Terra Industries Inc. Q2 2009 Earnings Call Transcript

Terra Industries Inc. (TRA)

Q2 2009 Earnings Call Transcript

July 23, 2009 3:00 pm ET

Executives

Joe Ewing – VP, IR and Human Resources

Mike Bennett – President and CEO

Dan Greenwell – SVP and CFO

Analysts

Mark Connelly – Sterne Agee

Steve Byrne – Merrill Lynch

Dave Silver – UBS

Charlie Rentschler – Wall Street Access

Daniel Rizzo – Sidoti & Company

Lisa Herman [ph]

Charlie Intrim [ph] – Stack Capital [ph]

Sam Eponia [ph]

Alex Heidbreder – Millennium Management

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2009 Terra Industries earnings conference call. My name is Latrice. I will be your coordinator for today’s conference. At this time, all participants will be in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator instructions) At this time, I would like to turn the call over to your host for today’s conference, Mr. Joe Ewing, Vice President, Investor Relations. Please proceed, sir.

Joe Ewing

Hey, thank you, Latrice. And welcome to everyone to Terra’s second quarter conference call. This morning we issued a news release, announcing that for the 2009 second quarter, Terra achieved net income of $80.5 million or $0.81 per diluted share.

And at the end of that news release is our Safe Harbor statement. And it describes the limitations of forward-looking statements and any other items that are not historical facts, included in the news release. Please note that those same limitations apply to any forward-looking statements that we may make during this call. With me today are Mike Bennett, Terra’s President and CEO, and Dan Greenwell, Senior Vice President and CFO.

Regarding our recent and upcoming Investor Relations activities since our last earnings call, we participated in three equity conferences and we held a sell-side analyst day in Salsa [ph]. Coming up later this quarter, we have Midwest road show, a marketing day in Toronto, a West Coast road show, and the Credit Suisse Chemical and Ag Science Conference in New York. And you can get more information about these events from our website or by calling us.

We also always as usual welcome any visitors if anyone listening today is interested in coming to tour our Port Neal, Iowa manufacturing facility and to also meet with our management, we’d be happy to have you come. If so, please call Kim Mathers or me to make those arrangements.

I’ll now turn the call over to Mike Bennett so that he can give us his perspective on the second quarter and on the outlook for Terra and the industry in upcoming months. Mike?

Mike Bennett

Thank you, Joe. Good afternoon, everyone. Thanks for joining us today. Our second quarter results clearly reflect the trends of the deferred fertilizer purchases and softening prices that were noted in the first quarter. The late planting season added the anxiety in the market and tended to reinforce these trends, though product actually moved well to the ground in June as later applications were completed.

Industrial demand remained somewhat weak during the quarter. Given significant reductions in the level of nitrogen imports over the past year, coupled with reduced domestic production rates, the surprisingly high estimated level of corn acres planted has in all likelihood reduced any inventories at the dealer and distributor level year-over-year.

We are pleased that Terra ended June with relatively low inventories, as we managed our production to reflect reduced purchases by customers. The real bright spot for Terra continue to be our Terra Environmental Technologies business, where volumes and gross margin were up 61% and 43% respectively through six months versus last year. We also note that natural gas feedstock cost dropped significantly, reflecting the sluggish economy that has impacted our industrial sales, as well as the prospect of supply -- increased supply of natural gas from unconventional sources.

While we expect agricultural nitrogen demand to normalize, industrial demand may improve more slowly than we had originally hoped. We idled the Donaldsonville ammonia plant on July 1st to keep our ammonia balances manageable. Recently, however, ammonia supplies in the US Gulf have tightened notably, and we plan to restart the plant in August to supply customer orders and to take advantage of improving Gulf ammonia prices.

As we indicated in our press release, limited but significant fill activity has taken place on UAN, and we are encouraged by recent forward market swaps concluded at higher price levels and initial fuel prices. While corn prices are significantly lower than year-ago prices, they remain relatively strong by historical measures and provide a strong margin opportunities for growers in this environment of lower input and fuel costs. Accordingly, we would expect to see strong fall applications if weather cooperates.

