CVR Partners LP (UAN) 2022 Q1 法說會逐字稿

Greetings, and welcome to the CVR Partners First Quarter 2022 Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Richard Roberts, Vice President of Financial Planning and Analysis and Investor Relations. Thank you, sir. You may begin.

Thank you, Christine. Good morning, everyone. We appreciate your participation in today's call. With me today are Mark Pytosh, our Chief Executive Officer; Dane Neumann, our Chief Financial Officer and other members of management.

Prior to discussing our 2022 first quarter results, let me remind you that this conference call may contain forward-looking statements, as that term is confined 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. You are cautioned these statements may be affected by important factors set forth in our filings with the securities and exchange commission and the overrated 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 accept the extent required by law.

I here remind you that CVR Partners completed a 1 for 10 reverse split of its common units on November 23, 2020. Any per unit references made on this call are on split adjusted basis. This call also, includes various non-gap financial measures. The disclosures related to such non-gap measures, including reconciliation to the most directly comparable gap financial measures are included in our 2022 first quarter earnings release that we filed at the FCC for the period. Let me also, remind you that we are a variable distribution in LP. We will review our previously 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 distributions if any, will vary from quarter to quarter due to several factors, including but not limited to operating performance, fluctuations and the prices received for finished products, capital expenditures, and cash reserves seen necessary or appropriate by the board of directors of our general partner.

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

Thank you Richard. Good morning, everyone, and thank you for joining us for today's call. To summarize financial highlights for the first quarter of 2022, include net sales of $223 million, net income of $94 million, EBITDA of $123 million. We repurchased approximately 112,000 CVR Partners common units for $12.4 million and the Board of Directors declared a first quarter distribution of $2.26 per common unit, which will be paid on May 23 to unitholders of record at the close of the market on May 13.

During the first quarter of 2022, we operated the plant safely, with consolidated ammonia plant utilization of 88%. We experienced approximately 3 days of downtime with Coffeyville due to an outage at the third party air separation facility and approximately 2 days of downtime due to a power outage. At East Dubuque we experienced approximately 11 days a downtime during the quarter due to a number of different outages.

As I mentioned on our last earnings call, major part of the plan for the upcoming turnaround at East Dubuque should address the issues that resulted in the downtime over the last 2 quarters.

In addition, during the upcoming Coffeyville turnaround the operator of the third party air separation facilities planning to complete some work that should significantly improve the reliability of that asset. Our combined operations produced approximately 187,000 gross tons of ammonia of which 52,000 net tons were available for sale for the first quarter of 2022. This compares to production of 188,000 gross tons of ammonia of which 70,000 net tons were available for sale in the prior year period. We produced 317,000 tons of UAN in the first quarter of 2022 as compared to 272,000 tons in the prior year period.

During the first quarter of 2022, we sold approximately 322,000 tons of UAN at an average price of $496 per ton and approximately 40,000 tons of ammonia at an average price of $1,055 per ton. Relative to the first quarter of 2021, UAN and ammonia sales volumes were higher, driven in part by a higher production from Coffeyville where the plant ran at an improved utilize rate during the short turnaround work we completed in the fourth quarter. Year over year, pricing for the quarter was 212% higher for UAN and 252% higher for ammonia.

Our first quarter results were reflective of the price increases for nitrogen fertilizers that we witness in the fall with the energy crunch that began in Europe and Asia. Fertilizer inventory levels remain tight across the US and globally the ongoing conflict in Ukraine has caused another wave of supply concerns across the fertilizer and grain markets. We have a good order book for the second quarter and are feeling more optimistic about pricing dynamics for the second half of 2022 and into 2023, which I will discuss further in my closing remarks.

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

Thank you, Mark. For the first quarter of 2022, we reported net sales of 223 million and operating income of 104 million compared to net sales of 61 million and an operating loss of 14 million in the first quarter of 2021. Net income for the first quarter of 2022 was 94 million or $8.78 per common unit and EBITDA was 123 million. This compares to a net loss of 25 million or $2.37 per common unit and EBITDA 5 million for the prior year period. There were no adjustments to EBITDA in either period. The year over year increase in EBITDA was driven by higher urea and ammonia sales, volumes and prices offset slightly by higher feed stock costs and operating expenses. Direct operating expenses for the first quarter of 2022 were 60 million compared to 37 million in the prior year period. Excluding inventory and turnaround impacts, direct operating expenses increased by approximately 17 million, primarily related to higher electricity and natural gas costs and higher share-based compensation as a result of the increased unit price.

