CF Industries - Q3 2023

Transcript

Operator (participant)

Good day, ladies and gentlemen, and welcome to CF Industries' first nine months and third quarter of 2023. All participants will be in a listen-only mode, and should you need any assistance during the call, please signal a conference specialist by pressing the star key followed by zero. We will facilitate a question-and-answer session towards the end of the presentation. To pose a question at any time, please press star, then one on your touchtone phone. 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 (VP, Treasury, and Investor Relations)

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 nine months and third 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 your 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 presentation posted on our website. Now, let me introduce Tony Will, our President and CEO.

Tony Will (President and CEO)

Thanks, Martin, and good morning, everyone. Yesterday afternoon, we posted our financial results for the first 9 months of 2023, in which we generated adjusted EBITDA of approximately $2.2 billion. Our trailing 12 months net cash from operations was $2.9 billion, and free cash flow was $2 billion. These results reflect continued strong execution by the CF Industries team, a constructive global nitrogen supply-demand balance, and energy spreads favoring North American production. Looking forward, we remain very positive about the opportunities that lie ahead. In the near term, we expect strong demand for the 2024 application season in North America due to low nitrogen inventories across the supply chain. We expect to close the acquisition of the Waggaman ammonia plant this year, adding that facility to our network and production volumes for 2024 and beyond.

In the medium term, industry fundamentals point to a tightening global nitrogen supply-demand balance. Over the next four years, construction of new nitrogen production capacity does not keep pace with the expected demand growth of approximately 1.5% per year in traditional applications. Additionally, several important regions are projected to have reduced nitrogen production, given constraints around the cost and availability of natural gas in those regions. Finally, longer term, we expect our clean energy initiatives to provide strong returns and multiple growth opportunities for the company while helping us to meet our decarbonization goals. Taken together, we are very optimistic about our ability to drive strong cash generation in the years ahead. This will enable us to continue to create value over the long term through disciplined investments in growth opportunities, as well as returning capital to shareholders through dividends and share repurchases.

With that, let me turn it over to Bert, who'll discuss global nitrogen market conditions in more detail. Bert?

Bert Frost (EVP of Sales, Market Development, and Supply Chain)

Thanks, Tony. The third quarter is often a period of softer demand and softer prices in North America, as applications for the current crop are completed and purchasers assess their needs for the next spring. This year, purchasers aggressively entered the market early in the third quarter, driven by attractive nitrogen values, positive farm economics, strong interest from Europe, and low inventories in the North American nitrogen channel. CF Industries built a good order book early in the third quarter, and by the end of September, our UAN and ammonia order books stretched well into the fourth quarter. Strong demand early in the quarter helped drive nitrogen prices higher during the quarter.

Urea barge prices in New Orleans moved up from below $300 per ton to over $400 per ton in early September, while the Tampa ammonia contract moved from $285 per metric ton to $575 per metric ton during the quarter. We believe nitrogen inventories in North America remain low, and substantial future demand will still need to be met as we enter the new year. We are well positioned for this environment, giving our low inventories today an open order book for the first quarter of 2024 and beyond, and wide global energy spreads that continue to favor our low-cost North American manufacturing base. Outside of North America, we project significant nitrogen demand from India and Brazil in the coming months.

As expected, India has been active in the fourth quarter so far, securing 1.7 million tons of urea in their latest tender. We expect demand for urea in Brazil will be robust through February for cotton and second crop corn planting. Longer term, agricultural-led demand for nitrogen should remain resilient, with global grain stocks expected to approach averages from the last five years by the end of the 2024 growing season. We also expect continued supply constraints in some key producing regions. Natural gas availability remains an ongoing challenge in Trinidad, which in recent years has seen the loss of nearly 1 million metric tons per year of production compared to the 2018 to 2020 average. High natural gas prices have made ammonia capacity in Europe the global marginal producer.

Ammonia production levels are 4-5 million tons lower in the region compared to the 2018-2020 averages. This includes the impact of the permanent closure of our U.K. ammonia plants, which accounted for nearly 1 million tons of ammonia capacity.

Europe has become the CF Industries' top export destination over the last 18 months, as purchasers bring in ammonia for upgrade, as well as purchase UAN, ammonium nitrate, and urea. In addition to curtailments and closures, government actions continue to restrain participation in the global market from other producing regions. The Chinese government reinstated urea export controls after Chinese producers contributed large volumes for the August India urea tender. Additionally, intermittent natural gas curtailments by the Egyptian government continue to affect nitrogen production in Egypt. With that, let me turn the call over to Chris.

Chris Bohn (SVP and CFO)

Thanks, Bert. For the first nine months of 2023, the company reported net earnings attributable to common stockholders of approximately $1.25 billion, or $6.42 per diluted share. EBITDA and adjusted EBITDA were approximately $2.2 billion. At the end of September, cash on the balance sheet was $3.25 billion. We have earmarked $1.25 billion of cash for the acquisition of the Waggaman Ammonia facility, which we expect to close on December 1st. As a result, our pro forma available cash at the end of September was approximately $2 billion. We expect company-wide gross ammonia production to be between 9 and 9.5 million tons in 2023.

