CVR Partners - Earnings Call - Q1 2020

Transcript

Speaker 0

Greetings and welcome to the CVR Partners LP First Quarter twenty twenty Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr.

Jay Sinks, Vice President of Finance and Treasurer. Thank you. You may begin.

Speaker 1

Thank you, Michelle. Good morning, everyone. We appreciate your participation in today's call. With me today are Mark Pytosh, our Chief Executive Officer Tracy Jackson, our Chief Financial Officer and other members of management. Prior to discussing our twenty twenty first quarter results, let me remind you that we are variable distribution MLP.

We will review our previous established reserves, current cash usage, evaluate future anticipated cash needs and may reserve amounts for other future cash needs as determined by our General Partners Board. As a result, our distribution, if any, will vary from quarter to quarter due to several factors including, but not limited to, operating performance, fluctuations in prices received for finished goods, capital expenditures and cash reserves deemed necessary or appropriate by the Board of Directors of a general partner. Let me also remind you that this conference call may contain forward looking statements as that term is defined under federal securities laws. For this purpose, any statements made during this call that are not statements of historical facts may be deemed to be forward looking statements. Without limiting the foregoing, the words outlooks, believes, anticipates, plans, expects and similar expressions are intended to identify forward looking statements.

You are cautioned that these statements may be affected by important factors set forth in our filings with the Securities and Exchange Commission and in our latest earnings release. As a result, actual operations or results may differ materially from the results discussed in the forward looking statements. We undertake no obligation to publicly update any forward looking statements whether as a result of new information, future events or otherwise, except to the extent required by law. This call also includes various non GAAP financial measures. The disclosures related to such non GAAP measures, including reconciliation to the most directly comparable GAAP financial measures are included in our twenty twenty first quarter earnings release that we filed with the SEC yesterday after the close of the market.

With that said, I'll turn the call over to Mark Pytosh, our Chief Executive Officer. Mark?

Speaker 2

Thank you, Jay. Good morning, everyone, and thank you for joining us for today's call. To summarize financial highlights for the 2020 included net sales of $75,000,000 a net loss of $21,000,000 EBITDA of $11,000,000 and there's no cash available for distribution this quarter. During the 2020, we experienced third party outages at the Coffeyville facility that led to approximately ten days of unplanned downtime. During the downtime at Coffeyville, we proactively completed maintenance work at the facility that allows us to move its planned turnaround from the 2020 to the 2021.

Aside from these third party issues, Coffeyville operated as expected in the quarter. The ammonia plant operated at 86% utilization below the 2019 at 96%. The unplanned downtime from the third party outages impacted Coffeyville's utilization rate by approximately 9%. We had strong utilization at the East Dubuque facility following the completion of its planned turnaround last fall. At East Dubuque, the ammonia plant operated at 101% utilization compared to utilization of 69% in the prior year period.

As a reminder, in the 2018 was severely impacted by wet weather, which caused additional ammonia inventory at East Dubuque to be carried into the 2019. We managed our storage capacity levels by reducing ammonia utilization during that period last year. Our combined operations produced approximately 201,000 gross tons of ammonia and 78,000 net tons of ammonia available for sale for the 2020. This compares to production of 179,000 gross tons of ammonia and 41,000 net tons of ammonia available for sale in the prior year period. We produced 317,000 tons of UAN in the 2020 compared to 335,000 tons of UAN last year.

We sold approximately 284,000 tons of UAN during the 2020 at an average price of $166 per ton. In addition, we sold approximately 54,000 tons of ammonia during the 2020 at an average price of $264 per ton. Year over year pricing remained soft for UAN and ammonia, which were down 2528% respectively. UAN pricing continued to be impacted by additional imports into The U. S.

From Russia and Trinidad as a result of the EU tariffs. The ammonia market also remained well supplied with customers having carried over inventories after the poor fall application season, which put pressure on pricing. Natural gas pricing was lower as well helping to offset some of the UOM price weakness. In the first quarter, we saw normal activity from our customer base as they prepare for the spring planting season. So far, spring application has been robust and we continue to expect a healthy increase to planted corn acreage compared to last year, which I will discuss further in my closing remarks.

I will now turn the call over to Tracy to discuss our financial results.