Turning to capital spending during the first quarter of 2022, we spent 6 million on capital projects, which was primarily maintenance capital. We estimate total capital spending for 2022 to be approximately 38 to 42 million, of which 36 to 39 million is expected to be maintenance capital. This excludes turnaround spending, which we expect will be approximately 26 to 31 million of expense.

Looking at the balance sheet as of March 31, we had approximately 172 million of liquidity, which was comprised of approximately 137 million in cash and availability under the ABL facility of 35 million. Within a cash balance of 137 million, we had approximately 80 million related to customer prepayments for the future delivery of product.

As we mentioned on our last earnings call, in February, we redeemed the final 65 million of the 2023 9 1/4 notes outstanding, completing our plan of reducing outstanding debt by 95 million. Between the refinancing of the senior notes completed in June of 2021 and the 95 million reduction in debt outstanding, we have reduced our annual debt service costs by approximately 26 million per year, a reduction of over 40%.

In assessing our cash available for distribution, we generated EBITDA of 123 million and had net cash needs of 22 million for interest costs, maintenance CapEx and other reserves. Of the 101 million or $9.57 per common unit remaining, we had cash needs at 65 million for the repayment of the remaining 2023 senior notes and 12 million for the repurchase of 112,000 common units. As a result, there was 24 million of cash available for distribution and the board of directors of our general partner declared a distribution of $2.26 per common unit.

Looking ahead to the second quarter of 2022, we estimate our ammonia utilization rate to be between 92 and 97%. We expect direct operating expenses to range between 55 and 60 million, excluding inventory and turnaround impacts and total capital spending to be between 12 and 17 million.

With that, I will turn the call back over to Mark.

Thanks, Dane. Russia's attack of Ukraine set a major impact on global agriculture markets. Immediately in February, exports of grains and fertilizers came to a virtual standstill in the black sea, as ports were closed. This impacted Ukrainian and Russian exports of wheat and corn and Russian exports of Nitrogen fertilizers, particularly Ammonia and urea. Formal and informal sanctions placed on export products and individuals closely associated with Russian leadership by Western countries had dramatically reduced Russia's ability to export Nitrogen, Phosphates or Potash.

Additionally, the natural gas shortages present in Europe since September 2021 are now likely to persist through the rest of 2022 due to limits on availability of Russia natural gas exports. The shortages of natural gas in Europe continue to cause the curtailment of Nitrogen fertilizer production, and with limited Russian exports supply conditions have been very tight into the spring 2022 planting season.

For ammonia production, natural gas cost along is currently $1,200 per short time in Europe. Given the draw down and available Nitrogen fertilizer inventories, we don't expect supply conditions to improve materially until 2023. Longer term, given Europe's stated shift away from using Russian natural gas to imported LNG, baseline nitrogen fertilizer production costs will likely rise for European producers and favor U.S. production where gas costs should be lower.

While input costs have risen substantially in the past 18 months, so have grain prices. With corn at $8, soybeans at 16.50, and wheat at 10.50, farm economics remain attractive. However, for spring planting, we have heard from wholesalers, retailers and co-ops that availability of inputs is as much a concern as price. Consistent with this feedback, the USDA's spring 2022 planting intentions report from last month estimated planted corn acres will be 89.5 million, down 4.1% from 93.4 million in 2021. And soybean acres are estimated at 91 million, up 4.3% from 87.3 million acres in 2021. Factoring these lower planted corn acres and higher soybean acres, inventory carry-out levels are likely to be below 10% for both corn and soybeans keeping them at the lower end of the 10-year range. Inventory levels for corn wheat may be drawn further than these estimates due to potential grain export shortages from Ukraine and Russia. Overall grain market conditions currently board well for Nitrogen fertilizer in 2023, due to the likely need for additional corn and wheat planted acres.

