CF Industries Holdings, Inc. Q4 2007 Earnings Call Transcript

| About: CF Industries (CF)

CF Industries Holdings Inc. (NYSE:CF)

Q4 2007 Earnings Call

February 08, 2008 10:00 am ET

Executives

Chuck Nekvasil - Director of Public and Investor Relations

Steve Wilson - Chairman and CEO

Tony Nocchiero - SVP and CFO

Dave Pruett - SVP Operations

Analysts

Dave Silver - JPMorgan

Steve Byrne - Merrill Lynch

Mark Connelly - Credit Suisse

Brian Yu - Citigroup

Charlie Rentschler - Wall Street Access

Andrew O'Connor - Millennium Partners

Mike Judd - Greenwich Consultants

Bob Grover - Scopus Asset Management

Operator

Welcome to the fourth quarter 2007 CF Industries results conference call. My name is Lacy and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference. (Operator Instructions) As reminder this conference is being recorded for replay purposes.

I would now like to turn the presentation over to our host for today's call, Mr. Chuck Nekvasil, Director of Investor Relations. Please proceed, sir.

Chuck Nekvasil

Thank you, Lacy. And good morning and thanks for joining us on this conference call for CF Industries Holdings, Inc. I'm Chuck Nekvasil, Director of Public and Investor Relations. And with me are Steve Wilson, our Chairman and Chief Executive Officer, Tony Nocchiero, our Senior Vice President and Chief Financial Officer, and Dave Pruett, our Senior Vice President Operations.

Yesterday afternoon, CF Industries Holdings Inc., released its fourth quarter results and also announced five-fold increase in the regular quarterly dividend on the common stock. 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 within the meaning of Federal Securities law.

All statements in the release and oral statements in this call or other discussions, 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 our 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 Chief Executive Officer.

Steve Wilson

Thanks, Chuck, and thanks to all of you for joining us this morning. This morning in Chicago its a cold grey day, and we've got snow piled all over the place, but across our company we have a pretty good warm feeling about our recent financial performance and the operations of the company.

Yesterday afternoon, CF Industries issued a news release to confirm the earning power of this company. Our financial performance for the fourth quarter was our best ever, since becoming a public company. Net earnings totaled a $135.4 million or $2.38 per diluted share, compared to $8 million or $0.14 per diluted share in 2006 fourth quarter.

Ideal weather helped us enjoy an outstanding fall ammonia season. Strong fall fertilizer application, combined with customer inventory stocking, for what is expected to be strong spring planning, drove shipments to nearly 2.5 million tons of nitrogen and phosphate.

That demand, reflected in pricing that was significantly higher, than both the year earlier quarter and 2007's third quarter, provided a wonderful opportunity for CF industries in the fourth quarter. But it was our people, who turned that opportunity in to results. We met our customer's strong demand during the quarter and we accomplished it without incurring a single lost-time accident at any CF Industries' location.

We operated our nitrate and phosphate complexes at high rates, throughout the quarter, 96% in Nitrogen and 102% in Phosphate. We also excelled in areas of our business that often don't get much external attention. Our product supply, logistics and distribution chain where we focus on maximizing throughput in order load fertilizer quickly and efficiently for our customers.

We set numerous monthly and annual shipping records this year, at a number of our terminals and warehouses including Velva, North Dakota, and both Spencer and Garner in Iowa. We believe that our ability to get fertilizer on its way to customers is an important differentiator in the market place.

Customers recognize our capability to load and dispatch ammonia trucks quickly in the most hectic part of the season. We think that's a competitive advantage that makes us a preferred supplier.

During the fourth quarter then, we capitalized on the opportunities the market place presented us. We executed our business plans well, met our customers needs efficiently, and delivered our best ever results.

Now Tony Nocchiero, our Chief Financial Officer, provides some added detail on our financial performance.

Tony Nocchiero

Thanks, Steve and good morning everyone. As Steve noted fourth quarter net earnings for our best-ever post IPO at a $135.4 million or $2.38 per diluted share. Those results compared to $8 million and $0.14 per diluted share reported for the fourth quarter of 2006.

Gross margin increased more than five-fold to $236 million, up from nearly $43 million in the fourth quarter of 2006. The gross margin in this year's fourth quarter included the effect of $12.9 million of mark-to-market gains on natural gas derivatives. We have recognized $9.4 million of unrealized mark-to-market losses in the fourth quarter of 2006. Gains and losses on natural gas derivatives are reflected in nitrogen segment results.

