CVR Partners LP (UAN) 2012 Q3 法說會逐字稿

Greetings, and welcome to the CVR Partners Third 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 for CVR Partners. Thank you, Mr. Harris. You may begin.

Well, good morning, Robin. Good morning, everyone. We appreciate your participation on today's call. With me today our Chief Executive Officer, Byron Kelley; Chief Operating Officer Stan Riemann; and Chief Financial Officer, Susan Ball. Before we start to discuss our 2012 third quarter 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 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 comparably GAAP financial measures, are included in our 2012 third quarter results press release that we filed yesterday after the market closed.

With that, I'll turn the call over to Byron Kelly, our Chief Executive Officer.

Well, thank you, Wes, and good morning to everyone. We are certainly pleased to have you join us this morning. Today I will begin with a review of the third quarter and some comments on our current business. Susan will follow with the discussion of the detailed financial results after my initial comments.

I will then conclude with a few remarks regarding some industry trends as well as our outlook through this year end 2013. And then after that, we'll be happy to answer your questions at the end of the call.

Following a very successful first half of the year, we were also pleased to have posted very solid financial results for the third quarter of 2012, including a net income of $31.6 million on net sales of $75 million. This is compared to 2011 third quarter net income of $36.3 million on net sales of $77.2 million. Looking at the nine months ending September the 30th of 2012, we posted sales of $234.7 million compared to $215.3 million in 2011 or 9% increase.

We recorded a 6% increase in year-to-date net income, growing from $91.2 million last year to $96.9 million in the third quarter of 2012. Our 2012 third quarter adjusted EBITDA, which as you know, represents our net income adjusted for depreciation, amortization, interest, expense and income, income tax expenses and share-based compensation was $39 million as compared to $43.3 million in the prior year. Looking at the nine months ended September the 30th, our adjusted EBITDA was $121 million, a 6% increase from the $114 million we reported for the same period in 2011.

Our strong financial performance in the third quarter of 2012 resulted in the October 26th announcement of a distribution of $0.496 per common unit. This distribution will be paid on November the 14th to unit holders of record on November the 7th. Looking at our operations in more detail, in the third quarter of 2012, we produced 104,200 tons of ammonia. Of this amount, we converted 74,800 tons into 181,900 tons of UAN, leaving a balance of 29,400 net tons of ammonia that was available for sale.

Comparing this to the third quarter of 2011, we produced 102,700 tons of ammonia, of which 76,800 tons was converted into 185,800 tons of UAN. This left a balance of 25,900 tons -- net tons available for ammonia sales in the third quarter of 2011. As we expected, our daily production rates were lower in this year's third quarter, as plant efficiencies typically declines as you approach the end of your two-year cycle between turnarounds. So while daily production rates for both ammonia and UAN were impacted by this link between turnaround cycles, total ammonia production volumes were actually higher in 2012 third quarter, as we utilized essentially all of our hydrogen in the production of ammonia.

This is compared to 2011 third quarter when we elected to sell ammonia equivalent of 6,369 tons of hydrogen to CVR Energies' adjacent refinery, pursuant to our feed stock agreement with the refinery. Susan will discuss the financial impact of these activities in her prepared remarks. Although we saw lower production rates, and I mentioned we expected to see that in the third quarter as we approached turnaround, we were pleased, though, to require high on-stream -- record high on-stream rates during the third quarter. During that period, the gasifier was on-stream 99% of the time, the ammonia synthesis loop was on 98%, and the UAN plant was on-stream 97% of the time.

During the third quarter, we realized an average net back price of $578 per ton, as compared to $568 per ton in the prior year. For UAN the average price for 2012 third quarter was $290 per ton, and this was slightly below the $294 per ton net back recorded in the third quarter of 2011. So we saw ammonia prices up, roughly $20 a ton, and UAN prices were down about $4 a ton year-to-year in third quarter comparisons.

We continued to make important progress on our UAN plant expansion during the third quarter, and we remain on target for completing the project by the start of 2013. We currently expect our total investment in this project will be between $125 million to $130 million. As we discussed previously, the expansion is designed to allow us the ability 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.

