CVR Partners - Earnings Call - Q2 2019
July 25, 2019
Transcript
Speaker 0
Greetings and welcome to CVR Partners LP Second Quarter twenty nineteen Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Jay Sinks, Vice President of Finance and Treasurer.
Speaker 1
Thank you, Dana. 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 nineteen second quarter results, let me 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 outlook, 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
Speaker 2
required by law. This call
Speaker 1
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 nineteen second 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 Pytash, 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 2019 included net sales of $138,000,000 net income of $19,000,000 adjusted EBITDA of $60,000,000 and the Board of Directors declared a second quarter distribution of $0.14 per common unit, which will be paid on August 1239 to unitholders record at the close of the market on 08/05/2019. During the 2019, we had strong utilization at both facilities despite the challenging weather and flooding conditions. At Coffeyville, the ammonia plant operated at 97% utilization for the quarter, well above utilization for the 2018 that was impacted by both planned and unplanned downtime.
At East Dubuque, the ammonia plant operated at 98% utilization, which was also higher than the prior year period. For the 2019, our combined operations produced approximately 211,000 gross tons of ammonia, 316,000 tons of UAN and 71,000 net tons of ammonia available for sale compared to production of 174,000 gross tons of ammonia, 241,000 tons of UAN and 65,000 net tons of ammonia available for sale in the prior year period. We sold approximately 340,000 tons of UAN during the 2019 at an average price of $217 per ton. UAN pricing for the quarter increased 14% over the prior year period. In addition, we sold approximately 110,000 tons of ammonia during the 2019 at an average price of $456 per ton.
Ammonia pricing for the quarter increased 31% over the prior year period. Low natural gas prices combined with strong demand and constrained river movements resulted in CVR Partners' solid financial results for the quarter. UAN sales volumes were up 26% year over year in the 2019. Despite the persistent wet weather and flooding conditions experienced during the quarter, there was still strong demand for nitrogen due to the catch up from the poor fall application and late start to spring. I will now turn the call over to Tracy to discuss our results.
Speaker 3
Thank you, Mark. Turning to our results for the 2019, we reported net sales for the period of $138,000,000 and operating income of $35,000,000 compared to net sales of $93,000,000 and an operating loss of less than $1,000,000 in the 2018. Net income for the 2019 was $19,000,000 or $0.17 per common unit and adjusted EBITDA was $60,000,000 This compares to a net loss of $16,000,000 or $0.15 per common unit and adjusted EBITDA of $26,000,000 for the prior year period. These improvements were driven predominantly by improved UAN and ammonia pricing and sales volumes. The increase in UAN sales volumes was primarily attributable to strong demand for nitrogen as Mark just discussed.
Direct operating expenses for the 2019 decreased to $46,000,000 from $47,000,000 in the prior year period. Excluding inventory impacts, direct operating expenses decreased by approximately $6,000,000 year over year primarily related to turnaround expenses incurred in 2018 and not in 2019. Turning to capital spending. During the second quarter twenty nineteen, we spent $2,000,000 on capital projects, which was primarily maintenance capital. We continue to estimate total capital spending for 2019 to be approximately 20,000,000 to 25,000,000 excluding turnaround spending.
In the fall, we have a planned turnaround at East Dubuque, which we expect will cost approximately $7,000,000 Looking at the balance sheet, as of June 30, we had approximately $69,000,000 in cash, including approximately $2,000,000 related to customer prepayments for the future delivery of product. Availability under the ABL facility was $48,000,000 plus $25,000,000 in our cash included in our borrowing base. We currently believe our total liquidity position of approximately $93,000,000 at the end of the quarter is sufficient going forward. Our long term gross debt and finance lease obligations of $631,000,000 including current portion remains unchanged. As a reminder, the majority of our gross debt position is comprised of our 9.25% senior notes due 2023.