Let me discuss some financial highlights for the quarter compared to last year's fourth quarter. Net sales increased by 62% to $853 million. Volume increased by 7% to nearly 2.5 million tons with a 179,000 ton increase in our nitrogen segment more than offsetting a slight decrease in phosphate volume.

Selling prices were substantially higher for all products. In total, average nitrogen fertilizer prices increased by 43% from the year earlier quarter. In phosphate, the increase was 78%. We enjoyed a $121 million increase in nitrogen gross margin and a $72 million increase in phosphate gross margin. Realized natural gas costs increased by just over $33 million.

SG&A expenses rose by $3.4 million or 24% compared to last year's fourth quarter, primarily due to increased cost associated with incentive compensation awards and the cost of closing the KEYTRADE transaction.

Cash flow from operations totaled $187 million, more than four times the $40 million in the year earlier quarter, due primarily to the quarter's improved earnings.

We enjoyed strength in liquidity. As of December 30, 2007, we had cash and short-term investments of $861 million and $220 million available under our senior credit facility which was undrawn. For the year, net earnings totaled $372.7 million or $6.57 per diluted share. Again, our best ever and up substantially from $33.3 million or $0.60 per diluted share in 2006.

You will find detailed year-on-year comparisons in the news release and the accompanying financials.

To summarize, we delivered excellent financial results for the quarter and the year. And looking ahead to the spring season, we believe that strength in the market should permit CF Industries to continue its strong financial performance. Steve?

Steve Wilson

Thanks, Tony. Today, the outlook for the farm economy and CF Industries remain strong. The view reflected in the decision by our Board of Directors to increase regular quarterly dividend on the company's common stock from $0.02 to $0.10 per share.

At the macro level, the drivers of 2007’s excellent performance are if anything stronger, going into 2008. Global stocks of course grains remain low, even as demand continues to build. That demand is underpinned by traditional factors that include increasing populations and rising GDPs in developing countries and expanding demand for more protein and consumers diets. It is enhanced by continued pressure on grain supply from the biofuels industry.

Strong global demand has driven prices for major crops to record or near-record levels. These prices provide farmers with a significant financial incentive to plant a lot of acreage and to do their best to make sure that acreage yields a bountiful harvest.

That translates to using a great deal of fertilizer. And because today’s strong demand is global, traditional fertilizer exporters can generally serve closer to home markets, more profitably than the conserved North America.

We believe all that should produce robust spring demand and strong pricing for nitrogen and phosphate manufacturers and distributors like CF Industries. That's not to say there aren’t question marks and challenges going into the spring.

Perhaps the biggest question is, what will happen if corn acreage falls to only 88 million or 89 million acres this year? Well, that level would still be approximately 10 million more acres than the 79 acres, the U.S. average in the 10 year period from 1997 through 2006.

And if you have to consider any decline in corn acreage in the context of overall nitrogen demand, increased acreage for wheat, sorghum and other crops that require nitrogen, as well as higher application rates, could well offset any decline in demand from corn.

In phosphate we are even more optimistic than in nitrogen, domestic and export demand remains very strong and the supply-demand balance is extremely tight, with no significant additions to capacity expected globally, before 2010 at the earliest.

Another question we hear involves ethanol’s long-term viability. Of course, the simple answer is that the U.S. renewal fuel standard mandates, the use of at least 15 billion gallons of ethanol from corn by 2015, up from the estimated 6.3 billion gallons produced in 2007. More to the economic point, margins for ethanol have strengthened during recent months, despite increased corn prices.

From our perspective, the outlook for ethanol in the U.S. remains bullish. Production efficiencies and logistics or infrastructure for corn-based ethanol are improving. Beyond that, crops such as Switchgrass and Miscanthus, sometimes mentioned as potential feed stocks for cellulosic ethanol required just about as much nitrogen as does corn.

What about the effects of a potential economic slowdown in the U.S.? Well, those effects bear watching, the Ag sector historically has been resistant to slowdowns in the pace of general economic activity.

So, we are extremely pleased with our fourth quarter and very upbeat going in to the spring season. We are refilling our tanks and warehouses and many of those tons already have customer's names on them, thanks to the high volumes we booked, at excellent margins under our forward pricing program.

And so with the usual caveats including weather, raw material availability and costs, and other factors, we are excited about our prospects for the spring of 2008.

