CF Industries Holdings, Inc. (NYSE:CF) Q4 2022 Earnings Call Transcript February 16, 2023
Operator: Good day, ladies and gentlemen, and welcome to CF Industries’ 2022 Full Year and Fourth Quarter Financial results. All participants will be in listen-only mode. 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, Senior Vice President of Sales, Market Development and Supply Chain. CF Industries reported its results for the fourth quarter and full year of 2022 yesterday afternoon. On this call, we will 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 fourth quarter and full year of 2022 that reflected a phenomenal year at CF Industries, highlighted by outstanding execution from our team. Our plants ran extremely well, producing nearly 10 million tons of ammonia. And most importantly, we continue to operate safely. At the end of the year, our 12-month recordable incident rate was 0.33 incidents per 200,000 labor hours, well below industry averages. Against the backdrop of a persistently tight global nitrogen supply/demand balance, these achievements led to extraordinary results. We produced record full year earnings, record fourth quarter and full year adjusted EBITDA, and record full year free cash flow.
We also made significant progress decarbonizing our network and furthered our leadership position in low-carbon ammonia production. Over the last 12 months, we’ve signed an MOU with Mitsui for the development of a new blue ammonia production facility, our BluePoint complex in Louisiana. We signed a CO2 transportation and sequestration agreement with ExxonMobil. We signed an MOU with JERA for the supply of low-carbon ammonia, and we recently signed an agreement with BP to purchase certified low methane emissions natural gas. All of which put CF Industries at the forefront of decarbonization and sustainability within the nitrogen industry. Turning to the market, the last 18 months have been particularly volatile period for our industry. High energy prices, geopolitical events, and economic weakness leading to reduced industrial demand affected both nitrogen production rates and nitrogen prices.
In the near-term, we expect continued volatility in the global nitrogen market. As we look at the first half of 2023, we believe typical spring demand in the Northern Hemisphere is going to be weighted to the second quarter as buyers have taken a wait-and-see approach to their nitrogen procurement. CF Industries network with our combination of in-market production, extensive storage and logistics capabilities and export optionality is well suited to navigate this type of environment. Longer-term, we continue to see a positive operating environment for the company. Industry fundamentals remain strong, resilient demand driven by the need to replenish global grain stocks, significant energy spreads between North America, compared to Europe and Asia and the emergence of demand for low-carbon ammonia as a clean energy source are all very favorable for our cost advantaged network.
![Nitrogen, Fertilizer, Agriculture](https://imonkey-blog.imgix.net/blog/wp-content/uploads/2023/02/20072753/chris-ensminger-yJDZTDeHeG8-unsplash.jpg?auto=fortmat&fit=clip&expires=1755993600&width=480&height=360)
Photo by Chris Ensminger on Unsplash
As a result, we continue to generate — we expect to continue to generate substantial free cash flow in the years ahead. This will enable us to both invest in growth and return capital to shareholders. We are enthusiastic about the growth opportunity that low-carbon blue and green ammonia provides for our company and believe our MOU with JERA demonstrates tangible emerging demand for low-carbon ammonia as a clean energy source. We will continue to focus on disciplined investments to decarbonize our network and accelerate our ability to produce low-carbon blue and green ammonia to help meet this developing new demand. Alongside these growth investments, we expect to continue returning substantial capital to shareholders. In 2022, we returned nearly 60% of our free cash flow, $1.65 billion to shareholders through share repurchases and dividends.
And in the last two years, we have reduced our outstanding share count by 11%. We expect to further leverage the $3 billion share repurchase program recently authorized by the Board to continue building on this track record and providing our long-term shareholders with ever-increasing participation in our business. With that, let me turn the call over to Bert, who will discuss the global nitrogen market conditions in more detail.
Bert Frost: Thanks, Tony. The global nitrogen market was pushed to extremes in 2022. The need to replenish global grain stocks drove prices for feed grains to the highest levels in a decade. This supported resilient demand for nitrogen and major agricultural production regions like North America, Brazil and India. At the same time, we believe historically high nitrogen prices led to lower demand and smaller subsistence focused agricultural areas in Asia and Latin America. Industrial demand in Europe and Asia was also softer than expected due to higher prices and recession fears. Additionally, we — very high natural gas prices in Europe and Asia significantly curtailed production in those regions. This, along with government actions restraining nitrogen trade, reduced product availability further supporting high global nitrogen prices.