Spring application got off to a late due to cold and wet weather. We are seeing strong demand at our plants and expect that demand to continue through the end of the second quarter and end of the summer. While planted acres are expected to be down, the supply of fertilizer is tight and the markets appear to be well supported at these price levels. Product net backs in the first quarter were higher by over $750 per ton for Ammonia and over $330 per ton for urea, and relative to the first quarter of 2021, reflecting the escalation and market prices that started in the fourth quarter. We have sold much of our 2Q volumes at this point, and that back prices are expected to be higher in the second quarter compared to first quarter generally reflecting an escalation of prices from the first quarter. The issues that cause the downtime in the first quarter are expected to be addressed in the turnarounds plan for both plants in the summer. Both turnarounds are scheduled for the third quarter and we are focused on improving reliability for the long-term.

In 2023, we don't currently plan any turnaround activity at either plant. We continue to progress on monetizing the 45 QTAX credits for the Coffeyville facility. We're working through detailed due diligence and structuring, and currently expect to complete a transaction in the coming months. As Dane mentioned, we completed our targeted debt pay down by retiring the remaining 65 million of the 2023 senior notes in February. Our total debt now stands at 550 million and with an interest rate of 6, and an 8%, we are comfortable with our debt level and interest costs through a full market cycle. We also, completed the repurchase of 112,000 units for 12.4 million. And when combined with the $2.26 declared distribution we returned $3.43 per unit to our unit holders this quarter. We are also, evaluating some brownfield development projects at both plants that could be targeted capacity increases to our existing footprint. If approved, these projects would take several years to complete, but we may believe there be some attractive opportunities within our plant footprint.

We aren't currently contemplating any Greenfield development projects. While fertilizer market conditions are strong, we're maintaining our focus on maximizing cash flow generation by safely and reliably operating our plants with a keen focus on the health and safety of our employees, contractors and communities, prudently managing cost, being judicious with capital by targeting select investments and reliability projects, and incremental additions to production capacity, maximizing our marketing and logistics capabilities and targeting opportunities to reduce our carbon footprint. In closing, I'd like to thank our employees for their excellent execution during the first quarter and their continued commitment to being healthy and safe in everything we do.

With that, we're ready to answer any questions. Christine?

(Operator Instructions) Our first question comes from line of Richard Kus with Jefferies.

Congrats on a good quarter. So firstly, for me, as you look at Q2, I guess you mentioned that the spring planting season got started a little bit later this year. Can you talk maybe about how you expect volumes to trend this year, just in terms of Ammonia and UAN as you look at the second quarter in the spring planting season?

Yes, Richard, it’s Mark. It's a little bit early to call that because we're still I'd say in the planting phase. And so I'm not ready to call volumes. What I would tell you typically, in a spring where less ammonia was applied, that generally has to be made up with Urea and UAN. So if it does in fact, if we don't get as much ammonia applied, then we would see a pick-up in demand a little bit later for Urea and UAN. So the simple fact is that you need to have a certain amount of Nitrogen on the ground to meet yield targets so, if it's unmet by Ammonia, then it'll get picked up in Urea and UAN. And I think this year we'll probably see incrementally more demand in Urea and UAN. Versus ammonia.

Got it. Okay. That's helpful. And then, you mentioned Q2 is substantially booked out. Have you guys started booking into Q3 yet?

We are in I'd say price discuss on Q3, and so, it's pretty early there again. With the spring it's got to play out, we got to get the crop in the ground, but we have had some price discovery with customers for the third quarter, but we haven't sold a lot of volume yet. But we have a sense for what people are thinking about.

Got it. Okay. And then maybe lastly, for me, just in terms of all of the cash that you guys are generating and are likely to generate for the remainder of this year. You talked about maybe some targeted CapEx, some unit repurchases, and then dividends, obviously things of that nature now that you've reached your gross debt target. Are you thinking about any potential organic opportunities in terms of M&A, or is that not really something that you're thinking about at this point?

Yes, I would say all the options are on the table. One of the challenges in this environment in M&A is what expectations are for the buyer and the seller. And as we've seen prices escalate that generally the [Psychology] goes with it. So asset prices are up substantially and I would just tell you that we're very returns focused, so we're not going to chase assets to deploy the capital. It's got to meet a full cycle return for us. And so I would say that we're going to continue to look and look for opportunities. But the bid's spread pretty wide at this stage.

Understood. Okay. I appreciate it. Congratulations.

Thanks.

(Operator Instructions) Our next question comes from the line of [William Stein], a private investor.

