CF Industries Holdings, Inc. Q2 FY2025 Earnings Call

Good day, everyone, and welcome to the CF Industries First Half and Second Quarter of 2025 Earnings Conference Call. I will now hand over the presentation to Mr. Martin Jarosick with CF Investor Relations. Please go ahead.

Good morning, and thanks for joining the CF Industries earnings conference call. With me today are Tony Will, President and CEO; Chris Bohn, Executive Vice President and Chief Operating Officer; Bert Frost, Executive Vice President of Sales, Market Development and Supply Chain; and Greg Cameron, Executive Vice President and Chief Financial Officer. CF Industries reported its results for the first half and second quarter of 2025 yesterday afternoon. On this call, we'll review the results, discuss our outlook and then host a question-and-answer session. Statements made on this call and in the presentation on our website that are not historical facts are forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any statements. More detailed information about factors that may affect our performance may be found in our filings with the SEC, which are available on our website. Also, you'll find reconciliations between GAAP and non-GAAP measures in the press release and presentation posted on our website. Now let me introduce Tony Will.

Thanks, Martin, and good morning, everyone. Yesterday afternoon, we posted results for the first half of 2025 in which we generated adjusted EBITDA of $1.4 billion. These results reflect outstanding operational performance by the CF Industries team against the backdrop of a tight global nitrogen supply-demand balance. We are also executing well on our strategic initiatives. The Donaldsonville Carbon Capture and Sequestration Project began operating in early July and is running at designed rates, and progress on the new Blue Point joint venture is well underway. We continue to return substantial capital to shareholders. Over the last 12 months, we have returned approximately $2 billion. This includes repurchasing more than 10% of our outstanding shares since last July. Given our world-class operating performance, the favorable global nitrogen industry dynamics, the financial benefits we generate from our strategic initiatives, and our ongoing capital return programs, we are well positioned to create value for shareholders over both the near and longer terms. With that, I'll turn it over to Chris to provide more details on our operating results. Chris?

Thanks, Tony. For the first half of 2025, we continue to differentiate CF Industries from peers through safety and operational excellence. We had 3 recordable incidents in the first 6 months of 2025 and 0 lost time days. This is particularly impressive given our scale and level of activity in the first half. Through the end of June, we produced 5.2 million tons of gross ammonia, representing a 99% utilization rate. For the full year, we expect to produce approximately 10 million tons of gross ammonia. The third quarter, as is typical for CF, will have lower production volumes compared to the first 2 quarters due to planned maintenance activity. Turning to our strategic initiatives, we started up our Donaldsonville Complex Carbon Capture and Sequestration Project in July. The carbon dioxide dehydration and compression unit has ramped up very well, and we achieved full nameplate capacity within the first week. In addition to reducing carbon dioxide emissions by up to 2 million metric tons per year, we earn a significant return from this project. We are generating 45Q tax credits and selling low-carbon ammonia for a premium. For the Blue Point project, we, along with JERA and Mitsui, have been building out the project team and have begun ordering long lead-time items. We also continue to evaluate opportunities to further de-risk the project by leveraging best-in-class capabilities. For example, the joint venture signed an agreement with industry leader, Linde, to build and operate the air separation unit which will supply nitrogen and oxygen for the ammonia production process. We remain excited about the compelling growth opportunity at Blue Point, given the tightening of the global nitrogen supply-demand balance, and the interest that has been generated in the ultra-low carbon ammonia that will be produced there. With that, let me turn it over to Bert to discuss the global nitrogen market. Bert?

