CVR Partners LP (UAN) 2012 Q1 法說會逐字稿

Greetings, and welcome to the CVR Partners first quarter 2012 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.

Well, thanks, Kevin. Good morning, everyone. We appreciate your participation today on CVR Partners earnings conference call. With me today are Chief Executive Officer, Byron Kelley; and Chief Financial Officer, Frank Pici.

Prior to the discussion of our 2012 first quarter results, we are required to make the following Safe Harbor statements. In accordance with Federal Securities 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. The disclosures related to such non-GAAP measures, including reconciliations to the most directly comparable GAAP financial measures, are included in our 2012 first quarter press release -- first quarter results press release that we filed yesterday after the market close.

With that, I'll turn the call over to Byron Kelley, our CEO. Byron?

Well, thank you, Wes and good -- let me add my good morning to each of you. We're pleased to have you join us this morning. I'm going to begin with the review of the highlights from the first quarter, as well as a review of our current business operations, Frank will then follow with details around our financial performance. I'll then come back and complete our prepared remarks with a discussion concerning our outlook and some business -- future business plans. And following that, Frank and I both will be available to take your questions.

For the 2012 first quarter, we reported a net income of $30.2 million, on net sales of $78.3 million. And this is substantially higher than the first quarter of 2011, when we reported net income of $16.7 million, on net sales of $57.4 million.

2012 first quarter adjusted EBITDA, which represents net income adjusted for depreciation, amortization, interest expense and income, financing costs, income tax expense, and share-based compensation was $38 million as compared to $25.9 million in 2012 first quarter.

Our solid financial performance during the 2012 first quarter resulted in last week's announcement of a distribution of $0.523 per common unit. This will be paid on May 15 to unitholders of record on May 8. This represents CVR Partners' fourth cash distribution since we began trading in April of last year.

Following our upcoming payment, we will have distributed $2.09 per common unit since going public. This is higher than the revised guidance we provided in February of between $2.00 and $2.05 per common unit for the 12 months ended March 31, 2012. In addition, this is 9% higher than our original guidance of $1.92 per common unit for the same period, which we provided at the time of our initial public offering.

Now let's look specifically at our first quarter operations. In late February and early March, we did begin seeing a decline in production output at the facility and essentially made a financial decision to take the plant out of service to implement unscheduled maintenance work.

Now this obviously did impact our production for the first quarter, but I would note that we expect the resulting improvements in production rates for the remainder of the year should make up this lost production over the course of the full year.

Including this downtime, the gasifier ran 93% of the time, the ammonia synthesis loop came in at a rate of almost 92%, and the UAN plant operated at 84% for the first quarter.

In 2012 first quarter, we produced 89,300 tons of ammonia. Of this amount, we converted 64,300 tons into 154,600 tons of UAN, leaving a balance of 25,000 net tons of ammonia available to sell.

Due to the downtime I mentioned earlier, production levels for the quarter were lower as compared to the first quarter of 2011. During that quarter of 2011, we produced 105,300 tons of ammonia, of which 70,100 tons were converted into 170,600 tons of UAN. This left a balance of 35,200 net tons available for ammonia sales in Q1 of 2011.

I'd also want to point out at this time that production for the first quarter of this year was also impacted by our election to sell hydrogen to CVR Energy's adjacent refinery under our feedstock and shared service agreement in lieu of converting that hydrogen to ammonia.

As I mentioned before, this hydrogen is sold to the refinery under a keep-whole pricing arrangement that approximates the value of hydrogen to CVR Partners, if it had been converted to ammonia. Under this arrangement, our first quarter 2012 included $5.7 million of hydrogen sales to the refinery and that's equivalent to producing approximately 8,400 tons of ammonia. This is compared to 2011 first quarter, when we were a net receiver of hydrogen from the refinery, and therefore, did not record hydrogens during the period.

So, I guess, a better comparison if you really want to see production rates would be to take our 89,300 tons of actual production in the first quarter, add to that the approximately 800,400 tons of equivalent hydrogen sales and we would have had an equivalent production of around 98,000 tons of ammonia in the first quarter of this year as compared to the 105,000 tons in 2011.

Now during the first quarter, we did benefit from strong pricing that we recorded from orders that were taken last fall. We've realized an average net back price of ammonia of $613 per ton for the first quarter of 2012 compared to $564 per ton in this period last year.

