CF Industries Holdings, Inc.’s CF profit increased roughly 12.6% to $351.9 million or $1.49 per share in second-quarter 2015 from $312.6 million or $1.22 per share a year ago. Earnings per share beat the Zacks Consensus Estimate of $1.45.
Sales declined roughly 11% year over year to $1,311.5 million in the quarter and missed the Zacks Consensus Estimate of $1,348 million. The top-line results were adversely affected by lower sales volumes for all products along with lower average prices across all segments other than ammonia.
Costs and Margins
Cost of sales stood at $625.6 million in the second quarter of 2015 compared with $882.4 million in the year-ago quarter. Gross profit increased 16.2% year over year to $685.9 million in the reported quarter. Selling, general and administrative expenses decreased almost 4% to $37.9 million from $39.5 million in the prior-year quarter. Operating income was $630.3 million, up 18.6% from $531.3 million in the year-ago quarter.
Earnings before interest, taxes, depreciation and amortization (EBITDA) were $669.5 million in the second quarter of 2015, indicating a 9.2% rise from $613 million in the second quarter of 2014. The increase in EBITDA in the reported quarter is attributable to lower natural gas costs, an unrealized gain of $18.4 million on natural gas derivatives, along with a year-over-year gain on foreign currency derivatives in 2015. These gains were partly offset by a loss related to the sale of non-operating equity method investment.
Segmental Performance
Sales for the Ammonia segment dropped roughly 1% year over year to $599 million. Ammonia sales volumes decreased owing to lower sales in the Eastern Cornbelt, stemming from wet weather conditions. Ammonia prices increased in the second quarter of 2015 mainly due to higher demand for agricultural ammonia.
Sales for the Granular Urea segment fell 21.2% year over year to $211 million. Sales volumes in this segment decreased due to lower supply resulting from plant maintenance and tie-ins associated with capacity expansions at Donaldsonville. Average selling prices per ton for granular urea decreased owing to the abundant global supply, mainly from China.
Sales in the UAN segment decreased 10.8% year over year to $407.4 million. UAN sales volumes fell owing to weaker demand, stemming from wet weather toward the end of the quarter and lesser lucrative sales opportunities for the products.
The Other segment’s sales plunged 22% year over year to $94.1 million. Lower sales volumes were the result of weaker ammonium nitrate (“AN”) demand from customers. Average selling prices per ton at this segment decreased owing to a shift in product mix to lower-priced industrial AN from agricultural AN.
Financials
CF Industries exited the quarter with cash and cash equivalents of $809.9 million, down 63% year over year. Long-term debt remained flat year over year, at $4.6 billion.
Dividend & Share Repurchases
On Jul 23, 2015, CF Industries’ board declared a quarterly dividend of 30 cents per share. The dividend will be paid on Aug 31, to stockholders on record as of Aug 14, 2015.
CF Industries bought back 4.5 million shares during the reported quarter for around $268 million. The company also repurchased about 358,000 shares after the end of the quarter for $22.5 million, taking its outstanding share count to 233 million as of Jul 31, 2015. CF Industries’ year-to-date share repurchases amounted to 8.9 million shares for around $527 million.
Capital spending during the quarter was $587.1 million, of which $453.7million was spent on its capacity expansion program. Net cash used in operating activities decreased around 83.5% year over year to $32.1 million.
Project Updates
CF Industries reported continued progress at its capacity expansion projects at Donaldsonville, LA, and Port Neal, IA. The Donaldsonville urea plant is anticipated to commence production in third-quarter 2015 or early fourth quarter due to work time lost on account of wet weather. The UAN plant is slated to start production in the fourth quarter. On the other hand, the ammonia plant at Donaldsonville, and the ammonia and urea plants at Port Neal, IA continue to be on schedule for production in 2016.
These projects are anticipated to increase the company’s nitrogen nutrient capacity by more than 25%. This will raise the company’s nitrogen nutrient capacity per share from 30 tons per thousand shares at present to around 38 tons per thousand shares by the end of 2016.
Outlook
CF Industries expects a strong third quarter owing to higher order bookings for ammonia and UAN, which support expectations of 2016 fertilizer demand being in line with 2015 levels. The company expects corn plantations of 89.5 million acres in 2016 compared to 88.9 million acres in 2015 as farmers are expected to book profits from a higher grain price that resulted from wet weather and reduced corn yield. These factors are anticipated to support strong North American nitrogen fertilizer demand, including direct application of ammonia during fall.
Moreover, the company anticipates Chinese urea exports to exceed 12 million tons in 2015. Also, new urea operating capacities outside China are anticipated to be 5.5 million tons in the year. Thus, global capacity expansion continues to exert pressure on urea and other nitrogen fertilizer prices, mainly UAN. CF Industries expects projected demand for UAN in North America in 2016 to be similar to that in 2015.
Also, CF Industries anticipates total capital expenditures in the band of $2–$2.5 billion in 2015. This consists of $1.5–$2 billion for capacity expansion projects and $0.5 billion for other capital expenditures.
Zacks Rank
CF Industries currently carries a Zacks Rank #3 (Hold).
Better-ranked companies in the basic materials sector include CVR Partners, LP UAN, Innospec Inc. IOSP and Orion Engineered Carbons SA OEC, all sporting a Zacks Rank #1 (Strong Buy).
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