Thanks, Chris. Throughout the first half of 2025, the global nitrogen supply-demand balance continued to tighten. Strong global nitrogen demand led by North America and India had to contend with low global nitrogen inventories and production disruptions in key supply regions. This included geopolitical events late in the second quarter that temporarily halted production in Egypt and Iran, as well as 2 facilities in Russia. The CF Industries team navigated these dynamics exceptionally well, especially as the North American spring application season lasted longer than normal. Backed by strong production, we leveraged our leading logistics and distribution capabilities to capture incremental opportunities well into July. For example, last month, we continued to make spot UAN sales at in-season prices, as supply from other sources was largely unavailable after the strong spring application season. As a result, our UAN inventory at the end of June was the lowest we have seen entering the third quarter in the last decade. This led us to delay our UAN fill program until next week, which is the latest we have ever launched. The delay has given us time to better understand customer requirements and communicate that fill prices will be significantly higher than in 2024, given the tight global supply-demand balance. Farmer economics in North America have been an industry concern as the price of corn has not kept up with the price of inputs. However, we expect nitrogen demand in the region to remain robust. The corn to soybean ratio favors corn, and farmers will be incentivized to optimize yield, supporting resilient demand for this nondiscretionary nutrient. In fact, our ammonia fill and fall prepay programs, which were closed at the beginning of July, saw strong uptake from customers. In the near and medium term, we believe the global nitrogen supply-demand balance will remain tight. Global nitrogen inventory is low, and the global demand is expected to be strong. Brazil and India alone are likely to require more than 8 million metric tons of urea imports through the end of the year, while the Northern Hemisphere will begin purchasing for 2026 applications. The global industry, even with the needed urea exports from China, does not have excess capacity to meet this demand easily. In fact, India closed its most recent tender at a price much higher than expected. Additionally, natural gas availability in Egypt, Iran, and Trinidad has become a chronic problem for their nitrogen industries. High natural gas prices in Europe and Asia continue to challenge nitrogen producer margins in those regions. These structural challenges are further exacerbated by the uncertainty created by geopolitical events. Longer term, we expect the global nitrogen supply-demand balance to tighten further through the end of the decade as projected new capacity growth is not keeping pace with demand growth for traditional fertilizer and industrial applications. We also believe demand for low-carbon ammonia for new applications, such as power generation, will only further tighten the global supply-demand balance. We are seeing this transition now. With the Donaldsonville CCS project operational, we will ship our first cargo of low-carbon ammonia in the coming weeks and at a premium. We have steady demand today and growing interest in Donaldsonville low-carbon ammonia volumes for new applications in addition to the longer-term demand for ultra-low carbon volumes from Blue Point. With that, Greg will cover our financial performance.

Thanks, Bert. For the first half of 2025, the company reported net earnings attributable to common stockholders of $698 million or $4.20 per diluted share. EBITDA and adjusted EBITDA were both approximately $1.4 billion. For the second quarter of 2025, we reported net earnings attributable to common stockholders of $386 million or $2.37 per diluted share. EBITDA and adjusted EBITDA were both approximately $760 million. As you will recall, we have begun consolidating the Blue Point joint venture into our financial statements. This is reflected in both our first half and second quarter 2025 financial reporting. On a trailing 12-month basis, net cash from operations was $2.5 billion and free cash flow was $1.7 billion. This includes a net benefit in the second quarter from the Blue Point project as capital contributions from our joint venture partners exceeded the project's capital expenditures. This will be the case for some time as we build cash in the joint venture ahead of expenditures. We returned approximately $280 million to shareholders in the second quarter of 2025, including $202 million to repurchase 2.8 million shares. We remain committed to a balanced capital allocation strategy, investing in growth through the Blue Point joint venture while returning substantial capital to our shareholders. With the nitrogen and oxygen agreements with Linde that Chris mentioned, the cost of the Blue Point project is expected to be $3.7 billion. CF Industries' portion of the project, along with the wholly owned common facilities is expected to total approximately $2 billion over the next 4 years. Over that same time frame, we have $2.4 billion authorized for share repurchases. We expect to complete the $425 million remaining on the current authorization before the end of the year. At that point, we will begin the $2 billion authorization. Finally, with the startup of the Donaldsonville CCS project, we will deliver incremental EBITDA and free cash flow starting in the third quarter. We expect EBITDA and free cash flow to be north of $100 million annually from the tax incentives and product premiums. This is a significant step towards the 2030 mid-cycle projections we shared at Investor Day of $3 billion in EBITDA and $2 billion in free cash flow. With that, Tony will provide some closing remarks before we open the call to Q&A.

