Terra Industries Inc. Q2 2008 Earnings Call Transcript

Terra Industries Inc. (TRA)

Q2 2008 Earnings Call

July 24, 2008 3:00 pm ET

Executives

Joe Ewing - Vice President of Investor Relations

Mike Bennett - President and Chief Executive Officer

Dan Greenwell - Senior Vice President and Chief Financial Officer

Analysts

Edlain Rodriguez - Deutsche Bank

Jeff Feinberg - JLF Asset Management

Charlie Rentschler - Wall Street Access

Terence Ortslan - TSO and Associates

David Rosen

Steve Byrne - Merrill Lynch

Michael Christodolou - Inwood Capital

Steven Yang - Morgan Stanley

Brian Yu - Citigroup

[Migin Cong]

Paul Damico - TD Newcrest

John Tolbin

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2008 Terra Industries Earnings Conference Call. My name is Jasmine and I’ll be your operator for today. At this time all attendees will be in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions).

I’d like to now turn the presentation over to your host for today’s call Mr. Joe Ewing, Vice President of Investor Relations. You may proceed, Sir.

Joe Ewing - Vice President of Investor Relations

Okay. Thank you very much Jasmine and I would like to welcome to everyone to Terra’s second quarter results conference call. This morning we issued a news release announcing that for the 2008 second quarter Terra achieved a record net income of $202 million or $1.94 per diluted share.

At the end of the news release which we issued is our Safe Harbor statement. 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 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 recent and upcoming Investor Relations activities, since our last earnings call we’ve held our annual meeting and our yearly investor reception in New York, and we’ve also taken the Terra story on the road in a three day, five city investor tour in the Western and Southern US. And, we’ve also participated in the three equity conferences. Coming up, we have the Credit Suisse conference in New York in September. And, also an investor tour Midwestern Cities in late September and early October. We also continue to host visitors to Sioux City to meet with our management and to tour our Port Neal manufacturing facility. If anyone there listening today is interested in making such a trip we’d be happy to have you come, and if you like to do please call Kim Mathers or me to help make those arrangements.

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

Mike Bennett - President and Chief Executive Officer

Thank you, Joe. Good afternoon everyone. Thanks for joining us today. We are excited by Terra’s performance in the second quarter, as well as the continued positive environment for our business. During the second quarter, all Terra sales segments, agricultural, industrial, environmental and each geographic segment, North America, Trinidad and the UK realized very strong operating and financial performances.

In North America our geographic positions products mix flexibility and our experience serviced very well in a season delayed by considerable moisture and tool conditions in much of the Corn Belt. Application activities stretched into July and due to the prolonged season. As we mentioned in our April conference call, customers fill commitments commenced in earnest during the month of April and continued throughout the quarter. Our forward gas position as of June 30 reflects the strong platform with sales commitments and secured margin that we have for the balance of the year. Once again we think our people did a great job of operating their plans and managing customer deliveries in this season.

As we look forward to the balance of the year and in the next year, the economic environment for business appears very strong. Global grain inventories remain tight as does the projected supply demand balance for nitrogen products. These facts are represented by continued off season demand by our customers and continued strength in global nitrogen market prices. Natural gas prices remain high but they have abated somewhat in recent weeks. These trends overall underscore our positive outlook for the business. Our planned restart of our Donaldsonville ammonia plant is progressing well. We’re currently undertaking those start up activities and we do expect to be producing ammonia there before the end of July.

We are also making progress with our Woodward Oklahoma UAN expansion and continue to expect a 2010 start up of that facility. Terra is in its strongest financial condition ever, and we continue to actively evaluate different opportunities with which we can use cash to add earnings accretion for our shareholders.

At this point I’ll turn the call over to Dan Greenwell for his remarks on the quarter and our financial position. Dan?

Dan Greenwell - Senior Vice President and Chief Financial Officer

Thank you, Mike and good afternoon to everyone. Mike has highlighted very strong second quarter results and robust environment for nitrogen products. I’d first like to round out our discussion of the top line with a few comments about product selling prices and natural gas costs. Do not follow the traditional comments of our operating result and joint venture operations in Trinidad and the United Kingdom and our planned restart of the Donaldsonville ammonia plant. We will also provide further discussion on our effective tax rate and future tax planning opportunities to lower the effective rates. I’ll then discuss our stock buyback program and Terra’s liquidity.

Net income available to common shareholders was $202 million or $0.94 per share compared to last year’s $69 million or $0.66 per share. This is a record level of quarterly earnings for Terra’s shareholders. Revenues increased by a $150 million in the second quarter of 2008 as compared to last year. The 2007 revenues included our United Kingdom operations which generated a $120 million a second quarter revenues with an operating income of $19.8 million. Excluding the impact of prior years United Kingdom sales second quarter North American revenues increased by $272 million approximately $255 million of that increase resulted from price improvement.