For UAN, the average net back price for the first quarter of 2012 was $313 per ton and this was more than 50% higher than the $207 per ton recorded for the same period in 2011.

Now I'd like to turn our attention to our UAN project. We continue to make significant progress on this plant expansion. As we discussed in the past, this is an important project to us, as it 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 and that's an approximately 50% higher rate than current levels.

On this project, all major contracts have been awarded and work is underway on all major items. Very importantly, the large heavy haul vessels have all been received and set, and work continues on our compressor building. The key upcoming activities include full mobilization of the electrical and instrumentation contractors, start of construction on the new cooling tower and receiving setting of the main compressor.

I would note that we remain on schedule with this project to begin operations in early 2013. And in addition, I'm pleased to announce that we currently expect the project to come in under budget somewhere between $5 million to $10 million less than our initial expectation. This will put the total expected investment at between $125 million to $130 million, and that includes approximately $5 million of capitalized interest.

We also continue to make progress on our construction of our storage distribution tank facility in Phillipsburg, Kansas. The dirt work is complete, all purchase orders have been issued, and the tank is currently being erected. And so we remain on target with that project for a successful completion in the second half of this year.

With that, I will now turn the presentation over to Frank Pici, our Chief Financial Officer. Frank?

Thanks, Byron, and good morning, everyone. As Byron discussed, we experienced another quarter of strong results in operating income, net income and adjusted EBITDA, and I'd like to discuss some of the financial highlights for the period.

As Byron said, the first quarter of 2012 net sales were $78.3 million compared to $57.4 million in the same quarter of 2011. The increase was primarily associated with higher product prices with a 51% increase in our UAN plant gate sales prices per ton, and a 9% increase in ammonia pricing.

Net hydrogen sales to CVR Energy's refinery were an incremental source of almost $6 million of revenue compared to last year's first quarter. Partially offsetting the increase was lower production associated with the downtime, Byron just told you about.

Cost of products sold for the first quarter of 2012 was $12.6 million compared to $7.5 million for the first quarter of 2011. Contributing to the net increase was higher pet coke costs that were partially offset by lower production volumes and a decrease in freight expense and hydrogen cost.

We typically purchase over 70% of our pet coke from CVR Energy's adjacent refinery. Under our agreement with the refinery, we paid lower of pet coke prices as reflected in the Pace petroleum coke quarterly index or a price tied to our UAN sales price with our cost capped at $40 per ton. Remaining 30% of our pet coke requirements are purchased from a third-party supplier under a fixed price contract that began in March of this year and runs through the end of 2013. We're responsible for freight charges, which are substantially fixed on that contract.

Our average costs for consumed pet coke, including third-party purchases during the first quarter of 2012 was $42 per ton. This is compared to a first quarter of 2011 pet coke average of about $15 per ton, when our average net back price for UAN was only $207 per ton. So the increase was really due to the increase in UAN pricing year-over-year.

As we move into the second quarter, our pricing for pet coke purchases from the refinery has reverted to the Pace index with the current price of $25.50 per ton. As 30% of our pet coke requirements are secured from a third-party substantially fixed price, for modeling purposes, you can assume that every $1 move in the pet coke price from the refinery equates to approximately $350,000 increase or decrease to our annual cost of goods sold.

Moving on to direct operating expenses, excluding depreciation and amortization that that was $22.9 million for the first quarter of 2012, which was essentially flat with the last year's quarter. Our selling, general, and administrative expenses decreased $2.4 million to $6 million in the first quarter of this year compared to $8.4 million for the same quarter last year.

Significant contributions to the decrease was lower share-based compensation expense and fixed asset charges that were partially offset by expenses for professional services associated with filing the registration statements for the possible unit sale and increased personnel related expenses from being a public entity.

Turning to capital expenditures, during the first quarter this year, we spent $22.3 million on capital projects, including $1.1 million for maintenance CapEx. For the full year 2012, we currently expect to invest $95 million to $100 million in capital projects. This includes $70 million to $75 million for the UAN expansion project, $10 million to $11 million for maintenance CapEx, and $14 million to $15 million for other growth projects.

I would note for you that all of our cap -- planned capital spending will be fully financed by cash on our balance sheet.