Let's now open the call to your questions. Lacy, please explain the Q&A procedure.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question will come from the line of Dave Silver with JPMorgan. Please proceed.

Dave Silver - JPMorgan

Hi, good morning.

Steve Wilson

Good morning, Dave.

Dave Silver - JPMorgan

Steve, I guess I would say just upfront, I mean, when you have a result like this, it's the result of a number of correct decisions you've made over a long period of time. One area I was wondering if you could address, would be in the sulfur area. A couple of years ago or some time ago, you did sell your interest in your Sulfur Services business.

And now you talked about raw material cost and availability in general, but if you look at the global market, the sulfur market seems to be very, very, very tight. So, could you talk about your general positioning in sulfur and availability?

And then secondly if you think that, amongst rather strategic initiatives, whether there is anything that CF needs to do to secure their position in sulfur?

Steve Wilson

We have been very comfortable with our position in sulfur. We have longstanding strong relationships with our sulfur suppliers. We operate on a basis of having committed supply, to the extent that we can have committed supply. We have not had our phosphate operations impacted by sulfur availability. But it is of course tight, and the pricing in this industry is essentially the same across the board or subject to the same quarterly market force as everyone else's.

In terms of long-term plans in the sulfur area, first I'll mention that we are long way down the road in the number of debottleneck projects in our sulfuric acid production. Of course as we eliminate debottlenecks and increase our sulfuric acid capacity that increases the need for incremental sulfur supply.

Today, we don't have any initiatives in that regard related to having a captive sulfur source if that's what you mean. That would be a very difficult thing for us to do.

Overall, we are as comfortable as we think it's possible to be in a very difficult sulfur supply environment.

Dave Silver - JPMorgan

Okay. Thanks. I am going to shift over to nitrogen and your average selling prices in the fourth quarter. So, one thing I noticed was that your peer company, Terra reported yesterday and they listed their average selling prices, and I was comparing them to the ones you presented. And I noticed that CF had a markedly higher ammonia average selling price then Terra. And they had a significantly higher UAN average selling prices as well. And I was wondering, I am pretty sure you guys do track that and try to figure out the differences.

Could you shed some light either qualitatively or in other areas about where you think your outperformance in terms of selling nitrogen in the fourth quarter came from?

Steve Wilson

Okay. Dave just a clarification, I think you made a comment that they had a higher UAN price than we did. Did you mean to say that?

Dave Silver - JPMorgan

I apologize if I misspoke, but in those cases CF's average selling price for ammonia and UAN were meaningfully higher than the numbers that Terra presented.

Steve Wilson

Okay. Well, First of all I don't have lot of insight into how pricing is done in other companies. We meet in the market place. We are very pleased with our prices in the quarter. We think we do a good job in the market place taking advantages of opportunities.

There are some differences in the two businesses and there are also some differences in the way that prices are reported. So, I would just urge you to make sure that as you look at the average selling prices that you consider how freight is handled by each of us in the calculations. That may tend to exaggerate some differences.

But overall, we're pleased with our margins in the quarter and that's really the most important thing to us, is what’s the difference the selling price and the cost of the product. And I think this quarter demonstrates that our forward pricing approach in our attempt to lock up margin and reduce risk is a little long run a bit, a good way to go.

Dave Silver – JPMorgan

Okay. And then, last question. Just I wanted to ask, you mentioned the phosphate markets seem exceptionally tight, and I tend to agree. When you talked to Herschel or when you look at your operating plan for 2008, is there anything that would prevent CF’s phosphate business from operating at 2 million tons, a nameplate or e slightly higher. In other words, are there major plant turnarounds, is there anything going on the ore side? Anything that might prevent you from meeting kind of nameplate production of DAP and MAP in 2008?

Steve Wilson

No. We have very ambitious plans for this year and we intend to operate in a fashion similar to the way we always operate and that’s as close to capacity as possible. I will mentioned to you that some of the -- we announced some projects,

I believe it was about a year ago to increase our capacity, and one of the reasons that we came in at 102% of phosphate capacity in the fourth quarter is that we actually have tweaked our nameplate capacity and you’ll be seeing when we issue our 10-K that we will be bumping that up a little bit to reflect the actual implementation of some debottleneck that we've implemented. So, not gone would -- we expect to operator at high rates.

Dave Silver - JPMorgan

Thanks very much.

Steve Wilson

Thanks you, Dave.