As we have seen over the past several quarters average UAN net back sales prices continue to increase as a result of strong market conditions. In addition, ammonia sales prices continued to demonstrate price strength. Included in operating income was $5.7 million related to the sale of recovered refinium catalyst material that Terra no longer uses in its operations. You may have noted that we have a $7.3 million of net income associated with discontinued operations. The discontinued operations consist of our Beaumont, Texas Methanol operations. The second quarter income is principally related to the revenues realized under the Beaumont facilities Methanol production contract which are payable when Methanol margins achieved specified levels and can amount to as much as $12 million per year. During the 2008 second quarter conditions were present that allowed Terra to recognize these revenues at the maximum $12 million level. Under the Beaumont contract there is an annual cap of $12 million on profit sharing revenue so we will not see further profit sharing revenue in 2008.

In 2007 these revenues were recognized in the third quarter. The Beaumont facility is under contract to be sold with an expected closing to occur on or before January 2009. We are carrying the Beaumont assets on our books at estimated realizable value upon sale. Natural Gas cost increased by approximately $1.74 per MMBtu or $49 million during the second quarter of 2008 as compared to the prior year, we continued to purchase gas as we take orders for products that will ship in the future. The year-over-year decrease to second quarter Selling, General and Administrative expenses totaled $1 million. The second quarter of 2007 included approximately $3 million of cost associated with the United kingdom when it was consolidated in our results. We recognized approximately $12 million of net benefit during the second quarter of 2008, that stems from incentive compensation for a general partnership interest in Terra Nitrogen limited partnership interest in Terra Nitrogen limited partnership. This is reflected in the minority interest line on our Income Statement.

Our United Kingdom joint venture operations performed very well during the second quarter, sales prices and volume increases in the UK more than offset higher gas cost which continued to be volatile. During the second quarter the joint venture sold assets related to the carbon dioxide business and Terra share of the pretax gain was $8.5 million, this gain is included in the equity earnings from the joint venture. There were no significant integration or synergy charges in the second quarter for the joint venture. The joint venture anticipates additional synergy cost of approximately $9 million in the second half of 2008.

As Mike mentioned we are in process of start up activity for Donaldsonville ammonia facility. The aggregate cost of the startup activity was approximately $18 million, approximately one-third of the amount consist of catalyst cost. The total cost was approximately $5 million higher than we originally anticipated as we elected to replace optional components to enhance operational reliability and efficiency. Production from this facility will replace product that has previously been purchased in international markets at prevailing prices.

Terra’s effective tax rate after minority interest in UK equity earnings was 35.3% for the second quarter. Terra was a federal and State cash tax pay in the Second Quarter of 2008. We’ve developed a multiple tax strategies to lower the effective tax rate and the amount of cash tax is paid. We anticipate certain of these tax planning strategies will be in place before the end of 2008 and estimate our 2008 effected annual rate between 32% to 34%.

During the second quarter we bought back approximately 189,000 shares of our common stock at an average price of $40 per share, aggregate cost for the repurchase during the quarter was $7.5 million. Under our share repurchase program we have approximately 12.6 million shares authorized for buyback at the end of June of 2008.

Our cash balances which included $92 million in customer prepayments totaled $752 million this cash is invested in high quality money funds. We also received $20 million from our Trinidad and other North American joint venture operations during the second quarter. We spent approximately $29 million for normal maintenance capital and turnarounds during the second quarter of 2008. We estimate our annual 2008 sustaining capital expenditures and turnaround cost will total $60 to $65 million. In addition we estimate capital expenditures of approximately $40 million to $50 million associated for capital expansion at the Woodward facility. The 2008 total annual capital expenditures and turnaround cost will approximately between $100 million to $115 million. The Terra declared a $0.10 per share common dividend payable on September 12 to shareholders of record as of August 25, 2008.

At, this time I would like to turn the call back to Mike Bennett.

Mike Bennett - President and Chief Executive Officer

Alright, thank you, Dan. That concludes our prepared remarks this afternoon. At this time I’d like to turn the call back over to Jasmine so that she can instruct listeners on how to pose the questions to us. Jasmine?

Operator

(Operator Instructions). Your first question from Edlain Rodriguez. You may proceed.

Edlain Rodriguez

Thank you very much, good afternoon guys.

Mike Bennett

Good afternoon.

Edlain Rodriguez

Mike quick question for you and this is regarding China, Come December, what do you think they’re likely to do in terms of that 125% tariffs that they have out there? Like is there any incentive for them to keep it or remove it?