Thanks, Greg. Before we move on to your questions, I want to thank the entire CF team for their contributions to an outstanding first half of 2025. We are delivering world-class operational performance across all aspects of our business, and most importantly, doing so safely. I want to acknowledge Ashraf Malik, our Senior Vice President of Manufacturing and Distribution, who recently announced his intention to retire in the spring of 2026. I recruited Ashraf into CF from our GrowHow joint venture in 2011. He was my right-hand person when I ran manufacturing, as he also was for Chris when he ran it. Appropriately, Ashraf took over as Head of Manufacturing when Chris moved into the CFO role in 2019. Ashraf is an experienced leader who has helped drive our culture of safety and operational excellence. We're fortunate to have him with us for the next 9 months, but I do want to take this opportunity to personally thank him for his many contributions and to congratulate him on a tremendous career. Although CF Industries has been around for almost 80 years, in a couple of days, we'll be marking the 20th anniversary of our company's IPO. Over the last 20 years, CF Industries has built an extraordinarily high-margin, focused business where we consistently execute at the highest levels, a global leader in every sense of the word. Our balanced approach to capital allocation, driving disciplined growth while executing consistent share repurchases has increased shareholder participation in our assets and the cash flow they generate. As you can see on Slide 13, we have driven a nearly threefold increase in nitrogen capacity per share since 2010, and this approach has led to superior shareholder return compared to all industry participants and even broader comparison groups. CF Industries is well positioned to build on this track record in the years ahead. In the near and medium term, industry dynamics remain very favorable for our low-cost North American production network. Longer term, we are investing in much-needed low-carbon ammonia capacity and have $2.4 billion authorized for continued share repurchases. Taken together, we expect to continue to drive strong cash generation and create substantial shareholder value. With that, operator, we will now open the call to your questions.

And today's first question comes from Richard Garchitorena with Wells Fargo.

You're progressing on the Blue Points, obviously, we've consolidated results. My question is on the outlook for returns. Obviously, we had the Big Beautiful Bill come out. I think there's some treatment of depreciation, which may be changing. Can you talk about how that impacts potentially the return calculations and how that may impact taxes from Blue Point and CCS?

Yes. So it's Greg. I'll take that one first. So when we look at the joint venture, there's a number of items that are going to run through that P&L from the tax side that we're going to need to be coordinated with our JV partners on it. Not only will our depreciation of the assets be important, the timing of the earnings to make sure we're maintaining our basis in the assets as well as the monetization of the 45Q credit. So we're in the process with our partners and with our advisers of modeling out those different variables. But what I can tell you, in particular, too, as we look at the depreciation, what we had in our original expectation within the model was already on an accelerated basis. So if you get to day one complete amortization, depreciation of the assets, we don't expect it to materially change the overall returns of the project that we've shared with you before. But we'll continue to model that out over the next few years and make sure that we understand how all these variables interplay with each other.

And the next question comes from Edlain Rodriguez with Mizuho.

I mean, Tony, just kind of when you look forward into 2026 and beyond, I mean, again, given where crop prices are and where fertilizer prices are, what are you thinking there? I mean, again, kind of there's a disconnect between prices and input cost for farmers. So how do you see that develop over the course of next year?

Good morning Edlain, this is Bert. And that is the question in the industry today, is how does the farmer solve the calculus of planting and at the end, profitability. Fertilizer represents about 25% of the input costs for a crop. And so, nitrogen, even less so than that 25%. Then you've got diesel, equipment, crop insurance, feed, crop protection. And the big question is land rent and land value. The majority of farmers today are renting a portion of some place, all of their land, and at $200, $300, $400 an acre, that's where the push has to come, we believe, in that calculus. We're a global product, globally traded, globally moved, globally valued product in the context of urea, UAN, and ammonia. And so we compete for imports and exports with the world. And so the U.S. farmer, in the same vein for corn, soybean, cotton, wheat, whatever product has to compete, and I think it will be some economizing with different subparts of that calculus that I gave. But nitrogen is the nondiscretionary nutrient and will have to be applied. And I think then farmers plant and apply for yield, and they earn their way out of this difficult market.

Bert, I totally agree on that, which is, I think once you've gone through all of the other expenses that you talked about, you are going to go ahead and try to optimize yield because it's the last couple of bushels that will actually make the difference in terms of profitability or not. And so, at least with respect to nitrogen, we continue to see and expect full application rates because that's really how you're going to get profitable. It's not trying to save a couple of bucks by reducing your nitrogen application. Now P&K is a different story, but at least nitrogen, we expect to go down.

And the next question is from Joel Jackson with BMO Capital Markets.

Can you talk about a report that came out yesterday around the time you reported? It seems like maybe if it's true, you've got a few days or a week of no loading happening at D'ville. Is that about demand, but you had a huge quarter, of course in Q2? Volume is so good, demand so good, you're out of inventory. Does that speak about the strong dynamic for yourselves market? Is there any production problems and you can elaborate?

Yes. So Joel, this is Chris. I'll start. So the report was incorrect in the sense that it said that it was an operational issue with our loading at the Donaldsonville facility. We continue to have full access to loading production and utilization there, as you can see in the second quarter, continues to be outstanding. I'm going to let Bert talk to some of the inventory levels and some of the customer direction that we've done that was probably more the source of that than it was operational.