I'm also pleased to announce that we completed our $2 million project to construct a storage distribution tank in Phillipsburg, Kansas. This is complete and the facility is operational. We have orders placed against the terminal for the first quarter of 2013, and we are currently quoting prompt ship tons out of that terminal as well.

I will now turn the presentation over to Susan Ball, our Chief Financial Officer. So Susan, this is Susan's first call, and we welcome her aboard. So you all take it easy on her today. Susan?

Thank you, Byron, and good morning, everyone. We are pleased to report another quarter of solid financial results. As previously mentioned, third quarter 2012 net sales were $75 million as compared to $77.2 million in 2011. This decrease was primarily attributable to lower UAN sales volumes and prices, and to a lesser extent, the related net impact of lower hydrogen sales to CVR Energies' adjacent refinery, partially offset by higher ammonia sales in this year's third quarter.

As a reminder under our feedstock and shared services agreement, we both buy hydrogen from and sell hydrogen to the refinery. Substantially all the hydrogen we produced in the 2012 third quarter was used in the production of ammonia. As Byron mentioned earlier, this resulted in higher ammonia volumes year-over-year. As a result, during this 2012 third quarter, we recorded hydrogen sales of approximately $0.3 million and hydrogen costs of approximately $0.1 million.

This is compared to the 2011 third quarter when we recognized approximately $5.7 million for hydrogen sales and $0.3 million for hydrogen costs. Costs of product sold for the 2012 third quarter was approximately $11.3 million as compared to $10.9 million in the third quarter of 2011.

Contributing to the slight net increase was higher freight and distribution costs, which were partially offset by reduced pet coke prices and consumed volumes. As we have discussed in the past, we typically purchase over 70% of our pet coke from the 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 2012 third quarter, our average cost for consumed pet coke, which includes third party purchases, shipping and handling, was approximately $30 per ton. This compares to $43 per ton in the third quarter of 2011.

Direct operating expenses excluding depreciation and amortization were $21.1 million for the third quarter of 2012, as compared to $20.1 million in the prior year. The increase for 2012 was substantially due to lower insurance proceeds received in 2012 as compared to 2011 for recovery of costs that were incurred with the 2010 vessel rupture.

We received insurance proceeds both in 2012 and 2011, but 2012 were approximately $1.5 million less than 2011. Selling, general and administrative expenses were $5.1 million for the 2012 third quarter as compared to $4.5 million in the third quarter of 2011. Contributing to the increase was higher overall personnel costs, including increased reimbursements to our general partner. This is partially offset by lower reimbursements under our services agreement with CVR Energy.

Turning to capital expenditures, during the 2012 third quarter, we spent approximately $18.2 million on capital projects, including $1.6 million for maintenance CAPEX. For the full year 2012, we currently expect to invest approximately $90 million to $105 million in capital projects, which excludes capitalized interest. This amount includes $6.5 million to $8 million for maintenance CAPEX, and approximately $85 million to $95 million for gross projects, which includes $75 million to $80 million on the UAN expansion project.

All of our planned capital spending will be fully financed by cash on our balance sheet. As of September 30, we had $180 million in cash, and cash equivalents, and $25 million available under our revolving credit facility. Of the $205 million in total cash liquidity, approximately 50% was not committed. In addition, at the end of the 2012 third quarter, we carried a modest $125 million in debt. As such, we remain in a very strong position to capitalize on available growth opportunities.

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

Thank you, Susan. I would like to -- I'm going to later get on some -- touch on some of the macros about the industry, and where that may be leading us into 2013, but before I do that, I would like to touch on a few items specifically related to our business. As you know, we have talked about that in the fourth quarter this year as our turnaround quarter, and we did bring the plant down for our scheduled turnaround on October the 3rd.

During this time, we performed maintenance activities that are designed to improve our operational efficiency in the plant. Also, this year, in addition to the normal turnaround work, we installed critical assets and tie-ins related to our UAN plant expansion. So it is a busy time during October completing all of that work.

We did resume ammonia production on October the 23rd, and UAN production on October the 25th. And I will have to take hats off to our group operating personnel. They did a great job getting all of the turnaround and the tie-in work done during this period.