Mike Bennett

Well, that’s a great question and I wish I had to some usual insight into that. Obviously, I think the tariff was enacted because more urea likely slipped out of there in 2007 than they would have liked and certainly I still believe that the main thrust of the nitrogen industry and the basis for China is to make sure that they have agricultural self sufficiency. I think what happens after December will depend on lot of things. Certainly, what type of crop production year they have this year and also I think a lot on how they ultimately ration or balance their energy resources, we hear a lot of anecdotal reports about coal being very tight in China and some curtailments on various activities, industrial activities because of that, and so ultimately I think that both of those factors will play into whatever decision they undertake, but to be candid, I really don’t have any special insight at this point.

Edlain Rodriguez

That was good enough. Another quick question on nitrogen prices. I mean, they have been moving up, seem to be going higher and higher. Are you seeing any greater appetite from your customers to buy forward and how do you balance that?

Mike Bennett

Well, certainly this year as we mentioned customers came forward much earlier than normal, primarily to secure supplies for off season fill and some prepayment for Fall among the application. There is still this appetite out there at this point in time I wouldn’t say its normally strong for this time of the year I think that certainly the first round of buying for fill has largely taken place and one way folks take a bit of brief before they jump back in. And we candidly wouldn’t except another real gut push on customer demand until we start getting closer to the Fall application season which typically is in that September or October time frame and then once again when prepayment dollars are secured for the end of the year from farmers we would expect to see you know a lot of the demand for spring ’09 prepayment sort of thing.

Edlain Rodriguez

Okay, thank you very much.

Operator

Your next question comes from the line of Charles Rentschler. You may proceed.

Charles Rentschler

Hi, everybody. Question about your best outlook on corn for next year. Mike what do you think what’s your wild guess for how many corn acres were planted this year and what the yields would be and then what do you think the corn acreage planning with the for next for ’09?

Mike Bennett

Well, you know, Charlie you know that also happens to be the subject I’m not a particularly expert on but, certainly the USDA report of little over 87 million acres was a tad higher than we thought might happen, primarily because of weather, because certainly the price incentives were there for farmers to plant corn obviously we’ve lost somewhere in the range of probably 3 million of those acres due to flooding and various issues. And so, at the end of the day weather is lined up to probably create a scenario where scenario where the yield this year certainly could be supportive of what USDA estimated. But, when you kind of cut through all that and look at the ending balance numbers of the USDA, it would suggest that corn inventories will drop further and that in my view should be a continued good scenario for an increase in planted acres next year. The most common range of acreage early on that I heard for next year ranges somewhere in the 92 to as high as 95 million acre range ultimately I think corn prices stack up post-harvest and where soybean prices are at ultimately will determine where that number falls in but even with some of the money coming out with commodity markets here over the last couple of weeks and with December corn back under $6 now. There’s still a very strong financial incentive and good financial return to growers to produce corn and I don’t see much out there that will probably change the economic equation significantly primarily due to the supply and demand fundamentals.

Charlie Rentschler

Okay. And as a follow-up, of course Donaldsonville is being brought back on stream and Woodward is being upgraded I guess to produce more UAM but can we look forward to some more upgrade type projects may be you could give us bit of an update on the aqueous urea solution demand from the 20 Tennessee or truck engines?

Mike Bennett

Yeah, well as we talked in the past Charlie we certainly think that the market for urea solution for the SCR and diesel engines with great potential. We expect that market to really begin to materialize as I indicated in 2010 and in the early years of that market we think that we with Woodward project especially that we got the flexibility to meet the market share objectives that we have as a company. As we go further out it’s pretty clear to us that we are going to have to have additional upgraded capacity to meet the growing needs of that market and as we indicated I think in the last call we have evaluated several other similar projects to the Woodward project at some of our other facilities where we have excess ammonia and CO2 available and we are still evaluating those, trying to make the best decisions we can but in all likelihood Charlie in order to meet the demands of that market as we get out maybe you know 5 years or so from now we will probably going to have pick up some more real liquid capacity within the system.

Charlie Rentschler

Thank you.

Operator

Your next question comes from the line of Jeff Feinberg. You may proceed.

Jeff Feinberg

Thanks very much. This is Jeff Feinberg with JLF Asset Management. Congratulations, guys.

Mike Bennett

Thank you.

Jeff Feinberg

Just a quick question for Mike. Listening to the commentary about the strength and pricing, can we think about the profitability increasing from the June level into the September level?

Mike Bennett

Well, I think that one of things that we emphasized in the commentaries back that specially where UAM is concerned that you know customer order activity began early and so I don’t think at least for the current quarter people should be thinking of the business in terms of a snapshot of today’s spot prices versus today’s spot gas, but rather looking back at what the situation was relative to product pricing and natural gas pricing back really in the first half of the second quarter. I think that will shape particularly the third quarter and typically in our business our results realize what I’d call a lag both in market pricing and to a degree and what’s happening in natural gas markets because of those forward position. So, typically when we see a spot situation on pricing and gas perhaps like we have today normally you expect to see those trends materialize more clearly in the business that further out you go and so more likely those trends will start to materialize more for the end of the year and they will certainly in the current quarter.