Several figures for issues at play, Joel, with the dynamic nature of this spring application. In the summer, we just did not have the inventory due to high demand in some of the previous remarks of being one of the last companies standing with available supply. So every day, we had full loading at Donaldsonville. This is a reflection of team dynamics and discussion on how we work collaboratively, but the urea product manager, along with production and allocation and logistics folks work together. We had 2,000 tons of inventory yesterday. We produced 7,500 tons per day at Donaldsonville, and when you throw in Port Neal and Medicine now, we produced about 14,000 tons a day. So to have that low of an inventory and you're loading 4 to 6 barges a day at 1,500 tons per barge, you want to have inventory for consistent and reliable loading. So this was just a reflection of the team coming together, making a decision and saying, let's build the inventory over the weekend, and then we'll be able to load barges more seamlessly as opposed to being sporadic. That's just good management and safe management for the team.

And our next question comes from Lucas Beaumont with UBS.

I saw some cost pressure in the first half this year, both like on SG&A and your controllable non-gas production costs, which were both sort of higher year-on-year. So could you please just kind of talk us through what the drivers were there, if there's anything that was kind of more one-time and kind of think about the trajectory there going forward into the second half of next year?

Yes, I'll start, and then I'll pass it to Chris. So let's start with SG&A. Listen, I've been here now 13 months and continue to be impressed by the organizational structure we have and the operating efficiencies that the business has. When I compare our SG&A to any benchmark in the industry, we are a very lean organization. So any small movements in the number will move that number on a percentage basis. This is specific to the quarter and specific to the second quarter. There were 2 discrete items to talk about. One was around our legal fees associated with us closing our Blue Point joint venture, not only with the partner, but all the other agreements we had to put in place. That was about half of the difference versus last year. The second part of the difference was almost all of the employees here at CF are on some type of variable compensation. Given what we're seeing from the operating performance of the company, as well as the market pricing that is there, we made an adjustment within the quarter for our expectation and how that variable incentive will pay out in the year. So those are the 2 main items that explain the SG&A difference year-over-year. As you think about it going forward, the third quarter and fourth quarter will probably look more similar to what we saw within the first quarter. Now on the cost side, I'll let Chris talk to it in particular, but just to make a couple of points as we try to analyze it. One, and you're right to do it ex gas, when you look at any 90-day period within the company, it's going to be impacted by the timing of maintenance, either planned or unplanned. So we tend to look at things over a longer period of time. If I look at it over the first half, in fact, our controllable costs were down minimally low single digits versus last year. If you look at it in particular, in the second quarter, you remember in the first quarter of last year, we had maintenance events associated with weather that drove an acceleration of our maintenance from the second quarter into the first quarter. So if I look at the variance in the second quarter of 2025, it has more to do with what happened in 2024 than in 2025. In fact, first quarter to second quarter, when you adjust for maintenance events is fairly similar.

Yes. And just to add on to that. As Greg mentioned, we do look at a longer time frame because it could just be timing when something hits. But during the quarter, we had really 2 events that drove up some of that controllable cost, and one was unplanned outages at a couple of facilities. Even though we had very high utilization throughout the rest of the network, there were 2 facilities that had some extended unplanned downtime. What that resulted in, bringing it back to what Bert talked about with tight inventory, we had tight inventory at all our locations. As a result, to meet some of the customer commitments we had, we had increased logistics costs, making those moves in order to service and provide the customers with their products. So a little bit some unplanned outages and then also the logistical moves, just given how tight inventory is in the industry.

And our next question comes from Jeff Zekauskas with JPMorgan.

On the DCS project, you talked about a $100 million benefit. I think I get that; there's an $85 a ton tax credit and maybe it's costing you $35 a ton for various isolation of the CO2. That gets you to an annualized rate of $100 million. In general, these are tax credits. When does the cash come in? And how do you account for it? That is, do you take the tax credits on an ongoing basis? When do you get paid from the government? How does that work?

