CF Industries Holdings Q3 2010 Earnings Call Transcript

CF Industries Holdings (CF)

Q3 2010 Earnings Call

November 05, 2010 10:00 am ET

Executives

Richard Hoker - Principal Accounting Officer, Vice President and Controller

Terrell Huch - Senior Director of Investor Relations & Corporate Communications

Bert Frost - Vice President of Sales and Market Development

Stephen Wilson - Chairman, Chief Executive Officer and President

Analysts

Horst Hueniken - Stifel, Nicolaus & Co., Inc.

Don Carson - Merrill Lynch

Charles Neivert - Dahlman Rose & Company, LLC

Mark Gulley - Soleil Securities Group, Inc.

Vincent Andrews - Morgan Stanley

Elaine Yip - Crédit Suisse AG

Jeffrey Zekauskas - JP Morgan Chase & Co

Mark Connelly - Credit Agricole Securities (USA) Inc.

David Silver - BofA Merrill Lynch

Lindsay Mann - Goldman Sachs Group Inc.

Michael Picken - CRC

Edlain Rodriguez - Gleacher & Company, Inc.

Presentation

Operator

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Good day, ladies and gentlemen, and welcome to the CF Industries Third Quarter 2010 Results Conference Call. My name is Regina, and I will be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host for today, Mr. Terry Huch, Senior Director of Investor Relations. Mr. Huch, you may begin.

Terrell Huch

Thanks, Regina. Good morning, everyone, and thanks for joining us in this conference call for CF Industries Holdings, Inc. I'm Terry Huch, Senior Director of Investor Relations and Corporate Communications. And with me are Steve Wilson, our Chairman and Chief Executive Officer; Rich Hoker, our Vice President and Corporate Controller; and Bert Frost, our Vice President of Sales and Marketing.

CF Industries Holdings, Inc. reported its third quarter 2010 results yesterday afternoon, as did Terra Nitrogen Company LP. On this call, we'll review the CF Industries results in detail and discuss our outlook for industry and company performance in 2010. At the end of the call, we'll host a question-and-answer session.

As you review the news releases posted on the Investor Relations section of our website at cfindustries.com and as you listen to this conference call, please recognize that they contain forward-looking statements as defined by Federal Securities laws. All statements in the release and on this call other than those relating to historical information or current conditions are considered forward-looking statements.

These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control and which could cause actual results to differ materially from such statements. These risks and uncertainties include those spelled out in the Safe Harbor statement included in yesterday's news release. Consider all forward-looking statements in light of those and other risks and uncertainties, and do not place undue reliance on any forward-looking statements. Now let me introduce Steve Wilson, our Chairman and CEO.

Stephen Wilson

Thanks, Terry, and thank you, all, for joining us this morning. For the third quarter of 2010, CF Industries reported net income of $48 million or $0.67 per diluted share, compared to earnings of about $39 million or $0.78 per share in the same period last year.

Our results benefited from our very timely acquisition of Terra Industries. And certainly, we're looking forward to showing how the integrated company can perform when we have the full benefits of the increases in product prices that unfolded throughout the third quarter and have continued into the fourth quarter, as well as the reductions we've seen in natural gas costs.

Our operating earnings were up 52% year-over-year to $137 million. Operating-related cash flow was almost $600 million, which allowed us to repay $350 million of debt during the third quarter and still exit September with $650 million of cash on the balance sheet.

We're in a great period for fertilizer manufacturers, especially for those located in North America. Industry conditions improved dramatically during the third quarter, driven by the interplay between significantly higher agricultural commodity prices and constrained availability of fertilizer.

Higher crop prices were prompted first by an intense drought in the former Soviet Union, which led to Russian grain export controls and tightened world grain trade, especially for wheat. This was followed by significantly lower yield prospects for this year's U.S. corn crop, which pushed domestic crop prices to two-year highs.

The dramatically higher crop prices, coupled with low fertilizer inventories worldwide, stimulated fertilizer product purchasing, which tightened fertilizer balances. At the same time, world production was limited by higher-than-expected plant outages. All of these factors combined to drive fertilizer prices higher during the quarter.

Domestic urea prices followed global markets upward. In the Midwest, ammonia market factors specific to North America added upward pressure on pricing, including limited supply availability after the exceptional spring application season, strong demand for fall application and pipeline maintenance affecting the Western Corn Belt.

The UAN market also tightened as nitrates were on high demand in Europe, reducing UAN production and available export supplies from the Black Sea region. U.S. Gulf UAN prices yielded lower net backs to European producers that were available to them in other markets, resulting in low U.S. imports and extremely low U.S. inventories.

Phosphate markets also strengthened considerably due to surging international demand. Higher crop prices stimulated purchasing to restock and to meet higher projected farm demand. Export commitments to India continued to underpin the market, and spot purchasing remained strong through the summer.

U.S. demand was particularly strong, which drove NOLA barge prices above Tampa export prices. This set the tone for world market and even resulted in attracting some imports into the U.S. Additional market strength came from reports of delays of Saudi Arabia's modern project and challenges in raw material supply.

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