These dynamics were exacerbated by Russia’s invasion of Ukraine, which triggered disruptions and a large realignment of trade flows. The combination of these events push global nitrogen prices to all-time highs in the spring of 2022. Through the second half of last year, the shock of these factors moderated as global trade flows of natural gas and nitrogen adjusted and the world absorbed previously delayed urea capacity additions. In addition, a mild winter in the Northern Hemisphere resulted in higher natural gas stocks, lower natural gas prices and therefore, lower global nitrogen prices. Global nitrogen prices were also pushed lower as many agricultural buyers took a risk off just-in-time approach to purchasing. This is not unusual, nitrogen prices are historically high, and demand for the spring application season seems distant.
This buyer behavior has persisted longer than normal as declining global prices reinforced the wait-and-see approach. Over the last two weeks, we have seen retailers and wholesalers begin to step back into the market at attractive price levels. The decrease in global nitrogen pricing has improved farmer economics dramatically and should spur demand globally that was discouraged at higher prices. We expect significant demand to emerge in North America in the coming weeks as the value chain moves into catch-up mode that will likely last into and through the second quarter. We believe inventories are lower at the farm and retail level given the extent of the Q4, Q1 purchasing slowdown. Additionally, nitrogen imports into the US since July are lower year-over-year, while nitrogen exports were significantly higher.
As a result, we believe there is a good amount of product movement yet to occur and purchases required to meet spring needs. From a longer term perspective, we believe that industry fundamentals continue to point to a tight global nitrogen supply and demand balance. As you can see on slide 9, global grain stocks did not improve from last year’s growing season per weather conditions in many key growing areas along with lower production in Ukraine due to the war limited global yields. As a result, global course grain stocks use ratios remain low, supporting high global grain prices for longer. This has been farming highly profitable and low cost exporting regions of the world, such as the US, Canada and Brazil. We expect this will support resilient demand for nitrogen as the agricultural sector focuses on maximizing food production and farm incomes.
We project that 92 million to 93 million acres of corn will be planted in the United States in 2023 along with strong wheat, cotton and canola plantings across North America. We believe we’ll take at least two more growing seasons at trend yields to fully replenish global stocks. In our view, Europe remains the marginal nitrogen producer in the industry. While forward energy curves have moderated, the current decline in global nitrogen values suggest that producer profitability in the region will continue to be challenged. We believe this is reflected in the estimated 20% to 30% of European ammonia capacity that is currently curtailed. With European production supplying the marginal product ton in the industry, the marginal opportunity for CF Industries remain substantial, as you can see on slide 10.
With that, let me turn the call over to Chris.
Chris Bohn: Thanks, Bert. For the fourth quarter of 2022, the company reported net earnings attributable to common stockholders of $860 million or $4.35 per diluted share. EBITDA was $1.25 billion and adjusted EBITDA was $1.3 billion. For the full year, the company reported net earnings attributable to common stockholders of $3.35 billion or $16.38 per diluted share. EBITDA was $5.5 billion and adjusted EBITDA was $5.9 billion. Full year net cash from operations was approximately $3.9 billion, and free cash flow was $2.8 billion, both CF Industries records for a calendar year. We generated this free cash flow even after making $491 million in one-time tax and interest payments in the fourth — third and fourth quarters related to a US Canada tax matter dating back to the early 2000s.
Excluding these payments, free cash flow was$3.3 billion, representing a free cash flow to adjusted EBITDA conversion rate of 56% and a free cash flow yield of almost 20%. Looking ahead to 2023, we expect ammonia production will be approximately 9.5 million tons. Capital expenditures are projected to be in the range of $500 million to $550 million in 2023. These amounts reflect a normal turnaround schedule. They also include expenditures related to our low carbon ammonia projects. We expect our green ammonia project at Donaldsonville to be finished around year-end. Fabrication of the electrolyzer is complete and site work is ongoing for its installation and integration later this year. The blue ammonia project at Donaldsonville remains on track for start-up in early 2025.