Jeff Feinberg

I didn’t follow the point on gas, I am sorry can you just make the point on gas?

Mike Bennett

Well, we when we make those customer commitments and secure those sales we also secure our forward natural gas cost position to derivatives, so that we lock our margins down, so obviously when we were selling material in April for a third quarter delivery we didn’t believe our sales open to natural gas volatility and so obviously the gas price secured against those sales may be different than what you see in the spot market today.

Jeff Feinberg

I see, okay obviously, it will still be very healthy results and like. Okay.

Mike Bennett

Thanks for your question.

Jeff Feinberg

Thank you.

Operator

Your next question comes from the line of Terence Ortslan. You may proceed.

Terence Ortslan

Hi, Terence Ortslan. The market is obviously quite prolific, I just wanted identify some risks here that you see as dark clouds ahead and may be the import markets if you see any changes in the imports of the nitrogen coming in?

Mike Bennett

Yeah. Well, first of all, it’s always sometimes its hard to see the dark clouds until they fill their almost over the top of it but realistically right now regardless of some of the volatility in the pricing of various commodities from day-to-day and week-to-week, fundamentally we still have a very tight supply demand balance for grain and ultimately grain demand will continue to increase and that’s certainly is the fundamental challenge and I think the basis for the cycle is that we were in. The other side of the equation really once you look at the nitrogen pricing which is largely driven by the strong demand for grain production really are feedstock costs and certainly the recent trends at least in North America have been indicative of a decent level of supply and likely less rapid rate of growth in terms of natural gas demand and in part because of the general economy, so from that standpoint while certainly not a perfect world I think that those two fundamental factors at least at this point certainly are supportive. As we look into 2009 and certainly if one expects a larger planted acreage of corn similar to what Charlie and I discussed earlier, it will require more nitrogen supply for the domestic market as we look forward from now all the way through next June and as a result we believe that inputs will have to increase. At this point our crystal ball which isn’t always the clearest tells us that import levels probably will need to be at least on a par with import levels from the prior year and that even if that level of imports if you do have that kind of planted corn acreage we will likely draw inventories down into supply chain not dissimilar to what we saw happen really in spring of ’07, and so at this point in time we think that market needs a very healthy rate of imports. The US market up until recently is actually been trading at a bit of a discount to some of the trends in global markets and so we probably haven’t had a real strong incentive for imports to come in over the past few months, but prices ultimately here will have to be reflected to global markets in order to attract enough imports to ensure that we got the right supply balance.

Terence Ortslan

Where do you first see the increased imports will be able to arrive from, from the Black Sea?

Mike Bennett

Well again, primarily when you look at, at import fertilizers in the US, the major import from fertilizer perspective has to be urea and much of that urea is not really Black Sea material its, its Middle East or Trinidad, Venezuela and so fourth, primarily granular. Certainly, we think ammonia import should stay pretty steady probably will need to see a slight increase this year in urea imports and probably continued fairly strong UAN imports which primarily have been coming from the Black Sea.

Terence Ortslan

One additional question about the share repurchase program. (Inaudible) for the termination of the program that you have or would you be renewing your programs between now and then?

Mike Bennett

Well actually we just bump the size of the program up and we extended the term of that program to give us additional flexibility and I think right now we have basically about $12 million shares well over $12 million shares authorized by the Board it’s part of that program and we extended the end date of that program to basically mid 2010. And so, essentially we got a $4.6 million share authorization and we have basically got two years right now to utilize with that authorization.

Terence Ortslan

Okay, thank you for the detailed answer, thank you.

Mike Bennett

You are welcome.

Operator

Your next question comes from David Rosen. You may proceed.

David Rosen

Couple of questions. First, on your tax rate it sounded like it was 37.5% you said it was expected for the full year and now it’s going to go down to 32. Does that mean the two back up quarters you are going to have mid 20% tax rates?

Mike Bennett

There should be some tax credits that we anticipate getting in the second half of the year, principally related to some APB 23 adjustments. We look to this restructuring in the second half of the year. So, we would expect lower effective rates in the third and fourth quarter. But we would expect the annualized rate for the year to be between 32% to 34% is before I said in my prepared comments.

David Rosen

Well okay. Second question on Donaldsonville, did you take a -- for this quarter did you take a charge?

Mike Bennett

No, we did not but we actually received a bit of a benefit some of those catalyst sales as we were renewing the Donaldsonville facility we retrained some catalysts from Donaldsonville so no we no we did not take a charge we actually received bit of benefits from catalyst sales out of Donaldsonville.