Yes. So Jeff, it's Greg. I'll answer it 2 ways. One is from our financial statements and then from our tax cash payments. So on our financial statements, we will begin accruing this into our EBITDA as the gas flows, and we've talked about that being an $85, 45Q credit that we'll net about $50 on up to 2 million tons. We'll begin to see that in our third quarter reported financials as part of our EBITDA calculation. Now, on the cash side, obviously, we won't settle up on our cash tax position until the later part of 2026, but we will begin to withhold our expectations around what we're going to receive back for the 45Q credit as early as our September payments that we make, our estimated September payments that we make into the IRS. You'll begin to see the cash benefits of that almost immediately. At the end, when we file our final return next year, it will all be part of that return.

Great. And just one follow-up. Can you talk about the theoretical relationship between the amount of ammonia made and the amount of CO2 captured? Sometimes, when you read the literature, it seems that CO2 capture should be much more in tonnage than the ammonia made? What you have is something that's pretty close to 1:1. Can you describe what's going on?

Yes, Jeff, let me start off with that, and then I'll turn it over to Chris. But all of our existing ammonia plants today are conventional steam methane reforming. In general, you end up with about 1/3 of the natural gas used to drive the process from an energy and heat perspective. About 2/3 of the natural gas goes into the actual process and the synthesis of ammonia. The total amount of gas, about 32 on average MMBTUs per ton of ammonia will generate about 1.8 to 1.9 tons of CO2 per ton of ammonia. With the existing process, though, because we're not doing flue gas capture on SMRs, you can only capture about 2/3 of that, which is related to the process side of the equation. Additionally, at Donaldsonville, as one of our large upgraded facilities, when you're making urea either as granular or as part of DEF or going into UAN, you have to use a lot of that process CO2 to make urea. Therefore, it's not available for CCS. When we move to Blue Point, because it's a different process, auto-thermal reforming, we can capture a much, much higher percentage of the CO2, in that case, probably close to 95% to 98%.

I'm not sure there's much I can add to that.

And the next question is from Chris Parkinson with Wolfe Research.

I'd love to hear your thoughts on the current supply side dynamics for the second half and into 2026. There have been various challenges, including attacks on Russian facilities, geopolitical issues, and gas shortages in Eastern Europe and Trinidad. Despite these factors, demand has remained stable to strong. How should investors be considering the sustainability of these dynamics going into 2026? Have you noticed any improvements, or are we still largely experiencing the same situation?

Chris, this is Bert. This has been an incredibly interesting market for the aspects that you articulated: taxes, geopolitical events, tariffs, gas shortages, and just issues in high demand then on the opposite side. Starting with the tariffs, we've been in this discussion since March, which was going to be April. So that delayed imports or even cut imports into North America and into the United States for Q2. As we exit Q2 and into Q3, inventories need to be rebuilt in the United States and Canada. We are doing our best at CF in terms of running as we do at very high rates and being efficient in moving our product. But as I mentioned in an earlier comment, nitrogen and fertilizer is a global commodity that moves based on price and based on needs. We are now entering the peak season for the Southern Hemisphere and seeing India step in yesterday closing 2 million tons. That's the first time they've been able to close that ton, but at prices in the $500, $2,500 to $3,000 range, very attractive compared to historical values. You've got high demand in the Southern Hemisphere, and when I talked about in my prepared remarks, Brazil needing probably 1 million tons a month for the next several months to satisfy their first planting and then getting ready for their second crop that gets planted in January. Then you've got to quickly pivot to the Northern Hemisphere entering 2026 for Europe and North America. I think that's going to be a very difficult calculation to close because of our inventories, the need for imports, and the disruptions of tariffs. Then you go to the gas shortages that were created during the conflict in Iran and the cutoff of gas to Egypt, a low gas supply in Trinidad, just between those 3 areas regarding what we lost, just between Egypt and Iran over 1 million tons. China is entering the market with an additional 5 million tons; it doesn't close the balance. This is why we're constructively positive in the market for Q3 and Q4, but into '26 with the current pricing dynamic that we're experiencing. Couple that with the low gas prices we have in North America at $3; it makes for a very attractive position for CF.

And just if I may parlay that question into another, the second half is setting up pretty well in terms of ASPs and obviously, we'll have to have our own views on operations and ultimately volumes sold. But if you set up favorably on the free cash flow side, just even given the historical 60%, 70% at times, how should investors be thinking about the uses of cash? Because on the one hand, a lot of people are going to be looking for buybacks. At the other, you are entering a CapEx cycle with Blue Point, and there have been some debates on basically derisking at least the beginning of that cycle. So how should we be balancing those 2 views under the presumption that free cash flow should be a little bit better as we progress throughout the year?