Engineering activities and procurement of major equipment for the CO2 dehydration and compression facility are in progress. Longer term, we remain focused on increasing our free cash flow generation capacity and growing shareholder participation in our free cash flow. We do this in four ways: disciplined growth initiatives in clean energy, investing in high return projects within our current network, pursuing inorganic growth opportunities that offer returns well above our cost of capital; and returning capital to shareholders. In line with this approach, we have a number of high-quality clean energy investments in motion, with some of the world’s best companies, as you can see on slide 15. We also expect to return substantial capital to shareholders.
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 outstanding work in 2022. Their expertise and unwavering commitment to safety is the foundation of everything we do. I particularly want to recognize, the more than 400 CF Industries employees, who contributed to the successful upgrade of our enterprise resource planning system, which we have had operating since the beginning of the year. This was our largest business technology implementation ever, and it was completed on time and on budget, an outcome that is extremely rare for these types of projects. And while the work may not generate headlines, it is fundamental for our future growth. We are proud of the outstanding 2022 that we had at CF Industries, but we’re even more excited about the opportunities ahead.
Given our operational focus, disciplined capital stewardship, positive market outlook and strong return profile from our clean energy initiatives, we expect to continue to generate superior free cash flows. As a result, we believe we are well positioned to build on our proven track record and continue to create substantial shareholder value. With that, operator, we will now open the call to your questions.
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Q&A Session
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Operator: Thank you. We will now begin the question-and-answer session. Our first question comes from Stephen Byrne from Bank of America Securities. Stephen, please go ahead.
Stephen Byrne: Thank you. I’m very curious to hear your view on what has driven NOLA urea from $700 to $300 in five months. Is this just deferred demand at the retail level that is driving that, or are there some other things like the US is willing to take Russian cargo as a lot of countries aren’t. Is there some Saudi-based cargos that are coming in and getting manipulated on price? Is there something else going on here? I don’t get it. You got a marginal producer even with lower gas, it’s still their marginal costs are still $500 a ton. So what has led to this? And where do you think it goes from here?
Bert Frost: Good morning, Steve, this is Bert. And your short answer is yes, yes and yes. So, yes, the pricing has fallen down from, I would say, $600 in September to $300 today, short ton FOB NOLA. And there are some factors, as I mentioned in my prepared remarks of there is the theory that high prices cure high prices. And some of that is reflected in demand. When you look across the world globally, to whether it’s a Tier 1, Tier 2 or Tier 3 consuming country, a lot of the Tier 2 and Tier 3 countries did cut back, especially on subsystems farming, or where you’re importing in dollars, but trading in a local currency, which makes it economically difficult for that kind of transaction. So when you look at South America, in Asia, and let’s just say, countries like Peru or Central America or Thailand.
That combination between those two regions is probably 2.5 million tons of lower demand coupled with then the next step of that equation is additional supply that came on feathered throughout 2022 from India, Iran, Nigeria, Russia, Brunei, is probably 5 million tons. So it doesn’t take a lot to tip that over. And then we’re starting in — or at least talked about recession and we did see that in our EU operations with high energy prices and therefore, the lower consumption of industrial products in Europe. Now there was to add in — to do an added on that equation, there was the European shutdowns that took a significant amount of tonnage off the market and pulled in imports from various exporting regions. So those combinations, along with in the Tier 1 countries of demand deferral or a slowdown or a purchasing holiday, we like to say, has pushed prices lower.
And then you’re right, the car goes from various countries that sell on index have overwhelmed NOLA. All that being equal though, we still see a positive market going into Q2 and a significant amount of demand to be satisfied, and we’re right in position with $2.50 gas in Oklahoma and a freight differential that’s positive to us. And so we’re eager. We’ve got a good order book on and waiting for Q2 to arrive.
Stephen Byrne : And maybe just one more for you, Bert, and you just said you have a good order book on. Would you say that you’ve you sold more into the second quarter than normal or maybe less than normal if you’re expecting a recovery in pricing?