CF Industries Holdings, Inc. (CF) Q2 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Second Quarter 2013 CF Industries Holdings Earnings Conference Call. My name is Danielle, I will be your coordinator for today. [Operator Instructions] I would now like to turn the presentation over to the host for today, Mr. Dan Swenson, Senior Director of Investor Relations and Corporate Communications. Sir, please proceed.

Good morning, and thanks for joining us on this conference call for CF Industries Holdings, Inc. I'm Dan Swenson, Senior Director, Investor Relations and Corporate Communications. And with me are Steve Wilson, our Chairman and Chief Executive Officer; Dennis Kelleher, our Senior Vice President and Chief Financial Officer; Bert Frost, our Senior Vice President of Sales and Market Development; and Tony Will, our Senior Vice President of Manufacturing and Distribution. CF Industries Holdings, Inc. reported its second quarter 2013 results yesterday afternoon, as did Terra Nitrogen Company, L.P. On this call, we'll review the CF Industries' results in detail and discuss our outlook, referring to several of the slides that are posted on our website. At the end of the call, we'll host a question-and-answer session. During this call and in the associated slides and our earnings press release, we make reference to certain adjusted or as adjusted financial results. These adjustments relate to the modification to the selling price methodology used for products sold by Canadian Fertilizers Limited or CFL. This modification impacts the comparability of the financial results between the 2012 and 2013 periods. To facilitate period-to-period comparisons of the company's underlying operating performance, we are presenting certain financial information on an adjusted basis, as if the modified selling price calculation methodology had been in effect from January 1, 2012 through April 30, 2013, when we closed the acquisitions of the remaining outstanding interest of CFL. Please refer to the exhibits and reconciliation in the press release or on Slides 14 through 16 of the presentation accompanying this call. These adjustments impacted revenue and gross profit, but did not affect CF Industries' economics, EBITDA, net earnings or earnings per share. As you review the news releases posted on the Investor Relations section of our website at cfindustries.com and as you listen to this conference call, please recognize that they contain forward-looking statements as defined by federal securities laws. All statements in the release and on this call, other than those relating to historical information or current conditions, are considered forward-looking statements. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control and which could cause actual results to differ materially from such statements. These risks and uncertainties include those spelled out in the Safe Harbor statement included in yesterday's news release and the slides accompanying this call. Consider all forward-looking statements in light of those and other risks and uncertainties, and do not place undue reliance on any forward-looking statements. Now let me introduce Steve Wilson, our Chairman and CEO.

Thanks, Dan, and good morning, everyone. During the second quarter of 2013, we experienced challenging fertilizer market and business conditions, but our solid execution resulted in a seamless support of customers and strong financial results for the company. As detailed in our press release published yesterday afternoon, CF Industries generated net earnings of $498 million and diluted earnings per share of $8.38 on sales of $1.7 billion and a gross profit margin of over 50%. These results are notable as our earnings per share was the second highest on record. Our Nitrogen business had a new revenue record in the quarter, and gross margin for that segment was second only to the record set in the second quarter last year when average daily natural gas market prices were 44% lower than they were this year. These results reflect the inherent advantages of our business model and our ability to execute effectively across varying market conditions. We produce these strong financial results while facing challenges during the quarter, principally due to weather, but also from other related industry conditions. Several regions in North America experienced nearly continuous cool and wet weather through May. This weather was notable for some of the new records that were set, as areas in the Corn Belt received precipitation that was 3 to 6 inches above normal. One of these records was set in Iowa, the largest corn-producing state, which experienced its wettest March to May period on record. This unusually cool and wet weather was not unique to North America, as Europe, Russia and China experienced similar conditions. These conditions resulted in a late start to planting, and many farmers were forced to forgo preplant direct ammonia application because of the limited time window open to get seed in the ground. This led to increased demand for UAN and the resulting products which enclaved [ph] to our strength as a full-line nitrogen supplier with a broad distribution footprint. A follow-on impact of the global delays and planning in fertilizer application was the buildup of inventory industry-wide. With 97 million acres of corn expected to be planted in the U.S., producers and importers recognized that there would be substantial demand for plant nutrients. The delay in the application season allowed time for inventories to build, which constrained global prices, especially for urea and phosphates. As the quarter progressed, the season developed strength quietly and without a lot of fanfare, and planting and application accelerated. Weather conditions improved and were conducive to field activity from late May through the end of the quarter. Activity was intense, with the USDA reporting that more than 97 million acres of corn were planted. The high level of planted acres led to a large amount of nitrogen moving through the North American distribution system, as demonstrated by the high volume CF Industries sold this quarter. Product movement was strong through the end of the quarter. And at the end of the quarter, we had a near-record low urea inventory and believe that industry-wide ammonia and UAN inventories were within the 5-year historical ranges. Through the quarter, our team worked exceptionally well in overcoming the challenging conditions we faced. On a very personal level, it was a difficult quarter for us as we lost one of our colleagues and 7 other people were injured in the tragic incident that occurred during the turnaround of an ammonia plant at our Donaldsonville nitrogen complex. The safety of our employees, contractors and communities is and will always be our first priority. We will incorporate the lessons we learned from this incident in our operating practices and reinforce our commitment to safety as priority #1. In addition to the turnaround at that particular ammonia plant, we had other turnarounds and carried out a precautionary shutdown of our Medicine Hat nitrogen complex due to flooding along the South Saskatchewan River. These contributed to our ammonia system as a whole, running at only 92% of capacity during the quarter. This is a lower rate than we have averaged over the past several quarters, but taking plants down for regular maintenance and to protect them against threats such as flooding is consistent with our approach of assuring the safe operating condition of our plants. Our sales team did an excellent job building a strong order book early in the year during a period of attractive prices, especially for ammonia and UAN. Their ability to find the best available opportunities contributed to higher year-over-year average prices for both ammonia and UAN. Our sales team also identified attractive urea and UAN export opportunities that have positioned us well for this fall. We continue to be good financial stewards. Early in the quarter, we issued $1.5 billion of bonds with 10- and 30-year maturities at an average coupon of 4.2%. The timing of this financing was fortuitous as it coincided with the bottoming of benchmark treasury yields. And during the quarter, we repurchased 2.6 million shares of our common stock for $474 million. Including activity through August 5, our year-to-date share purchases totaled more than 5.8 million shares or about 9% of our shares outstanding at the beginning of the year. The more than $1.1 billion of cash returned through these repurchases, plus the $49 million of dividend paid so far this year, equal almost 10% of our average market capitalization. We believe these share repurchases represent great value and provide the long-term benefit of increasing nitrogen capacity per share for remaining shareholders. Shortly after the end of the quarter, we received the air permits required for our capacity expansion projects in Louisiana and Iowa. The receipt of these permits helps clear the way for us to begin construction activity at both sites, which we expect will occur in the next several weeks. With that, let me hand the call over to Dennis to share the financial details from the quarter and year-to-date.