Operator

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

Steve Byrne - Merrill Lynch

Hi, thanks. Steve you came out of the third quarter with, were looks to me like 2 million tons booked in your Forward Pricing Program for 2008 business, this beyond the fourth quarter and now your Forward Pricing Program is up to 2.6. Does that suggest that your aggressiveness at selling forward slowed in the fourth quarter and if so why?

Steve Wilson

Hi, I haven't done the comparison that you're referring to. I just give you a philosophical answer to that, and that is, we look at margins every day, we look at it product by product, we look location by location and when we see good business opportunities, that we can lock in, we do.

We're sitting here with that amount of forward business on the books that's higher than last year's, it is higher than the year before, in fact it's higher than it's been in the four-year history of our Forward Pricing Program. So, I think what we do -- I guess I'd say we manage our appetite based upon what we think is happening in the market place and sometimes we will borrow back and sometimes we will put our foot down hard.

Steve Byrne - Merrill Lynch

Okay. If I'm right, then that would imply that most of the run up that we have seen in prices in the last few months, you probably won't realize it until the second quarter. Is that fair to say?

Steve Wilson

Well, there is a phase in there, so everybody more or less is operating in the same marketplace, responding to the same customer demands and we have certainly a good feeling about our margins going forward.

Steve Byrne - Merrill Lynch

Okay. Then question on your phosphate business, it looks like your DAP production rates were roughly flat year-over-year, but your rock production was down 15%. Does that suggest you're into a higher ore quality in recent months?

Steve Wilson

I will let Dave Pruett to comment on that one, Steve.

Dave Pruett

Good morning, Steve. The way we think about the rock production is, basically we use the mine as the flywheel in the system. And the rate there can go up and down depending on a number of factors, including rock quality, including plans for turnaround, either at the mine or at the chemical plant.

It depends on the inventory of rock at the plant itself. So, that will swing for a number of reasons and that's normal and it's just how we mange the inventory at the plant and keep the steady flow of product coming out at the end of the chemical plant at Plant City.

Steve Byrne - Merrill Lynch

Okay. It was in a more directly to the point. Then Dave, how have your rock production costs varied over the last couple years?

Dave Pruett

In general, they have been up and down a bit, again depending on the production volume and the quality, but there has not been a dramatic change in any direction.

Steve Byrne - Merrill Lynch

Okay, thanks.

Operator

And our next question will come from the line of Mark Connelly with Credit Suisse. Please proceed.

Mark Connelly - Credit Suisse

Thank you. Just two things, first you talked about the forward pricing. I wonder if you could tell us, how much of the forward bookings are for phosphate and whether your motivation to it will participate heavily in forward pricing is changing with the volatility that we’ve seen in pricing for the product?

Steve Wilson

Good morning Mark. I would like to I just go back and give you little bit of history under our FPP program. We designed the program in 2003 as it basically a nitrogen program to manage the risk in nitrogen. Of course as our customers got used to buying nitrogen on the forward, they also become interested in doing phosphate on the forward. We have accommodated them to some degree but we don't have the ability to match the cost, lock away the cost when we lock away the pricing in phosphate. So, we have to be a little more careful there.

As we have gone through that the months doing this, we have felt comfortable going out on the forward with phosphate when we had a big enough margin to absorb what we thought were reasonably predictable swings and input cost sulfur and ammonia.

As sulfur started to rise, as ammonia cost have increased, even in the wake of the huge increase in DAP prices we've recognize that there is more risk inherent in this than even we thought at the beginning of doing phosphate under the FPP. So, we are managing that, we want to make sure that we don't get exposed to elements of cost that are going to get away from us. So, our appetite as with nitrogen will vary overtime and our appetite certainly was reduced a bit or perhaps more than a bit as we saw this rapid rise in sulfur cost.

I know your direct question has to do with quantity, I will say that our forward position in phosphate is a meaningful amount of our 2008 plant sales, but I do not want to get into quantifying it.

Mark Connelly - Credit Suisse

That's fine. The qualitative assessment was very helpful, thank you. I wonder if I could just ask on the gasification project. Is there any additional color you can tell us about either specific areas where the costs are further ahead of where you expect them to be or whether you have proceeded enough with the redesign ideas to know whether the project is going to change materially, would change materially as a result?

Steve Wilson

Well, the answer to your second question is we have not proceeded far enough to come to that conclusion. This project like a lot of these projects are subject to rapid escalation in cost of hardware. The cost of engineering has increased. Almost all elements that go into a project like this have gone up. And in addition, the suppliers really have control of this situation because their services and products are in such demand.

