CVR Partners LP (UAN) 2012 Q2 法說會逐字稿

Greetings and welcome to the CVR Partners Second 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 of Investor Relations. Thank you, sir. You may begin.

Well, thank you, Christine, and good morning everyone. We appreciate your participation on today's call. With me today are Chief Executive Officer Byron Kelley; Chief Operating Officer, Stan Riemann and Chief Financial Officer, Frank Pici.

Prior to discussion of our 2012 second 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 date. These forward-looking statements are not guarantees of future performance and 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 second quarter results press release that we filed yesterday after the market closed.

So with that, I'll turn the call over to Byron Kelley, our Chief Executive Officer. Byron.

Well, thank you, Wes. Let me add my welcome to each of you this morning. We're very pleased that you could join us.

Before I get in the presentation, I maybe want to apologize up front a little bit for my voice. That may deteriorate on me. I, like a lot of people in Houston, have been fighting bronchial issues. It seems like it's an epidemic around Houston. So I do have a lingering cough that tends to come in every now and then. So my apologies if I have to cough a little bit and stop and drink water throughout the process. But we certainly want to cover the bases today. And I'm going to give you the quick review of the second quarter and talk a little bit about the current business. Frank will then discuss the financial results, and I'll conclude our opening remark with a discussion concerning some industry trends, and then our outlook. And then after that Frank, Stan, and I will all be available to answer questions that you may have this morning.

We posted another period of very solid financial results for the second quarter of 2012, including a net income of $35.1 million on net sales of $81.4 million. This is compared to 2011 second quarter with a net income of $38.2 million on net sales of $80.7 million.

2012 second quarter adjusted EBITDA which, as you recall, represents net income adjusted for depreciation, amortization, interest expense and income, as well as financing costs, income tax expenses, and any share-base compensation -- that adjusted EBITDA was $44.1 million for the second quarter of this year compared to $45 million in the prior year.

Driven by our strong financial performance in this year's second quarter, last week we announced a distribution of $0.60 per common unit, and this distribution will be paid on August 14 to unit holders of record on August 7.

Now let's look a little more at our operations. From our last earnings call, you may remember that in late February we began to see a decline in production output and made a financial decision to take the plant out of service to implement some unscheduled maintenance work. This work was successful, and we continue to make up the lost production. We think we'll make it up before the year is over. But with that work behind us, we have seen much improved run times for our facilities from the first quarter into the second quarter. During the second quarter, the gasifer was on stream 99% of the time. The ammonia synthesis loop was on 98%, and the urea ammonia nitrate plant was on stream 97% of the time.

In 2012 second quarter, we produced 108,900 tons of ammonia. Of this amount, we converted 74,000 tons into 180,000 tons of UAN leaving a balance of 34,900 net tons of ammonia available for sale for the second quarter. This compared to a second quarter of 2011 when we produced 102,300 tons of ammonia, of which 74,100 tons were converted into 179,400 tons of UAN. That left us a balance last year in the second quarter of 28,200 net tons available for ammonia sales.

During this year's second quarter, we were a net receiver of hydrogen under our feed stock and shared services agreement with CVR Energy's adjacent refinery. As such, we did not record hydrogen revenue sales in this quarter. This is compared to 2011 second quarter when we elected to sell $6.1 million of hydrogen to the refinery under our keep-whole pricing arrangement. The amount of hydrogen sold during that period -- remember again we're referring to second quarter of last year -- was equivalent to producing 9,400 tons of ammonia.

During the 2012 second quarter, we realized an average netback price for ammonia of $568 per ton as compared to $574 netback per ton in the prior year. For UAN, the average netback price for 2012 second quarter was $329 per ton, which was approximately 10% higher than $300 per ton netback recorded in the second quarter of 2011.

We continue to make significant progress on our UAN plant expansion. This 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 level. All else being equal with 2012, we estimate the expansion could add approximately $0.25 per unit to our cash available for distribution in 2013.

In relation to that expansion, at this point, all of our contracts have been awarded. The major towers have been erected, the cooling tower is complete and the motor control centers have been set. The main compressors also have been set, and the building is in the final stages of completion.