Thanks, Steve, and good morning, everyone. During the second quarter of 2013, the company reported net earnings attributable to common stockholders of $498 million or $8.38 per diluted share. This compares to $606 million or $9.31 per diluted share in the second quarter of 2012. Our second quarter 2013 earnings included a pretax unrealized loss on natural gas derivatives of approximately $18 million and pretax gains on foreign currency derivatives of $4 million. The net impact of these 2 items was a decrease of $0.15 in after-tax earnings per diluted share. First half share repurchases made under our $3 billion repurchase program increased our second quarter earnings per share by $0.53, reflecting a 6% decrease in our weighted average diluted share count for the second quarter. As Steve shared earlier, our Nitrogen business performed exceptionally well during the second quarter. The segment had record quarterly revenue of $1.5 billion and its second highest quarterly gross margin of $847 million. We delivered 3.6 million tons of nitrogen products and achieved a gross margin of 55.5%, which you can see on Slide 6. The decrease in segment gross margin is due primarily to the swing from a noncash mark-to-market gain of $78 million on natural gas derivatives in the second quarter of 2012 to a mark-to-market loss of $18 million in the second quarter of 2013. It also reflects realized natural gas costs of $3.78 -- $3.79 per MMBtu in the second quarter of 2013 compared to $3.13 per MMBtu a year ago. We currently have spot agreements covering 90% of plant production for August through November at an average price of $3.67 per MMBtu. During the second quarter of 2013, we sold 833,000 tons of ammonia at an average realized price of $704 per ton. Ammonia volume for the second quarter of 2013 was 5% higher than a year ago, primarily due to a later start to the application season in 2013 compared to the exceptionally early start in 2012, which pulled ammonia demand into the first quarter of that year. Our average ammonia price was 11% higher than in the second quarter of last year due to a strong forward order book entering the application season and a robust demand that developed during the quarter. Second quarter sales of granular urea increased from 694,000 tons to 704,000 tons due to export sales and higher agricultural sales, especially into Western Canada. Our average price decreased from $522 per ton or an adjusted average of $507 to $385 per ton due to global delays in fertilizer application and expectations for higher Chinese exports. During the second quarter of 2013, we sold 1.6 million tons of UAN, essentially unchanged from 2012. The average UAN price increased from $324 to $341 per ton due to an attractively priced forward order book and strong demand as some farmers switched from ammonia to UAN due to the late start of the application season. As shown on Slide 7, our Phosphate segment achieved total revenues during the quarter of $190 million, down about 18% from the second quarter of 2012. Total sales volume was 421,000 tons in 2013 compared to 493,000 tons in 2012. The decrease in volume was due to lower domestic and international product demand. Average phosphate price realizations during the second quarter were lower than in 2012 due to muted global demand. And the segment generated a 9.5% gross margin, down from 21.8% reported a year ago, as a result of lower average selling prices and higher production costs. Thanks to the strength of our Nitrogen business, these quarterly results represent a very healthy first half for CF Industries. Total first half revenues were $3.1 billion compared to $3.3 billion in the prior year. And first half volume was 7.5 million tons compared to 7.7 million tons in the prior year period. Total EBITDA for the 6-month period was $1.6 billion, while gross margin was 50% of sales. Net earnings to common stockholders was $905 million, which including the impact of share repurchase activity, resulted in earnings per diluted share of $14.80. Now let me turn it back to Steve.