David Rosen

Okay. The UK joint venture, is there any reason to think that, the economics in that business are not sustainable?

Mike Bennett

Well, as we mentioned the UK gas cost, as we seen over the last several years. We start moving into winter months in the UK, the gas cost is extremely volatile and there’s not a strong forward market for gas in the UK, and as we also mentioned we expect the synergy cost in the second half of 2008 of approximately $9 million. So, I caution UK operations with volatile gas and then of course the synergic charges and cost we expect to occur in the second of half as well.

David Rosen

Got it. Let me ask I mean another question after the third quarter and your response is based to the fourth quarter. So, it seems, as though where we stand today based on kind of what the green market is suggesting pricing should be, and with natural gases I mean Q4 should be reasonably robust, but do you have an issue with that statement?

Mike Bennett

Well, it’s all the things on the definition of the adjective I guess. But, I think realistically as we go forward, certainly at the pricing trends that we see today in the market place continue as we move forward further in time, we’re likely to see on average better realized prices simply because today’s stock prices are obviously are higher than those we saw in the first half and certainly, if the gas market stays anywhere close to current levels, they are the best levels that we have seen really since the first quarter. And, so as we start taking additional gas positions which would primarily be aimed toward Q4 and on into the first half of ’09 we’ve got a good piece of benefit from that.

David Rosen

Got you. And there is always this question about a supply response, in your estimation where you stand today. How long will take for someone to Greenfield the facility to meet the current demand?

Mike Bennett

Our conventional thinking today is that from planning to production you are probably looking at something close to four years.

David Rosen

So, basically a similar way to come out and decide to build the plant, it would come on my mind for some time in mid 2012?

Mike Bennett

I think realistically that’s that would probably be a fair estimate.

David Rosen

Okay. Could you there were some suffered analysts that have come out and speculated that the -- there will be a supply response in 2009?

Mike Bennett

Well, there are projects with currently construction and certainly there will be additional capacity brought on stream this year not as much on the basis of what we know from outside consultants in ‘09 and some additional capacity in 2010 and 2011 that currently was under construction but as we show people in our investor presentation when you look at the rate of growth in Nitrogen demand that certainly we are seeing over the past few years and is projected over the next two to four. At this point in time it doesn’t appear that the cumulative amount of new capacity is likely to be significantly different than the cumulative growth in all that time frame?

Mike Bennett

So yeah, I think like anything, when times are good, and there’s good money to be made people reinvest in industries and we would expect that but its not the kind of thing that you can turnaround on a time.

David Rosen

And, final question again on the Donaldsonville terminal, you guys not the terminal but the Donaldsonville plant that will actually appear in Q4, can you give us any more order of magnitude, what the opportunity that presents as opposed to buying product internationally?

Mike Bennett

Well, I can give you just a straight mathematical example and you can determine your own opportunity. When, we purchased ammonia internationally quite frankly the margins on that are too stuffy, I mean, if you have much more than ten buck of ton you probably done well. If you take a snapshot of today and you assume $10 natural gas of plant like that would have cash cost somewhere in the range of $370 per short ton. Ammonia today at the Gulf coast I’m not sure what it supported at but let’s say for the sake of argument its $600 per short ton. That would imply that the snapshot opportunity today would be $230 ton. And so, there is a significant difference between purchasing ammonia and producing it when you have that type of spread between the selling prices in raw material cost.

David Rosen

And, if I do that that would get on 400,000 tons that will be about $92 million, and again if I use your tax rate that you provided which I guess on a run rate basis 32% that would add about $0.60 of earnings respectively?

Mike Bennett

Based on that snapshot I would say that’s rough estimate on the impact and again that’s annualized rate.

David Rosen

Correct that’s $0.60 okay. Well again great quarter and we are looking forward to similar type of results in the future.

Mike Bennett

Thank you.

Operator

Your next question comes from Steve Byrne. You may proceed.

Steve Byrne

In your ammonium nitrate business how much of that is sold into agricultural markets versus the industrial and explosives market?

Mike Bennett

Steve, roughly when you look at ammonium nitrate our ag ammonium nitrate business is roughly 15% of our out put there as you said in the balance is goes primarily the industrial markets.

Steve Byrne

In the spot price is this move from roughly $400 a ton to $500 a ton in the last two weeks can you talk about those end markets as to whether what is the incremental driver that has caused that spot price to pop like that and now your industrial contracts tight to some trailing price or how does that work when would you see, when would that kind of price increase flow through into your industrial contracts?