We expect gross ammonia production to be significantly higher in 2024, as we add roughly 900,000 tons of ammonia capacity from the Waggaman facility to our network. We project that capital expenditures for 2023 will be in the range of $450 million-$500 million. Our green ammonia project at the Donaldsonville complex is nearing mechanical completion. We also continue to advance the carbon dioxide dehydration and compression unit at Donaldsonville, which will enable us to permanently sequester 2 million tons of CO2 per year. This project, which offers a return profile well above our cost of capital and will accelerate progress towards our 2030 decarbonization goal, is on track for startup in early 2025. Along with decarbonizing our existing network, we continue to evaluate low-carbon ammonia capacity growth that is well-timed with demand.

We expect the FEED study for our proposed joint venture with Mitsui to be complete before the end of the year, which is one of the many outputs into a final investment decision. We also remain committed to returning excess capital to shareholders, given our free cash generation outlook. Since the start of the year, we have repurchased more than 5 million shares for approximately $355 million. 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 (President and CEO)

Thanks, Chris. Before we move on to your questions, I want to thank everyone at CF Industries for all they did during the first nine months of 2023. Their teamwork continues to deliver outstanding results. In closing, I want to highlight two slides from our materials. Page 16 provides a recap of our consistent approach to creating long-term value. We thoughtfully and selectively add production capacity to our network, the Waggaman Ammonia plant being the latest example, while we steadily reduce our outstanding share count. Since 2009, we have increased the participation in our business by approximately four times, a 10% CAGR over this time horizon. I also want to highlight page 15 that demonstrates we are the best operators in the world of these types of assets. We have a long track record of unmatched asset utilization, enabled by a safety culture without peer.

I'm especially proud of our team's collective commitment to safety excellence and their focus on continuous innovation. Nowhere is this more evident than in our annual Wilson Safety Awards. Our winner this year was the Courtright, Ontario Complex, but all the finalists were outstanding and helped to drive continuous improvement across the organization. I encourage everyone to learn more about these innovations on the company's website. We believe CF Industries has a bright future. In the near and medium terms, we are well-positioned for what we expect will be a tightening global nitrogen supply-demand balance with strong margin opportunities. Longer term, our disciplined investments in low-carbon ammonia production provide a robust growth platform for the company. As a result, we expect to generate strong free cash flow in the years ahead, enabling us to create substantial value for long-term shareholders.

With that, operator, we will now open the call to your questions.

Operator (participant)

We will now begin the question-and-answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If you would like to withdraw a question, please press star, then two. At this time, we will take our first question, which will come from Joel Jackson with BMO Capital Markets. Please go ahead.

Joel Jackson (Managing Director of Equity Research)

Hi, good morning.

Tony Will (President and CEO)

Morning, Joel.

Joel Jackson (Managing Director of Equity Research)

So you know, a big question is, you know, whether European production is the marginal cost or not. Seems like in the last couple of years, we've gone through a lot of geopolitical issues and higher gas prices and lower gas prices. Sometimes it is, sometimes it isn't. Do you think that the European tons are marginal production? Can you elaborate on that? Is it seasonal? Anything else you can provide would be great. Thanks.

Tony Will (President and CEO)

Yeah, I mean, I, I think, as, as you point out, Joel, it shifts from sort of high third quartile to the high fourth quartile and, and back and forth. Kind of depends upon weather patterns and what's going on with storage and, and honestly, costs in other places... But I, I think if you look at, as Bert mentioned earlier, probably somewhere in the neighborhood of 4-5 million tons of ammonia production that has come out relative to where they were operating just, you know, 5 years ago, it's pretty evident that it's a challenged environment to operate there. But to your point, there are, there are times where Asia is, you know, equally challenged, or other parts of the world, whether it's because of export controls or, as Bert said, government-enforced gas curtailments.

I think Nigeria had some of that earlier this year and Egypt as well. So it is a situation that's dynamic and in flux, but the one thing we can definitely say is the U.S. is firmly at the low end of the supply curve, and you know, we have consistent access to gas. So we're really happy with our network and where our plants are.

Bert Frost (EVP of Sales, Market Development, and Supply Chain)

Yeah, Joe, when you look at the gas comparisons, whether it's NBP, TTF, JKM being Europe and Asia, but also factoring in the coal costs and then equating that back to an MMBtu value, you do have just a separation. But then, thinking about the age of the plants and the efficiency of the plants, that's when you call into question some of the European or Eastern European or FSU locations that are a combination of high cost and inefficient, and that's what how we're able to move some of those and call that the marginal ton. And you're seeing that reflected in the level of imports and the inability to operate in even the current environment of $15-$16 gas against ours and others in the world of $2-$3.

