CVR Partners LP (UAN) 2013 Q1 法說會逐字稿

Greetings, and welcome to the CVR Partners first quarter 2013 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 for CVR Partners. Thank you. Mr. Harris, you may begin.

Thank you, Melissa, and good morning, everyone. We appreciate your participation in today's call. With me today are Chief Executive Officer Byron Kelley, Chief Operating Officer Stan Riemann, and Chief Financial Officer Susan Ball.

Before we start to discuss our 2013 first quarter results, we're required to make the following safe harbor statements. In accordance with federal securities law, 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 2013 first quarter results press release. Adjusted EBITDA is an example of such non-GAAP measure. Adjusted EBITDA represents net income adjusted for depreciation, amortization, net interest expense, income tax expense, and share-based compensation.

So with these formalities out of the way, I'd like to turn the call over to Byron Kelley, our Chief Executive Officer.

Well, thank you, Wes. And let me extend my welcome to each of you for joining us today. We're really pleased to have you with us on the call.

If you've seen our press release, you obviously know we had an excellent first quarter from several different fronts that led to record UAN production and, more importantly, to a record quarterly cash distribution.

During the quarter, we posted net income of $35.6 million on $81.4 million of net sales, and this compared to net income of $30.2 million on net sales of $78.3 million in the 2012 first quarter.

Our first quarter 2013 adjusted EBITDA was $43.8 million, and this represents a 15% increase from the $38 million we recorded for adjusted EBITDA in last year's first quarter.

This strong financial performance in the first quarter of 2013, resulted in this week's announcement of a distribution of $0.61 per common unit, which is 17% higher than the $0.523 per common unit we distributed for the first quarter last year. Our 2013 first-quarter distribution will be paid on May the 15th, to unitholders of record of May the 8th.

A key highlight of the quarter was the successful completion of our expanded urea ammonium, or UAN plant. Our operations team did a great job of ensuring that there was minimal disruption during the startup of the new plant, which started up in late February. By mid-March, we were up to full production rates and have continued to produce at consistent high rates since that time.

As a reminder, the approximate $130 million expansion does provide us the ability to convert essentially all of our ammonia production into more highly valued UAN. This increases our capacity to more than 1 million tons of UAN annually, which is approximately 50% higher than previous levels.

The 2013 first quarter also benefited from high on-stream rates following the successful turnaround that we had in October of last year. During the first quarter, the gasifier ran at more than 99% of the time.

The ammonia synthesis loop came in at a rate of almost 99%, and the UAN plant operated at nearly 93%. Now, this compares to the first quarter of 2012, when the gasifier was at 93% of the time, the ammonia synthesis loop at 92%, and the UAN plant ran at a rate of about 84%.

So substantially higher -- the turnaround led to simply higher reliability rates in the first quarter of this year.

These high on-stream rates combined with increased production during March from our expanded UAN plant, drove a 26% increase in net production available for sale during the first quarter of this year.

More specifically, of the 111,400 tons of ammonia produced during this period, we converted 80,700 tons into a record 196,200 tons of UAN. This left a balance of 30,700 net tons of ammonia available sell.

Included within the 111,400 tons of ammonia production was approximately 1,500 tons produced from hydrogen we purchased from CVR's adjacent refinery pursuant to our feedstock agreement.

During the first quarter 2012, as comparison to '13, in '12, we produced 89,300 tons of ammonia. Of this amount, 64,300 tons were converted into 154,600 tons of UAN. And that left a balance of 25,000 net tons of ammonia for sale in 2012 first quarter. During that period, we also sold a net of 8,400 ammonia equivalent tons of hydrogen to the refinery.

During the 2013 first quarter, our average net back ammonia price of 160 -- excuse me -- of $663 per ton was up $50 per ton compared to the $613 we recorded in the prior period year. For UAN, the average net back price for the 2013 first quarter was $295 per ton, which was about $18 lower than $313 per ton we realized in the first quarter of '12.

In addition to higher production and continued strong pricing for our products, the 2013 first quarter benefited from lower operating expenses year-over-year.

As Susan will discuss in more detail, our cost of products sold decreased significantly from the first quarter of 2012. Cost of products sold for 2013 first quarter was $10.6 million, compared to $12.6 million in the prior year's quarter.

Driving the decrease was lower blended price per ton for pet coke consumed, and that was partially offset by some higher freight and distribution costs.

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 contract that began in March of 2012, and runs through the end of this year.