Speaker 3

Thank you, Mark. Turning to our results for the 2020, we reported net sales of $75,000,000 and an operating loss of $5,000,000 compared to net sales of $92,000,000 and operating income of $9,000,000 in the 2019. Net losses for the 2020 were $21,000,000 or $0.18 per common unit and EBITDA was $11,000,000 This compares to a net loss of $6,000,000 or $05 per common unit and EBITDA of $26,000,000 for the prior year period. The year over year decline in EBITDA was driven predominantly by lower prices for ammonia and UAN. Direct operating expenses for the first quarter twenty twenty were $35,000,000 in line with the prior year period.

Excluding inventory impacts, direct operating expenses were $39,000,000 also consistent with the prior year period. Turning to capital spending. During the 2020, we spent $6,000,000 on capital projects, which was primarily maintenance capital. We estimate total capital spending for 2020 to be approximately 19,000,000 to $23,000,000 of which 14,000,000 to $16,000,000 is expected to be maintenance capital. Turnaround expenses for the full year are expected to be less than $1,000,000 Looking at the balance sheet, as of March 31, we had approximately $83,000,000 of liquidity, which was comprised of $58,000,000 in cash, availability under the ABL facility of $50,000,000 less 25,000,000 of cash included in our borrowing base.

Within our cash balance of $58,000,000 we had approximately $37,000,000 related to customer prepayments for the future delivery of product. Our long term gross debt and finance lease obligations of $647,000,000 including the current portion remains unchanged. In assessing our cash available for distribution, we generated EBITDA of $11,000,000 and had total cash needs of $15,000,000 for debt service and $4,000,000 for maintenance capital expenditures. In addition, we released $3,000,000 of cash reserves from prior quarters for maintenance turnaround and other operating needs. As a result, there was no cash available for distribution.

Looking ahead, we estimate our ammonia utilization rate for the 2020 to be between 95100%. We expect direct operating expenses to be approximately 35,000,000 to $40,000,000 excluding inventory impacts and total capital spending to be between 6,000,000 and $10,000,000 With that, I'll turn the call back over to Mark.

Speaker 2

Thanks, Tracy. In the first quarter, we saw normal customer activity levels as customers were preparing for the spring planting season. During March, as a result of COVID-nineteen, we took measures at our facilities to have nonessential employees work remotely and adjusted staffing schedules and locations to maximize social distancing. We also modified our loadout process to protect our employees, contract workers and drivers while allowing the execution of the typical compressed application schedule. Even with these added measures, we were able to ship record levels of ammonia in April from both of our plants.

While the fall ammonia application season was below expectations due to wet weather, spring ammonia application has been robust throughout the Midwest. Looking to the spring, the USDA estimated in its most recent planting intentions report that The U. S. Farmers would plant 97,000,000 acres of corn. This survey was taken in early March and our opinion did not take into account the significant decline in ethanol and corn prices in the weeks after the survey and before the spring planting season.

We still estimate planted corn acres to be between 92,000,095 acres, which will be a healthy increase compared to last year. We think it is too early to predict the timing and strength of recovery in demand for gasoline and ethanol, which will be driven by the pace of reopening of The U. S. Economy and by ethanol exports. Ethanol accounts for approximately one third of domestic demand for corn.

Despite these impacts from COVID-nineteen, spring planting is following a normal pattern and we expect to see large product movements in the second quarter. During the quarter, we continue to see UAN price at a discount to urea on a per pound of nitrogen basis. The dynamics we discussed on our last call regarding the impact of the EU tariffs on product from Russia and Trinidad continued to impact the market. However, as we entered April, urea prices strengthened and led to increasing prices for UAN. Although UAN is still valued at a discount to urea, we believe on the margin that UAN will be favored versus urea for the remainder of the spring for top dress and side dress nitrogen application.

Continuing to offset some of the pricing issues has been lower natural gas cost. Natural gas prices used in production were significantly lower in the 2020 averaging $2.42 per MMBtu as compared to $3.83 per MMBtu in the 2019. Pricing for the remainder of 2020 looks attractive, where the forward strip is averaging $2.56 per MMBtu. Allergies caused by the third party air separation plant Coffeyville resulted in downtime of ten days from December to March. During this downtime, we took the opportunity to clean, repair or replace and inspect vessels and piping, replace catalysts and certify equipment.