I'm very pleased with the scope and the pace of the work that's been done to date. The progress that our team has made indicates that we will complete the project by the start of 2013, which is earlier than we had previously discussed. We previously discussed a start up sometime in the first quarter. Right now we're pretty confident that we will start up at the first of the year and gain a full 12 months of utilization out of the expansion for 2013.

We continue to expect the total cost of the project will come in under budget, between $5 million and $10 million under the budget. This puts the total expected investment at between $125 million and $130 million, and that includes approximately $5 million for capitalized interest.

We're also essentially complete with our $2 million project to construct a storage distribution tank facility in Phillipsburg. We are currently unloading railcars into the tanks, and we're targeting truck delivery shipments out of those tanks, the ability to start shipping out of those tanks, later this month, based on -- economics really drives when we'll pull that out. But we do expect to start shipping out of those tanks probably sometime later this month.

At this point I'm going to turn the presentation over to Frank Pici, Chief Financial Officer. And then I'll come back and have some additional comments later. Frank?

Thanks, Byron. Good morning, everyone. We're pleased to report another quarter of solid financial results.

As Byron mentioned, second quarter 2012 net sales were $81.4 million, compared to $80.7 million in 2011. The increase was the result of higher average plant gate prices and sales volumes for UAN, partially offset by lower hydrogen sales by CVR Energy's refinery and decreased sales volumes for ammonia.

Cost of products sold for 2012 second quarter was $10.7 million compared to $9.7 million in the second quarter of '11. Contributing to the net increase was higher freight and distribution costs which were partially offset by reduced pet coke volumes.

As we've discussed in the past, we typically purchase over 70% of our pet coke from CVR Energy's adjacent refinery. The 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. During the second quarter, our average cost of consumed pet coke including third-party purchases shipping and handling was $31 per ton compared to $30 per ton for the second quarter of 2011.

Direct operating expenses excluding depreciation and amortization was $22.5 million for the second quarter, which was essentially flat with the prior year. Selling, general and administrative expenses were $7 million for the second quarter as compared to $4.7 million in the second quarter of 2011. The increase was driven primarily by higher share-based compensation expense of $1.6 million and an increase in net personnel-related expense reimbursements to our general partner.

Depreciation and amortization for the second quarter was $5.2 million compared to $4.6 million in the prior year period. The increase was associated with an adjustment in the remaining useful lives of certain assets to be retired during the turnaround schedule for this year's fourth quarter.

Turning for a minute to capital expenditures, during the second quarter, we spent $16.9 million on capital projects, including $500,000 for maintenance CapEx. For the full year 2012, we currently expect to invest $100 million to $110 million in capital projects excluding capitalized interest. This amount includes $70 million to $75 million for the UAN expansion, $10 million to $12 million for maintenance CapEx, and $20 million to $25 million for other growth projects. I would note that all of our plant capital spending will be fully financed by cash on our balance sheet.

On our first quarter earnings call in May, we discussed that in addition to the typical adjustments for deferred revenue and maintenance capital, we were reducing our first quarter available cash for distribution by $7.5 million to reserve for accrued property taxes to be paid in the second quarter and catalysts purchased during the first quarter for use during the turnaround later this year.

Included in our earnings release is a reconciliation of cash flows from operations to available cash for distribution. As part of the reconciliation, you'll see that we increased the second quarter available cash for distribution by $6.7 million to reflect the payment of those property taxes reserved for at the end of the first quarter. The remaining balance of $800,000 reserved for at the end of the first quarter is for the prepurchased catalyst for the turnaround. We expect that this amount will be added to our fourth quarter cash available for distribution.

As we look to the balance of this year and into 2013, we remain in a very strong financial position with substantial flexibility. As of June 30th, we had cash liquidity of $221 million which is comprised of $196 million in cash and cash equivalents, and $25 million available under our revolving credit facility. I would also note that we continue to carry a modest level of debt at $125 million.

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

Thank you, Frank. Since we last had a review at our earnings call in May, the industry has seen a dramatic swing in forward corn prices from a low of less than $5 per bushel to more than $8 per bushel currently for December deliveries. This increase has been primarily driven by a growing negative outlook for this year's corn crop due to the severe drought in the majority of the Midwest and other key growing regions. To put this in better perspective, more than half of the country was under moderate to extreme drought conditions in June, which represented the largest area of contiguous United States affected by such dryness in almost 60 years. Nearly 1,300 counties across 29 states have been declared federal disaster areas. Unfortunately, the drought has only gotten worse since those June numbers were released.