We are hopeful that Q3 nitrogen prices will begin to reflect an improving supply and demand balance and expect record natural gas supplies to keep a lid on our feedstock costs. We are excited to see the initial shipments of diesel emissions fluid through our established partners in that market, and look for further year-over-year gains for Terra Environmental Technologies, as we move through the second half. It is worth noting, I think, that the environmental represented just under 5% of our revenues in calendar 2008, but represented roughly 8.5% of our revenues in the first half of 2009.

At this time, I’m going to turn the call over to Dan Greenwell for more detail on our performance and our financial position. Dan?

Dan Greenwell

Thank you, Mike, and good afternoon to everyone. Mike has described the tough market conditions during the second quarter as well as the initial signals of demand improvement for nitrogen products and moderate natural gas prices as we move into the traditional off-season third quarter.

I’d like to make some initial comments on revenues, product selling prices and volumes, and the impact of natural gas on net income. Then I’ll follow with additional discussion on our operating results and the joint venture operations located in the United Kingdom and Trinidad, and then provide a summary of our strong liquidity position and working capital management, including our temporary idling of the Donaldsonville facility.

Second quarter net income available to common shareholders was $80.5 million or $0.81 per share compared to last year’s $202 million or $1.94 per share. As Mike noted, product volumes were constrained due to buyer reluctance in the second quarter. We expect more normalized fertilizer sales volumes in the third quarter and the remainder of the year.

Revenues of $454 million in the second quarter of 2009 decreased by $390 million compared to last year. Selling prices decreased revenues by about $182 million while lower volumes further reduced revenues by $208 million. Our environmental business that we refer to as Terra Environmental Technologies, or TET, represented approximately 8% of Terra’s revenues in the second quarter of 2009.

As you may know, almost all of these revenues are from stationary power plant market. As the diesel exhaust business begins to ramp up, we expect to see additional growth from this new market. In fact, we expect Terra to be the leading supplier to this dynamic environmental emission reduction business in North America. As Mike noted, our production rates were lower during much of the second quarter.

Additionally, we took an extended at Woodward during the second quarter. As a result, we incurred approximately $4.9 million of cost beyond normal turnaround activities. Despite the significant pressures on product volumes and sales prices, Terra was able to achieve a gross margin percentage of 34.6% for the second quarter of 2009 compared to 35.1% in the second quarter of 2008. We have a very strong focus on cost control, production management and inventory control. We believe this slight decline in gross margin percentage during a period of significant market turmoil demonstrates Terra’s ability to flex our operations to efficiently serve customer demand pattern variability.

Our volume of ammonia inventory at June 30, 2009 is approximately 20% higher as compared to the prior year. The curtailment of Donaldsonville in July should reduce the volume below last year's levels by the end of July. UAN inventory volume levels at June 30, 2009 were approximately 15% lower than June 2008 volumes. We anticipate restarting Donaldsonville facility during the third quarter as additional demand warrants the volumes at prices and margins that we believe are acceptable.

As a result of our working capital management activities, we believe our inventory positions are well placed and at the right levels to meet anticipated third quarter demand. Second quarter 2009 natural gas cost included derivative hedge cost of approximately $25 million or $0.91 per Mmbtu. Excluding these hedge positions, our gas cost was approximately $3.39 per Mmbtu during the second quarter of 2009. Our derivative position values that we carry into the third quarter of 2009 approximate $4.6 million and are primarily associated with firm orders that will ship during the third and fourth quarters.

The year-over-year decrease to second quarter selling, general and administrative expenses was $13.3 million, due primarily to long-term phantom share-based compensation and other short and long-term incentive plans as well as lower consulting expenses. The phantom share-based expense reduction results from the mark-to-market accounting treatment for the phantom share program. We targeted and achieved cost savings in all key areas. We continue to keep a sharp eye on SG&A savings opportunities.

As we noted in earlier conference calls, our growth activities associated with TET environmental markets represents approximately 8.5% of Terra’s selling, general and administrative expenses. We believe our investment in these market development activities are providing value creation opportunities in this vast-growing emission reductions market.

We have segregated cost associated with CS unsolicited exchange offer as a separate line item on the income statement. During the second quarter of 2009, Terra recorded $12.6 million of expense related to these known activities. Year-to-date amounts totaled $14.3 million and reflect current projected CS related activities.