During the 2012 first quarter, our average cost for consumed pet coke, including third-party purchases shipping and handling, was $31 per ton, and this is compared to $42 per ton in the first quarter of 2012.

At this point, Susan, I'm going to turn it over to you and let you talk about more of the details.

Thank you, Byron, and good morning, everyone. As Byron discussed, first quarter of 2013 net sales were $81.4 million, compared to $78.3 million in 2012. This increase was primarily attributable to higher UAN sales volumes due to the expansion and higher prices for ammonia during this year's first quarter. Partially offsetting the overall increase was decreased prices for UAN and lower sales volumes of ammonia.

Cost of products sold, as Byron mentioned, for the 2013 first quarter, was $10.6 million, compared to $12.6 million in the first quarter of 2012. Driving the increase was a lower blended price per ton for pet coke consumed. That was partially offset by higher freight and distribution costs.

As we've discussed in the past, we typically do purchase over 70% of our pet coke from the adjacent refinery. Again, the remaining 30% of our pet coke requirements are purchased from a third-party supplier under a contract that did begin in March 2012, which runs through the end of this year.

During the 2013 first quarter, our average cost for consumed pet coke, including third-party purchases shipping and handling was $31 per ton. This is compared to $42 per ton for the first quarter of 2012.

Direct operating expenses, excluding depreciation and amortization were $22.6 million for the first quarter of 2013, as compared to $22.9 million in the prior year period. The decrease was associated with lower repairs and maintenance expenses and a decrease in property taxes due to the partial settlement with Montgomery County that we entered into in late February.

Partially offsetting the overall year-over-year decrease was the combination of higher utilities, personnel, insurance, chemicals, and reimbursed costs.

Selling and general administrative expenses were $5.6 million the 2013 first quarter, as compared to $6 million for the first quarter of 2012. Contributing to the decrease was lower cost for outside services and personnel, partially offset by higher management services expenses.

Depreciation and amortization expense increased from $5.4 million in the 2012 first quarter to $5.8 million in the first quarter of 2013. This increase was substantially due to the UAN expansion assets being placed into service during the first quarter of this year.

Net income for the 2013 first quarter was $35.6 million, or $0.49 per common unit, compared to $30.2 million, or $0.41 per common unit in the first quarter of 2012.

Turning our attention to capital expenditures, during the 2013 first quarter, we spent $18.1 million on capital projects, including $600,000 for maintenance capital expenditures. The substantial majority of our capital spending during the first quarter was associated with the UAN expansion project.

For the full year 2013, we expect to spend approximately $43 million to $53 million on capital projects, excluding capitalized interest. This amount includes $7 million to $9 million for maintenance capital expenditures and $36 million to $44 million for growth projects, including $23 million on the UAN expansion project.

It's important to note that all of this planned spending will be fully financed by cash on hand that originated from our IPO in April of 2011. As of March 31, we had $153 million in cash and cash equivalents, as well as $25 million available under our revolving credit facility.

In addition, at the end of the 2013 first quarter, our long-term debt was $125 million.

Our solid balance sheet provides us the ability to quickly capitalize on the growth opportunities that we are pursuing.

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

Thank you, Susan. Our strong start that we had in this first quarter obviously places us in an excellent position to materially grow our business this year. Supporting this outlook are also a number of positive industry fundamentals.

We continue to expect that there will be a substantial planting of corn acreage this year, due to the damaging effects from last year's -- on last year's corn crop from the severe drought in the majority of the Midwest and other key growing regions.

While the USDA recently increased its projection for last year's ending stocks-to-use ratio from 5.8% to 6.8%, the country still remains in a position where corn inventories are at the second lowest level in more than 50 years in relation to total use. The USDA's March perspective planting report projected for this spring season that 97 million acres of corn would be planted.

However, like others in the industry, we are closely watching the pace of planting due to the recent flooding and related wet conditions in a number of areas in the Midwest. As these conditions are driving later-than-normal planting, we believe the actual acres planted this year could move down to the 94 million to 96 million range. While a bit lower, this level will still represent a near-record corn planting season.

The more significant impact of late planting actually probably relates to yield. The current USDA projection for corn yields in 2013, is approximately 163 bushels per acre, which I believe is overly optimistic, even under normal weather conditions.

Beginning in 2003, in the years that we planted less than 90 million acres, the average yield has only been 153 bushels per acre. And this average actually excludes 2012, where we know, due to the drought, we had yields of only 123 barrels per acre. Further, in years when we have planted in excess of 90 million acres, the yield average dropped 149 bushels per acre.

