CVR Partners LP (UAN) 2011 Q4 法說會逐字稿

Greetings and welcome to the CVR Partners fourth-quarter and year-end 2011 conference call.

At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Wes Harris, Vice President Investor Relations. Thank you. Mr. Harris, you may begin.

Good morning everyone. We appreciate your participation on today's CVR Partners' earnings conference call. With me today are Chief Executive Officer Byron Kelley, Chief Financial Officer Frank Pici, and Chief Operating Officer Stan Riemann.

Prior to discussion of our 2011 fourth-quarter and full-year results, we are required to make the following Safe Harbor statements. In accordance with federal Security laws, statements in this earnings call relating to matters that are not historical facts are considered forward-looking statements. These forward-looking statements are based on management's beliefs and assumptions using currently available information and expectations as of this day. I would note that our forward-looking statements are not guarantees of future performance and do involve certain risks and uncertainties, including those noted in our filings with the SEC.

In addition, today's presentation includes various non-GAAP financial measures. These disclosures related to such non-GAAP measures, including reconciliations to the most directly comparable GAAP financial measures, are included in our 2011 fourth-quarter and full-year press release that we filed with the SEC late yesterday after the market close.

With that, I will turn the call over to Byron Kelley, our Chief Executive Officer. Byron?

Thank you Wes. Good morning to everybody. We certainly appreciate you joining us today and look forward to sharing with you information about our performance in the fourth quarter and last year as well as some looking forward into 2012 and 2013. I will begin with a review of the highlights from the fourth quarter and then Frank is going to follow with the financial details related to that. Then I'm going to conclude with a discussion concerning our 2012 outlook and then address some future business plans as well. Following that, Frank, Stan, and I will all be available to take your questions.

Looking at the fourth quarter, I'd have to begin by saying it was an outstanding quarter both from an operations and a financial perspective. We reported net income of $41.2 million on net sales of $87.6 million. This is compared to a $6.0 million net loss on net sales of $39.4 million in the fourth quarter 2010.

Fourth-quarter adjusted EBITDA, which represents our net income adjusted for depreciation, amortization, share-based compensation, issuing expense and loss on disposition of assets, was $48.4 million as compared to $7.5 million in the fourth quarter of 2010.

Our strong financial performance during the fourth quarter of 2011 resulted in our previously announced distribution of $0.588 per common unit, which was paid on February 14 to unit holders of record at February 7. This represents the third cash distribution paid by CVR Partners since we began trading this past April. In total, we have distributed approximately $1.57 per common unit since going public. Combined with our solid outlook for the first quarter of 2012, we are raising our previous distribution guidance from $1.92 per common unit to $2 to $2.05 per common unit for the 12 months ending March 31, 2012.

During the fourth quarter, our manufacturing facilities operated at high on-stream rates. The gasifier ran almost 98% of the time, the ammonia synthesis loop at about 97%, and our UAN plant operated at about 94% for the fourth quarter. Our liability rates for that quarter were also representative of the rates we saw for the entire year 2011, including a gasifier at 99%, our ammonia synthesis loop at almost 98%, and our UAN plant at more than 95%.

I would note that 2011 was the best year we have on record for reliability since the plant opened more than 10 years ago.

In 2010, our 11th fourth quarter, we produced 100,800 tons of ammonia. Of this amount, we converted 73,300 tons into 178,300 tons of UAN, leaving a balance of 27,500 net tons of ammonia that were available for sale.

Production levels for 2011 fourth quarter were up significantly as compared to the fourth quarter of '10 when we produced 69,900 tons of ammonia, of which 32,200 were converted into 77,800 tons of UAN, leaving a balance of 37,700 net tons available for ammonia sales in the fourth quarter of '10.

The 2010 fourth-quarter production results were negatively impacted by our biannual turnaround that occurred in that year, and by the rupture of a high-pressure vessel that shut down facility operations for more than a month during fourth quarter of 2010.

During the fourth quarter of 2011, we did sell hydrogen under our feed stock and shared services agreement to CVR Energy, which is our adjacent refinery. We sold that to them in lieu of converting that hydrogen to ammonia. The hydrogen, as you may recall we discussed before, is sold under a keep-whole pricing arrangement that approximates the value of hydrogen to CVR Partners had it been sold as -- had converted and sold as ammonia. Under this arrangement, our fourth quarter 2011 included 2.4 million [bottles] of hydrogen sales to the refinery, and that's equivalent to producing about 3500 tons of ammonia. This number was up significantly from the 140,000 of hydrogen sales to the refinery in the 2010 fourth quarter. That increase is primarily associated with the refinery's need in 2011 for additional hydrogen during its turnaround operations.

