice in an acceptable monsoon season.

And Brazil in the same category with being a substantial producer going forward. You got the cotton planting season that is in Q4, and then second crop corn for first quarter of 2024, is going to require substantial products to be imported. And then when you look at the — as we talked about earlier, the gas limitations and some of the supply points, it just puts together a very positive market for the tail end of the year and into 2024.

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

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

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.