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CF Industries Holdings, Inc. (NYSE:CF)

Q4 2009 Earnings Call Transcript

February 16, 2010 10:00 am ET

Executives

Terry Huch – Senior Director, IR and Corporate Communications

Steve Wilson – Chairman, President and CEO

Tony Nocchiero – SVP and CFO

Analysts

Edlain Rodriguez – Broadpoint Gleacher

Joe Fischer – Goldman Sachs

Jeff Zekauskas – J. P. Morgan

Sandy Klugman – UBS Securities

Fai Lee – RBC Capital Markets

David Silver – Bank of America/Merrill Lynch

Charles Neivert – Dahlman Rose

Sam Sibal [ph] – J. P. Morgan

Zach Schreiber – Duquesne Capital

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2009 CF Industries results conference call. My name is Eva and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question and answer session at the end of the conference. (Operator Instructions).

I would now like to turn the call over to Mr. Terry Huch, Senior Director of Investor Relations and Corporate Communications. Please proceed, sir.

Terry Huch

Thank you, Eva; good morning, everyone and thanks for joining up on this conference call for the CF Industries Holdings, Inc. earnings release. I am Terry Huch, Senior Director Investor Relations and Corporate Communications, and with me are Steve Wilson, our Chairman and Chief Executive Officer and Tony Nocchiero, our Senior Vice President and Chief Financial Officer.

This morning, CF Industries Holdings, Inc. reported its fourth quarter and full-year 2009 results. On this call, we will review those results and discuss our outlook for industry and company performance in 2010. We will hold a question and answer session at the end of the call.

As you read our news release posted on the Investor Relations section of our website at www.cfindustries.com, and as you listen to this conference call, please recognize that both 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 the 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.

Steve Wilson

Thanks, Terry; and thank you all for joining us this morning. This morning, CF Industries reported fourth quarter and full-year 2009 earnings. For the fourth quarter of 2009, net earnings totaled $51 million or $1.04 per diluted share, down from a record $190 million or $3.59 per share in the same period last year. This was a solid performance in an environment that was much weaker than 2008 for both demand and pricing. Results included business combination costs, development costs for our Peru project, a gain on the sale of Terra common shares, and the effects of mark-to-market gains on our natural gas derivatives. Tony will go into more detail on these items as well as similar items from the prior year.

Through much of the fourth quarter, domestic fertilizer demand was characterized by buyer reluctance to take inventory positions. But demand came to light in late November, as purchasers began to focus on the spring season, which promises to be a strong one. We have been looking forward to the strong market we are now enjoying for some time. Our task in the fourth quarter was to manage the transition from weak domestic demand in most of 2009 to this strong environment. We were able to do that successfully because of our access to export markets and our flexible approach to forward sales. Because of the late harvest, we knew that we would need very good weather in order to have a good fall ammonia application season. Well, we didn't get very good weather, and the result was very weak fall application. Some of you have commented that this sets us up for a strong spring for our nitrogen products, which is true. In fact, this effect started to show up late in the fourth quarter.

Despite the weak performance for ammonia, our total nitrogen volume was about equal to that of the fourth quarter of 2008. UAN volume was void by exports, and urea volume increased by 46,000 tons compared to the fourth quarter of last year, due to restocking and a dearth of imports into the US market. Because domestic demand and prices were weak relative to offshore markets throughout October and November, we saw export opportunities over this period. In the quarter, we exported 274,000 tons of phosphate, and 63,000 tons of UAN.

In the case of those nitrogen exports, which where a noteworthy development in 2009, there are two key observations that I think are important. First, in the current natural gas environment, we can earn good margins selling overseas. And second, when the product is in demand in domestic markets, we typically can earn better margins by leveraging our transportation and distribution assets to capture premium pricing in the Corn Belt. We were able to access both markets at various times in the fourth quarter, which underscores the value of the flexibility that our Donaldsonville location provides.