Congratulations on the good results. First, I'd like to ask about the 45QTAX credits. I understand this is still in process, but can you sensitize us so, we can maybe have proper expectations around the magnitude and timing of cash flows from these? Is this going to be an ongoing source of cash for the company and thus for unit holders, or is this going to be more of a onetime event?

I'll keep it generalized because I don't want to basically put the deal out there. But if there's going to be 2 buckets, there's going to be an upfront payment as part of the structure and then there'll be ongoing payments. So there'll be sort of 2 cash streams that come out of the 45Q credits, a one-time payment and then ongoing payments for the life of the project. And we're sort of finalizing that as we're getting there but we'll see 2 sort of cash streams coming out of 45Q.

Great. Next, your inventory is nearly at an all-time low. I think normally in Q1 you build inventory, in this quarter you built Ammonia, but you actually consumed inventory of UAN. Was that because of production problems that you cited at East Dubuque or was there something else going on ? And do you feel you're going to be able to delete demand and drain additional inventory during Q2 or are inventory levels too low to predict to do that?

So there were 2 different issues going on there. We did have production issues, so we have lower inventory coming in, but we have such a big fall in Ammonia that we already were low coming into the January one. So inventory, and this has been going on for a year, we've had low inventory even seasonally since urea hit last February. And this is what when I refer to tight industry conditions. It's pretty similar for others. All the producers have been carrying tight inventories and we did have Ammonia available for spring, but most of that'll be consumed in spring planting, pre-plant and so, we were able to make enough to support our customers. At Coffeyville if you recall back in the fall, we did expansion of the Urea plant and actually we are consuming a lot of the Ammonia because we're producing UAN at a higher level. So we're not having as much Ammonia available for sale, but we have more UAN for sale. So that's a good problem to have, and the performance of the plants exceeded our expectations when we put that equipment in the fall.

And then one maybe, well it's a longer term question if you'll indulge me. In Q1, you posted earnings per share, free cash flow per share that my analysis is right, these were greater for just the quarter than they were for the entire year of 2013, the last time your stock was trading at over $300. It's clear that part of that improvement related to having more capacity following the acquisition in 2016 and maybe other things as well, but clearly a big part of this because of better pricing of course, the result of the balance between supply and demand. You've talked a little bit about what might happen with supply in the very near term, but I'm hoping you can just indulge me for a minute and talk about sort of near medium and long-term anticipated changes in supply and demand factors.

Okay. So there's always 2 parts of the cycle for what we do. One is on the production side and it's partly related to performance of the facilities, part of it's related to input cost. This is a very different cycle than we experienced back in that call 2011 to 2015 timeframe. We have a severe energy shortage in certain markets and it doesn't look like that's an issue that's going to be solved in months, it's more like years. And so we require either natural gas or coal to produce nitrogen fertilizers, and that those markets are dislocated and look like it's going to take some time to fix that.

And so the input costs generally are much higher than they were in the last cycle. So global prices have risen and it doesn't look like there's going to be I'd say a recovery or major reduction in energy pricing and in the near term, I think it's going to take a while. And Europe, as I said, my point Europe is going through a transition from taking pipeline delivered natural gas from Russia to taking a lot of LNG and the cost of that's going to at a much different price point for a durable cycle. So that, the energy side is very difficult.

And then with the Russian Ukraine, in addition to availability of Russian fertilizers, the grain market doesn't look, we're going to draw a lot of the inventory out of grains. And our business is only as good as farm economics drive it. And the grain prices are very high and look like again, this is going to take time, measured in years to fix the grain market back to being normal. I think it'll take 2 to 3 years. It takes 2 to 3 planting cycles to recover from the loss of the grain inventory that's occurring with the Russia Ukraine situation. We were already pretty tight going in before that happened. So I think that the supply-demand dynamics are very different and they are every cycle, but this one is both the combination of the energy issue globally as well as a grain issue globally. We have a food security issue and an energy security issue globally, and I think it's going to take 2 to 3 years for that to reach a new equilibrium. And so I don't see the dynamics in our marketplace changing greatly here for the next year or 2. I think it's going to be pretty similar to what it is today.

We have reached the end of the question and answer session. I would now like to turn the floor back over to management for closing comments.

So again, I want to thank everybody for your interest in CVR Partners and our employees, and wish everybody a safe day. And we look forward to reviewing our second quarter earnings in the summer. Thank you very much.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.