Looking at marketing for a minute, we have UAN orders booked for substantially all of our anticipated production for the fourth quarter, and more than 80% of our production of the first quarter is also booked. In regards to ammonia, and current activities, we have a few thousand tons in inventory that we anticipate taking orders against for delivery before year end. And we also expect to have some December production tons that will be available for delivery in the spring.

As a reminder, following completion of our UAN expansion, we will have the ability to convert all of our ammonia into highly valued UAN. Therefore, we don't expect to have a substantial amount of net ammonia available for sale in 2013 and beyond. Now that we have -- turning back to results, as we moved into the fourth quarter, we have completed the turnaround. In our press release, you notice that we did narrow our previous distributable cash flow guidance for 2012 from $1.65, to $1.85 range to $1.70, to $1.80 range. Basically the midpoint hasn't changed, we just narrowed the two ends on each end of that guidance. Basically because we do have -- we are well into the fourth quarter, and we finished the turnaround. So we've got a much better feel for where the year is going to come out.

I would note that this guidance continues to include the negative impact of the turnaround in the fourth quarter. As our budget for 2013 and beyond is still under development, we will not provide guidance for 2013 until we report fourth quarter and full year results for 2012, and that will happen in February of next year. However, I would say that everything is pointing to what we expect will be a very successful year for the partnership and as unit holders in 2013.

We know that our next scheduled turnaround is not until late 2014, and that our expanded UAN plant remains on target to come online beginning of next year. As such, all else being equal, just the combination of those two factors indicate that next year's cash available for distribution could be $0.50 per unit higher than our expected 2012 full year guidance. That -- just using our range would represent a 25% to 32% increase just from those two factors, and I mentioned that assumes all else is equal in terms of costs and sales prices. Really just trying to give you an impact -- a flavor for the impact of those no turnaround of the new project.

As to basic fundamentals, since our earning call in August, we continue to see, and I'm sure you have seen this in some of the various studies, we have continued to see the damaging effects on this year's corn crop from the severe drought in the majority of the Midwest and other key growing regions. This has led the USDA to further lower their corn yield estimates to a current level of 122 bushels per acre and a carry out of 619 bushels. That would indicate a stock-to-use ratio of only 5.6% coming out of this year, and that's the second lowest in more than 50 years.

I believe the expected low year ending corn inventory levels should lead to a planting of at least 94 million to 96 million acres of corn next year, and this should continue a very positive pricing environment for our products into 2013. We can well see that continue on into 2014 as well. We also remain focused on growing beyond our current business. Our base of business, as Susan mentioned, we have a strong balance sheet that provides us significant flexibility to capitalize quickly on opportunities as they present themselves.

I discussed earlier our recently completed offsite storage distribution facility at Phillipsburg. We believe there are other key locations in the Corn Belt where the addition of distribution terminals would prove beneficial in our efforts to optimize the prices received for our products, and thus increase future cash flow. And we continue to evaluate additional sites.

We expect to see an expanding sales mix into higher margin products such as diesel emission fluid or DEL, and this is just another avenue that we see for increasing our cash available for distribution. We believe just the local market alone that we could access through trucking could be 75,000 to 100,000 tons a year. Complimenting these announced initiatives of our expansion and our -- and growing DEF as well as our terminals, we are also evaluating a number of opportunities to expand our business through efficiency enhancements projects, through acquiring existing assets, and development of new assets.

And I would note that our senior management team has extensive experience in growing businesses through these types of efforts. Although we are not ready to roll out any of the results of our strategic planning, we have had a very good strategic planning session over the last four months within the Company. Our team's done a great job, and they have identified quite a few initiatives that we think we will be able to implement over the next few years to continue to grow our earnings. And these come all the way from enhancements to acquisition opportunities as well as some other growth efforts that we have identified.

So, as we wrap that up through the end of the year and present those to the Board, we look forward to being able to look at some of the benefits that may come out of that for our unit holders in the years ahead.