We went down a particular path and looking at the technology and looking at a supplier of that technology and the answer that came to us, was an answer that would not yield a return that's attractive to us.

So, we are now without options here, we are looking a variety of technologies and supply sources and hoping that we can find a combination of the two that will get us in the ballpark in terms of our return expectations. But it is too early in the redirection to come to any conclusion on that.

Mark Connelly - Credit Suisse

Very helpful. Thank you.

Steve Wilson

Thank you

Operator

And our next question will come from the line of Brian Yu with Citigroup. Please proceed.

Brian Yu - Citigroup

Thank you and Steve congrats on the strong results in the quarter.

Steve Wilson

Thanks, Brian. Good morning.

Brian Yu - Citigroup

I have a follow-up question on the FPP program, you mentioned earlier that you guys recognize, you can't really control costs ion phosphates and you trying to handle that in your FPP, if we look at FPP sales the 39% of phosphates was due to FPP in the fourth quarter, which is down from 45% in the third quarter. So, it's looks like your selling more in to the spot markets.

Can we expect that percentage to continue to decline going into Q1 and then the second part, do any kind of forward selling outside of FPP?

Steve Wilson

Brian, I think in terms of providing color on our forward position in Phosphate going into 08, I probably said all that I'm prepared to say on that subject. I think the factors that I described can probably lead you to conclusion in that regard.

Do we sell -- we sell on -- most of what we do on a committed basis for future delivery is under the FPP, if that's your question, most all of it, yes.

Brian Yu - Citigroup

Okay, great. And then we've seen urea prices along the Gulf decline over the past few weeks, any color you could share with us on the pricing environment?

Steve Wilson

Well, if you could tell me when the spring season was going to break in the south and how robust applications going to be ruling in the season, I could tell you what might happen with prices, but I think it's a way too early to know and we could be seeing a seasonal low, but we won't know that until we look backwards.

Brian Yu - Citigroup

Got it and then with regard to the gasification project and you said costs are coming in, a lot higher than earlier expected. Could you provide a number on what that new range is?

Steve Wilson

The only thing I'll say is that, it was higher than were justified for the project.

Brian Yu - Citigroup

Thank you.

Steve Wilson

Thanks, Brian.

Operator

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

Charlie Rentschler - Wall Street Access

Hi. On the basis that ethanol really is what has triggered the boom in U.S.A. and clearly the whole world here. I wonder if you could talk for a minute about, where you see this thing going, with 63 new ethanol refineries coming on-stream in United States this year. That will require -- will they be able to produce something like 4.8 billion additional gallons of ethanol. This will require something like 2.2 billion bushels of additional corn on the back of the 13.1 bushels, if I recall that was produced last year.

My question is where do you think this is going to lead? I mean it seems to me that one scenario is, you just have a scrum of these ethanol refineries fighting for this stuff and driving up the price of corn, of course may be that's self-defeating because it gets to the point, where a lot of these people can't compete or maybe price of corn keeps going up so high that, the hedge fund managers up in Greenwich start planning this thing in the backyard, but what are your thoughts about, where this is all leading us?

Steve Wilson

Well, first of all, the premise of your question is generally aligned with our view here. We have something like seven ethanol plants being expanded right now in 62 or 63 under construction. All of that is going to add about 5.5 billion gallons to capacity, getting us to say 13 billion and 13.5 billion gallons. The market has known about this. I think that's all reflected in the price of corn today.

The last that we have looked, ethanol is profitable to the owners of ethanol assets today. The market is responding in terms of planting, and we actually believe that the high corn prices are as close to the acreage we have. It is going to lead to more acreage being planted on the margin...

Charlie Rentschler -- Wall Street Access

Yeah, but that's not what the farmers are telling people.

Steve Wilson

Well, we can talk about one particular season or we can talk about a trend and I guess my view is on a trend line basis. There is going to be more incentive to plant corn and lots of fertilizers required to grow corn. Farmers will be out to maximize yields. I think, it's certainly a robust underpinning for our business.

And with respect to what happens to corn prices and where the corn goes around the world that's really for the market to decide. We are in the business to try and help corn farmers produce as much as they can.

Charlie Rentschler -- Wall Street Access

All right.

Operator

And our next question will come from the line of Andrew O'Connor with Millennium Partners. Please proceed.

Andrew O'Connor - Millennium Partners

Thank you. Good morning Steve. Gentleman, great quarter.