I think you're gonna see that dynamic, and it is reflected in the forward gas curve, of how these plants will operate and when they'll operate.

Joel Jackson (Managing Director of Equity Research)

I got a follow-up? I forget.

Bert Frost (EVP of Sales, Market Development, and Supply Chain)

Go for it.

Joel Jackson (Managing Director of Equity Research)

Okay, I forgot. Okay, just really quickly, I read some of the filings. It's probably a sensitive topic on the ammonium nitrate dispute you're having with Orica and the Nelson Brothers. I'm sure it's a sensitive topic there, but anything you can talk about as you're thinking about to plan, you know, your ammonium nitrate volumes and your margins versus the past, how should we think about that going forward for next year, considering what's going on in that disagreement?

Tony Will (President and CEO)

Yeah, our, our expectation is that we continue to run our ammonium nitrate capacity at capacity. In the U.S., our, our AN is really centered around our Yazoo City, Mississippi, facility. And in the U.K., you know, we-- although we don't do ammonia production over there anymore, we're importing ammonia and then upgrading it to, to solid, ammonium nitrate. So our expectation is our volumes are gonna be the same going forward, and, and we're, largely constructive on, you know, on, margins, given the forward gas curve and our opportunity to bring ammonia into Billingham and, and get a good upgrade margin on it.

Overall, our AN segment, you know, we're real pleased with, and I can't really comment on the topic that you referenced earlier because it's, you know, a matter that's under dispute at the moment.

Joel Jackson (Managing Director of Equity Research)

Thank you.

Operator (participant)

Our next question will come from Steven Byrne with Bank of America. Please go ahead.

Steve Byrne (Managing Director of Chemicals Equity Research)

Yes, thank you. How do you think your Donaldsonville operations might change post the connection with Waggaman, given you can't—you could move those ammonia tons up into the Corn Belt from Waggaman and then maybe upgrade more at Donaldsonville? Is that logical? And maybe to that topic, your third quarter volumes were more ammonia than urea than we expected, even though, you know, pricing was so much better in urea. Was that just summer fill volumes were really robust in ammonia? Any comments on that?

Tony Will (President and CEO)

Yeah. So, Steve, let me start off with the question about Waggaman. The Waggaman facility has existing supply agreements that are in place, and those volumes are largely spoken for. We're very pleased with, you know, the recipient customers for that facility, and so we're, you know, we're not looking to make any changes in that regard. And our belief is we can get consistently more out of that plant than what historically it's been able to produce. So we're excited about that plant added to the network.

Relative to Donaldsonville upgrades, we tend to run the upgrades at basically full capacity, at least the urea plants, and then we swing back and forth between how much of that's granulated versus how much UAN we make, based on relative margin opportunities between the various products. So there's not really an opportunity to dramatically increase the amount of ammonia at Donaldsonville that's upgraded just because we're running upgrade plants full on. Relative to the product mix in the third quarter, we did have an upset at our Medicine Hat, Alberta urea plant that took some production offline, and we had a turnaround in another facility.

So, you know, the result of that was just through both planned and unplanned maintenance, lower ability to make granular in the quarter, and therefore, we ended up with a net longer ammonia position. Bert and his team were really focused on trying to manage kind of inventory levels and took appropriate steps to make sure we could keep the plants running full rates.

Bert Frost (EVP of Sales, Market Development, and Supply Chain)

Yeah, that's exactly what happened. The only thing I would add is we did export additional volumes out of Donaldsonville as we balanced the system in North America. As Tony said, we had the Medicine Hat issue, so we're moving some of that product down. And then we had some turnaround work at one of our Oklahoma plants, and then the balance then was moved to Donaldsonville, and that ended up being exports at a lower value, but that's what the values were at the time.

Tony Will (President and CEO)

The good news is, you know, we're back up out of the maintenance activities, and we're running full on in terms of our urea production network again. So we're looking forward to the fourth quarter and the first half of next year.

Steve Byrne (Managing Director of Chemicals Equity Research)

That's very helpful. And wanted to just pick your brain a little bit about the outlook for blue ammonia, Tony. You know, you have these partnership discussions with several players. It's, you know, it's not just Mitsui, it's Lotte, it's JERA, it's POSCO. And when you think about this down the road, are these likely to result in one greenfield plant, or could this be multiple plants? And do you have any kind of a conflict in that? Because some might prefer an autothermal reformer, whereas you were also considering steam reforming. Does that play into this at all?

Tony Will (President and CEO)

Yeah, Steve, without going down the rabbit hole of technology too much here, as Chris indicated in his comments, we're finishing up the FEED study on the conventional, you know, steam methane reforming plant. Basically, a carbon copy of Donaldsonville number 6, which I believe is the highest operating rate ammonia plant in the world. And the fact that they're so close together allow us to not only basically make a carbon copy of it and train operators just down the road, but also share common spare parts. And we think that the opportunity to get fantastic asset utilization out of a plant like that right from the beginning is, you know, is quite high. But as you mentioned, there is different appetites in different jurisdictions for carbon intensity.