To wrap up, we are very pleased with our performance year-to-date. And we look forward to completing a successful 2012 in just a few months down the road. In addition, supported by a solid industry fundamentals, 2013 is shaping up to be, we believe, an outstanding year, highlighted by substantial growth out of our expansion project as well as not having the negative impact of a turnaround next year.

And finally we remain focused on capitalizing on additional growth opportunities designed to increase distributable cash flow well beyond next year. Of course, all of our efforts are designed to benefit our unit holders, and we appreciate your continued support, and as we continue to position CVR for long time success.

So, with those comments, Operator, we will be glad to open the floor for questions.

(Operator Instructions). Our first question comes from the line of Jeff Dietert with Simmons & Company. Please proceed with your question.

This is Jeff Dietert with Simmons & Company. Good morning.

Good morning, Jeff.

It appears you've got growing confidence in the UAN expansion coming online, I believe your press release said by January 1st. Could you talk about what you lack there in completing construction?

I am going to really let -- Stan Rieman is with us. He is our Chief Operating Officer. I will let him address that.

Good morning, Jeff. How are you?

Good morning, good.

We're virtually done with the construction. We're probably 97%, 98% there. What we are going to be focused on here in November, and December, is just start up.

But there's virtually little to do. We are doing some electric wiring. We are doing some commissioning and stuff like that. So to Byron's point, I think he is extremely comfortable we will be on-stream by January 1, maybe even a little before that.

That's great, coming in ahead of schedule. Could you talk about the turnaround this quarter, and what you think the opportunity loss might be associated with the turnaround?

Well, what we have said in the past is that the impact that it's about $0.25. The turnaround this year went a little longer than we anticipated. We had a third-party vendor that we depend on for -- and they do a turnaround at the same time that we do, and we depend on some product from them to come across the fence to us. They had a few issues that extended their turnaround which by then in nature extended our turnaround.

And so, I guess at one point I was hopeful we might actually shave a few days off our turnaround. But in the end, we probably added about three or four days -- I think three days related to third party, and then we found one issue we had to deal with once we came up, that probably cost us a day. All and all, though, it still falls in that $0.25 range.

Okay. Great. And I know from your discussion that there are a lot of things up in the air, but I was hoping to get kind of a basic idea on what 2013 capital spending might look like. Can you make some comments on that?

No, not until we actually get our budget out in front of the Board and get that approved, and we've not presented that to them. We will be putting our budget in front of the Board here in the next week or so. And then once we get it approved then we can talk more about the capital for next year.

Okay, but it is not as simple as taking 2012 CAPEX and backing out the UAN expansion portion to get just to a general idea?

Well, I mean that's a beginning point, obviously, and taking out your maintenance cap related to that. We -- I mentioned we have done some strategic work, and we have identified some things that we think we can do that could be good around some planet hats. We've just got some more work to do on that before we finalize whether we are going to do those next year or the year after, and the final economics of those. So we really need to get through about another month or so here to get anything finalized. As I said earlier, I am very pleased with some of the work -- with the work our group has done around some opportunities we've got. But at this point, we need to get all this in front of the Board and see where we shake out.

Sounds good. We will look forward to hearing about that in February. Thanks for your comments.

Appreciate it, Jeff.

(Operator Instructions). Our next question comes from the line of Kenneth Cramer with Citigroup. Please proceed with your question.

Good morning. And welcome, Susan. Susan, I have a relatively easy and straightforward question for you. What is UAN's current ratio? And do you anticipate that it will improve in the next few quarters?

The --?

Debt to EBITDA? Is this what you're referring --- ratio? Or --?

No. Current ratio is current assets over current liabilities.

Oh. Okay, I missed -- give her just a minute.

Yes, I apologize.

3.7 times.

Yes, it is approximately 3.7 times.

Fine, thank you very much, and again welcome aboard.

Thank you.

There are no other questions in the queue at this time. I would like to turn the call back over to management for closing comments.

Well, again, we appreciate you joining us this morning, and we are again as I said, we are very pleased with our third quarter and year-to-date results. And we are certainly excited about next year and the things that we know that are pretty much a given that are going to provide some great upside and growth in our distribution next year.

So, with that again, we thank you for joining us, and as always, you know you can call for follow-up questions. Thank you very much.

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