CVR Partners - Earnings Call - Q3 2019

Transcript

Speaker 0

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Jay Finks, 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 nineteen third 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 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 nineteen third 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.

Speaker 2

Mark? Thank you, Jay. Good morning, everyone, and thank you for joining today's call. The summarized financial highlights for the 2019 included net sales of $89,000,000 a net loss of $23,000,000 adjusted EBITDA of $18,000,000 and the Board of Directors declared a third quarter distribution of $07 per common unit, which will be paid on November 12 to unitholders of record at the close of market on November 4. During the 2019, we had strong utilization at both facilities and began a planned turnaround at East Dubuque, which was completed in mid October.

At Coffeyville, the ammonia plant operated at 98% utilization for the quarter above the 2018 at 94%. At East Dubuque, the ammonia plant also operated at 98% utilization leading up to the turnaround compared to utilization of 100% in the prior year period. For the 2019, our combined operations produced approximately 196,000 gross tons of ammonia, 318,000 tons of UAN and 56,000 net tons of ammonia available for sale compared to production of 212,000 gross tons of ammonia, 338,000 tons of UAN, and 63,000 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 $182 per ton. UAN pricing for the quarter increased 7% over the prior year period.

In addition, we sold approximately 33,000 tons of ammonia during the third quarter of twenty nineteen at an average price of $337 per ton. Ammonia pricing for the quarter increased 13% over the prior year period. While our UAN sales increased by 10% over the prior year quarter and we benefited from higher fertilizer and lower natural gas prices, increases in direct operating expenses and pet coke pricing drove the slight decline in our EBITDA year over year. We continue to expect a favorable spring twenty twenty planting season compared to 2019, 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 2019, we reported net sales for the period of $89,000,000 and an operating loss of $8,000,000 compared to net sales of $80,000,000 and operating income of $3,000,000 in the 2018. Net losses for the 2019 were $23,000,000 or $0.20 per common unit and adjusted EBITDA was 18,000,000. This compares to a net loss of 13,000,000 or 12¢ per common unit and adjusted EBITDA of 19,000,000 for the prior year period. The slight decrease in adjusted EBITDA was driven predominantly by higher operating costs and higher pet coke prices.

Direct operating expenses for the 2019 increased 48,000,000 from $35,000,000 in the prior year period. Excluding inventory impacts, direct operating expenses increased by approximately 8,000,000 year over year, primarily related to turnaround expenses. Turning to capital. During the 2019, we spent 7,000,000 on capital projects, which was primarily maintenance capital. We continue to estimate total capital spending for 2019 to be approximately 20 to 25,000,000, excluding turnaround spending.

Turnaround expenses for the year are expected to be approximately 9,000,000. Looking at the balance sheet, as of September 30, we had approximately 106,000,000 of liquidity, which was comprised of 84,000,000 in cash, availability under the ABL facility of 48,000,000, less 25,000,000 in cash included in our borrowing base. Within our cash balance of 84,000,000, we had approximately 16,000,000 related to customer prepayments for the future delivery of product. Our long term gross debt and finance lease obligations of 647,000,000, including current portion, remains unchanged. Available cash for distribution of 8,000,000 is derived from our positive adjusted EBITDA for the quarter after consideration of reserves of 15,000,000 for debt service and 13,000,000 for maintenance capital expenditures and turnaround expenses.

In addition, we released 18,000,000 of cash reserved in prior quarters for maintenance turnaround and other operating 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. Looking ahead, we estimate our ammonia utilization rate for the fourth quarter twenty nineteen to be between 95 and a 100%, excluding the impacts of planned turnarounds.

We expect direct operating expenses to be approximately 40 to 45,000,000, excluding inventory and turnaround impacts, and total capital spending to be between 8,000,000 and $10,000,000 With that, I turn the call back over to Mark.

Speaker 2

Thanks, Tracy. We completed our turnaround at East Dubuque last week, which took a few days longer than we expected due to completing more repairs on the reformer, piping and vessels. We also spent $2,700,000 more than planned primarily to further improve long term reliability as we made a number of improvements to the primary and secondary reformers. As I mentioned on the last call, over the next several turnarounds at both of our plants, we will be targeting projects that that are intended to improve our reliability and debottleneck in incremental ways to gain added production for low capital investment. While our plants have been strong performance in the past several years, we continually look for ways to further improve operations and reliability.