Phosphate exports enabled us to increase fourth-quarter segment volume by 36% year over year to 551,000 tons. In addition to contributing only half of the company’s phosphate volume in the quarter, exports by us and our competitors, especially to China, left domestic producer inventories somewhat depleted. When domestic buyers observe prices rising, and developed a sense of urgency about replenishing their stocks for the spring, they found the product in short supply, which reinforced the upper price movement. In addition, our dynamic approach to forward pricing helped us manage through the fourth quarter transition. We didn’t price our nitrogen products just to fill our book. Our forward price offerings reflected our belief that prices would rise, and margins would expand. It turned out that prices and margins did increase at the end of the year, and continued to do so throughout January, rewarding us for our patient approach.

Natural gas prices were higher in the fourth quarter and in the third, but that seasonal effect was not surprising. What we found encouraging was the way the quarter was punctuated by brief spikes in spot gas prices, followed by pull backs. This reinforced our view that we are in a period of persistently low gas prices in North America relative to Eastern and Western Europe.

During the fourth quarter, our nitrogen production system ran at 92% of capacity, compared to 99% in the fourth quarter of 2008. We performed major scheduled maintenance projects in one ammonia plant, one urea plant, and one UAN plant at our Donaldsonville complex. We had some trouble getting those plants back up to full rates, primarily because of unusually cold weather. Our Donaldsonville complex is built to withstand 120 mph winds and even a New Orleans Superbowl victory, but not long durations of the low freezing temperatures. We also curtailed operating rates at our Medicine Hat complex to control ammonia inventory.

Our phosphate complex in Florida operated at 94% of capacity, compared to 85% in the fourth quarter of 2008, when high DAP and MAP inventories forced manufacturing slowdowns. This past quarter's inventories and demand supported full production, but we had complications in Florida that were similar to those we experienced in Donaldsonville. We performed two major scheduled maintenance projects, and had a difficult restart because of unusually cold weather. Some of these maintenance projects were pulled ahead intentionally to enable us to increase production in the first half of 2010, and we are benefiting from that now.

For all of 2009, we had sales of $2.6 billion, and net earnings of $366 million or $7.42 per share. We took advantage of our expanding global reach, exporting nitrogen and phosphate to 21 countries on five continents. And we made significant progress on our proposed nitrogen complex in Peru, including signing the gas supply agreement during the fourth quarter, and completing the feed study. Unfortunately, the cost estimate provided by that study was higher than expected, making the business equation more challenging. We are continuing to evaluate a variety of options that may improve the expected returns on the project. So we accomplished a lot in 2009, and prepared ourselves for a strong spring season.

At this point, I will turn the call over to Tony to review our fourth-quarter and 2009 financial performance in more detail.

Tony Nocchiero

Thanks, Steve; and good morning, everyone. As Steve pointed out, CF’s fourth quarter net earnings were $51 million or $1.04 per diluted share on an after-tax basis, compared to a record $190 million or $3.59 per share in the fourth quarter of 2008. Fourth-quarter results included business combination costs of $0.37 per diluted share after tax, Peru project development costs of $0.21 per share, a gain of $0.15 per share on the sale of Terra shares, and unrealized mark-to-market gains on natural gas derivatives of $0.03 per share. Results for the fourth quarter of 2008 included phosphate and potash inventory write-downs of $0.70 a diluted share after tax, unrealized mark-to-market gains on natural gas derivatives of $0.42 per share, and Peru project development costs of $0.01 per share.

Net sales of $507 million included Nitrogen segment sales of $352 million, and Phosphate segment sales of $155 million, which were down 50% and 58% respectively, due to lower prices in the fourth quarter of 2009 compared to the prior year. Nitrogen volume was 1.5 million tons, equal to the volume in the fourth quarter of 2008, with higher urea volumes offsetting lower ammonia volumes. UAN volume was flat in total, with exports to Argentina and France offsetting the lower domestic volumes.

Ammonia price realizations, excluding sales to Vitera were 47% lower than in the fourth quarter of 2008, and flat sequentially. Urea price realizations were 43% lower than the fourth quarter of 2008, and slightly higher sequentially. UAN price realizations were 56% lower than the fourth quarter of 2008, and flat sequentially.