So utilizing a more realistic yield number, especially in light of a late planting season, it is easy to see a scenario where the actual stock-to-use ratio could be well below the USDA's current forecast of 16.7%.

Let me give you an example. If we planted this year 95 million bushels and we saw a yield of 150 bushels per acre, we would see a carryout ratio of about 6.5%. So you can see with the weather conditions, I certainly expect that we're going to see yields move down into that range and nothing near the 163 bushels per acre the government's talking about.

As such, we really expect that it will take at least 2 years to rebuild corn inventory back to historical level, and this, of course, bodes well for the nitrogen fertilizer producers.

Let's move our focus back to our current business a little bit. We have orders in place for the first quarter. We have about 75% of our anticipated production already booked going through the second quarter. We only have some production remaining really in the last couple of weeks of June that has not already been booked and accounted for.

This order book, combined with the fact that our cost structure, for the most part, is fixed and that we do not have margin exposure related to the rising natural gas prices, provides us significant visibility for our anticipated results for the first half of 2013.

Now, you add to this the solid industry fundamentals I discussed earlier and our recently completed UAN plant expansion, no scheduled turnaround, well, all that really puts in place a number of signs pointing to what we expect will be a record year for the partnership in 2013.

As such, we are reaffirming our cash available for distribution outlook of $2.15 to $2.45 for the year. This indicates an increase of between 19% and 35% over our 2012 full-year distribution of $1.81 per unit.

Looking forward, I remain pleased with how our business is positioned for this year and beyond. Supported by a strong balance sheet and substantial financial flexibility, we remain focused on growing the partnership through a number of important initiatives.

As a follow-up to the offsite storage distribution facility we built last year at Phillipsburg, we're targeting other key locations in the corn belt where the construction or lease of distribution terminals could prove beneficial in our efforts to optimize the prices we receive for our products, and, thus, increase cash flow in the future.

In addition, we are growing our presence in the diesel exhaust fluid market and looking for additional opportunities to expand our sales mix into other higher margin products.

As part of our ongoing efforts to increase the efficiency of our plant assets, we have 2 products under review currently that collectively could materially increase our production of ammonia. We also have another project being analyzed that would allow us to expand into additional specialty agriculture products.

Preliminary indications are positive for all 3 projects. If after our full review is complete we decide to move forward with all 3, two of those projects could come online next year, and the third in 2015.

As we move further through our analysis and study of these projects, probably out about 90 days or so, we'll be in a position to come back and give you more details about the progress and what we think those projects will really lead to in terms of benefits for the company.

Complementing our announced expansion that we've just completed and the pending initiatives I've just mentioned, we also continue to be interested in expanding our business by acquiring assets, and we currently have a number of opportunities that are under internal review.

In conclusion, we are in an enviable position to post what is expected to be a record year for the partnership. Market fundamentals remain strong and our past strategic initiatives are beginning to materially increase our distributable cash flow.

We appreciate the continued support that we've seen from you, our unitholders, and we look forward to updating you the progress that we're making towards the future and our results for this year as we move through the remainder of 2013.

So with that, Operator, we will open the floor for questions.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) One moment, please, while we poll for questions. Our first question comes from the line of Ted Drangula with Morgan Stanley. Please proceed with your question.

Congratulations on a very good quarter.

Thank you, Ted.

So I guess I had a question on the second quarter, which, obviously, seasonally is a big one for fertilizer and nitrogen.

So you guys have 75% of your sales booked. And I guess you're somewhat insulated then from all the stuff that's going on out there. I mean, I'm hearing about snowstorms in areas north of you, but -- and fieldwork that's been delayed in a lot of cases.

How do you guys see the season playing out? And I guess, are you happy that you've -- it sounds like you might be happy you've booked 75% of your production, because I don't know if it's all going to get sold. I mean, how do you guys think about that?

Well, we are happy we have that production level booked, and it's not untypical for us to have this level of production booked this time of year. And so we like our book in terms of production and this is really like where we're positioned for the first half of the year. As you know, nobody's going to have any information about the second half of the year until we get over into June. But yes, we like our position.

Might not be a bad time just to comment about the impact of the late planting, though. I think there are a couple areas where the late planting comes into place. Will it reduce acreage? I think there's some thought that it could be anywhere from no change on the government's projection to as much as 1 to 3 million acres. But even if you saw that decline, we're still looking at the second highest year planting that we've seen probably in the history of corn planting in the US.