We receive strong ammonia and UAN prices during the fourth quarter of 2011. We realize net back prices for ammonia of $606 per tons, and that compares to $491 per ton in the fourth quarter 2010. For UAN, the net back price increased to $334 per ton for 2011 fourth quarter, again, compared to 2010 at a price of -- at $171 per ton.

Finally, let me update you on our $135 million UAN plant expansion, as we have made significant progress since we last spoke in November. At this point, nearly all major contracts have been awarded, and mechanical and structural work has commenced. Key upcoming activities include completion of critical lift plans for the NOx(inaudible) stripper and reactor settings, erection of the compressor building and installation related equipment, and the actual setting of the NOx in absorber towers. So a lot going on as we move through the early parts of this year.

I would also note that we remain on budget and remain on schedule to begin operations in the first quarter of 2013 with this expansion. Once completed, the expansion will allow us to convert virtually all of our ammonia production into more highly valued UAN. This will increase our capacity to more than 1 million tons of UAN annually, which is approximately 50% higher than current levels.

In addition to the UAN expansion, we also have a capital project underway to build a storage and distribution tank facility in Phillipsburg, Oklahoma. At this point, most of the contracts have been awarded for the project and dirt work is scheduled to begin next month. Our target date of completion is in the third quarter of this year.

In addition, this facility will allow us to selectively store some production during periods of lower pricing and then sell and market that product during peak periods later in the year, thereby allowing us to capture increased margin per UAN ton sold. Over the next several years, we do plan to build a number of these facilities near farming communities across the Midwest.

I will now turn the presentation over to Frank Pici. Frank joined CVR Energy and CVR Partners as Chief Financial Officer at the beginning of January. He brings more than 30 years of energy industry experience to the plate. Frank most recently was Executive Vice President and CFO for nine years at Penn Virginia Corporation. Penn Virginia is a publicly traded oil and gas exploration and production company. For most of his time at Penn Virginia, Frank also served simultaneously as CFO of Penn Virginia GP Holdings and Penn Virginia Resource Partners, two publicly traded Master Limited Partnerships. We believe we are quite fortunate to have someone with Frank's expertise, especially with his experience in the MLP arena, joining our team. I look forward to working closely with him as we grow CVR Partners for the long-term benefit of our unit holders. Frank, the floor is yours.

Thank you Byron. Good morning everyone. As Byron discussed, we experienced another strong quarter. I'd like to mention some of the financial highlights of the quarter as well as the full year, and Byron has already covered a good bit of these stats, but largely driven by the better sales prices and higher volumes. All of our primary financial metrics improved significantly from 2010 to 2011, both for the fourth quarter and the full year. I think Byron had mentioned these but for example operating, income was $42.6 million for the fourth quarter of '11 compared to an operating loss of $9.7 million for the same time last year while EBITDA was $48.4 million, up from $7.5 million the year-ago quarter, and then net income was $41.2 million, up from a net loss of $6.2 million. Same kind of statistics for the full year. As Byron mentioned, operating income was up, adjusted EBITDA was up, and net income was up all significantly from the prior year. So all of those results -- and I think you heard what Byron had to say about that.

I'll get into some of the details of the individual categories. For example, in the fourth quarter, net sales were $87.6 million compared to $39.4 million for the same quarter of '10. The increase was primarily associated with the higher prices as well as increased sales volumes due to facility downtime in 2010 as a result of the turnaround and repairs to the vessel rupture, as Byron mentioned earlier.

For the full year, we had net sales of almost $303 million versus $180.5 million for calendar 2010, the same reasons. Again, higher pricing and volume drove those period-over-period increases.

When you look at cost of products sold for the fourth quarter, we had $14.4 million compared to $6.6 million for the same quarter of 2010. Contributing to that increase was higher freight expense associated with the increased volumes as well as higher pet coke costs due to increased volumes and higher sales prices for our products.

We typically purchase over 70% of our pet coke from CVR Energy's adjacent refinery. Under our agreement with the refinery, we paid a lower of pet coke prices as reflected is the PACE petroleum coke quarterly index for our price tied to our UAN sales price. Under this approach, our cost is capped at $40 a ton. Like I said, that's the majority of our pet coke feedstock. The remaining 30% of our pet coke requirements are purchased from a third-party supplier under a fixed-price contract that goes through the end of 2013. We are responsible for freight charges, which are also substantially fixed.