During the fourth quarter, spot prices for urea and UAN at the Gulf rose by more than 20% and 40% respectively. Most of that increase occurred in December, and should be reflected in our average prices in the first quarter. Phosphate volume was 551,000 tons compared to 404,000 tons in the year-ago quarter. The increase was due primarily to a 100,000 ton increase in exports, including shipments to China, India, Africa, South America, and Mexico. Average DAP realizations for the fourth quarter were 69% lower than the same quarter last year, and about flat sequentially. Like UAN pricing, DAP spot prices rose significantly in the second half of the fourth quarter.

Gross margin was $126 million, down 65% from the year earlier quarter. Nitrogen segment gross margin of $110 million was 31% of sales. Phosphate segment gross margin of $16 million was 11% of sales. For the Nitrogen segment, sales under the forward pricing program accounted for 27% of volume compared to 75% in the year-earlier quarter. For phosphate, FPP sales represented 11% of segment volume, down from 51% in the fourth quarter of 2008. As Steve indicated, our lower FPP volumes reflected the measured approach we took for booking forward sales throughout the second half of 2009 to avoid capping our margins from what we have correctly expected to be an expanding margin environment.

As the press release mentioned, remaining bookings under the FPP for 2010 were 1.3 million tons at year-end, compared to 1.4 million tons at the same point last year. The average cost of natural gas at the company’s Donaldsonville, Louisiana operations in the fourth quarter of 2009 was $4.41 per million Btu’s, compared to $10.11 per million Btu’s in the year-earlier quarter. At Medicine Hat, our gas cost was $4.20 per million Btu’s, compared to $6.77 per million Btu’s in the fourth quarter of 2008. Lower gas costs were a significant factor in offsetting the impact of lower product prices for both the fourth quarter and the full year, when compared to the year ago periods.

Selling, general, and administrative expense in the quarter was $15.9 million compared to $15.0 million in the year-earlier quarter. Other operating expenses of $39.1 million included $10 million for Peru development costs, and $26 million for business combination expenses. At December 31, 2009, the company's cash, cash equivalents, and short-term investments totaled $882 million, which was $257 million higher than our balance a year ago. The increase was due primarily to cash flow from operations, offset partially by net capital spending, investment in Terra shares, and distributions to Vitera, our partner in CFL.

We also held $134 million in auction rate securities at year-end. We received $60 million in redemptions at par over the course of 2009, $7 million of which took place in the fourth quarter. In addition, we held nearly 5 million shares of Terra, which we sold in January for proceeds of $167 million, and a gain on sale of $28 million. All together, our cash and investments totaled about $1.2 billion at year end.

For the full year 2009, the company had net earnings of $366 million or $7.42 per diluted share, compared to a record $685 million or $12.13 per diluted share in 2008. The company's results for the year included unrealized mark-to-market gains on natural gas derivatives of $1.10 per diluted share after tax, proposed business combination costs of $0.91 per share, Peru project development costs of $0.73 per share, and a gain of $0.15 per share on the sale of Terra shares.

Results for 2008 included unrealized mark-to-market losses on natural gas derivatives of $0.73 per diluted share after tax, phosphate and potash inventory write-downs of $0.65 per share, and Peru project development costs of $0.02 per share.

For 2009, our net sales totaled $2.6 billion on volume of 8.1 million tons. Export volume was a record 1.3 million tons compared to 500,000 tons in 2008. Gross margin for the year was $839 million, down 31% from 2008. Full-year Nitrogen segment gross margin of $784 million was 43% of sales. Phosphate gross margin of $55 million was 7% of sales. Excluding sales of potash, gross margin for the Phosphate segment would have been $89 million or 13% of sales.

SG&A was $63 million for the year, down 8% from 2008. Other operating expenses of $97 million included $36 million for Peru development costs and $53 million in business combination expenses. Capital expenditures for the year were $236 million, reflecting increased investment in our advantaged North American assets during a period of high cash flow. Although our outlook for cash flow continues to be strong, we expect capital expenditures to be more in the range of $150 million to $200 million for 2010.