I think the bigger impact will really be around yields. And if you start getting past May the 15th on planting, you will start seeing projections for yields to come down. As I said earlier, I think they're optimistic to begin with. But as you move through May, you start having an impact on the yield.

And so, but I think most people feel like that we're still going to plant a pretty big crop this year, probably, as I said earlier, in the 94 million plus acre range. I think the yields will come down to a number that's still going to look favorable to a farmer, but actually may have some benefit longer term because we'll have a lower stock-to-use ratio coming out of this year.

I think the real question is what's the impact on nitrogen if that happens, if we see the, based on the sort of late wet weather, the real impact on nitrogen, assuming the planting moves forward somewhere in the month of May, is really only related to if we have some reduced acreage.

And there actually could be a positive benefit in there, for those of us that are in the -- that are selling UAN, because with the weather being wet, you're going to see a shift to UAN and urea away from ammonia.

So there could actually be some positive impact from us based on the kind of products that we produced. And I don't think anybody believes we're not going to still see a big corn crop this year.

Okay, great. And I guess just thinking about how the pricing dynamics are from first quarter to second quarter, could you just give us some maybe just some directional color on have prices kind of held in or should we expect them to be up for your results in 2Q versus 1Q?

And then on the volume side, I would expect we'll probably see ammonia coming down. I think you've said in the past you'd be selling a few tons --.

Yes.

-- but maybe less than 10,000 or something, and UAN going up quite a bit. Maybe just some help there.

Well, certainly, you're going to see our UAN production up. The plant's running well. We're running at -- today we're running at some very high rates on conversion. And generally, I think we've talked in the past that we'll end up 50 tons to 60 tons a day maybe of ammonia. So not a lot of ammonia going to be there.

So yes, we're going to be really a UAN seller, and a producer and seller, for all practical purposes, in the second quarter.

Obviously, we don't put out a lot of -- put out any information on our pricing in advance. We're pleased with what we've seen in the second quarter and we -- you can see some spot prices out there that are posted, and spot prices are still very strong for UAN right now.

But we, like I said, we sold forward, but when we look at our overall book, we're very happy with it, and, yes, those prices are probably going to be a little bit stronger than you saw this quarter.

But I'm not going to provide any more specifics than that around the pricing. But it's shaping up to be a good quarter for us.

Great. Thanks.

Thank you. Our next question comes from the line of Matthew Korn with Barclays. Please proceed with your question.

Could you maybe talk a little bit about the outlook for your pet coke costs? And I think remind us, maybe, when the contract ends for your [extra] refinery purchases. And then also maybe discuss a little bit of where the current cost level puts you on the UAN cost curve relative to the current kind of higher natural gas price.

Okay. Well, first of all, the contract, the third-party contract goes through this year. Right now, we are paying what I would say market price is for what we buy from the refinery, and that's based off of the [PACE] index. And we'll call that number, just call it $30. I mean, it depends on transportation and all, but just call it right at $30.

And when this contract we're under expires at end of this year, we would expect that contract to also move to market prices. And right now we think the outlook for pet coke is pretty much what you see today. I don't think you see a lot more downward movement, but I don't think you see any upward movement. There might be a few dollars downward left in that number.

So we hope by the end of this year that really all of our pet coke price is more inline in that price of, let's just call it $30 a ton.

And right now, relative to --.

I'll answer your second question had to do with sort of with pet coke prices in that range, where do we come out in regard to natural gas prices and comparing to that. If you look at a Henry Hub price and then add in some, just say Henry Hub and call it -- let me back up from that.

About a $3 delivery price to the plant that we will be competing with. So if you assume there's $0.25 transportation in that number, then you're back to a Henry Hub price of about $3.75. I think our number's like $3.95, less transportation. So maybe you're down at closer to $3.70 on a Henry Hub price, which, obviously, we're back on the positive side of that equation when you look at the forward curves.

Right. And maybe just another thing, kind of a different angle here. But is there any expectations after the recent event, the disaster in west Texas, any additional regulation, safety requirements, other kinds of legislation, maybe impacting the industry that you're hearing? Does it add any maybe potential complications for building out additional storage facilities? Anything like that that you're hearing?

Well, it's a little early to hear a lot. I think for sure what you're seeing is we know there's going to be a lot of discussion around what type regulations are in place for that type of facility.