Our average cost for consumed pet coke, including third-party purchases, during the 2011 fourth quarter was approximately $42 a ton. This is compared to the fourth-quarter UAN netback price of $171 a ton, which resulted in a pet coke average cost of approximately $8 a ton.

For modeling purposes, you can assume that every $1 move in overall pet coke prices equates to an approximate $350,000 increase or decrease to annual cost of goods sold. That's one indicator of the drivers behind our results.

Direct operating expenses, excluding depreciation and amortization, was $21.1 million for the fourth quarter of 2011, down from $26 million for the prior-year quarter. Included in the 2010 fourth quarter was $3.5 million associated with expenses for the turnaround Byron mentioned and $1.5 million of net expense for repairs related to the vessel rupture.

Turning to selling, general, and administrative expenses, for the 2011 fourth quarter, they decreased to $4.6 million from $11.9 million in 2010's fourth quarter, primarily due to lower share-based compensation charges and asset retirement expenses incurred in the 2010 quarter. We also had a slight increase in depreciation and amortization.

Turning to capital expenditures, during the 2011 fourth quarter, we spent $8.6 million on capital projects, including $0.6 million on maintenance CapEx, which is a deduction from our calculation of available cash for distribution. For the full year 2011, we spent $19.1 million, including $6.2 million for maintenance CapEx and $12.6 million for the UAN expansion project that Byron mentioned. Through the end of 2011, we spent approximately $44 million on the $135 million expansion project, leaving approximately $91 million to be spent prior to targeted completion in the first quarter of 2013.

Our planned capital spending for 2012 also includes about $1.5 million for our Phillipsburg storage tank project and about $10 million for maintenance capital. I would note that all of our planned capital spending will be fully financed by cash we have on our balance sheet.

Speaking of cash, at year-end 2011, we had a liquidity position of $262 million, which was comprised of $237 million in cash and cash equivalents and another $25 million of undrawn availability under our revolving credit facility. We also have outstanding debt in a term loan of $125 million. All that places us in a strong cash position to execute on our growth initiatives as we move through 2012. In addition, to support larger acquisitions we might consider, the debt markets remain open at very favorable interest rates based on any historical measure. If an acquisition opportunity would arise, there's plenty of capital available for those kind of opportunities.

With that, I'll turn the call back over to Byron.

Thank you Frank.

Needless to say, we are very pleased with our performance in 2011. The combination of the higher product prices, prudent cost control and the unusually high on-stream rates resulted in the best financial results we have seen. We had since the beginning a facility that went online I mentioned earlier over 10 years ago.

Looking specifically at reliability, we were extremely fortunate not to face issues that materially impacted production levels during 2011. The key to this was limited external factors impacting our operations, and more importantly, the outstanding efforts of our facility operations team. Quite frankly, the results we saw in our light reliability were remarkable.

As we look into 2012, we also see a number of very positive indicators for the industry. At the top of that list are a historically low corn stock to use ratio coming out of 2011, and a general consensus pointing towards a corn planting of between 93 million to 94 million acres for this year.

We've also seen strong ammonia demand and UAN top dressing during the first two months with prompt FOB pricing remaining fairly -- remaining quite strong. Our 2012 first quarter has also benefited from orders that were placed in the latter part of 2011 when prices were at levels that were the highest of the year. As such, we expect to report strong pricing for the first three months of 2012. Additionally, as we move forward beginning next month, we also expect to see lower pricing for our pet coke essentially driven by the PACE index mentioned earlier by Frank.

However, there have been a number of market factors in play that have tempered both ammonia and UAN prices in comparison to 2011. We saw an unexpected increase in urea imports in December, putting pressure on urea prices and ultimately other forms of nitrogen as well. The good news is it appears this trend has bottomed and we've actually seen some strengthening of urea prices over the last month.

Another anomaly facing us this year has been -- and is facing the entire industry, I believe -- has been the pullback by dealers and distributors on spring prepay orders as they of move towards a just-in-time inventory strategy for this year.

So I guess what I would say, in spite of a potential record planning season ahead of us, we have seen some uncertainty in the market by buyers and a softening of prices from the near record prices of October, November of last year. Now, that said, you should keep all of that in a historical context because we do continue to see very good prices from a historical look-back for both ammonia and UAN in the first half of the year.