Yes. I would say, in general, Chris, we do have $2.4 billion open to buy on share repurchase. We have a pretty good view of what expenditures look like for Blue Point going out initially. And these kind of projects start off a little on the slower side and then start accelerating. The big spend is really year 3 and 4 as you're paying for all of the deliveries of the large modules and doing the construction work to put them together and get the plant commissioned. But in general, as we're generating more cash than what maybe an LRP would look like or even what the expectation of certain market segments look like, then we will probably go ahead and deploy that capital against the share repurchase more expeditiously than otherwise we might pace it out.

The next question is from Kristen Owen with Oppenheimer.

This is Mason Manor on for Kristen. I just wanted to follow up on the carbon capture at Donaldsonville question, in particular, the contribution of the credits in Q3, understanding that the 45Q for enhanced oil recovery is different from the permanent sequestration credit. Can you just help us understand the economics of the EOR credit? And is there any additional costs related to that process? Or should we just think about the similar flow-through just off that lower credit value?

Yes. Thanks. This is Chris. Mason, I would start with that our base case assumptions for not only the Donaldsonville but also the Blue Point in Yazoo City is that it goes to Class 6 permanent sequestration. As far as the tax law, that particular allocation of 45Q at $85 per metric ton did not change. The EOR climbed up from $60 to $85 per metric ton. As you may know, we've begun sequestering at Donaldsonville while Exxon is in the process of getting their Class 6, utilizing the EOR and putting in permanent geological frustrations through EOR. That does allow us potentially to go from $60 to $85, however, we don't believe that this is going to really make any type of difference from our economics as we have equivalent economics, whether it's EOR or the Class 6 permit. One thing I would mention is Exxon was granted a draft Class 6 permit for its Rose-CCS project in July, and the comment period for that with the EPA ended earlier this week. It's our expectation that we'll be moving to that Class 6 relatively soon here before the end of the year.

The next question is from Vincent Andrews with Morgan Stanley.

I'm wondering, I think the press release talked about an expectation that China will not export further this year, at least after Q3. So just curious what's driving that view, if it's anything in particular you're picking up on the ground with your sources in China?

We have maintained our expectations regarding China's available exportable tons. Currently, the challenge is that many of these tons are prilled urea, which isn’t in high demand outside of India, Mexico, and a few other Asian countries. They initially planned to offer 2 million tons for export through the third quarter, then would ramp up for the spring season in the fourth quarter and first quarter of next year. Following that, they announced an additional 1 million tons. Our assessment is that these tons are necessary due to losses in various regions and the overall high global demand, aiming for a total of 3 million tons. However, their export performance in June and July has been lower than expected. We will see if they can meet these targets. There have been rumors about India potentially purchasing some Chinese tons, but those exports were not officially permitted, though this could change. Overall, this is a positive development for global supply, but I don't anticipate it will affect pricing. China has raised the minimum price for both prilled and granular products, and we will monitor the situation in the coming months.

What about for the fourth quarter? It sounds like you don't expect it for the fourth quarter?

Further announcements, that's all I'm going on is no.

And our next question comes from Matthew Dale with Bank of America.

Look, I know you made some comments about insufficient nitrogen supply additions. But what do you make of some of the larger capacity functions for urea that CRU has kind of noted or flagging coming to the market in the next 5 years in China? It's kind of the prevailing assumption that China won't build that or it just won't get exported given some of the current policies?

You have several factors going on in world supply and demand, focusing on the supply side. There are plants in Russia, Iran, and Turkey totaling about 2.7 million tons. Then the 4 plants in China, I think you're referencing, targeting 2.6 million tons that are scheduled to start up in the ensuing, I'd say, this year and next year, and then some ongoing construction. But you've had plants taken offline, and then the gas issues that we've talked about in different parts of the world. As you look at overall growth in the 1% to 1.5% growth each year that we see in the need for urea against, that's a 200 million-ton supply; you need 2 world-scale plants to 3 per year to be built just to stay steady with the growth. Again, coupled with the restrictions, whether that be Europe or Trinidad or different parts of the world that have gone offline, we don't see that keeping pace. You're seeing that reflected today in continued strong demand; Brazil is a great example. Brazil is going to be 9 million tons. It has steadily grown year after year, with yield accompanying that, whether that be corn, wheat, or cotton, yields improving, and they're going to need additional and they don't have any urea plants coming online. They've talked about Petrobras bringing several of those plants back online, but that's going to take some time. We're seeing India; even though they built new plants, they're not operating to expectations. They're underperforming in terms of their total production based on expectations. You've got Ukraine not operating, Pakistan not operating. Different parts are driving the supply shortage and demand increasing.