Mike Bennett

Well, first of all, all of our industrial contracts vary. Now the Oreck agreement, which consumes at least a good share of our industrial ammonium nitrate is more or less a tolling agreement, Steve which is based primarily on natural gas costs and we entered into that agreement obviously in 2005 when people didn’t think (inaudible) was worth much. So, on that business we don’t see the kind of fly up in margins that we will probably see on the Ag side. On the Ag business, I think the driver behind ammonium nitrate price increases really has been the global cushion in urea prices. Those ammonium nitrate value is ultimately stand from what’s happening in the Black Sea. Certainly, when you look at Europe, with higher expected production costs and Europe being the other significant market in fact probably a more significant market for Ag ammonium nitrate demand. Certainly, I think that those are influencing drivers. So, for us as we go forward to the second half assuming those drivers remain in place, we will see a much better pricing on the Ag side they are in but won’t see a nearly anything of that magnitude on the industrial piece.

Steve Byrne

And can you talk about the outlook for the regulatory climate for handling and transporting AN as your outlook improved recently on that?

Mike Bennett

Well I don’t know that it improved Steve we think some great measures will put in place to help ensure that material doesn’t get in to the wrong hands. Material now as fairly heavily regulated relative to keeping track of basically who is receiving and merchandising the material and of course we’ve got much better measures in place these days to really track and identify shipments and so, I think a lot of the very sound yet common sense measures were put in place to really mitigate the odds of something untoward happening in that regard. Those things have been put in place have actually been there now for some time absent some other type of issue or incident, I really don’t expect much additional regulation or change in that regard. But, certainly it’s not a big impact on the industry and I think the some of the shipping patents and material and certainly it’s had an impact on the I think the ease of import as well.

Steve Byrne

So, that market has probably tightened in recent years than?

Mike Bennett

Well, maybe to some degree you know, because also we’ve had some competitors get out of that market. And certainly we’ve – that’s up to balance but at the end of the day I mean ammonium nitrate more and more is what I call almost specialty fertilizer, it is a great product economically for a number of crops especially in the south and Southeast. You don’t really see it used much anymore on corn or some of the mainstream crops but, the real value is basically delivering that Nitrate in conditions, we have the lot of moisture and humidity and lighter soil type so like we see in the south and Southeast.

Steve Byrne

Okay. And just last one, Dan, do you see that 32% to 34% tax rate in 2009?

Dan Greenwell

Probably in the 34 range.

Steve Byrne

Okay. Thank you.

Operator

Your next question comes from Michael Christodolou. You may proceed.

Michael Christodolou

Hi gentlemen. A couple of questions on inventory. Mike, I think during the wet spring in April and May you made some commentary that there will be a number of your dealers want April to take physical delivery of there prepayment volumes just because their growers in turn couldn’t access the feel and then it seems to get better and then there was of course the flooding in Iowa and Indiana in June. Couple of questions did any prepaid volumes originally just needed for first half ‘08 shipment not get shipped?

Mike Bennett

Well I would say that any of that they didn’t get shipped or relatively minor in the scheme of things might basically at the end of the day this season is just continued to pace it out and pace out and in globally when you look at really our inventories today we were not really in a much significant position and I think we were a year ago at this time I think for the most part our customers are in pretty good shape and really here in July as we’ve indicated the fill activity on products like UAN and toping of Ammonia as really been moving at a pace that we would normally expect.

Michael Christodolou

And even inventories right there flat on a dollar basis I guess even if that’s value to cost right so?

Mike Bennett

And we the cost is little more to put that inventory away this time

Michael Christodolou

Further volumes are actually down probably that you are preparing at the end of June 30^th versus the year ago?

Mike Bennett

Yeah but one thing you have to remember is that a year ago we also were still consolidating the UK and so overall we certainly don’t think our volumes and inventory comparable but at all but they in summer as they maybe a little higher than last year which its kind of bull out here but when you factor the UK out the dollar value in North America is very, very higher this year.

Michael Christodolou

And what are you hearing from the field for wheat planning here in the Fall?

Mike Bennett

Well at this point in time it’s still early in the game but basically in a lot of our geography wheat farmers did pretty well this year. Usually that scenario that we don’t see a lot of advanced purchasing on for fertilizer before and the planning market for that is quite primarily ammonia for pre-plant and the UAM market for that crop really doesn’t come until top dress usually in the first quarter of the calendar year. So, at this point in time some of the things we’ve seen suggest that wheat acreage may be flat to slightly down next year but any decrease may likely be due to the continued strong opportunity for growers in corn and soybeans.

Michael Christodolou

My last question. Did I hear you say you thought may be 3 million acres corn were lost and I am curious if I heard that correctly and also did you see any attempt here in the last months for side dressing for growers trying to just salvage some of the acreage?