Now, obviously, we're a very different type facility. We're a manufacturing facility. They were a storage and blending facility. We already come under much more stringent regulatory, both environmental and safety requirements.

And I personally don't anticipate that we're going to see anything that's really going to back up to your manufacturing facilities into any kind of significant change. You may well see a little -- some -- a lot of focus on the state regulatory levels for regulating the type of assets that was in west Texas.

In terms of our terminals, maybe there should be discussion around that, but I would just tell you, first of all, we don't store any urea ammonia -- we don't store any ammonia nitrate at our terminals. We're only storing UAN, and that is a pretty benign product.

All right. Thanks very much.

Thank you. (Operator instructions) Our next question comes from the line of Adam Samuelson with Goldman Sachs. Please proceed with your question.

I was hoping, Byron, you could comment just some thoughts. You've seen a large disconnect this spring between urea and UAN prices and you've also seen a large disconnect between NOLA and some of the inland prices, certainly there's been pressure in the international markets. And you haven't really seen that kind of move upriver yet.

Maybe just some thoughts there. And what gives you confidence that that disconnect can really stay in place as you move out of the spring, assuming really no meaningful change at NOLA?

Well, I mean, I think, we'll actually start with urea and why are we seeing really a downward trend in urea prices. We've not seen that stronger trend in the UAN prices. And that's just there've been a lot more imports, and a lot of that has been, whether it's directly or indirectly, really related to what China has done in terms of their exporting a lot higher urea than you normally see.

Some of the discussion around that is expect to see that to come back into more normal levels for the remainder of the year. Apparently they've been working off some inventory.

But as UAN goes, in the market area, first of all, we really saw a strong demand in the spring that held up, I think UAN prices nicely in light of what was going on with urea. And we know it for certainly it -- we have a strong spring for ammonia prices.

So, and then, as I get into what's ahead of us over the next few months, I really think that the planting conditions are very favorable to UAN, and I really expect to see UAN prices stay up quite nicely throughout the second quarter.

And so far as the product moving up the river in the barges, yes, you're right, we haven't seen an impact. I've been a little surprised maybe there. But again, I think that the liquid fertilizers, the UAN fertilizers have continued to hold strength pretty much in all areas across the company, just because of the ability to get the product out in the fields.

Yes. And maybe just on that point, I mean, as you think about on kind of a dollar pound nitrogen content per pound basis, I mean, the spread between urea and UAN is very wide right now relative to historical norms. I mean, is that just the ease of applicability of UAN versus urea really supportive of that on a sustainable basis? Or do you think that's got to narrow at some point?

Well, I mean, I think you've got to go back, and, when you say historical basis, not look at just the last year. I mean we saw -- last year we saw where urea actually had a price premium over UAN. But if you backed up a number of years, that really has not been the case.

And we saw the UAN curve sort of switch back over on the urea curves beginning around midyear last year and it continued to grow. And so right now, I would say the premium is -- for current premium is probably a little high, but the trend is more in the normal range that we've seen over the last, say 4 years.

And so I would expect to see this, especially as we move through the spring and the advantages our product's got is that we're going to see that spread stay. It may not stay - I don't know, what is it, maybe a $0.15-plus premium right now on a pound basis, nitrogen pound basis. But I think you're going to see that premium stay there.

Okay, that's helpful. And then just on the capital projects, appreciate that you're still working through some of the detail there and you'll get some additional clarity over the next several months.

But maybe at a high level, just remind us of kind of some of your targeted return hurdles. And clearly you've got some excess cash on the balance sheet. And just make us maybe just some parameters on some of the targeted returns there.

Well, I mean, generally, when we look at investing in growth capital and you just look at an internal rate of return basis, we are 14, 15 sort of becomes the norm, although, when we're talking about plant enhancements, we're looking at things that could be more in the 18% to 20% range when you're just coming in to do an improvement to what you've got.

So we're looking at the mid- to the high teens as normal expectations we have for investing capital into enhancement and into growth projects.

Okay, that's helpful. Thanks very much.

Ladies and gentlemen, we have come to the end of our time for questions. Mr. Kelley, I'd like to turn the floor back to you for any closing comments.

Well, again let me thank all of you for joining us today. We are excited about the quarter we've just had. But even more so, we're excited about the year that's ahead of us and about the value we think we're going to be able to deliver to our unitholders.

And so again, we appreciate your interest. We appreciate all the confidence that our unitholders are placing investing to us, and we look forward to what should be a very successful year.

So we thank you again. Have a good day.

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