And ultimately, that's it, you know, the notion of blue ammonia or green, green ammonia is convenient shorthand. Ultimately, where we're gonna have to get to is a measure of carbon intensity. And the possibility for Autothermal Reforming does provide at least, at first blush, a lower carbon intensity than Steam Methane Reforming does. So we are engaged in a FEED study also on a integrated standalone Autothermal Reforming technology plant. That cost estimates from those probably won't be in for about another 12 months. We're also engaged in a study on doing Flue Gas Capture. So that theoretically, the alternative to get to a very, very low carbon intensity number could be autothermal. It could be a conventional Steam Methane Reformer with Flue Gas Capture technology added to it.

So we've got, you know, a number of different potential pathways going forward. And, you know, we're excited about the developing appetite and new demand applications for clean ammonia. As I mentioned in my earlier comment, we're also very excited about the fact that even in traditional applications, we think the world is gonna be nutrient short going forward. So, I think the demand is clearly out there. We are, I, you know, as I said, the best operators of these kind of assets in the world. And given North America's access to plentiful, low-cost natural gas and a very favorable framework around rule of law, as well as carbon capture and sequestration, this is increasingly recognized as the place to be.

So I think all of that sets up very well for us in terms of evaluating these different types of opportunities. And we, you know, are, as you said, engaged in conversations with numerous parties. They all look to us because we are the global leader in this space, and we think we can navigate any kind of conflicts, and manage that situation through a variety of ways, including the fact that we're gonna have multiple sources of decarbonized ammonia, from a production standpoint. Not only potentially if we build a new plant at our Blue Plant complex, but also at Donaldsonville. Waggaman, once we add CCS there, our Yazoo City, Mississippi, facility, once we add CCS there. And so we'll have multiple points of production, multiple ways of navigating potential conflicts should they arise.

Honestly, we're just really excited about the opportunities ahead of us.

Steve Byrne (Managing Director of Chemicals Equity Research)

Thank you.

Operator (participant)

Our next question will come from Richard Garchitorena with Wells Fargo. Please go ahead.

Richard Garchitorena (Senior Equity Analyst of Agriculture and Fertilizers)

Great, thank you. Just, with the Waggaman acquisition closing December first, I was wondering if you could give us an update in terms of your thoughts on the ramp-up once you take ownership. I believe, you know, the plant was running?

... probably sub 90% operating rates under IPL. So, you know, how long do you think it can take you to get those operations up to the rest of your plants? And, you know, related to that, any synergies that you think you, you've sort of unveiled, you know, given the recent work that you've done since you first announced the acquisition, would be great.

Tony Will (President and CEO)

Yeah, I mean, I think the biggest synergy from our perspective is the fact that we think we can consistently run that plant at higher rates and get incremental tons that come out of it into the network. And so, you know, that's where, basically, all those incremental tons are purely at variable cost, and therefore, at very high margins. And that's, you know, first and foremost, the most important aspect of this. I think it also gives us some flexibility as we think about scheduling turnarounds and ship from, ship to locations. It's a plant that is on the pipeline, and so, you know, it's got access into the terminaling system in the Midwest. And it just gives Bert some additional flexibility in terms of how he thinks about minimizing aggregate logistics and transportation costs.

So that's really kind of how we're thinking about the plant. But first and foremost, the biggest value is, we're, you know, buying it, I think, at an attractive value for us. I think it's attractive for IPL as well, and we think we can get more tons of production out of it, that should generate some very nice incremental margin for us.

Richard Garchitorena (Senior Equity Analyst of Agriculture and Fertilizers)

Okay. And then just as a follow-up, your CapEx guide this year, $450 million-$500 million. Is there anything in there for prep work for Waggaman? And how should we think about 2024 CapEx levels, given that as well as the progress on the Donaldsonville TCF? Thank you.

Tony Will (President and CEO)

Yeah, so all of that is baked in there. The finishing up of the green ammonia plant this year, you know, is part of this year's CapEx. Continuing progress and basically getting, if not to mechanical completion, darn close to it on our dehydration compression project next year at Donaldsonville, plus what we're expecting to do at Waggaman in the way of turnaround and process improvement is all embedded in there, as well as some of the ongoing improvement things we've got on our end from an IT and a systems perspective. So, including the integration of Waggaman into our systems and our network. So all of that is rolled into the number that Chris gave you.

We are very consistently, year in and year out, you know, in the range of $400, $450 to $500 million. And I think, you know, this is one area that Ashraf has brought great discipline to, from an operations standpoint of being able to get world-class on-stream factor and asset utilization without, you know, having to gold plate stuff. But we keep, we keep all the processes incredibly safe and, and high running and, and our people safe as well. So, I would say this is an area where we really excel.

