The Haber-Bosch process, for which its creators both received Nobel prizes, solved this challenge just over 100 years ago. Using natural gas or other energy sources as feedstock, nitrogen manufacturers use Haber-Bosch to fix atmospheric nitrogen with hydrogen to produce anhydrous ammonia. Ammonia can then be upgraded to other fertilizer products such as granular urea or urea ammonium nitrate.
The ability to produce nitrogen has had an undeniably positive effect on the world. Along with Green Revolution seed advancements and farming practice improvements, the growing use of nitrogen and other fertilizers dramatically increased food production in the second half of the 1900s. Food security and quality of life around the world improved as well. The annual rate of people dying due to a famine globally per decade declined nearly 99 percent from the 1960s to the 2010s.
HOW WE COMPETE
Nitrogen is a globally traded commodity. The global price is set by our industry’s marginal producers, which are Chinese producers that use anthracite coal as feedstock. Given the commodity nature of our business, our focus is on having the lowest delivered cost per ton. To do this, our strategy is to leverage our core capabilities to optimize and sustainably grow the world’s most-advantaged nitrogen and chemicals platform.
This starts with our substantial structural advantages. We operate some of the most energy-efficient plants in the world, which, combined with access to abundant low-cost North American natural gas, positions CF firmly on the low end of the global cost curve. We operate in, and sell product to, regions that require imports to satisfy demand. Additionally, nitrogen fertilizers must be applied each year and global demand for nitrogen is growing, and largely driven by population growth and dietary improvements.
We also create operational advantages for our company by investing in our people and our assets.
We focus our capital expenditures on safety and reliability in order to improve safety, high asset utilization and productivity. Data collected by CRU, a global industry consulting firm, shows that our asset utilization-and-production over the last five years is approximately 12 percent higher than the average utilization rate of our North American competitors. Based on the size of our network, that translates into roughly 1.1 million tons of incremental gross ammonia per year — volume that is equivalent to a worldscale ammonia plant. Said differently, our operational capabilities lead to capital efficiency, saving our shareholders approximately $1.5 billion to $2.0 billion of capital in order to produce the same volume of ammonia.
We have also invested in the flexibility of our manufacturing facilities and built an extensive distribution platform. This allows us to maximize margins by optimizing our product mix and lowering logistics costs.
Our disciplined portfolio management has created substantial value for shareholders, most notably through capacity expansions and acquisitions. We have also driven value through divestments of assets, strategic ventures and long-term supply agreements.
Free Cash Flow Yield (1)
We do all this while operating efficiently, with an engaged employee population of approximately 3,000 people. Our SG&A costs as a percent of sales remain among the lowest in both the chemicals and fertilizer industries.
CREATING LONG-TERM SHAREHOLDER VALUE
By executing our strategy across these structural and operational advantages, we are able to generate substantial free cash flow. In fact, we believe we are well-positioned to generate superior cash flow through the cycle compared to most of our global competitors.
Our goal is to use excess cash to increase shareholder participation in our underlying assets as measured by tons of nitrogen capacity per 1,000 shares. We do this in two ways. First, we look to reinvest in our business when we can identify opportunities that fit within our strategic fairway and have risk-adjusted rates of return well above our cost of capital. Second, in the absence of available growth opportunities, we expect to distribute excess capital to shareholders.
In line with this philosophy, we have deployed $1.2 billion over the last three years for share repurchases and growth initiatives, increasing shareholder participation in our underlying business by nearly 10 percent. We also returned $825 million to shareholders through dividends.
Over the same time frame, we have redeemed $1.85 billion in debt as part of our focus on reducing fixed charges, optimizing our capital structure and returning to investment grade debt ratings. As a result, we entered 2020 with greatly improved credit metrics and a strong and flexible balance sheet that is well-positioned for the future.
CF Industries’ Nitrogen Volumes and Shares Outstanding
as of Year-end
OUR BROADER IMPACT
Our financial results and our track record of creating long-term shareholder value are not the only way we evaluate our company’s performance. We expect to have a positive impact across the issues important to our many stakeholders.
We communicate our performance in these areas and others through our annual environmental, social and governance (ESG) reporting. This year we are releasing our annual Sustainability Report at the same time as our Annual Report, and reporting our ESG performance using the Sustainability Accounting Standards Board framework for the first time. This is in addition to our long-standing use of the Global Reporting Initiative, through which we report on a comprehensive basis.
We are proud of the progress these reports document. For example, our entry-level wages average nearly 300 percent of the local minimum wage, nearly half of our annual procurement spending is with local suppliers and we actively support local groups and non profit organizations.
We also report on the progress that has been made to limit and reduce the environmental footprint of the agriculture industry. Greenhouse gas emissions are inherent to the nitrogen manufacturing process. However, because more than 20 percent of global greenhouse gas emissions are estimated to come from land use, a sustainable future requires the world to use less land to feed more people. Fertilizer increases yield per acre, which means less land is required to feed the world’s population. Without fertilizers, we estimate that net global greenhouse gas emissions would increase by 10 percent due to greater land use for farming.
We have also partnered with non governmental organizations to support efforts to improve how our products are used. We just completed the fourth year of our partnership with The Nature Conservancy on the 4R Plus program, which has made great progress to increase awareness and adoption of nutrient stewardship and conservation practices in order to improve soil and water quality while helping the financial performance of farmers.
We encourage you to spend time across all our annual reporting to understand the scope of our impact on and contributions to society. We look forward to our ongoing discussions on the positive impact nitrogen has had on the world, and how we are approaching emerging issues important to stakeholders.