So, in summary, we delivered another quarter and year of strong financial and operating performance. That leaves us in an excellent position to capitalize on the improving market conditions we see as we move into 2010.

Steve?

Steve Wilson

Thanks, Tony. In my earlier remarks, I had touched on our bullishness on agriculture and fertilizer market over the up and coming months. I would like to expand on that a bit.

Corn futures prices rose quickly in December, but fell back to about $4 per bushel for December 2010, when the WASDE report raised yield estimates for 2009. Nevertheless, corn prices remain in a very favorable range, from which planting corn rather than soybeans is a profitable endeavor, and so is buying corn to produce ethanol. As a result, we expect corn plantings in 2010 to be higher than in 2009.

In addition to favorable farm economics, there are other positive factors affecting fertilizer demand specifically. First, distributor and producer inventories are low, and need to be replenished, especially in light of low imports of urea and UAN so far this fertilizer year. Second, the poor fall weather caused under application of nitrogen, which farmers need to make up in the spring. And third, the record crop in 2009 depleted nutrients in the soil.

Nitrogen inventories all across the value chain and worldwide are low, with the exception of ammonia in the Midwest. However, we expect carry-over demand from the fall season, combined with improved industrial demand to result in strong ammonia movement this spring, weather-permitting, of course.

In the cases of urea and UAN, imports lagged significantly in the first half of the fertilizer year compared to prior years. Urea imports began to flow into the US in January in response to stronger domestic pricing relative to other markets. With strong domestic demand, China’s export tax rate back up to 110% for the next five months, and India's demand still unmet, we expect the domestic supply demand balance for urea to remain tight. Based on our estimates for February, UAN imports for the first eight months of the fertilizer year will be less than half their five-year average. Imports will have to increase significantly in order to meet expected demand. Furthermore, the increase is going to have to come at a time when strong international demand and production shortfalls in the major exporting countries have dramatically tightened the availability of product onto the world market. Our balance among ammonia, urea, and UAN puts us in the position to benefit from market strength in all three products in 2010.

Our outlook for the spring season is equally strong for phosphate. Pricing got a boost in mid-November, when China unexpectedly entered the market as an importer. Production difficulties for some market participants, and renewed buying interest in Latin America reinforced the upward pressure, which was further compounded by a resurgent demand in the US domestic market. That left US producer inventories at extremely low levels, with little prospect for rebuilding them for the spring season.

In summary, we expect strong volumes and rising prices for all of our products in the first half of the year, due to strong agricultural markets, and relatively low global nitrogen and phosphate availability, due to the diminished industry production. We delivered strong performance in 2009 in the face of a turbulent market. We are proud to have provided a total return to shareholders of 85% over that period. In 2010, we are positioned to continue delivering value in an environment of greatly improved industry conditions.

With that, let us open the call to your questions. Eva, please review the Q&A procedure.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Edlain Rodriguez with Broadpoint Gleacher. Please proceed, sir.

Edlain Rodriguez – Broadpoint Gleacher

Thank you. Good morning, guys.

Steve Wilson

Good morning, Edlain.

Edlain Rodriguez – Broadpoint Gleacher

Quick question. Since the WASDE report of January 12, we have seen the decline in corn prices. Are you seeing or sensing any change in behavior from customers, farmers, distributors, or retailers since then?

Steve Wilson

Well, we don't deal at the farm and retail level, but certainly, our customers are preparing for a very strong spring season. And we haven't seen any diminution in the appetite for planting corn for the spring.

Edlain Rodriguez – Broadpoint Gleacher

And the other question is, you talked about a permanent decline in MAP gas costs in the US. What is your forecast for MAP gas in 2010?

Steve Wilson

Tony?

Tony Nocchiero

Yes, our forecast for 2010 is generally in line with the forecast of leading industry forecasters for the gas market, it is around $5.05 on average for the year.

Edlain Rodriguez – Broadpoint Gleacher

Okay, thank you.