I would just add to that on Bert's comments that generally in China, when new production is going on, a lot of times that is replacement for old, less efficient or higher particulate matter plants that are going offline. So it's a bit of a replacement. Additionally, our view on the tightening S&D balance from a nitrogen perspective, specifically ammonia, is based on there's a lot of upgrade urea plants that are going in to consume that ammonia. As we see this tightening of the ammonia market, part of it is just new upgrade plants going in both here in the U.S. and globally that are consuming that ammonia and tightening that market even more. Coupled with what Bert said, with European production continuing to be challenged, we expect that to continue as well. So I think it's still going to be a very tight market as we move through the end of this decade.

I appreciate that. If we consider the blue and green ammonia market, how much do you think could ultimately be transitioned into Asian energy markets for shipping? How much tonnage do you anticipate that will be?

Yes. I would say the base case right now between now and 2030, we're looking at is probably 3 million tons of low-carbon ammonia would be moving in there, primarily for power generation. However, with that, I think what we're seeing with our announcement actually moving forward is more interest from other parties who are contacting not only Bert but also bidding through different areas for low-carbon production, both in power generation, and then you're also seeing a bit more starting to grow in the marine side. I still think the marine side is a bit further out than 2030, but you are beginning to see ammonia engine vessels being constructed.

And the next question comes from Ben Theurer with Barclays.

I would like to gain a clearer understanding of the sequential trends in ammonia. Comparing the second quarter to the first quarter, it seems that while gas prices decreased, the gross margin actually declined significantly on a sequential basis. I would like to know what has been occurring in this regard and how we should anticipate the latter half of the year, particularly in relation to the current gas prices and the impact on your Nutrien adjusted gross margin per ton.

Yes. No, no, I'll start and pass it over to Chris. This is Greg. As we talked about before, and Chris talked about in particular, with some of the unplanned outages we saw, as well as the distribution cost of moving product around to meet customers' needs that ran through, particularly in the ammonia segment into the second quarter.

Yes. And we also, as Greg mentioned earlier, we look at it more than just on a quarter-by-quarter basis, given some of the timing. Now, as we look at the back half of the year, as we mentioned in our prepared remarks, Q3 is generally a little bit heavier of a turnaround period. So we may see a couple of hundred thousand tons less of gross production of ammonia during that period as well.

On the movement of the product, Q3 is generally an industrial export quarter with Q4 being more ag-based. We've built a very solid order book for Q4, but weather is dependent, so we'll see how that goes. The pricing has been very positive, and the demand uptake very positive.

And our next question comes from Andrew Wong with RBC Capital Markets.

Maybe a topical question for today to start. What's your view on how a Russia and Ukraine truce or some sort of peace settlement could impact natural gas prices and also on the nitrogen market?

Yes. I have several Russian friends and Ukrainian friends. I would take it to peace. I would love to see peace break out, and this situation ends. It bothers me that we take it economically, and that I understand that's a reflection of our business. The Russian tons that are coming to the United States, it amazes me that we are sending bombs and missiles there but bringing fertilizers here. I would hope that, that is addressed in some form or fashion. The impact on natural gas, that's not going to come back anytime soon as the Nord Stream system is not going to be rebuilt anytime soon. The frustration, I believe, with the European NATO allies and the purchasing of Russian product, whether that be gas or in the form of nitrogen, probably is not going to come back anytime soon. There are tariffs and sanctions coming that will only increase on Russian products. I think for the world, you're going to see much more North American natural gas moving to Europe and other places, and we're going to see on a Bcf type basis probably going from 15 in the United States up to the mid-20s in the next several years. On a nitrogen basis, again, it's a globally traded commodity. I think the pricing and the product moves in relation to product needs and the values communicated. Russian product is traded at a discount to Brazil and India. I expect that to continue for a while.

Yes. I would just add on the energy front, anything that has to be solved relatively quickly to stop some of the pressure that's already in motion, specifically for European producers, given the maintenance activity that these plants require, the working capital, and the demand timing as you're building production for 2 points of the year of demand. From our perspective, what we see from a European curtailment and shutdown is expected to continue no matter what happens just given the timeframe it would take in order to build back Nord Stream or bring in more Russian LNG through that timeframe.