As Byron discussed earlier, based on our continued strong cash -- operating cash flow, last week, we announced a distribution of $0.523 per common unit for the first quarter of 2012. As we do in each quarterly earnings release, yesterday's press release included a reconciliation of cash flows from operations to available cash distribution.

With respect to that reconciliation, I would like to point out that along with the typical adjustments we make for deferred revenue and maintenance capital, we established a reserve to our first quarter available cash for distribution of $7.5 million for accrued property taxes to be paid in the second quarter and for catalyst purchase for use during the turnaround to be completed this coming fall.

As we look to the remainder of the year and into 2013, we remain in a very strong financial position to execute on our strategic initiatives. As of March 31, we had cash liquidity of $251 million, which was comprised of $226 million in cash and cash equivalents, and $25 million available under our revolving credit facility. We also continue to carry a modest level of debt at $125 million.

Finally, I'd like to note that in early April, we filed an amended registration statement to support CVR Energy's possible sale of a portion of its ownership interest in CVR Partners in a secondary offering. In light of recent events involving CVR Energy and Carl Icahn and entities controlled by Mr. Icahn, the offering has been put on hold until further notice.

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

Thank you, Frank. I want to spend a few minutes discussing some of the changes in the market, since we last spoke in February. We have seen our UAN truck FOB price move from under $300 per ton to currently over $400 per ton, which represents more than a 33% increase. Contributing to this increase in pricing are the historical low corn stock to use ratio of 6.3% coming out of 2011. A general consensus expected on a higher corn [planting] this year, some expectation the size 95 million to 96 million acres for 2012. And some -- actually some favorable weather conditions that supported some early spring planting as well.

In addition, on our call in February, you may recall that we discussed a pull back at that time by dealers and distributors on spring prepay orders as they employed more of just-in-time inventory strategy. This reduced the levels of prepay orders normally taken by us in November and December. However, over the last two months, we've seen a substantial increase in both orders taken and in crop shipments, and essentially this has brought us our book order back to what we would expect for -- compared to historical levels.

While I'm not going to discuss today our forward outlook on net back prices for -- obviously for competitive reasons, I can tell you that we are in a good position for reporting solid near-term earnings results. And at this point, we have delivered or have orders in place for more than 90% of our targeted deliveries for the second quarter of 2012.

As we look to the fill season, although we've not received much in the way of direct pricing signals, we are encouraged by the recent upward movement in the direct hedge and in Blue Johnson pricing indicators.

I would remind you also that 2012 is a turnaround year for us and this cycle is on a two year cycle. This year's turnaround is slated for October and we expect the facility to be down for approximately 16 to 18 days.

As discussed on our February call, we estimate the combination of foregone revenue and incremental operating expenses for this turnaround will be approximately $0.25 per common unit this year.

In terms of distributable cash flow guidance for 2012, as expected, we have seen an improvement in our production rates following our March maintenance work and we've also seen improvement in current and forward pricing. These factors combined with a few other potential upsides support our full year guidance range of $1 that we are raising to $1.65 to $1.85 per common units. This is compared to our previous guidance for distributable cash flow of $1.50 to $1.75 per common unit.

I would note that our guidance still includes the negative impact of approximately $0.25 per common unit for the turnaround that we discussed. As so, on a normalized basis for the turnaround, our increased guidance range would be $1.90 to $2.10 in a normalized year, all else being equal. Before we -- so we are very pleased to be able to announce that increase in our guidance.

We're going to open up for questions in a minute, but before we do that, I'd also like to comment on our longer term view.

Over the past few months, there has been much speculation in the market associated with CVR Energy's interactions with Carl Icahn including what it could mean for CVR Partners, given that CVR Energy is our majority owner.

While we will not answer questions or comment on the issues or related circumstances associated with duration agreement between CVR Energy and Icahn controlled entities that permit Mr. Icahn to complete his proposed tender offer of CVR Energy.

What I will assure you is that internally at CVR Partners, we continue to focus all our efforts on growing the partnership for the benefit of our unitholders. And I believe the opportunities for growing our business are many, and to date, we've only discussed a few of them publicly.

Obviously, the most significant near-term opportunity is the UAN expansion project. As I mentioned earlier, it's currently on line, on schedule to come online in the first quarter of 2012 and we estimate that this could add at least $0.25 per common unit throughout 2013 full year distribution.

