CF posts record results for year, 4Q, takes P&K inventory write-down of $57 M

CF Industries Holdings Inc. reported record results for both the fourth quarter and full-year ending Dec. 31, 2008, citing higher fertilizer prices, which more than offset lower volumes. Fourth-quarter net income was $190.1 million ($3.59 per diluted share) on sales of $1.07 billion, versus the year-ago $135.4 millon ($2.38 per share) and $852.5 million. The company took a $57 million inventory write-down in the fourth quarter, with $30.3 million and $26.7 million coming from phospates and potash, respectively.

“We performed very well in what proved to be a volatile market for fertilizer, posting substantial increases in both net sales and net earnings despite a more than 20 percent decrease in volume from the year-earlier quarter,” said Stephen Wilson, CF chairman and CEO.

Fourth-quarter nitrogen gross margins were $281.3 million on sales of $705.6 million, versus the year-ago $153.1 million and $630.7 million, respectively. Nitrogen tons sold during the quarter were down to 1.475 million st from the year-ago 1.926 million st.

“During the quarter, spot market prices for our three nitrogen products declined significantly from third quarter levels,” noted Wilson, “but we benefited from the large volume we had booked under the company’s Forward Pricing Program (FPP), which locks in a substantial portion of the margin on nitrogen sales.” CF said its two nitrogen complexes operated at 99 percent of capacity in the fourth quarter; however, they were operating at 75 percent going into 2009, reflecting weaker demand and high fertilizer supply chain inventory. CF bought some 100,000 tons of low-cost ammonia in the for the fourth quarter 2008 and first half 2009 resale.

CF said nitrogen sales under the FPP were 1.1 million tons in the fourth quarter, 75 percent of nitrogen sales volume compared to the year-ago 80 percent.

Fourth-quarter phosphate gross margins were $79.4 million on sales of $366.4 million, versus the year-ago $82.9 million and $221.8 million, respectively. Tons sold were down to 404,000 st from the year-ago 526,000 st.

Phosphate FPP were 206,000 st during the quarter, 51 percent of volumes, versus the year-ago 39 percent.

CF’s Plant City, Fla., phosphate complex operated a 85 percent capacity in the fourth quarter; however, it entered 2009 at approximately 40 percent of capacity, the result of week demand and the high fertilizer supply chain inventories.

CF noted that it has begun marketing purchased potash through its distribution network, with potash sales expected to begin in the spring. Results for potash sales are included in the phosphate segment.

Full-year 2008 net income was $684.6 million ($12.15 per share) on sales of $3.92 billion, up from 2007’s $372.7 million ($6.57 per share) and $2.76 billion.

For the year, nitrogen gross profits were $770.3 million on sales of $2.6 billion, up from 2007’s $446.8 million and $2.04 billion, respectively. Nitrogen tons sold were 6.141 million st, down from 2007’s 6.938 million st.

Full-year phosphate gross margins were $452.4 million on sales of $1.33 billion, compared to 2007’s $223.2 million and $714.8 million. Tons sold were down to 1.787 million st from 2007’s 1.994 million st.

As for CF’s outlook, Wilson said that uncertainty in the grain markets, high fertilizer inventories in the supply chain, and concerns on the part of farmers about input costs and crop economics make it difficut to predict how the spring planting season will play out. “Looking ahead, the fundamentals of agriculture and fertilizer remain strong globally. Once we overcome near-term challenges and providing the weather cooperates, we believe this industry will resume its growth trend.” He noted that the global fertilizer industry responded quickly by reducing capacity, and that this should help eliminate excess inventories and allow production to resume at more normal levels.

Wilson told analysts that CF projects farmers will raise 86 million acres of corn in 2009. Wilson said looking at a model with $3.90 corn, it looks like farmers would favor corn over soybeans. Also, he believes that due to the lighter applications of nitrogen in the fall, there will be a lot of pent-up demand in the spring.

Wilson noted that due to the Russia-Ukraine gas dispute, U.S. nitrogen is even more competitive and that Ukraine is now having to pay much higher natural gas prices, making it difficult for them to compete. Add to that relatively inefficient assets and freight costs, and Wilson said it would make it difficult to get product to CF’s market place. In the meantime, the U.S. is seeing lower gas prices due to quickly developed shale reserves and lower industrial demand.

In other news, CF said it has completed its pre-FEED (front end engineering and design) study for a nitrogen complex in Peru. It said the preliminary cost estimates are attractive and it will now proceed with a full FEED study, which is expected to be completed near the end of 2009. CF is also nearing completion of natural gas negotiations for the complex.

Wilson would not discuss CF’s attempt to merge with Terra Industries Inc., nor would Terra address the same issue in their call with analysts after their earnings were released.