These notes became callable in June at 104.6% of par. Available cash for distribution of $15,000,000 is derived from our positive adjusted EBITDA for the quarter after consideration of reserves of $15,000,000 for debt service and $2,000,000 for environmental and maintenance capital expenditures. In addition, we reserved $28,000,000 for future turnarounds, capital and operating cash needs. We are a variable distribution MLP. We will review our previously established reserves, 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 distributions, if any, will vary from quarter to quarter due to several factors, including but not limited to operating performance, fluctuations in the prices received for finished products, capital expenditures and cash reserves deemed necessary or appropriate by the Board of Directors of our general partner. With that, I will turn the call back over to Mark.
Speaker 2
Thanks, Tracy. Weather impacted the business in the second quarter in two ways. Planting conditions were late and were never dry enough to effectively plant either the corn or soybean crops. And two, the severe flooding in Kansas and Oklahoma curtailed UAN rail shipments for eighteen days between mid May and mid June. Despite these conditions, there was still strong demand for nitrogen due to the catch up from the poor fall application and late start to spring.
The late planting season extended well into July for the side dress seasons and fertilizer consumption has brought customer inventories to very low levels at the end of the planting season. The late planting season also delayed the start of the summer fill season for UAN, which we expect will begin in the next couple of weeks. There's been a lot of speculation about the number of planted corn and soybean acres versus preventative plant acres. At the June, the USDA issued a confusing planting intentions report that estimated nearly 92,000,000 acres of corn were planted in the spring, but only 82,000,000 acres of soybeans. From our point of view, looking at demand for nitrogen fertilizer at our plants, we believe that the planted corn acres are significantly overstated and farmers either waited longer to plant soybeans or preventatively planted a portion of their acreage.
For those acres that were planted, excess moisture should negatively impact yield per acre. Corn yields were estimated by the USDA to be down 10 bushels to 166 bushels per acre for this planting season versus last year. We have seen yield estimates for corn as low as 160 bushels per acre. With fertilizer inventories for distributors and retailers lower than normal in the short term, the reduced corn production from this planting season bodes well for 2020. Corn prices have rallied about $0.75 a bushel since April and are at the highest absolute prices in several years.
We expect fertilizer demand to be strong in the third quarter and expect demand to further increase when customers begin focusing on the spring twenty twenty planting season, where we currently expect planted acres to be significantly higher than 2019. As Tracy mentioned, we are planning a twenty eight day $7,000,000 turnaround at our East Dubuque facility starting in September and are focused on a significant upgrade of our natural gas reformer and various other reliability and repair projects. Over the next several turnarounds at both of our plants, we will be targeting projects that are intended to improve our reliability and debottleneck the plants in incremental ways to gain added production for a low capital investment. Our plants have been strong performers in the past several years, but we know we can do better in the future. Finally, 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, prudently managing our costs, being judicious with our capital and maximizing our marketing and logistics activities.
In closing, I would like to thank all of our employees for their contributions in the second quarter to help us navigate challenging weather conditions and being well prepared to capitalize on this past spring season. With that, we're ready to answer any questions. Dana?
Speaker 0
Thank you. At this time, we will be conducting a question and answer session. Our first question comes from the line of Adam Samuelson with Goldman Sachs. Please proceed with your question.
Speaker 2
Thanks. Good morning, everyone. Good morning, Adam.
Speaker 4
So Mark, I guess, first, I'd be interested, in getting a little bit more color on the market outlook thus far in July and how it frames, the second half. I mean, I believe, at least in the trade press, that there was a summer fill price from you guys that got lifted, late last week. But any sense or color you can provide on how much of the 3Q volume might still be summer at spring pricing or near spring pricing relative to what would be a notable step down for 3Q as always happens at this time of year?
Speaker 2
Sure. So what I would say to that, Adam, is that we and I'm not going get quantitative on that measure, but there's been a decent period in July where we've still been selling in season product. And so we had a late season and then the embargo for all the rail facilities in Oklahoma were equally embargoed during sort of mid May to mid June for a big chunk of that time. So the product left later and then people had to catch up on a refill there. So went further into July than normal, maybe two or three weeks.