Steve Wilson

Thank you. Good morning Andrew.

Andrew O'Connor - Millennium Partners

Steve, I though heard you say that you are tweaking or debottlenecking your phosphate output capacity this year and I wanted to know can you quantify that, how much?

Steve Wilson

Well, we announced projects a year ago to increase our phosphate capacity by about 40,000 tons of P205 and those projects are largely completed. And what happens when you debottleneck an integrated process, you move the bottleneck from one point to another and so we have moved a bottleneck in phosphoric acid now to sulfuric acid, and so, you kind of go back and forth, get a little more sulfuric acid capacity.

Andrew O'Connor - Millennium Partners

Sure.

Steve Wilson

And may be go a little bit further in that regard, and then, you are back to another bottleneck.

Andrew O'Connor - Millennium Partners

Okay. So there is no additional debottlenecking on top of the 40,000 that you already have underway, is that the correct read?

Steve Wilson

I would say that when you have good engineers working for you, they always got projects in their drawer that they want to bring out and try to justify. So I wouldn’t say that's end of the line, but that's the end of the line of what's been approved and is in process.

Andrew O'Connor - Millennium Partners

Got you. And then, secondly, regarding uranium enrichment. Can you expand on your comment in the press release that you've made progress in identifying supply contracts with utilities? Thanks so much.

Steve Wilson

Sure, well. The first comment on that is that despite uranium prices has gone from about a 120 or 130 bucks down to the 70s, 80s, and so, that makes it somewhat more challenging than it was when the industry was scared about future prices. But we are finding interest among utilities in entering into long-term arrangements.

That interest appears to be at levels that could justify this kind of facility, but we don't have a name signed on the dotted line or anything we have to take care in lead to providing firm support to a project.

Andrew O'Connor - Millennium Partners

Okay. And then is it possible to accelerate the timing on this project?

Stephen Wilson

I think we will move in this as fast as we can, but I ask frequently what we can do to accelerate progress here and we're anxious to get going.

Andrew O'Connor - Millennium Partners

And then lastly is there a ballpark estimate for upfront CapEx for the facility?

Stephen Wilson

Well, I know there have been numbers bandied about, but I'm a little bit low to repeat them because recent experiences in looking at capital costs lately have led to frequent upside surprises. So, I'd like to reserve on that till we go out into the market place and test the costs of the facility.

Andrew O'Connor - Millennium Partners

Understand. Thanks, Steve, nice quarter.

Steve Wilson

Thank you very much, Andrew.

Operator

And our next question will come from the line of Mike Judd with Greenwich Consultants. Please proceed.

Mike Judd - Greenwich Consultants

Hi yes. Good morning and congratulations on a good quarter.

Steve Wilson

Thanks Mike.

Mike Judd - Greenwich Consultant

Yesterday, during the other conference call related to fertilizers that was going on yesterday they indicated that there seems to be adequate nitrogen based fertilizers available.

And I'm just curious if you could talk or give us a little bit of some insight in terms of your expectations of how inventories look right now, for your customers, not so much urea inventories, but how things look let's say versus last year, what do we need to do in order to fill up the bins down stream, where we in that process and how this season is likely to play out, and realize there is lot of unknown at this point. We don't know what the acreage is going to be, but just what you know and what your stance is at this place?

Steve Wilson

Sure. Well, first of all we don't have clarity on downstream inventories. There is not a reporting service that we can go to that would give us any numbers on that. So, we have to rely on sound bytes and field reports. But having said that, if we look at ammonia, there is an ability to store a lot of ammonia beyond the producer level. So, it has to move from us and our competitors to the field, when the season starts.

With respect to urea and UAN there is downstream storage, of course urea being a dry product, it can be stored in a lot of places. UAN requires tanks, but there are lot of tanks in the market place. We believe that the strong fall movement that we had was associated with two factors, a good application in the fall excluding UAN, which doesn't go down in the fall and rebuilding supply for the spring.

The fact that UAN prices are strong as they are suggest that, the demand is there and there is not a surplus sitting around or the market would reflect that in the pricing. I can give you some numbers that the producer level, the manufacturer level that will put some of this in a perspective, these are CFI numbers. As of the end of '07 we had about 750,000 tons of ammonia, compared to almost a million tons as average inventory over the '02 to '06 period.

In urea 318,000 compared to about 350,000 in that five year period. UAN a little less than 600,592 compared to 750,000 on average. And you didn’t ask about phosphate but phosphate was 425,000 versus 548,000 over the five-year period. So first, is the five-year average producer level inventories across the Board are lower.