Thanks, Dennis. We have a cost-advantaged North American footprint that allows us to generate strong earnings under varying market conditions and that positions us well for long-term growth. And we believe that the current agricultural and fertilizer market conditions are conducive to plant nutrient demand and our near-term profitability. Corn remains a very profitable cash crop for farmers, with futures prices reflecting the market's assumption that the industry will return to more normal stocks following this year's harvest. Of course, the actual stocks use depends on weather between now and late October, which will determine the size of this year's harvest. With fall 2014 futures pricing corn at about $5 per bushel, farmers can expect to earn very attractive returns next year from corn relative to other crops. Based on today's futures prices, corn will generate a significant premium over soybeans, including the cost of fertilizers. Given this profit differential, we project that farmers will plant about 92 million acres of corn in 2014. Although the planted area will represent about a 5% decrease from what has been reported as planted in 2013, total acres planted through all crops is expected to decline by just 1%, resulting in expected nitrogen demand of 13.3 million nutrient tons in fertilizer year 2014, modestly below the estimated 13.5 million tons in 2013. This is an historically robust level of nitrogen demand. Ammonia demand is projected to be healthy this fall in light of planting expectations for next year. We believe we have an appropriate amount of inventory and planned production so that our system can meet this demand and our commitments to customers. UAN side-dress application continued very late this year, providing us with a high level of spot sales opportunities through June and even into July. We delayed the start of our UAN summer fill program into July and benefited from strong customer interest. In the urea market, prices in the U.S. Gulf have tested floor levels. The Chinese low tariff export window opened on July 1, and that seasonally available product has been moving to various regions. Notable among these regions is India, which has experienced a more normal monsoon season this year, improving planting conditions in that country. We're all aware that subsidy programs and currency fluctuations impact India's purchasing behavior, but fundamental planting and crop economic conditions are favorable for urea demand. We expect that the projected modestly lower nitrogen demand in the U.S. will result in lower urea imports in the new fertilizer year. Just as we did in this most recent quarter, we will seek the best sales opportunities for our products, whether through domestic or export sales. The phosphate market looks challenging in the near term with modest global demand and substantial available production. However, the recent declines in ammonia and sulphur prices will help margins by reducing production costs. Longer term, the plant nutrient market presents good opportunities for increased earnings. Growth in global population and a shift to higher-protein diets continue to drive a greater need for grains to feed the world. These demand factors support our 2% annual growth expectation for the world nitrogen market. This growth translates into the need for 4 or 5 worldscale ammonia urea complexes to be built each year to satisfy demand. While some of our peers have announced indefinite delays to their nitrogen expansion plans, none of them has cited the lack of expected product demand as a reason. We are pleased to be in the vanguard of North American capacity additions. We have met with a number of long-term oriented investors following our Investor Day event in June. These conversations have been valuable as we, as a management team, continue to learn more about what is important to the type of investors that make up the majority of our shareholder base. While the detailed points vary from investor to investor, we did hear consistent feedback, encouraging us to keep doing what has led to our successful track record: Managing the business with a focus on safety and operational excellence, investing selectively in growth projects with attractive return profiles and aggressively returning cash to shareholders through dividends and a value-oriented share buyback program. We continue to have a significant amount of discussion with investors, among management and with our Board of Directors about what methods of returning cash to shareholders are most appropriate for CF Industries. We are -- and we continuously assess the best path forward in this dimension of our business. To date, our analysis led us to the belief that executing share buybacks has been the best way for us to return cash to shareholders, especially since we believe that the earnings potential of the company is not fully reflected in the market price of our stock. Our actions this past quarter to issue debt while continuing to buy back shares were oriented towards improving the efficiency of our balance sheet and increasing the leverage our shareholders have to our business model. We are proud of the shareholder value created by CF Industries and are glad that the strength of our business provides us with the wonderful challenge of considering a variety of options for both increasing and returning the value of that enterprise. We welcome input from our shareholders on this topic. With that, we'll now open the line to answer your questions. Danielle?

[Operator Instructions] And our first question comes from Don Carson from Susquehanna.

Steve, just want to get an update on your supply demand outlook for U.S. nitrogen. We've seen, as you mentioned, 2 cancellations by some of your peers due to soaring construction costs, and there's likely to be another one soon. So can you comment on cost escalation in general and what you're doing to mitigate that, whether you're going to come in on budget as originally expected? And what's your current view on how many significant expansions we might see in the U.S., either greenfield or brownfield, and what that does to sustainability of the net import status of the U.S. in nitrogen?

Okay. So far on our 2 major projects, we have made great, great progress in specifying the engineering costs and nailing down the cost of major components that are being fabricated by fabricators for us. And with respect to those 2 sections of the project cost, we are very comfortable with how they're coming in relative to our budget. They're essentially in line with our expectations. We are in the process now of looking at -- entering into competitive bidding for the construction costs element of the projects. That represents roughly half of the total project cost, and we'll have more clarity on that aspect of the project cost when we complete the competitive bidding process. With respect to the number of projects that are likely to be built, there's certainly a lot of discussion about that. There are a number of projects that are moving along. There are others that have been canceled, there are others that are in decision mode. We don't have any more clarity than the general market has on that point.