As a result, we determined that the maintenance work that had been done supports our decision to push back Coffeyville's planned turnaround from the 2020 to the 2021. In addition, we are moving the East Dubuque turnaround planned for the 2021 to the 2022. With the weakness across the stock market from the COVID-nineteen pandemic, our unit price has fallen below $1 and we've received a continued listing notice from the New York Stock Exchange. We have until 01/01/2021 to regain compliance. We will consider the appropriate actions to take if necessary as we get closer to that date.

Given the performance of the units recently, we feel they are significantly undervalued and the Board has authorized a unit repurchase program of up to $10,000,000 The authorization does not obligate the partnership to acquire any common units and may be canceled or terminated by our General Partners Board of Directors at any time. I want to reiterate that the partnership will continue to focus on maximizing free cash flow by safely operating our plants reliably and at high utilization rates while focusing on the health and safety of our employees, prudently managing our cost, being judicious with our capital, but selectively investing in reliability projects and incremental additions to production capacity and maximizing our marketing and logistics activities. In closing, I would like to thank all of our employees for their focus on being healthy and safe, flexible and committed to helping the company execute at a high level at a critical time of the year for our customers. We all look forward to gradually returning to more normalized conditions. With that, we are ready to take any questions.

Michelle?

Speaker 0

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue.

Our first question comes from the line of Adam Samuelson with Goldman Sachs. Please proceed with your question.

Speaker 4

Yes, thank you. Good morning, everyone. Hope everyone is safe.

Speaker 2

Thank you. You too. So

Speaker 4

Mark, thinking about the market and understanding kind of an outlook for a strong spring, but given some of the dynamics facing you potentially facing the market in the second half of the year and potential for lower corn acreage next year if corn holds where it is and ethanol demand is what it is, Can you maybe take a look at view of the UAN cost curve and where you sit on it?

Speaker 2

Well, first of all, Adam, let address the market because we're I would say in the pretty early days of kind of experiencing the recovery aspect of it. Obviously, we have the benefit of our parent companies in the refining business. And so we have the ability to kind of watch the dynamics of where gasoline is headed, gasoline demand in particular in ethanol. And gasoline demand fell about 50% starting in March. And most of the estimates that have been tossed around here in the last few days by other by refiners have been that that has bounced to maybe 60 or 65% of normal.

And so, you know, I everyone's concerned, we share that concern about where gasoline demand is going to be and the draw on ethanol. But I think it's pretty early to make that call in the May. But there's some encouraging signs about gasoline demand. So just to put that out there. On the cost curve, globally, ever pretty much all the producers globally have seen benefit in the last twelve months from low natural gas prices.

LNG prices have gone down offshore. We've seen obviously you can see in our numbers and the other producers in North America how low natural gas has been. What I would tell you there again early days, we don't really know yet. But it appears that some of the what's been driving that down may be taken out of the marketplace. The biggest driver probably globally has been associated natural gas from oil drilling.

And obviously activity there has fallen dramatically in the last month. And the associated gas component will be falling there. And if you can if you look further out on the natural gas curve, I would say conditions appear to be changing the other way. It's not going up dramatically, but I think the benefit globally of what low prices have meant probably is that bottomed. The benefit we have being in The U.

S. Is we'll probably I would expect The U. S. To sustain the lowest natural gas prices in the world. So I would expect US producers when you combine natural gas plus lower transportation cost that we will be by far the lowest cost producers in the world as it relates to delivering fertilizer in the Midwest and The U.

S. So I think we will be we retain in fact probably get a more of a spread in our competitiveness in 2021 as compared to what it's been like later in 2019 and 2020. So I expect it to improve actually.

Speaker 0

Thank you. We have reached the end of our question and answer session. I'd like to turn the call back over to management for any closing remarks.

Speaker 2

Just want to again thank all our employees for courageous efforts this quarter and the work they've done to support to be healthy and safe and to support the company. And I wish everybody on the call to be careful and be safe and look forward to talking to you in the summer and hopefully in brighter conditions. Thank you very much for participating today.

Speaker 0

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for

Speaker 4

your

Speaker 0

participation and have a wonderful day.