Operator

Your next question comes from the line of Robert Koort with Goldman Sachs. Please proceed, sir.

Joe Fischer – Goldman Sachs

Good morning, gentlemen. This is Joe Fischer filling in for Bob here. I was wondering if you could chat a little bit about obviously demand, it has been much better sequentially. But I was wondering if you could maybe talk about your customers’ positioning levels, if you will, versus the proverbial normal or average year? That is my question. I have one follow-up.

Steve Wilson

Well, clearly, there has been some reticence on the part of buyers down the chain to position inventory that hasn't already been pre-sold. So they have been slow to commit to purchase and extremely risk-averse. That has changed in the last couple of months, however, because of the realization that there is a pretty strong, that there is a very strong spring ahead of us, and the supply chain, if you will, is shortening, the time window is shortening, and if they don’t get orders on the books now, they may have a problem meeting their own demand.

Joe Fischer – Goldman Sachs

And the other thing I wanted to ask you is whether or not we are setting up for any kind of logistical crunch time, so to speak. I had a (inaudible), if the infrastructure is good enough that you can do product investment generally?

Steve Wilson

Well, you know, widespread logistical challenges is one of those things that is predicted periodically. It is a little bit like predicting urea shortages, and I have commented that we have predicted three out of the last zero urea shortages. There will clearly be bottlenecks as there always are in isolated locations in our great territory, whether it is widespread or not I think is going to be a function of a lot of things, including weather patterns, and the degree to which customers step up and commit to product in the window they have available right now.

Joe Fischer – Goldman Sachs

Great, thank you.

Operator

Your next question comes from the line of Jeff Zekauskas with J. P. Morgan. Please proceed, sir.

Jeff Zekauskas – J. P. Morgan

Hi, good morning.

Steve Wilson

Good morning, Jeff.

Jeff Zekauskas – J. P. Morgan

Do you think the prospective purchase of Terra by Yara is sort of favorable – makes it more difficult for CF to operate in the nitrogen markets in the United States, sort of makes it easier; is this combination beneficial to you or detrimental from your point of view?

Steve Wilson

Well, this is – Jeff, this is new news that came out yesterday. We are still digesting that news to the extent that we don’t have a comment on that proposed transaction. We will make it if and when we are ready to do so.

Jeff Zekauskas – J. P. Morgan

Okay. You spoke of various options to increase your expected returns in Peru. Can you elaborate a little bit more on that?

Steve Wilson

Sure. This is a very complex project in an area that doesn't have a lot of infrastructure. So, we have got, for example, to construct a port, we have – there is a pipeline project that a third party is involved in and has to be – power brought to the site and so forth. So we are looking at creative approaches to all the components of the project, all of the required infrastructure to see whether there are ways to bring down the capital costs and/or the operating costs.

Jeff Zekauskas – J. P. Morgan

Okay. And then lastly, in the $150 million to $200 million you expect to spend on capital in 2010, what are the large components of that number, or what are the big projects in the $150 million to $200 million number?

Tony Nocchiero

Jeff, as always, the biggest piece of that spending goes in to CapEx that is largely related to maintaining our existing asset base and building catalyst turnarounds. So that tends to be the biggest piece of the $150 million number. Other projects would be projects that go to expand production or increase efficiency either at our D-ville or our Florida operations.

Jeff Zekauskas – J. P. Morgan

Okay, thank you very much.

Operator

Your next question comes from the line of Don Carson with UBS Securities. Please proceed, sir.

Sandy Klugman – UBS Securities

It is actually Sandy Klugman sitting in for Don. You know, my question is, you obviously had very strong DAP demand in the export markets in 2009. India accounted for the lion’s share of the domestic export. My question is, what do you see in terms of demand from India in 2010, given both the proposed changes to their subsidy system, you know, as well OCP’s recent sale of phos acid, which would seem to make the cost of local production increasingly competitive with the cost of importing the product?

Steve Wilson

Well, we think India has a substantial need for imported product on the horizon. And we obviously don't know what they will do or when they will do it, but we see robust demand coming from India.