And just to clarify, how long would you expect the U.S. to remain a net importer of nitrogen? I realize it varies across the 3 major product types, but how long do you think that window will remain?

Well, certainly, our projects are coming online in 2015 and '16. We expect there to continue to be substantial imports of nitrogen at the time we complete our projects, and we actually don't see anything on the horizon that's going to flip that for a number of years.

And our next question comes from Vincent Andrews from Morgan Stanley.

Just 2 questions. First, Steve, if we can think ahead to the fall season in the U.S., can you speak a little bit about the timing of the U.S. harvest and how important that will be relative to the size of the fall application season? And I guess sort of as a follow through, if we have a long or short fall application season, what does that mean for sort of the setup going into spring next year in terms of where inventory levels may shake out over the winter?

Okay. Bert Frost will handle that.

This is Bert. And regarding the fall and the harvest and the size of the harvest and the timing of the applications, what we expect to see is, obviously, with the late maturing crop, it may come off later, but I think that farmers would take advantage of drying capabilities and be buying and utilizing propane to drive down the corn and get it into the silo. I actually think this moves to our advantage because as that timing is compressed and there are certain areas of the United States where fall applications make more sense than the spring, that those areas then will need to utilize our capabilities, which is a rapid response and the ability to quickly supply product to the market and then resupply again in as short as a 2-week window, and so that's where we would leverage our terminal system and pipeline and rail service to those terminals to allow the farmers to pull product as quickly as possible and apply it. Obviously, that's weather-driven later in the quarter in Q4. You could see, if we do see an early snow, that would be a negative impact, but we have that problem every year. So whether it goes to spring or not, some markets are naturally spring applicators and some are naturally fall applicators, but we're projecting a robust fall and a robust fall application of ammonia.

Okay. And just as a follow-up -- not as a follow-up but as a housekeeping question. The CapEx number that you gave in the press release, there were 2 numbers, there is the one for the brownfield or new plants and then there was a $450 million number. Was that -- is that a maintenance number or does that have some debottlenecks or other type of activity in it as well?

Go ahead, Dennis.

Yes. If you look at our gross spending for the quarter, what we've gotten this quarter is we got $250 million of spending, of which $115 million, $116 million was for the expansions in Donaldsonville and in Port Neal. The other part of the $250 million is going to have to do with turnarounds and to some degree, some debottleneck projects that we have ongoing in the system. If we look at it, Vincent, year-to-date, we've got $402 million of gross spending, $181.5 million of which are applicable to the expansion projects at D-ville and at Port Neal, and on the balance of which, again, is devoted to maintenance, sustaining CapEx and also some debottleneck projects as well and some other construction projects of the plants like tank construction and what have you. So that's sort of what's happened so far this year. As we look ahead to the balance of the year, what we're looking at is a total -- for the guidance for the total year is between $1 billion and $1.3 billion of total CapEx spend, and we believe that about $0.6 billion to $0.8 billion of that will be for the big projects at D-ville and in Iowa, and then the balance again is going to be between sustaining and the debottlenecking and other construction projects that aren't associated with the big projects.

Vincent, with respect to the $450 million, that is above trend line for maintenance CapEx because of the number of turnarounds we have and because of some discretionary projects, including some small debottlenecks that are in there.

Okay. And just where would you think that number would be going forward for next year, or too soon to tell?

I think if you look at maintenance CapEx going forward, we're probably looking at between $300 million and $350 million a year.

And our next question comes from Christopher Parkinson from Credit Suisse. Christopher S. Parkinson - Crédit Suisse AG, Research Division: You mentioned one of the reasons for the recent decline in ammonia was due to offshore producers shifting from urea to ammonia. In your view, what inning do you think this game is in, given the spread has recently narrowed, and how do you see this going forward?

I'm sorry, could you repeat your first question? Christopher S. Parkinson - Crédit Suisse AG, Research Division: Sorry. I said, given the -- you mentioned in your release that one of the reasons for the declines in ammonia was due to offshore production shifting from urea to ammonia. What inning do you think this game is in and how do you see this going forward?

What inning do we think this game is in? I don't know what game you're talking about, but I'll just comment on this general development. The fact that some offshore producers shifted from urea to ammonia is indicative we think of support for our cost curve globally for urea. The fact that those producers found the ammonia market to be more attractive than urea at the price level it fell to, we view it frankly as a positive long-term indicator for the strength of our cost position. With respect to where we are in the evolution of urea prices generally, we've tested this general floor level several times over the last few years, and we believe that our look at that global cost curve and the margin implications is intact. Christopher S. Parkinson - Crédit Suisse AG, Research Division: Perfect. And just kind of a derivative of that question. Can you just offer a little more color on the mix benefit opportunities between UAN and how you see this in the second half versus the first half?