Current and expected conditions will have a substantial negative impact on the final crop for this year. As a result, we do expect to see very low year ending corn inventory levels, which we believe will necessitate a substantial planting of corn acreage in the coming years to rebuild inventories.

On July 11, the USDA lowered its initial corn yield estimate for this year from 166 bushels per acre with a carryout of 1.9 [sic] bushels to 146 bushels per acre with a carryout of 1.2 billion bushels. With the continued drought condition, we expect the USDA will lower their estimates again next week. I would note that [pro-exporters] most current forecast assumes a yield of 132 bushels per acre with a carryout this year of 571 million bushels. This could result in a stock-to-use ratio of around 5% or less which would represent the lowest level since 1988.

Looking specifically at our business, in mid June the fill season got under way in full force and within two days, we had placed orders for substantially all of our remaining UAN production for 2012. While I'll not discuss our forward netback pricing for competitive reasons, I would note that we typically see -- the industry does -- typically sees prices come down a bit for deliveries in summer and fall months. This year was no exception. However, having said that, we are very pleased with the UAN prices that we've seen for the current season for fill, and very pleased with the resulting increase in fill's ability we now have for our full 2012-year outlook.

For ammonia, we've been taking fall prepay orders, and are also pleased with overall pricing. Similar to UAN, we now have significant visibility for the remainder of 2012. At this point, we placed orders for almost all of our targeted third quarter ammonia deliveries in the majority of our 2012 fourth quarter production as well.

I would remind everyone that we do have a turnaround slated for the fourth quarter, and the facility is expected to be down for approximately 16 to 18 days. We estimate the combination of foregone revenue during that work as well as the incremental expenses for the turnaround will approximate $0.25 per common unit. Turnaround, as you remember, occurs every two years, and so we'll not be looking at a turnaround next year.

In terms of distributable cash flow guidance for 2012, given our solid results today and our substantial visibility we have for the remainder of the year, we are reaffirming our full-year guidance range of $1.65 to $1.85 per common unit. I would note this guidance does include the negative impact of approximately $0.25 per common unit for the Q4 turnaround.

As we look to 2013, while we're currently not in a position to provide formal guidance, there are a number of factors that point to what is expected to be another excellent year for the partnership and all of our unit holders. First and foremost, we look forward to benefitting from our expanded UAN operations for the entire year. In addition, as I mentioned earlier, we will not have a turnaround in 2013. Therefore, all else being equal, cash available for distribution in 2013 could approximate $0.50 per unit higher than we've seen in 2012.

Looking at the $1.75 midpoint of this year distributable cash flow per guidance, this indicates the potential for an almost 30% increase in cash available for distribution in 2013, and again, that's all things being equal. And when you say that, you're essentially talking about wait and see prices equivalent to this year or better.

We also expect to benefit from a continued positive fertilizer pricing environment moving into next year's spring corn planting. As I discussed earlier, the challenging crop conditions are indicating a very low year-end stock-to-use ratio. Therefore, we expect to see -- and personally I expect that we'll see 92 million-plus acres planted again next year to support both the growing demand for corn as well as rebuilding inventory for the years to come. In general, I think you're going to see several years of really strong planting to rebuild these low inventories that we're going to come out of the this year with.

Adding to this, some strengthening in the world economy down the road, and I think that you have the makings for strong demand for nitrogen-based fertilizers for quite awhile.

As we've discussed in the past, we are focused on a number of initiatives to grow our business. Supporting these efforts is a strong balance sheet that provides significant flexibility to capitalize quickly on opportunities as they present themselves. At the top of the near-term opportunity list is, as I mentioned, our UAN expansion that comes on line in 2013. Our addition of our on-site storage facilities in Phillipsburg this year, and we expect to add other key locations in the future of additional terminal as well. Both of these will be increasing our cash flows as we seek to optimize the prices we receive for our products.

Expanding our sales mix in the other higher-margin products, like we're doing with diesel emission fluid or DEF, is another way that we're increasing the amount of cash available for distribution. And then finally, we're continually looking for any acquisition opportunities that could come into the market, and we'll be aggressively pursuing any of those opportunities that are available.