Our United Kingdom nitrogen joint venture with Yara faced continued tough market conditions during the second quarter of 2009 and provided $1.9 million of earnings in the second quarter. United Kingdom customers remained on the sideline for the early part of the quarter. As a result, product sales volumes were down by approximately 36% during the second quarter as compared to last year.

To put the joint venture operations in perspective, the total nitrogen sales of the United Kingdom joint venture in the second quarter of 2009 were approximately $109 million compared to $279 million in the second quarter of 2008. Declining exchange rates lowered United Kingdom revenues by $28 million during the second quarter of 2009 as compared to the prior year.

United Kingdom gas prices continued to be moderate, and we anticipate increased sales volumes of fertilizer during the third quarter as compared to the second quarter of 2009. Despite the challenging quarter, the joint venture operation returned approximately $2.7 million of cash during the second quarter of 2009. We continue working closely with Yara to manage this business.

Our North American joint venture nitrogen operation consisting primarily of our Trinidad ammonia plant operated as a 50% joint venture with Coke Industries provided earnings of approximately $1.5 million during the second quarter of 2009. We received $12.4 million of cash from our North American joint venture operations in the second quarter of 2009. We view earnings associated with Terra’s United Kingdom and Trinidad joint venture arrangements as part of the overall return that our operations generate in the conduct of our global pure play nitrogen business.

Terra’s effective tax rate from continuing operations after non-controlling interest and the United Kingdom equity earnings was 32.2% for the 2009 second quarter compared to 35.3% in the second quarter of 2008. The year-to-date effective tax rate was 31.5% in the first half of 2009 compared to 35.9% in the first half of 2008. Our implementation of tax optimization strategies in the fourth quarter of 2008 provided the lower effective rates.

Net cash tax payments in the second quarter of 2009 were $30.8 million. We paid $86.6 million in the second quarter of 2008. In 2008, we were able to utilize NOLs to offset taxable income. We have fully utilized the prior NOLs and are a cash tax payer. We continue to estimate a 2009 effective annual tax rate between 31% to 33%. We expect to realize these effective rates for the next several years.

Our current share buyback program extends through June 2010 and we have 7.4 million shares available to purchase under the authorization. There are no buybacks during the second quarter of 2009. We may make further buybacks under the repurchase program and would do so at times and in quantities we believe will generate the best value to our shareholders.

Our cash balances totaled $1 billion at June 30, 2009. Our cash is invested in high quality money funds that remained highly liquid. As mentioned previously, none of our cash balances are invested in illiquid asset classes. Today Terra’s cash balances remain in excess of $1 billion. This cash is in excess of $10 per share.

We spent approximately $37 million for the Woodward UAN expansion, normal maintenance capital and turnarounds during the second quarter of 2009. In the remainder of 2009, we will undergo turnarounds at one half of the Verdigris plant in the third quarter and the Courtright urea nitric acid plant in the fourth quarter. The Woodward turnaround was completed in the second quarter.

We estimate our 2009 sustaining capital expenditures and turnaround costs will total $85 million to $90 million. We also estimate our Woodward UAN expansion will require $105 million to $110 million. In the aggregate, we estimate our 2009 capital and turnaround spending will be in the range of a $190 million to $200 million. Terra declared a $0.10 per common share dividend payable on September 10, 2009 to shareholders of record as of August 20, 2009.

We remain focused on a forward-looking and disciplined capital management approach that will ensure our ability to take advantage of opportunities in the future. We continue to be strongly committed to returning value to shareholders.

At this time, I’d like to turn the call back to Mike.

Mike Bennett

Okay. Thank you, Dan. And that concludes our prepared remarks today. Before we begin the question-and-answer period, really the purpose of today’s call is to discuss our second quarter performance and the outlook for the business. We really have nothing further to say today regarding the unsolicited exchange offer CS Industries other than what has already been released. Accordingly, we ask that you not pose questions regarding the unsolicited CS offer in today’s call.

So at this time, I would ask Latrice to give you instructions on the process proposing in questions in today’s session. Latrice?