And we did sell some product out of East Dubuque, but that was an isolated sale and we still have tons to sell at East Dubuque. Sort of the main fill season I expect to come in the next couple of weeks. So we will get some blending of sort of late spring pricing. And as you know, typically the spring pricing starts to fall in June. So it won't be exactly where the second quarter pricing was, but the season definitely went longer.
The most important thing about the late season was that it sort of drew down all the inventory in the dealerdistributor network, which bodes well for the demand to refill the tanks. So we're expecting a very healthy demand coming out in the here in the third quarter because the tanks are largely empty at this stage.
Speaker 4
Yes. And any similar commentary or thoughts on the ammonia market where obviously you don't have the late season demands, but you've also had a pretty sharp correction of prices at The Gulf as we get out of season, just how frame that market a little bit?
Speaker 2
Yes, I would say it's a little bit of two markets because the Northern Plains is very different than the Southern Plains, which is still much better than The Gulf or Tampa price. I would say depending on where your plant was, you may not have had the best spring. We had a very fortunate spring at East Dubuque. We had a lot of need a pent up need there because it didn't get put down in the fall. So the spring was very good at East Dubuque and we had pretty healthy demand profile looking into the fall.
But I expect the market to pick up there because if the planted acres are correct, there's going to be desire of weather conditions hold together to have a strong ammonia run-in the fall. But there's been more, I'd say, carryover in the Southern Plains than the Northern Plains. The Northern Plains, there was more ammonia that was able to get onto the ground. But in the Southern Plains, the weather just wasn't going to allow it because of all the rain.
Speaker 4
Okay. No, that's very helpful. And then a couple just on the debt refinancing, know the bonds did become callable in June. Just any color you could provide on that, how you look at the market opportunity to refinance there?
Speaker 3
So we've been evaluating the market, the rates that are available to us, and we'll look to see what the Fed does next week, and continue the discussion with our board around the call premium versus the rates available and make a decision in the future.
Speaker 4
Okay. And then I guess the last one for me, just, making sure I understand that the reserves taken for CapEx and the turnarounds, in 2Q relative to the distribution, should we think about that as a conscious effort to maybe ensure that there actually is a certainly in 3Q when you have the turnaround a distribution. But is it intended to kind of level load or more straight line the distribution? What I would
Speaker 2
there, Adam, is that we this year, we have a pretty aggressive spending plan in the second half and the CapEx kind of drifted backwards into the second half, partly around spending around the turnaround. And so we generated more cash in the second quarter and the Board decided that it would since we have the cash on hand and we had this big spend on the horizon that we would go ahead and reserve a portion of our free cash flow to pay for that spending. So that's really where the reserve came from.
Speaker 4
Right. But it just the maintenance capital for the rest of the year and the turnaround costs for 3Q. So just as we're thinking about whatever EBITDA proves to be in the second half and how that filters into distributable cash flow, you already have the turnaround expense and then most of the maintenance capital already reserved for. Correct?
Speaker 2
Yes. Again, yes, we had a big quarter, a lot of free cash flow and the Board decided that it would be prudent to go ahead and set aside that big spending dollars now and sort of see what happens in the second half. So we're in a good position going into the second half and the turnaround and that CapEx are reserved. So we're in good shape right now.
Speaker 4
Okay, understood. I appreciate the color. I'll pass it on. Thanks.
Speaker 2
Thanks, Adam.
Speaker 0
Our next question comes from the line of Charles Newberit with Cowen. Please proceed with your question.
Speaker 5
Hi, guys. Just a quick question. You had was your gas cost in 2Q lower than 1Q and should we look for lower still in 3Q at this point?
Speaker 2
A little early to call it a 3Q. Prognostication skills aren't the greatest there.
Speaker 5
Well, looking at the strip then, is it low it's going to be it looks like it's going be lower? Okay.