Mike Judd - Greenwich Consultant

Okay. This is a follow-up to that. If I look at your inventory numbers on your balance sheet, it looks like that there that sequentially it was a pretty big build at the end of the march quarter of '07 versus the end of December quarter '06. Is that the same type of patterns that we expect to see at the end of March of '08 versus December '07?

Steve Wilson

It's good question and a lot of it depends upon the whether believe it or not. If we go back two years in the spring of '06, we had a very, very strong movement in March. So, if you look at the end of March inventories in '06 versus '07 you probably saw a big increase. And in '07 we had very little movement in March and so the spring movement didn’t start until the second quarter. So, it's difficult to predict what our inventory position might be at the end of March in the absence of having a crystal ball on the weather.

Mike Judd - Greenwich Consultant

Thanks for the help.

Steve Wilson

Thank you Mike.

Operator

(Operator Instruction). Our next question is a follow-up question from the line of David Silver with JPMorgan. Please proceed.

David Silver - JPMorgan

Yeah, hi. Steve, I am wanted to ask you question about how you view your balance sheet right now and in particular additional distribution of your cash flow. So, obviously you have a huge, a very large net cash position at the end of the year and if you believe the earnings estimates on the street, it should rise substantially further in 2008.

So, in the context of the fact that you have raised the common dividend here, and you do have some gross projects, I mean how do you view the opportunity for additional distribution to cash, special dividends or buyback something else as 2008 progresses?

Steve Wilson

Well. I’ll give you a philosophical answer today, because those decisions evolve over time. We have demonstrated I believe quite effectively in our 2.5 years as a public company that we do a pretty good job of executing on the operating side with focus and discipline. We managed our way through the Katrina, post Katrina experience, I think in a first class way. And recently we've demonstrated and ability to execute in a very strong market.

We have the same focus when it comes to managing our investments and managing our capital structure. We have an ambitious set of objectives related to capital deployment in the business initiatives that we talked about in the press release are prominent. Peru was a very important initiative for us and we have some other things that may or may not materialize as the months go by.

Our Board of Directors is very much engaged in an ongoing basis in reviewing our strategic initiatives portfolio, reviewing our capital structure and putting all these things in perspective and earlier this week they made a decision to raise the common dividend. When we are ready to make further decisions on any of these dimensions, whether it would be related to capital deployment, we will make them, but we want to make sure that we consider all the factors and we consider the future of the business in a thorough way.

David Silver - JPMorgan

Okay. And then I was wondering, I just wanted to follow-up I guess on your comments in the printed release about the change in the status of the expiration of the term sheet in Trinidad. So I'm not familiar with what happens, quite frankly when the term sheet expires and what has to be done to get it renewed and what not.

But should we view that kind of from our perspective as a risk to that original gas allocation under the favorable terms that your Trinidad partner had secured it. And does this represent kind of a turning point in your deliberation, when you're thinking about the opportunity in Trinidad?

Stephen Wilson

The answers to your two questions are yes and yes. It's been a long frustrating process. We were quite optimistic that this was going to happen and the failure to get a sight turned out to be the key missing link here in this project and the clock ran out on the term sheet.

In terms of the legal ramification , a term sheet it's a term sheet, it isn’t a contract, its a kind of binding from a process standpoint, but its not binding from delivery of gas standpoint. We'd like to see that renewed, but as far as this management group is concerned, we've turned our sites to the southwest and we are aggressively working on the Peru project. I don't think that we've had a chance to talk with investors in a conference call, since we announced the Peru project.

We are very pleased to be selected there. We are working there on a gas-term sheet. We are working on site selection. We are working on establishing an office. In Peru, we are establishing relationships with, of course with the supplier, the supplying consortium and with a number of government officials.

We had great encouragement from the U.S. government, the Embassy in Peru and officials in Washington. So, as far as international grassroots expansion, we're on that single focus right now.

David Silver - JPMorgan

Okay. And I know well, there is a lot still to go on Peru, but just I wanted to maybe just see if I thinking about this is correct in one or two areas. So, the Trinidad project would have been an export-based project and a fair amount of that product would have ended up available to you in the U.S. Gulf, should that project have been completed.

And then, I'm wondering with the Peru project at least that has been sketched out kind of a different product mix and of course it is in a different part of the continent there. Would that be more of a regionally focused sales program, in other words, would that Peruvian product largely be kept and marketed in Latin America or would that also be kind of something that could supplement your production in the U.S. Gulf through a large steady kind of flow of exports up into the Gulf?