Bert?

This is Bert. I assume what you mean by the mixed benefits is in the composition of the options available to CF, whether that's urea, UAN, ammonia or ammonium nitrate, depending on the plant. UAN, because it's consumed 3 to 4 months out of the year, predominately in the spring, it's a build season which we've just entered, which is the July through March period where our customers are building their inventory in preparation for spring, which again, like ammonia, is a very quick dump. And so what we've just completed in our summer fill program over the last month was pricing that product to our customers, and now we're beginning the shipping period. So we're very comfortable with the forward position for the United States market, as well as the options that are available to us in the world market. Our urea inventory, as we mentioned in the press release, was very low entering Q3, and we're going to be continuing to produce at full rates for our urea capability or capacity. But our other products are also in a low-inventory state. So we see many options for us going forward and market options in our ability to capture profitable sales.

And our next question comes from Matthew Korn from Barclays.

Just a couple of questions. First, a lot of news recently and the market's now anticipating a large drop in potash prices should the industry shift, as it looks like it might. Would you anticipate any impact on nitrogen demand at the margin or in the growth rate going forward as an effect of like a rebalancing of nitrogen versus potassium costs? And secondly, if we were to see a divergence in the pricing direction between like corn and soybeans between now and when farmers make their planting decisions this spring, how much of that 92 million acres would you say is practically at risk, would it be 4, 6, 8, more or less, just would like your opinion there, too?

Okay. With respect to the first question on potash, we're not in the potash business, but frankly, nitrogen demand goes with planting. And if farmers are going to plant 92 million acres of corn, they will fertilize to that level at optimal levels. The economics are very, very favorable for corn planting. There hasn't been any diminution of nitrogen demand because of potash prices being at some higher level than they might be in the future. Nitrogen demand is pretty inelastic with respect to demand for the other nutrients. And Bert, on the other question?

This is Bert. Regarding corn and soy and the price structure that's currently in place on the Chicago Board of Trade, what I think would be more likely is that your outer reaches -- your marginal acres in the world and specifically Mato Grosso for the second-crop corn, the safrinha, that will go in, in January and February of 2014 would be most at risk. Your outer reaches there, Sapezal, Lucas do Rio Verde would probably be okay, Sorriso, those regions that plant the second-crop corn and have fertilized more in recent years, and those yields have gone up and you're seeing that expressed in Brazil's exports of corn, and as well as the pricing for corn probably would decrease. And I think that would support the corn levels that we're talking about for the United States, and that's just a yield and the infrastructure ability to move that corn at a fair price for a farmer. And so the next probably level for the United States would be dryland corn, and that's going to be competing with wheat. And where wheat on the stocks-to-use ratio is today, it's still more attracted to plant dryland corn in the Oklahoma, Kansas regions that are currently planting today. And so I would say on the corn-soybean balance, it's still favorable to corn and probably will be just due to supply and demand factors in the world and planting costs around the world.

And our next question comes from Kevin McCarthy from Bank of America.

Steve, with regard to your planned expansions at Donaldsonville and Port Neal, just curious as to whether CF has been approached by any companies interested in partnering with CF, either as a financial partner that would defray capital costs or perhaps as a business partner willing to baseload the incremental capacity? And if so, are there any scenarios under which that might make sense for the company in your view?

Well, our projects are 100% owned by us. We're very confident of our ability to construct the projects and operate them and sell the product. So we don't have any plans along those lines.

Okay. So most likely scenario is go alone then. Okay. And then just curious, on cash return to shareholders, I appreciate the magnitude that's occurred year-to-date, but just curious on the dividend, Steve, it's been stable for about 2 years or so. Do you care to comment on whether or not you would see any potential to increase the payout level in coming quarters?

Well, I made a comment in my prepared remarks on that general subject. We are very pleased to be in a position of generating lots of cash and having lots of optionality with respect to how to deploy that cash. We talk about that deployment on a regular basis among ourselves as a management team with our board. And we're certainly open to reexamining, frankly, everything we do if good ideas are presented to us. Should we change our views, certainly, we'll communicate that at the time we do that.

And our next question comes from Tim Tiberio from Miller Tabak. Tim J. Tiberio - Miller Tabak + Co., LLC, Research Division: I guess looking at the sharp decline in ammonia prices, particularly in the mid-Corn Belt, I've received several questions from investors, just wondering if retailers are taking product during this period and prices are still declining, is there the risk that retail pricing is not adjusted fast enough heading into the fall application season to kind of support the fall demand that you're talking about even in a compressed window? So I just wanted to, I guess, get your insight into whether you think that is a meaningful risk on the margin that farmers could maybe delay some of the purchasing into spring if we don't get that retail adjustment quick enough.

Bert?