I will not actually begin receiving any direct pricing signals for the fill season until much later in the year, but I have to believe that, as we move forward with planning of 92 million to 94 million acres of corn, that this will bode well for all of us in the fertilizer production business.

I will also remind you, though, in our case, that 2012 is a turnaround year. This generally occurs every two years and is part of our normal operating cycle as we have discussed in the past and as we discussed during the period of our Initial Public Offering. The turnaround is currently slated for October and we expect the facility to be down for approximately 18 to 20 days. Further, we currently estimate that the combination of the foregone revenue and incremental operating expenses for the turnaround will be approximately $0.25 per common unit.

Now, looking specifically at the guidance for 2012 and for the fiscal year 2012, I would like to share with you our thoughts on what you've seen in our press release about our guidance. Given the unusual environment I discussed earlier, it's really quite difficult to predict with any amount of certainty where prices for ammonia and UAN will come in by month for the second half of 2012. So, as you saw in our press release, this year, we are providing a guidance range rather than a specific number. I wanted to note in this discussion here on the call a few of the key sensitivities around that guidance range.

First, keep in mind that this is guidance for the fiscal year ending December 31. It's not in any way related to the guidance, the increased guidance, we provided for the period ending 12-31-12. The key elements as we look into the fiscal year guidance in determining that range, we gave consideration to the following factors -- our forecasted production numbers for the year; our currently booked sales; all current market data for the first and second quarters that we have in hand; and then utilization of Blue Johnson's February 10 pricing data adjusted for transportation location differential. That comes into play for us. As we look into the second half of the year, we're utilizing those numbers. We've also have included in our thinking sensitivities around and related to forecasted pricing, and of course the recognition of the impact of the turnaround in the fourth quarter.

So this approach results in our 2012 distributable cash flow guidance range of $1.50 to $1.75 per common unit. As noted, this does include the negative impact of approximately $0.25 per common unit for the turnaround. Normalized, for the turnaround, you would actually see this range be $1.75 to $2 per common unit.

Now, since our facility costs are highly fixed, I think, as we go through the year, there are principally three variables that impact EBITDA -- pet coke prices, production rate, and commodity pricing. Frank previously provided you a sensitivity with changes in pet coke prices.

So assuming we hit our production forecast, then the major driver going forward this year is really related to UAN and ammonia commodity pricing. In this regard, a market visual for pricing sensitivity would be changes from Blue Johnson's February 10, 2012 forecasted pricing for Southern Plains of ammonia and Cornbelt UAN in the last two quarters of the year. For example, a realized $10 per ton movement in either ammonia or UAN up or down for the last half of the year would equate to approximately $700,000 and $3.1 million respectively in cash available for distribution.

I also want to take a minute before we wrap up the call to discuss 2013 and beyond. First, to fully understand the full cash earnings power of CVR Partners, I would point you to 2013. In that year, there will not be a turnaround and as I discussed earlier, the expansion is scheduled to be online in the first quarter of 2013. We estimate that the expansion could add at least $0.25 per unit to our 2013 full-year distribution. So combining that number with no turnaround, you can see the potential for an additive $0.50 to distributable cash flow, all else being equal, in 2013.

Then as we plan for the future, I think it's -- and growing our business -- I think it's important to recognize that the macro fundamentals and related factors impacting our business remain quite solid. Continued world population growth, dietary changes in developing countries and increased biofuel consumption indicates strong long-term fertilizer demand. We believe we are well positioned and will continue to be well-positioned to benefit from this positive environment.

Now, complementing those positive external factors, we are also focused on internal strategic initiatives designed to extend our footprint of operation. Our UAN expansion is an example of one of those efforts. And adding the storage distribution tank facilities in key locations to help optimize the sales prices we receive for our product is another. Also included would be our efforts to expand our sales mix in some higher-margin products such as diesel emission fluid or more commonly known as DEF.

In addition to investing in our current asset base and enhancing our distribution capabilities and optimizing our sales mix, we are evaluating other opportunities to expand that business by developing new facilities and acquiring the existing assets.

So, in summary, we had an excellent year in 2011, we are seeing base fundamentals for another very good year in 2012, and we see a solid prospect for a strong 2013.

With that, we will open the floor for questions. As a reminder, in addition to myself, Frank will be on the line, and so will Stan. They will be able to take your questions.