Sandy Klugman – UBS Securities

Okay, thank you. And then just a follow-up. In terms of, you know, sulfur supplies are obviously getting very tight. Did you anticipate any constraints or are your sulfur supplies, you know, relatively well provided for in 2010, as far as you can see?

Steve Wilson

Well, clearly, the sulfur market has tightened and the price has gone up. I am pleased to report that we have not had to impact our production rates based upon sulfur availability. And I will take this opportunity to commend our team here and our suppliers, you know who you are, we have had good performance by our own team and by suppliers. Having said that, we had a little transportation hiccup over the weekend that I believe we have resolved. But, our sulfur supply has been first grade.

Sandy Klugman – UBS Securities

Okay, thank you.

Operator

Your next question comes from the line of Fai Lee with RBC Capital Markets. Please proceed, sir.

Fai Lee – RBC Capital Markets

Thank you. It is Fai Lee from RBC. I just wanted to ask you a couple of questions just following on Jeff’s question about Peru. In terms of the price, was it really on the infrastructure or the operating costs, when you say the costs came in higher than expected?

Steve Wilson

Well, the study that I referred to is the front-end engineering and design study. It is basically capital cost oriented, so the outside supplies was on the capital costs side.

Fai Lee – RBC Capital Markets

And was there anything in particular or was it just a wide number of things that came in higher than your application?

Steve Wilson

Yes, there are a number of factors, not the least of which is the weak dollar.

Fai Lee – RBC Capital Markets

Okay. And in terms of the costs, did they provide a total cost number or I think previously in choice somewhere around $1.5 billion to $2 billion, is it above that range?

Steve Wilson

We are working on getting the capital cost number into a range we are comfortable with and I just assumed that will not go beyond that.

Fai Lee – RBC Capital Markets

Okay. And if you can't get the capital costs, would the project still be economic at this point?

Steve Wilson

Pardon me?

Fai Lee – RBC Capital Markets

If you can't get the capital costs down, would it be an economic project?

Steve Wilson

Well, if the project is economic, we will move forward with it and if it isn't, we will move on to other things. That is the sole purpose of the work we are doing right now.

Fai Lee – RBC Capital Markets

Okay, great. And just on the Terra-Yara news, in terms that you mentioned it was a surprise, was the price that Yara offered, was that on the table in part of your negotiations?

Steve Wilson

The only comment I will make on that is that we have had no interactions with Terra since January 14, when we made our last public announcement and beyond that, I will just go back to my older statement that the merger agreement was just, I believe, posted this morning. We haven't digested it, so we don't have any comment beyond that at this point.

Fai Lee – RBC Capital Markets

Okay, thank you.

Operator

(Operator Instructions). Your next question comes from the line of David Silver with Bank of America/Merrill Lynch. Please proceed, sir.

Steve Wilson

Good morning, David.

David Silver – Bank of America/Merrill Lynch

Good morning. I have a question I guess about – I guess a general question about raw materials positioning as you head into the spring. You know, you mentioned – you answered a question I guess about sulfur, I am just thinking about natural gas and whatever else is there. With may be a smaller SPP book, you know, kind of by design, is this a period where you would do some incremental natural gas hedging; in other words, kind of, you have a smaller book of business that you hedge off against, but your comments all point to very strong demand into the spring and at least on paper, there are margins to lock in here. So is this a period where you can go against maybe your traditional strategies and try to lock in some gas ahead of when your order book fills up?

Steve Wilson

David, I will make one comment and then I will ask Tony to chime in, if he would like. This is a – you know, we are in February now, and gas prices today I think are reflecting winter economics. And so the script is not so much in our favor at the moment. We see some downward potential, and if it were to get to a point where it is enticing, we might take some action, we have done that in the past.