Chris Bohn (SVP and CFO)

Yeah, Richard, if I could do-- this is Chris. If I could just add on to that. So Q3 is generally our-- historically been our higher maintenance and turnaround period, and after that period, you know, we actually reduced what the range was from 500 to 550, down to 450 to 500. And we did that because once we get through this heavier turnaround period, we have better line of sight on what the spending was for those particular turnarounds, but also what we can accomplish project-wise until the end of the year. I think, as Tony was speaking about the Waggaman site, because we don't necessarily have that site yet, and we will only have it for 12 months, pretty much looking at what will be built in into the 2024 CapEx number as we go forward.

Richard Garchitorena (Senior Equity Analyst of Agriculture and Fertilizers)

Thank you.

Operator (participant)

Our next question will come from Josh Spector with UBS. Please go ahead.

Josh Spector (Director of Chemicals Equity Research)

Yeah, hi. Thanks for taking my question. First, I wanted to ask near term. You know, Bert, we've seen some decline in urea prices over the last month, despite kind of entering the stronger North America season. I guess, one, what do you attribute that to? And two, like, what's your view when you look over the coming months here?

Tony Will (President and CEO)

Yeah, so urea has been on an interesting ride. As I mentioned in the prepared remarks, we entered Q3 at $285-$295, and then accelerated through the quarter, based on some global issues, being India's demand and China's restrictions, to over $400, and then has since settled out, and has probably dropped back down into the—for NOLA, $355-$370 range today. And, when you look across where the demand will come from, we still see significant demand out of India and from Brazil, South America, and then we'll transition to the northern hemisphere, in the new year, and a lot of demand to be fulfilled in North America and Europe. So demand is solid. We've seen, on the supply side, more restrictions.

The gas issues that we mentioned in Trinidad and Europe affect urea and as well as the upgraded other upgraded products, and there are continued restrictions out of China. So the market, we believe, is tight, and that supply-demand balance probably has moved more towards demand. We're in an okay range. We expect pricing to improve as we go into Q1 and Q2, as well as demand to accelerate. We're looking at planted acres for the 2024 crop, below 2023, but not significantly so. More in the 90-91 million acres, and then solid wheat, but good performance out of South America for second crop. So demand is good globally, and, you know, pricing is like urea is, it's volatile. Volatile, there, there's the volatility with gas, but I think we're in a good spot.

Josh Spector (Director of Chemicals Equity Research)

Thanks. No, I appreciate that. And, and just longer term, Tony, I wanted to ask just more about the timing here for the, the JV with Mitsui. So you have the FEED study completing shortly. So from our prior conversations, talked about the milestone in Japan with METI, talking about some subsidy support or how that evolves. Is that timing still early to mid next year? And does that mean you make a decision to invest later next year, mid to late next year? Or is there any reason that timeline would be off from how you're thinking about it?

Tony Will (President and CEO)

Yeah, I think, I think the situation with METI and JERA's decision-making might be a little fluid. It feels a little bit like many governments, one step forward, two steps back. So it's hard to know with precision exactly when they're gonna come to a conclusion on their evaluation and putting in place the subsidy schemes that are ultimately gonna drive that marketplace. But we remain, you know, strong believers in the fact that it's ultimately gonna happen. It's gonna be an important tool for ongoing decarbonization, both in Japan and in Korea. And if anything, our, you know, our conversations with the potential end users are becoming more firm and kind of more compelling as opposed to softening based on what's going on with the government.

So, you know, we're very optimistic about how that demand profile develops. It's more a question of when the governments kind of finalize things and people are able to step forward. You know, we are continuing to have, as Chris mentioned, the FEED study is one important input into the process in making an investment decision. We're continuing to have ongoing, very constructive dialogues with our potential, you know, partner/partners in that project. And, you know, we're hopeful to be able to be a little more definitive about things. I'm gonna stop short of saying making a final decision, but being more definitive about things on our fourth quarter full year call in February. So I, you know, I would just say, Josh, stay tuned. That's probably a good time horizon for us to really update where we're at.

Josh Spector (Director of Chemicals Equity Research)

Okay. Thank you.

Operator (participant)

Our next question will come from Adam Samuelson with Goldman Sachs. Please go ahead.

Adam Samuelson (VP of Equity Research, Agribusiness, and Packaging)

Yes, thank you. Good morning, everyone.

Tony Will (President and CEO)

Morning, Adam.

Adam Samuelson (VP of Equity Research, Agribusiness, and Packaging)

Morning. So Tony, I mean, we talked a little bit about the, kind of some of the supply disruptions in Ammonia in the near term, which is certainly helping kind of the overall nitrogen balance. There's also a lot of Blue Ammonia and new kind of project activity happening in this market, maybe with a little bit less diligence in terms of kind of the pre-engineering or customer offtake agreements than you seem to be pursuing. But how do you look at that merchant Ammonia market over the next couple of years? Do you see any concerns that there might be some Blue Ammonia that comes to market before some of the end demand use really is in place yet? Or do you still feel comfortable that there's a sufficient kind of tightness in the nutrient on the fertilizer side to absorb that if needed?