Question-and-Answer Session

Operator

(Operator instructions) And our first question comes from the line of Mr. Mark Connelly with Sterne Agee. Please proceed.

Mark Connelly – Sterne Agee

Thank you. Just two things, Mike. Your press release talks a little bit about where you are in terms of hedging, but I wonder if you could talk about your attitude towards hedging and taking advantage of today’s low gas prices more generally. Has your emphasis shifted? And you’ve talked in the past about maybe doing something to try to lock in more broadly. I wonder if you could just give us a sense of where you are going.

Mike Bennett

Well, I’ll sure do my best. First of all, obviously, like many folks, we continue to watch this market very carefully. And we do think that there is a timeframe here under which it may well make sense to take advantage of some length in the gas market, certainly given the history we’ve seen over the past eight or nine years. At the current time, obviously prices are very attractive on relative terms and very favorable for the business.

And as we look forward, obviously gas and storage continues to build at a pretty steady rate. We have record inventories right now, something in the range of 400 to 500 Bcf greater than the five-year average. And without really much in the way of hot weather, I guess, in the medium term forecast, it would appear that the gas and storage will continue to build as we move into the fall. And so we are looking carefully at not only near-term like winter ’09, ’10 strips, but also, as we have indicated before, have investigated and continue to investigate opportunities to enter into medium-term arrangements that we fell may be more advantageous.

Again, this isn’t one of these all-in types of bets, but something that we think could be an opportunity to secure a smaller percentage of our gas needs for the medium-term. But at this point in time, we still think the market trends appear to be moving slowly in our favor. And we will continue to monitor that and be prepared to act, as we see market conditions change.

Mark Connelly – Sterne Agee

And just one more question. We thought we had seen some signs of life in the non-ag ammonium nitrate markets. Can you tell us what you’re seeing in those markets right now?

Mike Bennett

Well, generally in terms of non-ag or industrial ammonium nitrate, I would say that the business activity all in all has been a bit lower than normally what we would expect in a normal economy. And right now, the indicators from our customers in that area continue to be fairly steady. But as of yet, we are really not getting much of a signal, but they expect a substantial uptick at least in the -- over the next quarter or so.

Mark Connelly – Sterne Agee

Very helpful, thank you.

Operator

And our next question comes from the line of Steve Byrne with Merrill Lynch. Please proceed.

Steve Byrne – Merrill Lynch

Hi, good afternoon.

Mike Bennett

Hi, Steve.

Steve Byrne – Merrill Lynch

Hey, Mike. Your forward order book at the end of June was fairly modest, certainly relative to where it was a year ago, about half the level of the year ago. Is that a reflection of your view on where pricing is going this fall and an intentional pullback on forward sales to take advantage of what you think is a rising price environment?

Mike Bennett

Well, it’s best part of the story. A year ago, Steve, we saw customers come to the -- come to us very early, in fact, actually even early in Q2 to place fill orders or for subsequent shipment. This year, that fill activity commenced very late, and in fact, really some of those orders weren’t transacted until early July actually. And certainly as we look at the pricing levels, given the fact that for the most part, US nitrogen prices are really below where world nitrogen markets would indicate parity is, we certainly see the potential for improvement there. And so we don’t really think it’s in our best interest to go out and do a whole lot of business at some of these levels, and we’ve tried to take a pretty measured approach to that.

Steve Byrne – Merrill Lynch

And speaking of prices being below where you think they should be or below parity with global pricing, it seems as if UAN has been the one where there has been the most pressure. It’s at a discount to urea on a per-unit nitrogen basis, which is not in the historical case. And your shipments of UAN were quite weak in the fertilizer year. Why do you think that is? Is that all primarily a function of inventory destocking or do you think that consumption was also below normal?

Mike Bennett

Well, certainly, Steve, time may tell us whether consumption was off much. But if we really look back to 2008, the second quarter to the ground type volumes are probably difficult to estimate because so many early fill orders were placed. And so as we went through the second quarter, it was really difficult to determine how much of that product was probably going to the ground, especially late in the quarter versus actually going to storage tanks. This year it was a pretty safe bet that anything we sold was ultimately going to the ground. And so part of this -- part of the volume shortfall, I believe, has to do with the fact that customers clearly wanted to reduce inventories in this environment of uncertainty. And I think that is certainly part of it.