Okay. I appreciate all that. Then maybe just switching over to Europe. With the implementation of CBAM, can you just talk about how you see that impacting the markets, both in Europe and globally? And how does that change to all of Europe at the marginal cost better?

Yes. So I'll start, and I'll see if anybody else wants to add in. Right now, just to put in context, CBAM is in a transitional phase where importers have to report their carbon intensity. It goes into place in January of next year. There are quite a few details still being worked out, that our hope is by the end of the year here, the specifics to that particular program are put in place. It will allow us, based on today where it's roughly an $80 per metric ton carbon tax on producers that we should begin to see with our low-carbon ammonia coming out of Donaldsonville something that's probably in the $25 per metric ton benefit. That continues to increase through the years, so by 2030 would be equivalent of a $100 per metric ton advantage that low-carbon production out of Donaldsonville would have. From our perspective, it's going to be something that we haven't really worked into all of our models of upside, and that's why we feel confident that we've been probably overly conservative but will be something that will be an advantage and almost our carbon arbitrage opportunity for CF as we're able to move our product in there.

Yes, I agree with Chris. In terms of how we're looking at CBAM, but also working with our existing operating units in the U.K. and planning to send low-carbon ammonia to produce low-carbon ammonium nitrate for that market, as well as other customers; industrials as well as fertilizer producers. We see a tremendous opportunity in the near term with the products we're already making due to our CCS and longer term with the Blue Point operation.

I would just add that we are seeing demand for the low-cost, low-carbon intensity product already today, even before considering the CBAM situation. This initiative has been beneficial for us, not only because the 45Q makes it a highly valuable investment with CO2 capture and dehydration, compression, and injection, but also because we are receiving increased product margins for these attributes. As Chris mentioned, this will be further enhanced by the CBAM, which wasn't factored into any of the initial calculations for Blue Point.

And maybe just the other part of the question just on the nitrogen market itself, like what is the impact there and on EU in its marginal cost role?

The impact, I assume what you're asking for is what's the impact on low carbon product to the market?

No, just in general, like EU right now is the marginal cost setter; does that raise your cost profile? Does it change how the market works and maybe they're a different part of the market now or kind of that?

Yes. I think what it's going to do is it will raise the cost of the product going into Europe, obviously, as you're having to pay for that carbon tax that's there. I don't think it changes anything with European production. As demand grows there, and you're seeing that constraint, that's why we strongly believe that you're going to have to incentivize new production globally to be bid in. Recently, with the exception of our project, many of these other projects that were in FID state have either deferred those FIDs or canceled the projects altogether. We see the back half of this decade just getting tighter, and that's at the same time that we'll be bringing on our production. We think the cost curve from that perspective, given demand growth will probably move up along with some of these other carbon initiatives globally.

And the next question comes from Aron Ceccarelli with Berenberg.

What is CF's perspective on nitrogen fixation products? Do you see these products as a growing risk to traditional nitrogen producers? Or do you expect farmers to adopt them as a complementary solution? And perhaps additionally, would CF be interested in entering the nitrogen fixation market?

This has been a topic, nitrogen fixation, microbials, biologicals, different applied products for years. I've been following this phase for a couple of decades and there have been many new entrants, and we have a lot of access to farmers. We've paid attention to the studies from the various universities, and I would say today, it's a questionable segment. They haven't performed as advertised; they've been tried in various environments. I talked to 2 farmers most recently with all the variables controlled, being water, the only variable being weather, but water, seed, crop protection, fertilizer were constant, and the variable being the active products. At times, they work, and at times, they don't. Are we interested? Well, we follow these things because it impacts our business. We want to align with the retailers and farmers that are using best practices, and so far, we haven't seen the performance as advertised.

The other thing I would just add to that is our expectation is that the value associated with any kind of, as Bert said, biological or other approach, is really to drive increased yield as opposed to a cost reduction based on nitrogen. If you think about a couple of hundred pounds of nitrogen going down per acre, even at relatively strong values for nitrogen, it's worth a lot more to the grower to increase yield by 3% or 4% than it is to try to take 5% of the nitrogen off the field. There's just more dollars associated with the end grain. We don't really see this as a necessarily a competing technology, more of a value enhancement to the grower.

Ladies and gentlemen, that is all the time we have for questions today. I would now like to turn the call back over to Martin Jarosick for any closing remarks.

Thank you, everyone, for joining us, and we look forward to seeing you at the upcoming conferences.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect your lines.