Steve Wilson

Let me go through your question kind of in reverse order. The fact that this plant would be on the west coast of South America leads one to the conclusion that [process] is probably not going to work its way back through the Panama Canal to North America because there are other more attractive markets closer to Peru.

There is significant demand in Peru, it is a meaningful amount of demand. There is other regional demand in South America. Frankly, we review the opportunity in the Americas stretching all the way up to west coast of Mexico and the U.S., with [Kieni] down there is really no significant nitrogen production on the west coast of the Americas.

Our partnership with KEYTRADE is very important in making this work. It's obviously once you load urea on a ship that can go any place and it could find us a way to Asia. And so we are obviously early on in formulating any marketing plans, but we are very excited about the opportunity to be in that location in the heart of an underserved market place.

David Silver - JPMorgan

That's great. I appreciate it. Thank you. Thanks Steve.

Operator

And our next question as a follow-up question from the line of Brian Yu with Citigroup. Please proceed.

Brian Yu - Citigroup

Hi, great. Thanks.

Great, thanks. Steve, now that KEYTRADE is handling all of your phosphate exports, how much flexibility do you have in allocating products between the domestic and international markets to take advantage of some of the relative price disparities we are seeing while still maintaining customer relationships?

Steve Wilson

Well. That's – I mean you hit the number with the question right there. We have strong relationships with domestic customers. The fact that we've been able to move product back and forth through the years between export and domestic means that we have certainly a flexibility on the domestic side.

But, we are very anxious to establish solid relationships with export customers and we will certainly, we will be working with them on sales plans and would align our interest and their interest where we retain some flexibility probably. But we're a long-term relationship oriented company and in general that's the way we like to continue operating.

Brian Yu - Citigroup

Okay. And then, with regards to channel inventories and correct me if I am wrong, but in a typical spring planning assuming there is something as typical, warehouse bins and tanks can churn two to three times. So would you say it's premature to make judgments about customer inventories right now? It could…

Steve Wilson

No, well, re-supply is happening now and we’re getting our system set up to run. We don't really know, that's the truth. We don't have data on downstream inventory.

Brian Yu - Citigroup

Right, okay. Thank you

Steve Wilson

Thanks Brian.

Operator

And our last question comes from the line of [Bob Grover with Scopus Asset Management]. Please proceed.

Bob Grover - Scopus Asset Management

Good morning, guys.

Steve Wilson

Good morning, Bob.

Bob Grover - Scopus Asset Management

How is everything?

Stephen Wilson

Everything is pretty good here, Bob.

Bob Grover - Scopus Asset Management

Good congratulations. Very nice quarter and I just wanted a follow-up on Brian's question on the phosphate export situation. I was just wondering what kind of pricing you're seeing in those markets now with all the pressure from sulfur, pressure being much greater on the overseas producers than it is on the domestic producers.

Also wondering what kind of lag you see in realizing the type of prices that we see on the spot market, is it similar to the domestic lag may be 8 to 12 weeks or is it anything shorter or longer?

Steve Wilson

Well, the pricing in phosphate has gotten incredible publicity in the last few months. And since we now have a market presence or KEYTRADE in 65 countries around the world we get emails everyday about this particular price indication and that particular indication from various parts of the world. And we've seen some very large numbers for individual transactions.

Are those pervasive across the market? Maybe or may be not, only time will tell how fast and far are those prices spread.

The phenomenon you described is an important driver, what's going on here? You've got DAP producers in some parts of the world, who are importing rock, importing ammonia and importing sulfur. And if you look at marginal costs of those commodities today, they are very high and suggest some sense of float pricing around the world.

In terms of how fast prices move in to our inventory and get reported on our sales. Its weeks to months. It depends upon how the market . Where you are in the annual cycle? Where you are in the trend in the market place? But clearly there are price increases in phosphate that we have yet to work away through our system.

Bob Grover - Scopus Asset Management

Thank you, Steve. I appreciate it.

Steve Wilson

Thanks Bob.

Operator

And at this time I'd like to turn the call back over to Mr. Steve Wilson, Chairman and CEO for closing remarks.

Steve Wilson

Okay. Thank you, Lacy. And as always, thanks to all of you for your continued interest in CF Industries. We look forward to talking with you in the future.

Operator

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect, good day.

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