When you look at the pricing aspect of it, it’s a little bit puzzling, but yet we had such a wet and late spring that there were a lot of delays in movement. And you know, over time what we’ve learned is that once in a while people get nervous when product isn’t moving, and the calendar tells them it should be. Certainly, there was probably more side-to-side selling activity between dealers and distributors to empty inventories than what we’ve seen in a few years. And I think all of that probably came together to create some anxiety on the part of some people in the market. And I think ultimately it drove prices to a level that customers finally found -- or at least some customers found difficult to resist and certainly, I guess, spurred this early fill demand activity and interest that we’ve seen in early July.

Steve Byrne – Merrill Lynch

And so are you pushing the prices in your forward pricing program to levels that are causing some of your customers to pull back or -- because they are at such a high level?

Mike Bennett

Well, I don’t know about they are at such a high level. You know, it seems like they go down a lot quicker than they go back up, referring to prices, Steve. And certainly, as we seek to get price increases, we will see less I guess enthusiasm, but we think that we’ll transact some business at some higher levels as we go forward here and just patiently work at this book over the balance of the quarter.

Steve Byrne – Merrill Lynch

Okay, thank you.

Operator

And our next question comes from the line of Mr. Dave Silver with UBS. Please proceed.

Dave Silver – UBS

Yes, hi. I dialed in just a little bit late, so I apologize if I’m repeating some things you’ve said before, apologize in advance. First thing, I just wanted to maybe clarify the new line item on your, I guess, investment banking or other types of professional fees. Is that the first quarter that you’ve recognized that? And then more to the point, do you -- is this kind of a run rate level of expenditure that we should expect for the next few quarters or as long as the issue persists?

Dan Greenwell

Dave, we recorded $1.7 million in the first quarter that was included in selling, general and administrative expenses. We decided in the second quarter with the recording of the $12.6 million that we would segregate that. And so we request the $1.7 million out of SG&A in the first quarter into that line item. So the total for the year is $14.3 million. But as I said in my prepared comments, the current quarter expense is related to known activities and the year-to-date amounts reflect our current projected activities for things related to CS activity.

Dave Silver – UBS

Okay.

Dan Greenwell

Also, basically what we know about and what we think we are doing with these, we’ve recorded. We don’t project any additional costs in the third quarter or fourth quarter unless some unknown activities today come up.

Dave Silver – UBS

Okay, No, that’s helpful. Thank you. And then just in modeling or projecting forward, I had a question about natural gas. So I think you guys have laid out what your natural gas costs would have been excluding the hedges, which was $3.39 in the second quarter. And with a much lower hedge percentage, I’m just wondering is it fair to project a natural gas costs for the third quarter of, I don’t know, $2.50, adding in the effect of your inland cheaper gas and the Trinidad operation et cetera. Is something as low as that representative of what we might see you guys report in the third quarter?

Dan Greenwell

Well, Dave, as you may know, roughly 60% of our -- as you mentioned, roughly 60% of our volume is inland gas, being Oklahoma and Iowa. So that clearly does have a basis advantage over NYMEX. The other facilities are effectively NYMEX. The Yazoo City, the Donaldsonville facility and the Courtright, Ontario facility, those are effectively at NYMEX. So if you take 60% of our volumes and say it’s got a basis differential, 40% of volume does not have a basis differential from NYMEX. And then if you add on the $4.6 million of cost in our position right now, you could probably come up with a pretty reasonable basis for what our gas cost would be. But the $2.50, I don’t know where you got that number, but keep in mind, we do not include Trinidad in our gas cost number. We do not report it in our normal operations. That’s an equity earnings line. So Trinidad is not included in that.

Dave Silver – UBS

Okay. And then I did want to ask you this question about I guess use of available cash. So $1 billion is a nice round number, and it’s about $10 a share. And you’ve outlined some of your uses for discretionary capital over the next year or two in terms of Woodward and building up your industrial business. But I mean, anyway you slice it, I think, most people would say you’re going to be highly liquid for a while here. So Mike, in terms of thinking about things that you might put some of that cash to use for over a longer term period, could you maybe discuss whether there are any Greenfield opportunities that would strategically make sense or whether tuck-in acquisitions or something to build on your distribution would be attractive here? In other words, from your perspective and your experience, what types of incremental opportunities do you see out there that might make sense on a multi-year period?