Tony Nocchiero

Yes, I guess the only thing I would add to that is that we look at the forward strip and we look at the overall supply-demand picture for natural gas virtually every week. And if we thought gas was getting attractive in the out months, we have the authority under the action of the Natural Gas Pricing Policy Committee to take action and we have done that in the past, as we have described on calls like this. So, I wouldn't say we are positioned necessarily to do that, you know, if the forward curve goes into backward (inaudible) or something like that. We certainly might be tempted to pick something off, but generally speaking, we have been very successful buying gas in the cash market and staying sharp. We will continue to do that, but of course, if demand for products in the out months starts to get strong enough to make up for the penalty we pay in buying gas forward, we could end up doing that too, but that all depends on the tone of the markets, because we are always managing the margin.

David Silver – Bank of America/Merrill Lynch

Okay, thanks for that. If I could just follow up maybe with a slightly different angle on the Peru question, I mean, it is a project that you have put a lot of effort in over an extended period of time. Is there flexibility – you know, you mentioned it was a complex project. Is there flexibility in terms of negotiating with the government for contributions or some assistance on kind of the infrastructure or surrounding utilities kind of a portion of the overall project, or is it understood that CF in any part, as you bring it in, are fully responsible for the ports and distribution networks and things like that?

Steve Wilson

Well, David, we have a very good relationship with the government of Peru and we interact with the representatives of the government on a regular basis. The degree of cooperation is quite high. The philosophy that is in place in Peru today is one of encouraging private investment, and trying to have separation between the government and private enterprise, and we generally view that as an admirable position to be in. On the other hand, you know, if we look at the project and you are right, we have put a lot of effort into this and it has a lot of commercial feel. We certainly would not eliminate any course of action in our effort to make this economic, including sitting down with the government and seeing if we have a mutual problem, a mutual opportunity to work on it together to try and solve it.

David Silver – Bank of America/Merrill Lynch

Okay. And then last question, you know, in spite of your best efforts, the cash continues – the liquidity on your balance sheet just continues to be at a very high level. Could you kind of walk us through whether you think whether your long-term interests are served by holding onto this cash and if not, whether a buyback or a special dividend, which some of your peers in the industry have chosen or other avenues to kind of make sense that kind of optimize your balance sheet, and kind of will maybe allow the company to focus more on operations and less on what are you going to do with all the cash on your balance sheet?

Steve Wilson

Well, David, as you rightly pointed out, this is a wonderful problem to have. I would remind you of two things. First is that in November of 2008, we spent $0.5 billion buying our own stock back. I think we bought it back in the mid to high 50’s. That certainly proved to be a great benefit to our stockholders. We also had plans to utilize our cash to acquire Terra. And again, that was going to be the focal point. And so, as we look at our situation going forward, we will continue to evaluate all of our cash needs, we will evaluate opportunities to deploy that cash in various ways, and those ways include the possibility of further distributions of cash in the direction of stockholders, in one form or another, that is part of our ongoing deliberations.

David Silver – Bank of America/Merrill Lynch

Thank you very much.

Operator

Your next question comes from the line of Charles Neivert with Dahlman Rose. Please proceed, sir.

Charles Neivert – Dahlman Rose

Good morning, guys.

Steve Wilson

Good morning, Charlie.

Charles Neivert – Dahlman Rose

Quick question. You had talked about some phosphate capacity I guess globally that is offline. Could you just comment on about how much you see as being offline and when it might show up again or when it might be getting back into the production picture, or is it already?

Steve Wilson

Production issues in Morocco, and there were some production issues domestically, these are perhaps largely resolved. At this point, we are not sure. You know, it wasn’t a large amount of capacity, but in a tightening market, marginal shortfalls have pretty significant impacts.

Charles Neivert – Dahlman Rose

Do you think that now that assuming that they are basically resolved, when do you think the product will get back to the market and will that provide the market with – well, let us say balance, or do you think it is still going to be tight moving forward?

Steve Wilson

Well, I can't really comment on when a competitor’s product will get back into the market. But certainly, we view the market as being tight enough to be able to absorb the return of that production.

Charles Neivert – Dahlman Rose

Okay, thanks very much.

Operator

You have a follow-up question from the line of Edlain Rodriguez with Broadpoint Gleacher. Please proceed, sir.