Customers purchase UAN for the summer fill and ammonia prepay for fall application in early August as the timing of the normal fertilizer purchasing cycle has been a little later than normal. Consistent with the past eighteen months, customers have been buying fertilizer more ratably and the expectations that harvest will be later than normal has led customers to stage their buying. Weather is going to dictate the timing of harvest and the available window for ammonia application. There continues to be a lot of speculation about the yield numbers for corn and soybeans, and the USDA numbers have been more aggressive than most analysts believe. The existing corn and soybean inventory levels have been lower than expected, and some early cold weather has caused crop prices to rise to their highest levels in the past couple months.

If these prices hold up to the rest of the fall, spring twenty twenty planted acres should be favorable compared to 02/2019. Fertilizer inventories are comfortable levels for distributors and retailers for this time of year, but depending on the amount of fall ammonia application, there should be another way of purchasing to fulfill nitrogen needs. At CVR, we have a good order book for UAN at both of our plants and will continue to participate in the market when liquidity is available. At East Dubuque, because of our turnaround, we have sold most of our existing UAN production for the rest of the year and will look to participate in the rest of the fall purchasing program for ammonia as application accelerates. 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, prudently managing our costs, 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'd like to thank all of the employees for contributions in the third quarter to drive continued high utilization of both facilities and safely completing the planned turnaround at East Dubuque. With that, we are ready to open the call for questions.

Speaker 0

Thank you. We will now be conducting a question and answer Our first question comes from the line of Adam Samuelson with Goldman Sachs. Please proceed with your question.

Speaker 4

Yes, thanks. Good morning, everyone.

Speaker 2

Good morning, Adam.

Speaker 4

First, Mark, I would love

Speaker 5

to get just a little

Speaker 4

bit more color on the cadence on sales cadence through the back half of the year. And specifically, in the quarter, how much of your third quarter sales do you think actually went to ground at probably more spring like pricing versus kind of the fall reset. Just wanna just calibrate a little bit just how much the the late summer might have might have helped you in the third quarter.

Speaker 2

Actually, I don't think it really helped a lot this quarter. July was pretty light because there wasn't a lot going on the ground at the end of the the season. So I I don't think we got a lot of lift down in there. I think the pricing that you see in the quarter was largely the fill for UAN was largely the fill pricing, and the ammonia pricing was the the summer fill and prepay. So I I don't think there was a lot of carryover from our book.

We our book had was pretty low at the June. And even though the season went longer, we didn't see a a great deal of, flow out of our book in July. So that price is kinda what we took in the quarter.

Speaker 4

Alright. So so in that in that sense then, you're the the as you think about sales, selling pricing for the fourth quarter, third quarter is a recent gauge of kinda a good decent gauge of where you where you might shake out. Just usually, you sell a lot of your second half volumes through the summer fill. Right?

Speaker 2

Yes. But usually, for UAN this is UAN I'm talking about. The the quarter price is pretty reflective of what the second half price you know, that's the fill kind of fill levels. And and there's been some ratable buying, but it's been kind of around those numbers. So I think it's consistent that that that's a consistent second half like it is normally for

Speaker 4

us. That's helpful. And then, as you look at, just the the bonds, is it just can you talk about the decision maybe not to to go a tender and look for refinancing or just how how you're looking at that today? Just seemed like a pretty attractive refinancing opportunity for rates are and just how how you're approaching that?

Speaker 3

We'll continue to evaluate it. At the time that we were looking at it, we just felt like the payback period was not sufficiently short enough for us to move forward, and the certainty around the rate that we would be able to take out of the market, wasn't as strong as we wanted it to believe, and we decided to look at it again next year when the call premium comes down again.

Speaker 4

Got it. Okay. And then just as you think about kind of just inventories, I mean, there's a lot of questions about the ultimate planted acreage this year. Coming out of the spring, Mark, do you think inventories in the channel were really depleted for both UAN and ammonia, or do you think that there was some carryover product or more than average, or do you think people can't find managed to come out of the spring empty?