Combined with the absence of a turnaround in 2013, you can see the potential for an additive $0.50 to distributable cash flow per common unit in 2012, all else being equal.

The addition of our off-site storage distribution facilities in key locations is underway and this will help us optimize the prices we receive for our products and another -- what I would mention here is, as we've mentioned one project that we have on the board, we're also looking at additional locations and this is an ongoing strategy at these terminal facilities at a number of locations.

And then also as I mentioned before, included in our growth plans is an effort to expand our sales mix into higher margin products such as diesel emission, Diesel Exhaust Fluid, or DEF.

Complementing these announced initiatives, we're also evaluating a number of opportunities to expand our business by acquiring existing assets and developing new facilities. I would note that the senior management team here at CVR Partners had significant experience in both mergers and acquisitions and in long-term project development. So this is a natural fit for us to look at these kinds of longer term opportunities in a way to provide real growth and promise for our partnership and growth in our distribution for our unitholders.

We believe the long-term fundamentals and the industry indicate a need for incremental supply of nitrogen fertilizers in the US. As such, we are using 2012 to review the feasibility of developing a new fertilizer production facility. Our internal evaluation is designed to determine an optimal facility location, size, product mix, all these based on specific market fundamentals, distribution logistics, feedstock and other key factors.

Certainly key to any decision related to an expansion to the building of a new facility and moving forward with that will be a comfort level that we can achieve an acceptable return, commensurate with the risk associated with this type of project.

In terms of acquisition of existing assets, while I'm not in a position to discuss any specifics, I do believe there are number of opportunities that should we be able to capitalize on, could significantly grow the partnership and future distributable cash flow.

With CVR Partners' solid balance sheet and extensive management experience in mergers and acquisition, I believe we're well positioned to capitalize quickly on opportunities as they present themselves.

In conclusion, we are pleased with our solid start to 2012. We remain bullish on the outlook for the remainder of the year and beyond, and we're very pleased to have been able to raise our guidance for this year in our announcement this morning.

Our team at Coffeyville is doing an outstanding job of operating facility. Their year-to-date safety and environmental performance has been exceptional, and our marketing folks continue to secure sales of our products at favorable prices.

I'm also very pleased with our continued progress on the UAN expansion project and the team that is managing that, and we look forward to bring in additional production on line by early next year and what is expected to be a continued solid pricing environment.

Finally, I remain positive on our prospect for significant longer term growth through acquisitions and developments. We have a very active process underway and we're building a solid book of potential opportunities.

I believe all of these efforts points to a strong future for CVR Partners and we appreciate the continued support of our unitholders as we execute on our many strategies to drive future growth.

And with that, we'll now open the floor to questions. So, operator, I will turn it over to you to -- for question session. Thank you.

Thank you. (Operator Instructions) Ted Drangula, Morgan Stanley.

Yes, hi, guys.

Hi.

Good morning, Ted.

A quick question for you on the just -- I know you won't give -- say too much for competitive reasons on the guidance, but the spot market here in the calendar second quarter has obviously been very strong. And was curious, I know historically -- and I know coming into the quarter probably wasn't as much of an active forward selling market.

So, could you maybe qualitatively or just give us a little more insight on to the portion of the guidance upside that may be coming from the realization of second quarter versus maybe the back half of the year? I did hear the comments that it sounds like the back half. There is maybe a little bit more -- a little bit more improvement there from Blue Johnson and other sources. But I just want -- trying to understand the breakdown of the year from that perspective?

Okay Ted, I'd be glad to give a little more color there. Obviously, when we talked in February, there were some pretty strange market signals going on -- really a lot of that driven about the issue I discussed earlier when the distributors and dealers had elected to not do a lot of prepay purchases. And earlier in the year there were some signals out there that gave you some discomfort, although there were also some signals out there from some of the forecast -- independent forecast that things were going to be better.

But we took all that into consideration our guidance we gave that quarter, and certainly we came out of the first quarter with a very strong position in terms of pricing. We've been very pleased with what we've seen in terms of pricing in the second quarter as well. And we -- as I mentioned, we already have a large portion, about 90% of the second quarter booked. So we really know where are those numbers. So, certainly that drives a strong comfort level in raising our guidance simply because those numbers are stronger than we had thought perhaps at on our last call.