This is Bert. And so it's an interesting question relative to risk and market optionality. Market prices are changing daily at times. And so, yes, we're going to see a correction, and we've already seen that with ammonia pricing to our customers, which tend to be the retailers and wholesalers and traders. And so, I think those prices have already corrected. We've already launched our fill program and are having dialogue with each of our customer bases regarding the product mix that they will need. Retailers are taking ownership but, generally, that ownership still rests with the producer, with us, with our terminal system. There's a summer fill program that takes place in June and July. That is a quick fill, but that retail space is fairly limited. And then they rely on the producers in the larger terminals throughout the Midwest that are on the pipeline and are along the river to make those sales. So we have to position that product for fall sales and generally do that tying it through sales. So we're selling the product, positioning in the terminals and then preparing our barge and pipeline movements to meet that demand. And so, will the adjustment be fast enough? I think farmers right now are focused on their crop and rightly so. They've planted the crop, it's growing, it looks like we're going to have a fairly large harvest. And so, I think as that product gets closer to maturity, then the attention will be placed on planting next year's and preparing the nutrients. But farmers are smart people, they're economic beings in their heart and they're trying to figure out the lowest cost price to put that crop in the ground to achieve the maximum yield. So they will focus on nitrogen. And we believe that by October or September, the majority of those decisions will have been made, and we will have our product priced, sold and prepared to go to the ground in November. Tim J. Tiberio - Miller Tabak + Co., LLC, Research Division: That's great insight. Just one follow-up question. I noticed that in the Pakistan tender today that we did see a small bounce on urea prices. Should we view this as just another event and continued volatility in international prices? Or are you of the view that with the size of the recent tenders that we've seen in the international markets that maybe we're at the point that we could actually start building somewhat of a positive base heading out of the low-tariff window for Chinese exports?

Okay. So a lot of questions in that one. Look, urea prices have been very volatile over the last several years, hitting the floor that Steve mentioned, this $300 level short ton U.S., short ton NOLA, rising all the way last year in April to $740, and then back down. So prices will continue to be volatile to world -- of globally traded product. And today, I think you've hit on the right point that China is driving this market with the abundance of exports that are expected in Q2. The market anticipated that level of exports. It's now being realized in Q3, and we anticipate that to wind down through Q3 and probably will bleed out into Q4. But from what's coming out in the publications and from our own investigations, with the cost of anthracite coal and the production cost and logistical cost to put that product into the Chinese bonded warehouses and onto a vessel, there is not much of a profit option available to a Chinese producer. So what is happening? We are seeing less tonnage shipped to the ports. And so by the end of Q3, a scenario could be painted that there will be less available to export as this program winds down. So is the Pakistani tender a reflection of that? Possibly. But demand has been robust for nitrogen this year. India has taken a significant level, and we expect that India could be at an all-time high for urea imports. Pakistan, Brazil and other markets are doing the same. And so the tenders did start later, but they have been bigger, and that is helping to sustain, I think, at this floor level. So I do think you can build a case for higher prices worldwide going into 2014, and that should spur, I think, appropriate behavior. And we're, I'd say, positive going forward for the options to CF.

I think if we take this subject and bring it back to CF Industries, it's important for us to all realize that nitrogen will continue to be a cyclical and seasonal business. There will be significant moves in prices. But the beauty of our position is with sub-$4 gas and urea prices in the range that we're talking about right now, there's plenty of money to be made at this company. And we are seeing reinforcement of our thesis that we're in a sustained period of higher lows and higher highs. That is a great band to be operating in.

And our next question comes from Jeff Zekauskas from JPMorgan. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: I think the USDA thinks that the corn yield this year will be 156.5 bushels per acre, and that will plant 97.5 million acres. Is that your view as well, or do you think the numbers will be higher or lower? How has the weather evolved, and how do you see that influencing yield?

We don't really have any basis for having a substantially different view. Our thoughts are right in that range. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: Okay. And then you said that you bought back 5.8 million shares so far this year. I think you bought back 5.1 million in the first half. So it seems that your general orientation to your share repurchase program is that your shares represent a good value and that it's better to allocate more capital upfront for your longer-term program. Is that correct? And then the second part is, was there anything unusual about your tax rate in the quarter that elevated it?

Jeff, can you just elaborate. I didn't understand your point about the program upfront, what did you mean by that? Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: Yes. So you have a multiyear, multibillion-dollar share repurchase program. And it seems like you've bought shares sizably in the first quarter and the second quarter. You continue to buy them in the third quarter, I think. So it sounds like you wish to allocate more of your capital to share repurchase in the early years rather than having it go all the way out, I think your program ends in 2016?

It ends at the end of 2016. Our attitude on this, first of all, is that we have plenty of liquidity to execute our share repurchase program and our capacity expansion projects. And I think we've demonstrated that, obviously, by the facts that you cite, Jeff. Our view on deploying capital for share repurchases is that we would like to be able to look back at the end of the program and say we did a good job doing it. Whether we buy more or less in any given month or any given quarter is not particularly pertinent. We gave ourselves a 4-plus-year authorization in order to maintain flexibility. If we don't need all of that flexibility, fine. If we do need it, fine. There's not any particular timetable that's important to us here. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: Was there something unusual about your tax rate this quarter?

Dennis?