Edlain Rodriguez – Broadpoint Gleacher

Tony, just a quick question to help us with modeling purposes. What should we expect to improve development project costs will be in Q1 and for the year?

Tony Nocchiero

The major costs I will say to Peru last year were the field study. That was the biggest chunk of that number we disclosed to you in the quarter and the year. The costs we are incurring right now, primarily relate to legal and consulting and internal costs. So, at the moment, those costs would range from $3 million to $5 million. Now, if we make a decision to initiate the project later in the year, that could change, but on the base we are operating right now, it would simply be $3 million or $5 million.

Edlain Rodriguez – Broadpoint Gleacher

Okay, thank you.

Operator

You have a follow-up question from the line of David Silver with Bank of America/Merrill Lynch. Please proceed, sir.

David Silver – Bank of America/Merrill Lynch

I was just going to ask, Steve, if you would mind commenting or giving us your perspective on an aspect of yesterday's announcement with Yara, in that I listened to the Yara webcast and there were several interesting things about it. One, I would say is that they were obviously willing to pay a much higher price and to fund it in a way that cost them some goodwill with their shareholders et cetera. And I was struck by the fact that they cited a lower synergy total than CF cited when you were engaged with Terra. And I was wondering, you know, as someone who has spent decades in the nitrogen industry and knows the markets very well and probably knows Yara very well, what is it in your opinion that they saw that wanted them to pay a significantly higher price for a target when CF, with the geographic and product overlap, probably had a greater synergy opportunities at the same time?

Steve Wilson

Well, David, I have two responses to that. First of all, I think that was a question best asked of Yara, not of us. But secondly, you know, I made the comment earlier that we are digesting this news, and are not in a position to comment on it this morning.

David Silver – Bank of America/Merrill Lynch

Okay, thanks a lot.

Operator

Your next question comes from the line of Lequis Marzo [ph] with J. P. Morgan. Please proceed, sir.

Sam Sibal – J. P. Morgan

Hi, this is Sam Sibal [ph] from J. P. Morgan. Your current terms or the terms that you had offered to Terra were worth $40 a share. You had nickels and quarters I think in your pocket, which was like $0.50. So $0.50, was that really the differential that just couldn’t get this deal done or what fell in the process?

Steve Wilson

Sam, we are not going to comment on the Yara-Terra transaction.

Sam Sibal – J. P. Morgan

Okay. So, you know, if you didn't get a last look, was it more of a situation about having to pay to play, kind of like with the CF-Agrium situation?

Steve Wilson

Sam, we are not going to comment on the Yara-Terra announcement.

Sam Sibal – J. P. Morgan

All right, thank you.

Operator

Your next question comes from the line of Zach Schreiber with Duquesne Capital. Please proceed.

Zach Schreiber – Duquesne Capital

Yes, it is Zach Schreiber from Duquesne. Just a quick question. You guys were pretty clear – we are large holders of CF. You were pretty clear a few weeks ago that the price that it would have taken to get a Terra deal done was a price that would have made the transaction dilutive to CF’s long-term shareholders. Has anything changed in the world to make that statement no longer true. I don't understand why you can't be more definitive that you are not going to – that this whole thing is over from your perspective and why you are leaving the door open, even a tiny little bit. Is this thing over, or is it not over? You guys basically said it was over a couple of weeks ago and now we get a little bit remorseful that she slipped away. Can you just sort of clarify what has changed, has anything from a long-time value perspective, if the deal didn't make sense to its reason or whatever it was, why would it make sense today? Thank you.

Steve Wilson

Zach, we are not going to comment on the Yara-Terra announcement.

Operator

With no further questions in the queue, I would now like to turn the call back over to Mr. Huch for closing remarks. You may proceed, sir.

Terry Huch

Thanks, Eva. I would just like to thank everybody for joining today’s call, and invite you to contact me with any follow-up questions.

Operator

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

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Source: CF Industries Holdings, Inc. Q4 2009 Earnings Call Transcript
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