In conclusion, we are pleased with our results for the first half of 2012. We certainly look forward to the remainder of this year. In addition support of our solid industry fundamentals, we are poised for what is expected to be a very successful 2013 highlighted by substantial growth over 2012.

As always, we appreciate the continued support of our unit holders, and as we continue to build an even stronger CVR partners for the future.

So with that, we will open the floor for questions. And, Operator, I'll turn it back to you.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions)

Our first question comes from the line of Vincent Andrews with Morgan Stanley. Please proceed with your question.

Hi. This is [Ted Drangula] in for Vincent. I had a question on how you see the volume playing out for the rest of the year. Is it a similar sort of pattern as to the second half of '11? And then I guess to follow on to that, will the mix likely be similar? And have you essentially -- it sounds like you essentially priced everything for the rest of the year and firmed up the entire order book. Could you give us an idea of how that pricing is? Is there any indexing on that, or was it just contracted at a certain point in time? I know you can't give away all of that, but just some ideas of the methodology behind the pricing for the rest of the year?

Okay, Ted, I'll try to go through that. If I mis-answer you -- I think you had several questions -- if I missed any of them, come back and remind me.

First, in terms of this year versus last year, I think that in terms of sales for this year, it's pretty similar except that we're probably a little ahead of booking full capacity. We have reserved some ammonia capacity that we think will be -- the fourth quarter is going to be a very strong quarter for ammonia. So we reserved some of that. But UAN, we're pretty well booked.

The big differences you saw last year were, though, how quick people were buying for the spring. As we got into the fourth quarter, we saw a lot of the distributors holding back on buying product at that time. It's too early to know whether that's going to be duplicated again. Our sense is the distributors are probably going to be more aggressive in this market on refilling their product. I think as part of that will also play into, now that we're seeing where the stock-to-use ratio is going to come out, that most of the distributors are going to be expecting a pretty strong year next year, and will probably fill their product a little earlier. But we're actually quite pleased with where we are and for this year on putting our product in the market, and also quite pleased with some of the things that we're seeing out there as we head into people buying for spring deliveries next year as well.

Let's see -- in terms of pricing, no. We don't do any index pricing. Every deal we do is individually negotiated, and it's really based on the timing of deliveries, based on our read of the market and where we think the market is going to go, and really one-on-one negotiation with the customers. It's always a give-and-take negotiation in that regard.

Was there another question in there that perhaps I missed, Ted?

No. You got that. I guess just one follow-up, even though it sounds like -- I think I've assumed now correctly that you've pretty much sold everything for the rest of the year -- is even considering that, have you noticed in your contacts in the marketplace the, I guess, the sentiment of dealers or of your customers in the face of this rapidly deteriorating crop outlook? Meaning, I guess, how do you think purchases will be in the fall? Are people licking their wounds? Are some customers licking their wounds because their customers, the end farmers, are in some cases having issues? I mean, how do you see demand, I guess?

No. I mean, I think a couple of things to keep in mind about this drought is perhaps different from some of the historical droughts is most of the farmers carry between 75% and 85% of insurance. And so I'm sure they're going to be somewhat financially impacted by the drought, no question. But they're going to have pretty good recoveries. Some of what they are going to be selling is going to be at higher prices than perhaps they thought. So the sentiment we're receiving is that we're not seeing at this point any pullback from either the dealers or the farmers. The dealers are actually -- we think from what discussions we're having -- are getting a little anxious about actually firming up some of their stuff for the spring. And we see that as supporting what we think will be some pretty good prices next year. No, we're not actually seeing a pullback in the market.

Thank you.

(Operator Instructions) Mr. Kelley, it appears we have no further questions at this time. I would now like to turn the floor back over to you for further comments.

Well, thank you very much. Again, let me thank all of you for attending this morning. As I said, we're very pleased with the quarter. We're actually very excited about how our year has been moving so far both from a financial performance as well as progress we're making on our expansion. And all this leaves us, with the fundamentals as we see in the business as well the success of this year, very excited about next year.

So we appreciate your attendance, and as always, if you have any other questions or need any clarification, we're always available to take your calls as well.

So with that, Operator, I think we'll conclude the meeting.

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.