Yes. If you go back to 2012, Jeff, we had a tax provision in the quarter of $309 million on pretax earnings of $960 million, which gave us a rate of about 32.2% at the time. This year, we had a tax provision of $283 million on pretax earnings of $802 million or a tax rate of about 35.2%. The big change there is, remember that in the pretax earnings that is used for the denominator is included -- or was included, Viterra's share of the earnings of CFL. In 2012, that Viterra share as reported would've included the profit that they earned, selling product at a full mark-to-market basis, okay, so effectively product sale basis. As you wind the clock forward to 2013, we adjusted that so that actually the share of the income that Viterra earns from CFL is at a cost-plus basis. So effectively, what that does is that it pulls down the denominator, pushing up the tax rate, because the tax provisions for -- that you see, that is used in that calculation, is the tax provision for CF's proprietary income. It does not include a tax provision on the income of others. So that's really the big change there. Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division: So what's your tax rate for the year?

We're usually around 35%, and that's what we think we're going to be around this year.

And our next question comes from P.J. Juvekar from Citi.

Farmers tend to think of P&K in a similar fashion. So with the recent change in potash landscape, what is the risk that lower potash prices could spill over into phosphate and drag phosphate's market down?

Bert?

This is Bert. A lot of speculation today on what's going to happen in the potash world, and I think you'll hear more about that today from one of our colleagues. Really, as the farmer looks at this, I don't think they're necessarily comparing the potash price to the phosphate price, but they do go on together when you're broadcasting or putting the product down. And so, they're complementary in that sense. You -- I think people on the production side, as well as the traders and wholesalers, do tend to look at those prices to see a relative value sense, but I don't think it's that way for a farmer. He's looking at his overall nutrient needs and trying to economically put down the best choice for him, depending on soil type and seed and other varying issues. So I don't see a spillover.

Okay. And then secondly, on your Analyst Day, you explained that cost curve really well, the urea cost curve. You talked about demand of 183 million tons of urea. If U.S. corn acres decline as you expect next year and presumably, global acres also decline, where do you see that demand on the cost curve?

Well, we're talking in the U.S. about a decline in acreage to 92 million acres. 92 million is a lot of corn acres, historically, very high. And I think you may recall that I made a comment that we see the demand for -- on a nutrient ton basis in the U.S. going from 13.5 million tons to 13.3 million tons. That's so small as to almost be lost in the rounding. So we don't see that as a significant event that's going to affect urea demand.

And just lastly, quickly, you talked about your urea exports. Was it just opportunistic, and what are your inventories now post these exports?

Yes, this is Bert. For the urea exports, as well as UAN, you could say they're opportunistic. We look at all the opportunities that are available to us at the time. Obviously, we're students of the market, trying to determine where the best option for us on a profitability basis lies. And during the quarter, during Q2, we did export to several countries based on a relative value equivalent to NOLA. And so at that point, that was attractive to us, and we executed those sales. On UAN, we sold to Mexico, France, Belgium, Argentina, Uruguay, and if you consider Canada an export, we also sent product up there. And so those are also options available to us, and that's really a balancing issue. And so, as we look at our production facilities and where they're located and the logistical constraints or options available to them, Donaldson at times makes sense for us to export, and it's an attractive proposition for us.

And our next question comes from Michael Picken from Cleveland Research.

I just wanted to talk a little bit about your phosphate margins for the quarter. They were a little bit lower sequentially than last quarter, and just sort of wondering when we might see the impact of those lower input costs kind of flow through and whether we should expect a higher gross margin percentage even if DAP prices are falling in the back half of the year?

I think, as a very crude rule of thumb, those changes in input costs usually take about a quarter to roll all the way through our system.

Okay. So I guess, was there anything sort of unusual in terms of your raw costs or anything else on the phosphate side?

No. It's just been a tough market.

Okay. And then last question, just switching over back to nitrogen. Could you talk a little bit about the substitutability between UAN and urea, both in the Midwest and then kind of in other parts of the country, like how much would farmers go back and forth between the 2 products based on pricing?

That's an interesting question which we discuss -- we seem to discuss every spring. The absolute switchability, all the products can be switched. Then it depends on equipment. So then there are regional differences on the type of equipment. A producer or a retailer may own if they're doing custom application. And then, again, it gets back to soil type, seed type and what type of farming you're doing. And so, we do -- and this year we did see some switching, and you see that reflected as we discussed in our lower overall ammonia volume on a 6-month basis. We had a huge amount of urea come in to the United States. Almost 1.7 million tons over and above last year's record were imported into the United States. That, coupled with 300,000 tons of UAN, which was over and above last year's level -- this is on a fertilizer year basis -- points to what we expected probably going into Q2 of high level of inventories coming out of Q2. That is not the case. What happened? A lot of that urea was because of the price -- the attractiveness of that value proposition for urea was consumed probably -- and who suffered was the ammonia volume. And so, we talked about that in our quarterly release. But again, inventories coming out of Q2 are fairly low for all the products. So it's an interesting analysis on how that balanced based on the value proposition.

The flexibility that some farmers have to shift between urea and UAN and the changes that occur between the relative prices are factors that drove our decision to expand the flexibility of Donaldsonville. To be able to switch between urea and UAN, we can do that quickly, and we're able to capture whichever is the better margin opportunity. We can run a few weeks one way, switch in a short time period, run a few weeks the other way, and we do that regularly.