Speaker 2
Yes. The third quarter gas price strip today would be lower than the second quarter, which was lower than the first quarter. And the forward strip looks reasonably low for today's price, it would look low through the end of next year.
Speaker 5
Okay. Is there any reason to start thinking about whether you would buy some of your guests forward? Mean, Coffeyville obviously not an issue, but is there any reason to do it for East Dubuque at this point or not?
Speaker 2
We're always evaluating it and I think our what we'd like to do is that the opportunity presents itself to take a portion of that winter gas price. So I'm hoping we'll be able to put something in place there as we go. So we look at it all the time. So I'm hoping we'll put something in there. It's pretty attractive right now.
Speaker 5
I guess when you look at the cadence of sales over the course of the next two quarters, is there any reason to think that 3Q might be a little on the lighter side because of the late planting, late harvest that will likely occur because of that? Or that might be offset by the fact you have all this prevent planting that's basically going to get pulled out early to get and any opportunity to get fertilizer down on it is going to be taken?
Speaker 4
How do you sort of
Speaker 5
play those against each other?
Speaker 2
The third quarter is always a light quarter because we don't put a lot of ammonia on the ground in the third quarter. So relative to the second quarter the second and the fourth are big quarters for ammonia application. So the third will always be lower than the second just because ammonia doesn't move that much. And then the fourth will be where we'll see that activity really pick up. So volumes are always going to be lighter.
We'll be as you know, Charlie, we ship pretty ratably out of Coffeyville, UAN. So we'll have all else being equal and the plants running, we'll have the normal shipping schedule there. And then East Dubuque will be shipping UAN, but the big move in ammonia won't be until the fourth quarter.
Speaker 5
Okay. And right now expectations are for good demand because of the likely increase in corn acres?
Speaker 2
Yeah. Saw each other at the Southwest Conference. I think most customers are saying they really would like to see good weather in the fall to be able to have a strong ammonia application in preparation for the feeling of a big acreage number in the spring.
Speaker 5
Okay. And last question, is it I mean, I assume it's reasonable for getting the pricing you received, but looking at the volumes you did in 2Q, that had a lot of that carryover that we discussed after the first quarter that it didn't get down during 1Q or didn't get out. So you carried it through into 2Q, you managed to basically get rid of it all. So I think is it reasonable to assume that 3Q volumes, at least from a sales perspective, and even maybe in the entire second half might be a little bit lighter? Or definitely the You 3Q, I just don't have the inventory to work through.
Speaker 2
Well, what I would tell you is that again, UAN moves, I'd say, more ratably. So I don't think there'll be any big changes there. We did lose a little bit of ammonia application in the first because of the weather and it got taken up in the second. But I think the second half will be normal. A lot of UAN movement in the third and then UAN and ammonia in the fourth.
So I don't expect anything unusual. The planting cycle didn't really change any of what I consider the normal pattern of purchasing other than the fill season is a little bit later than normal in terms of that picking up and buying the second half.
Speaker 5
Forgot one other thing. You guys took advantage of the fact that a lot of product couldn't make it upriver because of the river issues and the high the currents and the high water and all. Is that something that's still affecting deliveries or is that now completely by the boards and things are, for lack of a better word, back to normal?
Speaker 2
I'd say the Mississippi when you look at rivers in the country, the Mississippi is up stream normal, but there are other rivers that are not normal in the Southern Plains that are affecting it, but that's not really affecting us per se, but the Mississippi is back to normal.
Speaker 5
Okay. So, things can get up to East Dubuque and be competitive again as opposed to in the second quarter when basically they couldn't be?
Speaker 2
Yeah, that's correct.
Speaker 5
Okay. Thanks very much.
Speaker 4
Thank you.
Speaker 0
Ladies and gentlemen, we have reached the end of the question and answer session. And I would like to turn the call back to management for closing remarks.
Speaker 2
Well, again, we want to thank everybody for joining our call today and we look forward to speaking to you on the third quarter call. Thank you very much.
Speaker 0
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.