And just overall in the third and fourth quarter, yes, there's some of that upside related to that. We are a little more optimistic about the pricing that's going to be out there than where we were a couple of -- or really basically three months ago.

Okay. And then if I could just have a follow-up on a different topic. On these expansion opportunities, so are you considering -- I mean, how wide range of opportunities you're looking at here? I mean, we are looking at greenfield with potentially even different feedstock beyond pet coke?

And then, I guess, following up on that, what we hear is that permitting is extremely difficult with EPA and others. Do you guys feel like you might have an advantage in that regard, or might it be a tough situation to actually get a new plant permit, maybe just a little more color on that?

Okay, I'll address -- again, I'll address that. Yes, our outlook right -- then we are talking about expansion, I mean, there's not a large incremental project we believe we would be able to do on site.

We're always looking for the small incremental additive things and [Neil] and his team do a great job there continually finding ways to boost capacity by spending a little capital. That never stops, it's ongoing. But what I really was referring to was in terms of a greenfield project.

I'm a firm believer that when you look at the imports in the US and the level of imports of nitrogen, and with some of the market outlook funnels, I don't know that we're going to -- we know the pricing cycles, but when you look over the long-term, I like the fundamentals look pretty good for this business and I'm convinced that someone is going to build a new plant out there somewhere, let's just say put it in service somewhere in the next five years.

In terms of environment, obviously, yes, permitting is difficult. I would say that one of the things that we think is a positive for us is the fact that we will be at -- we're in the process, as you know of sequestering our CO2 emissions at our existing facility. And that we will over the next year, essentially be sequestering 100% of our CO2 emissions.

And so I'm hopeful and we think that those will become something that can be used as offset for credits or nothing -- or perhaps even sold as credits. But I think that gives us an advantage of being able to put a project on the table and bring something to that that is supportive of environmental issues through what we're doing in our existing facility.

But, yes, it's difficult, but permitting is difficult than anything and there's a need there, and you just got to put the effort into it and I think our position on our sequestration project, and as I said earlier, it gives us a -- should give us a leg up there.

Great, thanks.

Thank you. (Operator Instructions) Charles Neivert, Dahlman Rose.

Yes. Just a quick question on the hydrogen sales. Can you go over, again, what it is that makes you choose to sell hydrogen versus using it for the ammonia process? In any given point, was it this time, because turnaround -- that you had the excess hydrogen you couldn't produce because of turnaround. What was going on there that made you decide to go that route this quarter and other quarters where you don't do -- go that route?

Well, I think a couple of things to keep in mind there about that agreement. First of all, it is that our election as to whether we sell. But also under that agreement, we get the opportunity from time to time to buy excess hydrogen from them when they have it. So it's mutually good for both of us.

If I'm in a position, where I've got my market covered in terms of obligations that I've made earlier on -- around deliveries, then it's -- it does not disadvantage me in any way to make those sales to them. I'm price neutral on that.

Actually the way the formula works, we tend to probably be a little bit price positive, but not enough to really drive the decision. So we're price neutral. But on the other hand, we get the opportunity through the relationship sometime to buy excess hydrogen from them, which is good for us, it lets us produce higher levels of ammonia.

So, overall, this thing is good for us. It's not detrimental to us. We -- if we have deliveries, we need to make and we need to produce that hydrogen and meet the obligations, we will obviously not sell to the refinery. But -- and that has not -- was not the case in first quarter, and so we elected to make those sales.

Got it. And so as a quick follow-up, when I look at the pricing (technical difficulty) price neutral when you sell it. What you get from the refinery, when you choose to buy it, is that at the same sort of price level or is it more like fuel value?

It's really based around our value on what -- the value of third-party hydrogen.

Okay.

And if that works for us, then we buy it.

Got it. Thank you.

You are quite welcome.

Thank you. (Operator Instructions) It appears there are no further questions at this time. I'll turn the floor back over to management.

Well, we thank you for joining us today. We're very pleased that with our -- as I said earlier, with our first quarter performance, we're very excited about what's ahead of us for the remainder of the year. Again, very pleased that we're able to raise our guidance and we always continue to try to share as much information with you, so you can have a good understanding of our business. We're always available through myself or Wes Harris to take calls later if you have additional questions around anything, we may have said this morning.

So, again, thank you very much for your time, and I wish all of you a good day. Thanks.

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