And we did that this year. And you can see, based on our -- if you look at our production volume, 2013 over 2012, we're almost 300,000 tons higher on UAN as a reflection of that decision we made in January to favor UAN over urea.

And our next question comes from Adam Samuelson from Goldman Sachs.

A lot of ground covered on the call today. Maybe I was hoping to get a little more color on the corn acreage outlook and maybe some of the sensitivities to that 92 million acre outlook, specifically, what do you think that does? And I see it in the chart, in the slides, but it's hard to read kind of what it does to bean acreage and wheat and cotton and kind of where -- how you think about the sensitivity of that to its ultimate pricing this fall and maybe upside, potential upside to that acreage number for next year?

Well, we're sitting here with corn crop maturing, awaiting harvest and awaiting if weather patterns are going to develop with respect to the harvest. So we don't really know what the ending position is going to be yet. And so, one of the inputs that's determining the acreage plant next year, a major input, will be what the result is of this year. So there's an assumption in all of this work of having a very strong harvest, a lot of grain put in the bins. And that if we put those factors together and look at the relative economics of various crops, we come out with about 92 million acres next year. There's sure sensitivity to that number, but it's around a very strong market in general. I would point out that in 2011, when we had about 92 million acres or 92.5 million acres of corn, first of all, everybody thought that was a wonderful crop. Secondly, we generated almost $3 billion of EBITDA that year in that kind of scenario. So we -- obviously, these projections will change over time but we don't know which direction.

No, I appreciate that. I guess I'm wondering, given some of the CRP acreage that's come into the system, how much is the increase in acreage up into this 97 million range, potentially could be structural for a couple of years, especially given the increase in [indiscernible] in many parts of the Midwest? And if that's the case, you run the risk of more 14 billion bushel potential harvests that could then yet drive corn prices even lower than we are today. I'm just trying to get your view on that balance.

Okay, I understand. Bert, do you want to comment on that?

Yes. I think what you're going to see is the marginal acre, as you mentioned, whether that's CRP or dryland farming or even up into Canada what got converted into corn, possibly could go back to other crops, wheat, canola. But I think you're going to see -- you got take it on a global basis with what's going on with corn, soybeans and cotton and the optionality available to different countries. And I would go back to Brazil in Paraná, probably you won't see as much first-crop corn; as well as Mato Grosso, you won't see as much second-crop corn. What would replace that would be beans. So we see the comparative competitive advantage shift that has been taking place that the U.S. is much stronger in corn, and South America is becoming -- it already has become the advantaged producer for soybeans. Then it goes to the second crop, and I would expect to see cotton produced more in the outer reaches of Mato Grosso shift more to that this year over second-crop corn. So I think our 92-million-acre expectation is pretty solid. Now you have to remember, on a yield basis, if we're projecting, the USDA is at 156, somewhere as high as 166, whatever that number is and you have a 14-billion-bushel crop in the United States, that's unprecedented. And our ability to do that year-on-year has not been consistent. And so, be careful when you project out that we'll have various or multiple years at that level, probably not likely.

And our next question comes from Mark Connelly from CLSA.

Steve, as you think about the seasonality and cyclicality and your mix begins to shift even more dramatically towards nitrogen, do you tend to feel more inclined to look for ways to expand the Phosphate business? Or are you okay with this continual shift towards nitrogen or substantial shift towards nitrogen?

Our Phosphate business is a worldscale operation. We have a mine that produces about 3.5 million tons of rock, and that meshes well with our chemical plant. As I'm sure you know, the ability to expand operations in Florida is somewhere between 0 and tiny. We buy small parcels of land that contiguous to our operation when the opportunity arises, adding some tonnage to our reserve base. But certainly, domestic expansion is not a reasonable option. And other places in the world with huge phosphate deposits are not particularly friendly to foreign investment, although we've occasionally looked at those things. And if opportunities were to arise, we'd certainly take a look at them.

Okay. And just one last question, with Donaldson substantially changing your flexibility to export, does that have any impact on the way you approach hedging? I'm just wondering if the opportunities to hedge are going to look different when you have so much more flexibility.

I haven't thought about it that way, Mark. I don't think so. I mean, we look at our gas supply, which is -- which after the expansion will be close to 1 Bcf a day. We try to balance the opportunities that may exist in the market against mitigating some risks. I think we've done a reasonable job through the years. I think just because we're bigger, it's probably not going to change our profile on that. And I -- whether the product heads north or southeast and west, I don't think is necessarily pertinent to how we buy our gas.

Ladies and gentlemen, that is all the time we have for questions for today. I would now like to turn the call back to Dan Swenson, Senior Director of Investor Relations and Corporate Communications, for any closing remarks.

We'd like to thank everyone who participated on the call today. If you need more information about CF Industries or our results, please contact me. Danielle? Thanks for participating on the call. That concludes our call.

Thank you for participating in today's conference. That does conclude today's program. You may all disconnect. Everyone, have a great day.