Mike Bennett

Well, I guess first of all some of the numbers that we heard that states were reporting like the State of Iowa, the State of Illinois and the State of Missouri, when you aggregate what some of those estimates were somewhere in that ballpark of acreage probably isn’t totally unrealistic. In terms of those crops and most of that damage occurred late enough where really re-planning probably wasn’t a viable option for many of those growers especially when you look at corn with such a short window on the growing season. And so, clearly at worst; the flood losses certainly offset anything that we picked up in that site acreage initially, and yeah, we’ve seen very good demand for Nitrogen all the way very good season and we had a pretty good over the top and inside the season over the top inside dress season out here especially in the western corn belt, and a lot of that’s been driven by just delays imposed by the weather.

Michael Christodolou

Thanks for the insight. Keep up the great work.

Mike Bennett

Thank you.

Operator

Your next question comes from the line of Steven Yang. You may proceed.

Steven Yang

Hi, can you hear me?

Mike Bennett

Yes, yes.

Steven Yang

Quick question in terms of the operations utilization and utilization rates and the operation cost are you seeing increase in you know what the electricity cost is and how does that impact to your plant costs?

Mike Bennett

Well, first of all, obviously the biggest cost of production for us is the cost of natural gas, and like anyone and like anyone else, I think we’re subject to what I’d call normal inflationary increases in things like wages and power costs. For the most part, in our facilities, we purchase power under term contracts with the utility providers, and so while certainly in some areas over time, we have seen changes in that in electricity costs I wouldn’t call those as dramatic relatively minor and certainly have not had a major impact on our variable cost of production.

Steven Yang

Anything outside of electricity costs other than natural gas?

Mike Bennett

Those really when you look at our business, natural gas dominates production costs and the second biggest cost we have with the Company is primarily freight, you freight and distribution expenses is to move our product and as they were and as there were going that’s been around certainly knows freight costs have been moving upward and certainly that’s been an issue that’s been an issue for our customers as well as the increased cost of material.

Steven Yang

And then capacity utilization is the same as last year?

Mike Bennett

Our capacity utilization has been to high, I don’t have the numbers right in front of me but the facilities run well up this year and I would guess we’ve got to be up in the 97 plus the same range.

Steven Yang

Right, thank you.

Operator

Your next question comes from the line of Brian Yu. You may proceed.

Brian Yu

Great thanks quick question here on in terms of the pre buy can you tell if this is dealers tactically buying for the fall to refill their bins or, are they buying these to fill commensurate orders from the farmers?

Mike Bennett

Well its there is a probably a little of both of those Brian, but I think primarily. at this stage of the gain it would be largely driven by retailers, wanting to fill that storage knowing that they are going to move that material in the coming spring, in some cases even early this past year there were some there were some people particularly integrated into grain running some programs where they were selling some inputs to farmers in addition to running forward grain sales program for them to, but I would guess most of the material that least on UAM has sold this March it’s probably not been sold yet at the farm level whereas on ammonia prepayment, my guess is that a higher percentage of that has probably had some cash commitment on the part of the farmer associated with it.

Brian Yu

And Mike, just from what I’ve been hearing about retailer s having some working capital issues because of high costs of fertilizers, have you had to change any of your prepayment terms?

Mike Bennett

Well, Brian, typically, on the short-term stuff that we’re going to shipping here over the next quarter, but this time of the year, normally that material isn’t associated with a prepayment program and as you ship, as you take orders for shipment further out, you associate more pre-payment with that just to kind of security, the position of that sale and obviously the integrity of your cost hedge against it. But typically, like the 100% prepay programs most commonly are associated with the prepayments that we make to customer sales that we make in like December and January that will accompany the Spring movement of that material and typically, that’s when they receive the most money from farmers for advanced payment on inputs.

Brian Yu

And one last one switching topics a bit, any major turnarounds planning in your Operations for the back half?

Mike Bennett

Well actually only one. It’s kind of an unusual year in that we only have one turnaround planned. That’s and that will occur I think in the first half of August, but this year, we do not have the turnaround planned. We went slightly over our two year cycle there, so only one planned and that will be Fort Neal in August.

Brian Yu

And how long will that be down for?

Mike Bennett

I believe that’s going to be roughly a two to three week turnaround.

Brian Yu

Okay, great. Thanks and great quarter.

Mike Bennett

Thank you, Brian.

Operator

Your next question comes from the line of [Migin Cong]. You may proceed.

Migin Cong

Hi. Given the run up in product prices, I’m wondering if you could talk a little bit about what’s driving this increase you know, where is the marginal produce pricing this product now and you know related to that as things turn over when they turn sometimes in the future they are given our natural gas cost is in now almost at a discount to where Western European prices are being set. Like how is that change the earnings power of your business?