Tony Will (President and CEO)

Yeah, Adam, so one of the things I mentioned in my prepared remarks, and certainly able to kind of provide more details of this offline, if, you know, as it makes sense, is that if you look globally at the number of projects that are under construction right now, you know, and it basically takes four years before, you know, when you announce and actually break ground to have something that is in production. So you have a very good visibility in terms of how much capacity is coming online in the next four years. The amount of new net capacity coming online does not keep up with a 1%-1.5% demand growth in traditional fertilizer applications.

And so we think that just based on the fundamentals in the marketplace, we are going to experience an S&D tightening, and that's before you layer in some of the supply disruptions Bert talked about with Trinidad being down 1 million tons of production, Europe being down 4-5 million tons of production, other, you know, other disruptions elsewhere in the world. So we are very constructive on the S&D balance globally over the next 4 years. I think it remains to be seen how many new blue plants that are actually announced get built. You know, capital cost continues to go up, and it's easy to announce one. It's a lot harder to actually get financial close and build one and get it running. So, you know, I think as we look out, the next 4 years are very promising.

We, you know, we think based on the partnerships that we have lined up, we're in a really good position, having secured end user demand to go forward with these things, if we can make the math work. And others, you know, it's hard for me to speculate on where they are. You know, we've seen a couple of projects that have been announced that people have walked away from. So, I would just say, again, more to come. Stay tuned. At the end of the day, I think some level of discipline and rationality is gonna prevail here because it is a, you know, a big expense to build one of these things. And if you're an end user, do you wanna line up with someone that's got single facility risk?

Or do you wanna line up with someone that's got multiple sources of production for a decarbonized product and can guarantee supply even through turnaround periods and so forth? So we feel really good about our position in this marketplace.

Bert Frost (EVP of Sales, Market Development, and Supply Chain)

Just some additional comments. This is Bert, Adam. When you look at ammonia, and we mentioned in the prepared remarks about lack of gas in Trinidad and the difficulties in Europe, but yeah, if you factor in, Brazil's not operating, and the Togliatti pipeline coming out of Russia through Ukraine is not operating, you take an additional several million tons out. So if we calculate 4-5 out of Europe, 1 out of Trinidad, and Brazil and Russia could be up to 3 or 4, you've got a substantial amount of movable ammonia out of the market. And that's why I think you saw the reflection in the market. When it hit the lows, it quickly bounced up back into the $500-$600 range for global pricing, which is a very attractive range for us.

Now, regarding blue, and let's just call it low carbon products, we'll be coming on in 2025 with our Donaldsonville low carbon ammonia and products. And we're seeing a substantial interest, whether that be for industrial applications or agricultural, and that's globally. So I'm very excited about the progress and the position we will be in, in the short, medium, and long term with these products and the receptivity in the marketplace.

Adam Samuelson (VP of Equity Research, Agribusiness, and Packaging)

All right. There's a lot of helpful color there. I appreciate it. I'll, I'll pass it on.

Operator (participant)

Our next question will come from Andrew Wong with RBC Capital Markets. Please go ahead.

Andrew Wong (Equity Research Analyst of Fertilizers and Uranium)

Hey, good morning. So just looking at the balance sheet, there's a pretty large cash balance, even after taking into account Waggaman, and you're generating some pretty significant cash flow, which, you know, I think can pay for most of these projects that you're considering over the next several years. Your shares are also trading at an attractive valuation. I think you would agree with that. So are there any plans to maybe just do a larger share buyback?

Tony Will (President and CEO)

So let me give a just a little bit of color, you know, Andrew, on this one, which is going back to the beginning of last year. We've purchased, I think, something close to 20 million shares back, which is about 10% of our outstanding float. During that same period of time, we have invested in some new capabilities, both in terms of green production and, and, dehydration, compression, blue production, and built cash on the balance sheet. So, you know, we, we have been able to do sort of all of the above.

We do have an open $3 billion share repurchase authorization, and the approach that we have opted to go for is to be sort of disproportionately opportunistic when we see attractive valuations and as opposed to just a consistent and steady return of capital. So, you know, you will continue to see us jump in, you know, deeper during those periods of time, and then there may be, you know, weeks or months where we're kinda sitting on the sidelines. But the whole idea is to make sure that we disproportionately reward our long-term shareholders by taking out as many shares at the lowest values we can. And I think it actually is a, you know, good strategy.

I'm not really that worried one quarter to the next if we flex up or flex down a little bit. And as Chris mentioned, we've, you know, we expect to close the Waggaman transaction here within a month, and so, you know, $1.25 billion is already spoken for in that regard.