Mike Bennett

Well, at the current time, given the environment we’re in, David, obviously we -- as you noted, we’ve laid out some of these kind of expansion opportunities of the existing assets. And they are not going to require a tremendous amount of cash. Certainly, we’ve talked about the possibility of spending a relative modest amount of cash if we can secure the right thing to give us a stronger gas position in the medium term. And then beyond that, really -- the way I look at the current environment is I think the -- I think the prospect for greenfield opportunities at this moment in time is a bit diminished over where certainly we would have potentially viewed them three or four years ago.

A lot of that has to do with the natural gas cost delta between North America and what’s projected in the medium term versus advantaged gas areas in the world, as well as the fact that greenfield projects basically put a lot of cash out the door without generating return cash flows, return on those investments generally for three or four years. And so for us, I think certainly we think that this is a good time to be looking for opportunities to add existing assets to the portfolio that we think complements the business we have and certainly are consistent with our market direction and where we see the long-term trends in the industry. So more of the focus I think in that area, David, than probably a greenfield-type expansion at least here over the next several years.

Dave Silver – UBS

Okay. Thank you very much.

Operator

And our next question comes from the line of Charlie Rentschler with Wall Street Access. Please proceed.

Charlie Rentschler – Wall Street Access

Mike, I wonder if you would give us your outlook on nitrogen imports over the next year or two.

Mike Bennett

Well, I’ll be glad to, Charlie. Really I think at the end of the day, it’s broadly a function of kind of market parity, if you will. Over the past year, typically the US pricing situation has been such that it discouraged imports relative to other markets. And as a result, we saw that that import volume off very significantly; in the aggregate, somewhere in the range of perhaps 25% to 30%. And certainly, as we’re going through July, prices here continue to be low relative to other markets, and certainly we aren’t attracting a great deal of attention at this point.

When you look at -- when you look at the whole supply situation and if you do make the assumption that we have drawn some chain inventories down relative to a year ago, it’s clear at some point we do need to return to a level of imports that will fully supply this market for the crop year. And in the absence of deterioration in global markets, which certainly I don’t anticipate, domestic prices here will have to come up in some areas in order to attract the necessary volumes. And so I think that import volumes should normalize as we move through this crop year, but they are going to have to do -- they will only do so if they are incented to come here.

Charlie Rentschler – Wall Street Access

And second question, kind of a theoretical one, but do you have a -- kind of an ideal corn price in the back of your mind? In other words, $5, $6 corn, it seems to me causes demand destruction, but $3.50, $3.75, livestock feeders like that, the ethanol boys like that. So do you have any thoughts about that?

Mike Bennett

Well, I guess, not specifically, but I will agree with one thing that certainly currently with this corn price paradigm in the $3.00 to $3.75 range, obviously it looks like the ethanol producers have a bit more breathing room and certainly they had for a while. And certainly that’s welcome for the livestock producers. And likewise, I think that as long as we can couple that with a moderate energy cost environment like we’re seeing today so that not only natural gas prices are very manageable, but diesel fuel prices and so forth as well. This seems to be, I guess, a less volatile environment. If we can get things back to the right operating plan. And so certainly, corn prices perhaps a little bit higher than they might be today in this type of cost environment, I think, would be generally good for agriculture.

Charlie Rentschler – Wall Street Access

Can I sneak in just a third quick question? I guess I paid something like $860 a ton for anhydrous. At that level, I wonder -- are you seeing pushback by farmers? I know it’s all anecdotal, but what’s your thinking about that?

Mike Bennett

You mean currently or that you think we saw --?

Charlie Rentschler – Wall Street Access

This growing season, yes.

Mike Bennett

Over the past year?

Charlie Rentschler – Wall Street Access

Yes.