Mike Bennett

Well, I’ll answer the first question and then speculate on the second. Right now, to be honest, I don’t think that the robust Nitrogen markets are really so much driven by where the marginal producer can operate. I think that we’ve, in large part right now, the supply and demand balance globally is so tight that there is been a decoupling of that effect. Today when you are looking at global urea markets in the range of $800 basically any plant that’s out there as far as I know from a cost structure standpoint can operate can operate at some pretty good cash margins. Certainly the I think that what we’ve seen happen in crude oil that’s impacted the price structure of natural gas in Western Europe changes fundamental changes in the pricing of Russian gas to Eastern and Central European producers clearly has made a significant difference and in my view, a step change relative to regional competitive positioning, and certainly, today as a certainly as a domestic North American producer, where all of our product is sold, when one looks at those fundamental changes in some of these regions and also couples with that the significant increases in freight costs that we seen over this time frame, it’s created a pretty significant competitive buffer for domestic producers and I think largely left the North American industry in a much stronger competitive position globally than it was certainly earlier in this decade.

Migin Cong

Got it. Thank you. The great quarter, guys, thanks.

Mike Bennett

Thank you.

Operator

[Operator Instructions]. Your next question comes from Paul Damico. You may proceed.

Paul Damico

Hi, good afternoon, guys. Mike, just something you mentioned earlier and then you touched on in the most recent question. In terms of the demand forecast versus supply that you either subscribe to thinking is coming on or that you have seen other people say, where would you put that right now over the next say two to three years? Where would you see the supply response and the demand in line with that, and what product would you be talking about in particular when you talk about nitrogen?

Mike Bennett

Well first of all, I guess the consultant data that we had indicates that it’s probably not unreasonable to expect about a 3% annual growth rate in consumption of Urea which globally is really the major form of Nitrogen that’s traded and applied in many of the growth markets such as India and Asia and so when one looks at urea capacity are planned start ups and plans under constructions. Basically of this year or next year it looks like new capacity actually will fall a bit short about 3% growth rate but could very well catch up some then in 2010 or 2011 to kind of get back and back in line with that 3% annual growth rate over the time period. And so, it’s the supply and the demand wont be staged in absolutely evenly and it looks like we could have a bit of our gap relative to demand increases relative to the supplier response in ‘09 and then some of that gap being closed as we get it out in the 2010 and 2011.

Paul Damico

And to just to be clear that supply response that you are referring to that’s excluding China?

Mike Bennett

That is excluding China. Yes.

Paul Damico

Thank you.

Operator

Your next question comes from the line of John Tolbin. You may proceed.

John Tolbin

Your 7% notes are rated B1, BB by the rating agencies frankly seems out of sync with your very, very strong credit profile at the moment, have you got any plans to talk rating agencies to address your ratings or is or is that just not a priority for you.

Mike Bennett

No as matter of fact Standard & Poor’s updated their rating earlier this Spring, so we have talked with them, and we’ve talked with others as well. Moody’s is probably scheduled to do something here and in the short-term but no, we talk soon on a regular basis and I think part of the rating model or profile is relative size of issuer, and we follow with them the categories. So, we do touch base with them on a regular basis. They’re familiar with our operations and they run a shop. So we’ll go with their schedule on updating ratings.

John Tolbin

Okay, fair enough. And a follow up question again your financial performance is in very strong in your credit profile is exceptionally your cash is twice your debt balance outstanding, the stock price performance is probably been disappointed for you as well as your investor with big picture what you guys thinking about doing as something being talked about mergers, acquisitions something to change that?

Mike Bennett

Well, obviously we would love to change that, and certainly as I touched on just very briefly in my remarks, one of certainly my priorities here and a priority for our board is to look at all of the different options that are available to us to utilize our strong financial position to create a more accretive earnings platform for shareholders and that can take a lot of the different forms. Certainly, we’ve talked a little bit about the share buyback today. We’ve talked about new projects that will add upgrading capacity which in turn will add additional earnings capability for the company and we’ve always been very open about the fact that we continue to desire to make accretive acquisitions in our space and we’re always looking and thinking about ways that we think are smart that can improve the profile of the company both in scale and I think performance over the cycle for shareholders. So, that is a priority for us. It’s on our mind. I think there are a lot of reasons why sometimes apparently a pure play nitrogen company doesn’t get the exactly the same type of I guess value that is subscribed these days to phosphate companies or certainly potash operations, but we think nitrogen is a good business. We think it can be a good investment for the shareholders, and we’re committed to finding ways to make that more evident.

John Tolbin

Okay, very good. Thank you.

Operator

And, you have no further questions at this time.

Mike Bennett

All right well, again, we would like to thank you all for your interest in Terra. We appreciate your participation today. And again, if any of you would like to come visit us or have follow-up questions, please contact Joe Ewing or Kim Mathers and we would be delighted to host you or to field those questions. Have a great day. We’ll look forward to speaking with you at the end of the third quarter.

Operator

Thank you for attending today’s conference. This concludes your presentation. You may now disconnect. Good day.

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