Chris Bohn (SVP and CFO)

Yeah, this is Chris. I would just add to that, you know, as Tony mentioned, really just being opportunistic, but patient. So there will be periods where we have higher cash balances on the balance sheet. I think if you look at the overall macro uncertainty, whether that be geopolitical in Ukraine or the Middle East, or even, you know, here at home, from whether there'll be funding approved by Congress in the next couple weeks, and then even the higher interest rates market and having companies deal with that through that time, that we're probably gonna see periods where that macro uncertainty goes counter to the fundamentals of the company that, you know, Bert and Tony have talked about today.

As a result of that, that's, as Tony said, we'll go in deeper in more shares during that particular time, really rewarding the long-term shareholders for their patience.

Tony Will (President and CEO)

I would also say that we, you know, we were blocked out for-

Chris Bohn (SVP and CFO)

Q1.

Tony Will (President and CEO)

Yeah, Q1 because we were in kind of the final throes of negotiation with Incitec on the Waggaman acquisition, and so we couldn't be in the market buying our shares back. So, you know, that kind of thing may happen here or there, but we, you know, we are focused on continuing to drive the underlying fundamentals of what underpins that page 16 that I referenced in our materials, which is selectively adding capacity where it makes sense, and otherwise, returning capital and buying our share count down.

Andrew Wong (Equity Research Analyst of Fertilizers and Uranium)

... That's great. Makes a lot of sense. And maybe just, maybe I'll throw a question over to Bert. Just going back to the question on Europe as a marginal cost producer. You know, globally, we tend to look at urea a lot, but Europe is more of an ammonia and nitrates kind of market. So should we be maybe more product specific when we talk about marginal cost? Like, if you look at it today, you know, ammonia prices aren't that far off from European marginal costs, and maybe just looking at it, urea more specific, isn't the right way to look at it. Like, how, how do you think about that? Thanks.

Bert Frost (EVP of Sales, Market Development, and Supply Chain)

Yes and no. I think, regarding your question, urea is a placeholder globally that is the most traded product at 190 million tons of consumption, 56 million tons moved globally on a ship, and so it becomes the placeholder that is basically used on every continent. So it's a good measure of nitrogen values. You're correct that Europe is more of a nitrogen or a ammonium nitrate, calcium ammonium nitrate consumer, or UAN, but they're still a large importer of urea, I think 4-5 million tons per year. So they do participate by a lot of North African and Nigerian tons, and some Middle Eastern tons make it up there.

That's why I talked about when the Northern Hemisphere moves into its high demand period here, starting in January, they become a pretty good importer as well. So yes, you need to look at it that way, but ammonium nitrate is not really consumed that much for agriculture outside of Europe and maybe Russia and Ukraine as well, maybe 1 million tons in Brazil. And so that's falling in North America, so we don't really talk about it outside of the explosives sector in North America. So we do look at all those factors, but again, urea is more of the easy placeholder for everyone to understand.

Tony Will (President and CEO)

But I think the other important thing, Andrew, that I wanna just highlight here is, and you mentioned it, if you think about from a natural gas cost differential, the difference between the cost of production in the U.S. versus the cost of production in Europe right now, and even on the forward curve, is about a $400-$500 spread. So whether we're talking about ammonia or whether we're talking about urea or whether we're talking about UAN, North American production network has a huge economic advantage. And you know, that's one of the reasons we're so happy where our plants are located.

Andrew Wong (Equity Research Analyst of Fertilizers and Uranium)

That's great. Thank you very much.

Operator (participant)

Our next question will come from Ben Theurer with Barclays. Please go ahead.

Ben Theurer (Managing Director and Head of LatAm Equity Research)

Yeah, good morning, and thank you very much for taking my question. I wanted to go back to some of the demand expectations you've talked about, and particularly the gap of imports or what you expect, at least for Brazil and India. We've seen a lot of, like, peers in the industry talking about just the softness in Brazil and the more spontaneous buying as you need, kind of, purchases. What's your level of confidence as it relates to this demand for the imports and what you flagged in the 3-4 million ton range, just in the fourth quarter to basically wrap this up? And then obviously similar to India, because it's also a very sizable number. So just about the level of confidence you're having for this demand.

Bert Frost (EVP of Sales, Market Development, and Supply Chain)

Yes, when you look at Brazil, the substantial growth in Brazilian agriculture is amazing over the last 20 years, going from, you know, an exporter of soybeans and corn to a major number one position for soybeans and corn, and a subsequent or a parallel increase in fertilizer demand, going from 2000, let's say, 23 years ago, 16 million tons, to today, 44 million tons. Well, what does it take to bring that in when you're only producing a little bit of phosphate? That means all the potash, most of the nitrogen, and almost all the phosphate as well, needs to be imported. What does that look like when you have just a few ports, Paranaguá and Santos and some of the others, that are congested, and so you have lineups that, and it's expensive to have demurrage.