Mike Bennett

Certainly I think that there was some pushback, and certainly some pretty tough negotiating by farmers and we may well have seen some of those farmers change historical suppliers over concern about those input costs. And certainly we were in a commodity boom last year, Charlie, where everything in the commodity field rose pretty rapidly. So whether there was much of an impact on application rates, I’m not really convinced of that, but I think there was a lot more active shopping and negotiating on the part of farmers in a number of areas than probably what one would typically see.

Charlie Rentschler – Wall Street Access

Thank you.

Operator

And our next question comes from the line of Mr. Daniel Rizzo with Sidoti & Company. Please proceed.

Daniel Rizzo – Sidoti & Company

Hi, guys. You indicated that TET was 8.5% of sales. I was wondering if you could break out how much that was of operating margins as well.

Dan Greenwell

Well, Dan, we typically -- we typically haven’t described in operating margin percentage associated with TET. I think it’s probably fair to say that we expect TET margins with the diesel exhaust fluid to be at or higher than agricultural margins from the business. So we historically haven’t disclosed those.

Daniel Rizzo – Sidoti & Company

Okay. That’s it, thank you.

Operator

And our next question comes from the line of Robert Koort. (Operator instructions)

Lisa Herman

Hi, good afternoon. This is Lisa Herman [ph] in for Bob Koort.

Mike Bennett

Hi, Lisa.

Lisa Herman

I just have a question. Given that you are no longer going to be idling the Donaldson facility starting in August, can you just give us a little bit more color on what you anticipate operating rates to be at for the second half of ’09 and then also just what you expect operating rates to be for some of your other facilities?

Mike Bennett

Yes. Well, first of all, I might clarify that. If I understood the first part of the question right, the Donaldsonville plant is currently down. We idled it July 1st. And we expect to restart that facility sometime in August. And so it’s not a matter of it coming down, but it’s actually coming back up. We also have a couple of normal turnarounds scheduled this year in the second half, which was a bit different than a year ago. We have one half of Verdigris facility this fall, and we have a turnaround scheduled for the Courtright facility later in the year.

And so relative to second half of last year, we will see a bit lower operating rates. At this point, I guess our expectation isn’t that -- you know, other than Donaldsonville we don’t necessarily anticipate specific curtailments at this point in time. Obviously, what develops will depend a lot on how the market responds to various things as we go through the year. But beyond the Donaldsonville curtailment for the month of July and the scheduled turnarounds, at this point we don’t have an expectation that we would be running at some specific rate under our normal operating plan.

Lisa Herman

Okay. But I know that in the very beginning of the conference call, you kind of led towards the fact that you would expect normalized sales for the second half of this year. Is that correct?

Mike Bennett

Yes.

Lisa Herman

Okay. I was just wondering if that would maybe translate into some sort of normalized operating rates for some of your plants.

Mike Bennett

Well, we certainly would hope so. I mean, when you look at the first half of the year, we probably operated our ammonia relative to last year, perhaps close to 90% of last year, but our operating rates were lower probably in the range of 75% to 80%. Certainly if fill demand returns the way we would expect it, I would think those ammonia operating rates would be pretty consistent with the first half of the year, and including the Donaldsonville outage and that our upgrading rates relative to capacity, it should be a bit higher.

Lisa Herman

Okay. And then I have one more question just if you could clarify for me. I noticed that in the urea and the ammonia nitrate volume and sales prices that you have in the press release, there is some footnotes that say that solutions are now included. Is this from the Environmental Technologies group?

Mike Bennett

Yes. So when you look at the urea numbers, that would include our TET movement, which even some of our stationary business is in the form of liquid urea, and certainly ammonia nitrate, I think that also includes liquid ammonia nitrate sales to industrial customers.

Lisa Herman

Okay, great. Thank you very much.

Operator

And our next question comes from the line of Charlie Intrim [ph] with Stack Capital [ph]. Please proceed.

Charlie Intrim – Stack Capital

Hey, thanks for taking my questions, and actually both have been answered. Thank you.

Mike Bennett

Okay, Charlie.

Operator

And our next question comes from the line of Sam Eponia [ph]. Please proceed.

Sam Eponia

Good afternoon, gentlemen. Most of my questions have been answered. Just want to revisit the sort of the use of cash. If you can just once again clarify what the intent is with your cash balance?