We'll go ahead and answer one question upfront by pointing out that we are not in a position to comment on the recent announcements by affiliates of Carl Eikon regarding CVR Energy, our majority owner, or on CVR Energy's response. We also cannot comment on CVR Energy's announcement on February 13 that it may seek to monetize a portion of its holding in CVR Partners. I would, if you have questions related to those points, I would direct you to specifically address those questions to CVR Energy rather than to us. So to save us all sometime this morning, just keep in mind we will not be discussing any of those points.

So with that, we look forward to your questions related to our performance in '11 and where we are headed in '12 and beyond. Operator, we are open for questions from our participants.

(Operator Instructions). Jeff Dietert, Simmons.

Good morning. I was hoping you could talk a little bit about what you've got in backlog and good pricing obviously in fourth quarter. Prices have kind of softened a little bit seasonally without any expectations for better pricing once the fill season starts. But as you look at first-quarter pricing, similar to fourth-quarter? Or is there some softness maybe expected there in ammonia and UAN?

I think, if you look at the first quarter, first of all, you recognize that some of the way we book revenues is only upon delivery, and so there were sales made in the fourth quarter that actually got through the transfer process, actually physically delivered in the first quarter, and so obviously those sales are carrying some of the pricing you saw last year.

Obviously, we have not reported on first-quarter results, but in general, if you look at first quarter of this year versus first quarter of last year, it's much stronger than that, not quite as strong as you saw in the fourth quarter, but on a historic perspective, these prices are still -- what we are seeing are quite good. We had a good wheat top season during the first quarter and actually it was a little bit stronger than we thought for that. So our crop shipments still remain very strong during the first quarter.

You've highlighted your storage project and talked about a little more effort towards just-in-time inventory. Are you seeing the industry move to more storage? How do you expect that to impact your sales this spring?

Stan can add to this if I say something wrong, but actually I don't know if we've seen the industry add additional storage. Our storage is -- if we look, what we look at is historically if we had retained a certain percent of our product and not sold it and wait and sold it during in-season, that there was some arbitrage there that we could capture. That's what's driving us adding some storage facilities. We've got one going in and we haven't decided exactly how many, maybe another four to six over the next few years. That's just really an arbitrage play that we will get just on a percentage of our sales. But I haven't seen the industry at a lot more storage.

In terms of my comment about just-in-time inventory, I think you probably had some dealers and distributors last year that bought at the high price and didn't get all that placed, so they have been very cautious this year about prepayments. So really I think most of us in the industry have basically seen prepaid sales down, and that with those distributors and dealers really saying we will buy at the point of demand. That's what we have seen begin picking up. It seasonal. It's now time where that those demands, orders have to be placed and we're beginning to see that pick up. We don't think ultimate affects our levels of sales. It just makes it easier if you've done some in advance and can schedule logistics. But it's just a little different year, and we'll manage through it.

Given the expectations for a heavy corn plant this year and those slower prepays, are you expecting a substantial portion of your business to be done in a tighter time frame this spring?

I think the spring, yes, it does get done in a tighter time frame since we didn't have the prepaid sales. You really look over the next month, and most this business is going to have to be put to bed for the spring.

On a different topic, there's been some discussion in the press about Iowa Fertilizer adding some ammonia, urea, and UAN capacity in the Mid-Continent. Do you think those economics are justified? You've talked a little bit about expansion potential. Where do you see opportunities? Do you think existing fertilizer plants are more cost competitive than new builds?

I think there are a couple of factors you have to look at. First of all, yes, we saw their announcement. We really don't know any more about that project other than what was in their press release. I think they estimated a cost of $1.3 billion. Without -- and really the press release is around getting some tax credits that are being worked on I think by the local county. I'm not sure those are finalized yet, but all in all, I guess not much I can say specifically about their project.

I would say that when you look at the fact that in the US we continue to import in round numbers 20% of our UAN and 30% of the nitrogen, if, in the long-term, you believe natural gas prices are going to stay sub let's call it $5, in that range, then at some point somebody will build a plant. But their specific economics, it's really hard to sort of address those at this point without knowing. We don't know what they think their rail transportation is going to be in market areas and how much contingency they've got built in that capital cost, etc.

Thanks for your comments.

I appreciate you joining us. Yes.

(Operator Instructions). There are no further questions in the queue at this time. I would like to turn the call back over to management for closing comments.

This is Wes Harris. We want to thank everyone for participating today, and we look forward to talking with you in the next couple of months about our first-quarter results for 2012. Thank you.

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