So when you calculate the movements of products, why we have confidence is the acres will be planted, they will be fertilized. The profitability for, especially a farmer in Mato Grosso, for second crop corn, even factoring in 100 bushels per acre, is positive, and that's basically a cover crop for them. So that is, at minimum, an application of urea. So when you look at our expectation of 7.5 million tons, more or less, for an annualized basis of urea for Brazil and where they are today, that import will last through February. So we've got November, December, January, February, four months at around 700,000 tons, more or less, per month, and the demand is there. So we expect to see that, and it's pretty consistent over the last several years.

Again, consistent with their growth and production of feed grains and oilseeds. In India, we've seen a different dynamic with the construction of the plants that have taken place with the Modi government, you know, Build and Buy India program, that that production has gone up to close to 30 million tons of the 36-37 million tons of demand. So our expectation is more or less 7 million tons. That's off of the 9-10 million tons of imports of the previous few years, but still sizable. That puts India-- well, now it put Brazil as the number one importing country, India number two, and United States or North America region number three. And again, those numbers are trending exactly that way.

Ben Theurer (Managing Director and Head of LatAm Equity Research)

Okay, perfect. And then, just coming back, quickly on, on the capital allocation side. Just as we think about it, you talked about the, the buybacks to be opportunistic, obviously, and, and accelerating here when, when prices are, are lower, and, and dividends to be sustained. Now, if we think about the projects that you, that you have pending, and you have obviously the Waggaman, cost next year, and then roughly $450 million-$500 million in CapEx, but it still leaves a very substantial amount for excess cash. So if it's not buybacks because you don't think the price is low enough to aggregate the value, how do you think about other inorganic growth opportunities similar to Waggaman? Are there any things you're looking at?

Do you, do you feel there is need of doing something? Or with the projects you have on decarbonization and clean energy, plenty of CapEx to be spent on anyway?

Tony Will (President and CEO)

Well, you know, we don't really think about it in terms of trying to look for a home on how to spend capital. We, you know, we, we have an open $3 billion share repurchase authorization that runs through the end of 2025, and our expectation is that we are going to complete that program. And historically, we, we tend to complete those ahead of schedule in terms of when they expire. So I'm not worried about the pacing or the timing of getting out there and repurchasing that volume of shares. We're just trying to get the most bang for our buck when we go do it. That, you know, we, we do have an awful lot of interesting potential growth opportunities that we're evaluating, but we evaluate them very rigorously and, and, you know, in a disciplined approach.

And we, you know, we do keep our eye on inorganic growth as a possibility. And we were very pleased with the Waggaman acquisition. We think that'll, you know, create a lot of value for us, and we're excited about it. But those things tend to be fairly sporadic, as opposed to consistently available. They also tend to be fairly large bites, when they do come out, just because replacement cost is so high for existing assets. So, you know, we're evaluating all of those things, but I'm not worried about our ability to buy the $3 billion of share repo back.

Ben Theurer (Managing Director and Head of LatAm Equity Research)

Okay, thank you.

Operator (participant)

Again, if you have a question, please press star then one. Our next question will come from Vincent Andrews with Morgan Stanley. Please go ahead.

Vincent Andrews (Managing Director of Equity Research and Chemicals)

Thanks. Hopefully, you didn't get to this. I had to hop off for a moment. But, Bert, could you talk a little bit about where you think U.S. dealer inventories are going to end this fall season? Or are customers behaving a little bit more normal now, or are they still looking to have empty bins, or, where is sentiment?

Bert Frost (EVP of Sales, Market Development, and Supply Chain)

I think sentiment is positive. We've seen this actually on a global basis. I can take it back to North America, but the increases in pull from places like Turkey and importing countries has been remarkable compared to 2022, and North America is similar. You're right, the buying behavior from 2022 was basically a risk off, prices were falling, and inventory built with the producer until prices came to an attractive level in the spring of 2023. We're seeing the opposite effect for this fertilizer year, which began in July, of healthy demand, healthy pull for our fill programs and fall application of ammonia program. We actually think inventories trending into 2024 fertilizer year were low, based on acreage, consumption, and then just actual demand and our channel checks.

We think they, they still remain lower than normal, and we think a lot of buying is still to take place. Even with the lower import levels, the November lineup for urea is still fairly weak, as is December, so I think that will have to be made up in Q1 and Q2. We're, that's why I think you can view from our comments, we're constructively positive of what will take place in North America relative to demand and pricing. I think behavior is back to normal.

Vincent Andrews (Managing Director of Equity Research and Chemicals)

I'll leave it there. Thanks, guys.

Operator (participant)

Ladies and gentlemen, this will conclude our question and answer session. I'd like to turn the call back over to Martin Jarosick for any closing remarks.

Martin Jarosick (VP, Treasury, and Investor Relations)

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

Operator (participant)

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.