Mike Bennett

Well, again, Sam, first of all, we recognized that we are not a bank. We do think that this is a period in which there may well be some very good opportunities to utilize our cash to position the company better for the longer term. And so from our perspective, certainly the internal projects we’ve identified, whether it’s the Woodward project or others that we think we’ll clearly provide excellent short-term returns and build our product line in the directions we want to go, we’re going to use cash for those. Certainly we’re going to continue to explore, I think, relatively modest opportunities for positioning ourselves medium-term on feedstock if that becomes available and then look for -- again, for opportunities to add good assets that will generate accretive returns to the business and add EPS as well as cash flow. And certainly in the absence of those opportunities, as we have from time to time in the past, we have used our cash to, we think, hopefully judicially repurchase shares when that’s made sense, which certainly helps EPS but doesn’t help cash flow.

Sam Eponia

Okay. And for the Woodward project, what is again the CapEx on this?

Mike Bennett

About $180 million.

Sam Eponia

Okay. And last question, just a housekeeping item. Are you planning to have a shareholder meeting soon?

Mike Bennett

We have not yet set a date for our shareholder meeting.

Sam Eponia

Okay. Thank you, gentlemen.

Mike Bennett

Thank you.

Operator

(Operator instructions) And our next question comes from the line of Mr. Alex Heidbreder with Millennium Management. Please proceed.

Alex Heidbreder – Millennium Management

Hi, good afternoon.

Mike Bennett

Hi, Alex.

Alex Heidbreder – Millennium Management

Two topics. First, can you talk a little more about the impact of the increased UAN capacity coming on line in Trinidad? When do you expect actual product to land? And are buyers using this against you yet in price discussions? And the second topic is, why did it make sense to buy stock back in this quarter given how undervalued you guys are? And why not increase the dividend?

Mike Bennett

Well, second questions are both good questions. Let me talk about UAN first. The plant that is being constructed in Trinidad, my understanding is that facility or that upgrading portion should be completed towards year-end. Customers by nature use whatever they can in price negotiations. The fact of the matter is, this year we’ve seen something like 50% -- or I’m sorry, this past 12 months we only saw about 50% of the UAN imports that we saw the preceding 12 months.

And when we look at the marketplace overall, our assumption is that the market is going to require 2 million to 2.5 million tons of imports each year of UAN to satisfy supply needs, given the domestic capacity restraints. And so our view is that the Trinidad plant, while sometimes there is confusion until people figure out who their customers are, we believe especially in this environment we’ll displace imports from other higher cost, higher freight cost sources such as former Soviet Union or Europe. And quite frankly, you know, it may have an impact on the market, but then again the FSU producers basically produce UAN only when it’s more lucrative than it is to push that upward into either urea or ammonium nitrate.

And so at this point in time, certainly where UAN market has been to date, we really don’t see those sources finding this market attractive. And at the end of the day, I think the market is big enough to normalize this production very easily, and it’s not an overriding concern for us. In terms of the share buyback, again, I think that every quarter the company has to waive what may be developing as opportunities to use cash that generate future cash flow as well as EPS improvement against the EPS improvement gain from buying back our own shares at good price levels. And I would point out that -- you know, the other thing that isn’t so transparent is that we don’t have the opportunity to just enter and walk away from that activity any time we like.

We do have to comply with regulatory requirements, judging what information we may have that you don’t have. And so all of that enters into decisions on a given quarter into what activity level we can generate there. And the dividend at the end of the day, most investors aren’t going to buy the stock as for yield, and we instituted our dividend to demonstrate that fundamentally the company had changed and that it was in a much position for the long-term, and we demonstrated that commitment through the institution of the dividend. And certainly, as we go forward, both of those options remain clearly on the table for us to execute as conditions and judgment warrant.

Operator

And there are no further questions in queue at this time. I would like to turn the call over to your host for closing remark, Mr. Mike Bennett. Please proceed.

Mike Bennett

Thank you, Latrice. Everyone, thank you for your participation today. We appreciate your interest in Terra. As always, there is an open invitation to come see us and learn more about the business. If you have interest, please contact Joe Ewing and we can arrange that. And absent that, we look forward to talking with you in October when we discuss our third quarter results. Have a good day.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and everyone have a great day.

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