Speaker 2

I would say it was geographic. There were pockets where it was empty, and there were some pockets where people were still carrying some product. I'd say, generally, the market kind of emptied emptied out pretty well at the end of the season, which, you know, that's why the fill was later this year than than we've seen in prior years. So I think the system was in pretty good shape, but there were pockets that carried over from the spring where there were still some inventory out there. We we didn't really see that in in our markets, but we you know, some markets where we don't really participate, we had been hearing from customers that there was inventory out there.

So, you know, I I think the inventory situation right now is very comfortable in the marketplace. It's not heavy. It's not light. I think it's comfortable. There is a need, I think, on the horizon to buy some more, which is typical for this time of year.

So I think we're in a pretty good spot. I would just tell you that, surprisingly, the last week, the weather's been helping us, generally, the industry. It's been a little drier, a little colder, and harvest has picked up momentum. And we're starting to see pockets of ammonia application already, which is early. This is not kind of what I think that most people thought the scenario would be, but but we're seeing the harvest not everywhere, but in pockets getting done and clearing the fields, and then they're coming in right behind with ammonia because it's been cold enough to lower the soil temperature.

So we're seeing, you know, pockets and and early ammonia application, which I think bodes well for the rest of the fall.

Speaker 4

All right. Super, super helpful color. I'll pass it on. Thanks.

Speaker 0

Thank you. Our next question comes from the line of Charles Neeber with Cowen. Please proceed with your question.

Speaker 5

Good morning, Just one question, I guess. When you look at typical fall application, I mean, it looks like you guys may have held back some of the ammonia to, you know, to be available for the fall or two weeks. Sorry.

Speaker 2

Thanks for the fall. Yeah.

Speaker 5

Thanks. For the fall to be applied in the fall application. So if you get like you said, you got a little bit ahead of the game right now. And if assuming things stay as they are, is it possible you'll run through that inventory and sort of come into January pretty clean? And also is there any in looking at production for this quarter, are you guys going to be sort of producing a little less UAN or consuming a little less ammonia, I think is a better way to put it, consuming a little less ammonia through UAN and then putting that down as well or getting that ready for application.

So I mean, again, this is the balance of production for the quarter.

Speaker 2

Yes. But I would let me start with the last end of that question, and I'll move my way back up to the front. I think we're gonna right now, and this could change depending on what the market tells us, you know, we don't we we we've got a little ways to go to see how all the ammonia application I think we're we're in pretty good shape with our ammonia prepaid book and the inventory that we're carrying now. And we're just gonna look and see what kind of windows we get. This is really around East Dubuque.

The window that we get for ammonia application there, we probably will run our normal production slate there. We've got good demand for UAN and ammonia. And, you know, really just waiting to see around the plant where we normally deliver a product, how what the harvest is gonna be and when that application occurs, we can always dial back the UAN. If if we have a good long run, you know, we can always dial that back and make some more ammonia and deliver it. So that that's really we have the flexibility there to pull back in the plant.

Right now, we're just gonna run a full slate, you know, normal slate because we have again, we have draw out of the plant for both ammonia and UAN. What I would tell you is if you remember last year in the fall, we it just stayed wet all the way through November, and we never got windows. And this year, at least in the the front end of it, we're seeing drier weather than we saw last year. And so harvest has been able to progress around the East Dubuque, and we're seeing the crops coming out in the field, which bodes well. You know, we're gonna get the soil temperature in the right spot, but it bodes better this year so far because we had a wet October last year, and we haven't had that wet October this year.

So we're, we feel like it we could maybe get a full run out of of ammonia application this year.

Speaker 5

Okay. Which would wouldn't, in that case, put you guys through basically between the prepay you've got and, again, a full run, you would basically bring the inventory down a lot lower on the on the ammonia side. Again, three three two, you had a lot of excess.

Speaker 2

Yeah. That's I mean, I I think our goal would be to come into the end of the year with pretty low inventory number and, you know, kinda get ready for the spring, and that's going to be more weather dependent. Last year, we didn't get it this year. We're starting off on much better footing than we did last October.

Speaker 5

Got it. Okay. Thanks very much.

Speaker 1

Thank you.

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

Well, just want to thank everyone again for joining the call today. And we look forward to sharing with you our fourth quarter results coming up after the New Year. Thank you.

Speaker 0

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.