CVR Partners LP (UAN) 2014 Q4 法說會逐字稿

Greetings, and welcome to the CVR Partners fourth-quarter 2014 conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Wes Harris, Vice President Business Analysis for CVR Partners. Thank you, Wes, you may begin.

Thanks, Kevin. Good morning, everyone. We appreciate your participation in today's call. With me today are Chief Executive Officer, Mark Pytosh; and Chief Financial Officer, Susan Ball.

As in the past, before we discuss our results, we will 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 today. 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 2014 fourth-quarter results press release that we issued earlier this morning. Adjusted EBITDA is an example of such non-GAAP measures. Adjusted EBITDA represents net income adjusted for depreciation, amortization, net interest expense, income tax expense and non-cash share-based compensation.

With these formalities out of the way, I'll turn the call over to Mark.

Thank you, Wes. Good morning, everyone. Thank you for joining us today for CVR Partners' 2014 fourth-quarter earnings call.

I'm pleased to report that we posted solid results across the board in the fourth quarter. Financial highlights for the period included revenue of $74.4 million, adjusted EBITDA of $33.5 million and net income of $24.8 million. In today's press release we also announced the 2014 fourth-quarter distribution of $0.41 per common unit. The distribution will be paid on March 9 to unit holders of record on March 2.

Financial highlights for the 2014 full year included revenue of $298.7 million, adjusted EBITDA of $110.3 million, net income of $76.1 million and distributions totaling $1.39 per unit. Driving our financial results for the fourth quarter was much improved operating performance as compared to earlier in the year. More specifically, during the period the gasifier ran at almost 100%, the highest level of 2014; the ammonia unit operated at 98%, also the highest level of 2014; and the UAN plant ran at 96%, near the highs for the year.

Given this backdrop for the fourth quarter, we produced 105,900 tons of ammonia, the highest quarterly level for 2014. We purchased 3,900 tons of ammonia as feedstock, and we converted the substantial majority of our ammonia into 259,600 tons of UAN. This left a balance of 4,400 net tons of ammonia available for sale. To date, for the 2015 first quarter, we continue to see good production rates. Our operations team is working diligently to continue this trend as we approach our estimated three-week plant turnaround currently scheduled for the third quarter.

Turning to product pricing. As discussed on our last earnings call, in late June we entered into agreements and locked in pricing for the significant majority of our expected UAN production for the second half of 2014. For the fourth quarter of 2014, we received an average realized gate price for UAN of $247 per ton. This was fairly flat with the $254 per ton we recorded in the 2014 third quarter and $253 per ton we reported in the 2013. For ammonia, we received an average realized gate price of $547 per ton in the fourth quarter of 2014 versus $503 per ton in the 2014 third quarter and $478 per ton in the fourth quarter of 2013.

I will discuss our outlook for 2015 product pricing in my closing comments. Prior to that, however, Susan will discuss our detailed financial results for this quarter. Susan?

Thank you, Mark. Good morning, everyone. Net sales for the 2014 fourth quarter were $74.4 million compared to $84.3 million in 2013. The key factors contributing to the decrease were lower sales volumes for UAN, lower hydrogen sales to CVR Refining to adjacent refineries, and lower UAN prices. Partially offsetting the overall decrease was higher ammonia sales volumes in 2014.

Cost of products sold for the 2014 fourth quarter was $15.4 million as compared to $18.9 million in 2013. Driving the decrease was lower third-party ammonia purchases as well as lower freight expenses due to the reduced UAN sales volumes. The overall decrease was partially offset by higher costs for regulatory required rail car inspections and repair. We have more than 750 UAN rail cars in our fleet, and each is required to be inspected every 10 years. Following inspections, a number of corrosion related repairs are typically made to the cars.

In addition, we have been adding liners and replacing valves with stainless steel versions to limit the amount of corrosion repairs required between these inspections. In 2014, we spent a substantial amount on rail car inspections and related repairs as almost a quarter of our fleet came due for inspection. For 2015, we expect to spend far less on these activities as a much smaller portion of our fleet is due for inspections as compared to 2014.

Direct operating expenses were $21.7 million for the 2014 fourth quarter as compared to $23.4 million for the same period in 2013. This decrease was primarily attributable to a net nonrecurring utilities reimbursement as well as lower catalysts and insurance costs. The overall decrease was partially offset by higher repairs and maintenance, refractory brick amortization, and chemical expenses. Selling, general and administrative expenses for 2013 fourth quarter were $3.8 million as compared to $5.3 million in the fourth quarter of 2013. Contributing to the decrease was lower general partner reimbursements and share-based compensation expense.

Finally, net income for the 2014 fourth quarter was $24.8 million or $0.34 per common unit. This is compared to net income of $27.9 million, or $0.38 per common unit, for the fourth quarter of 2014. During the 2014 fourth quarter we spent $7.6 million on capital projects, including $2 million for maintenance CapEx. For the 2014 full year, we spent $4.7 million on maintenance CapEx and $16.4 million on growth capital. Included in the growth capital spend was the purchase of 62 rail cars, the upgrade of our pressure swing adsorption unit to 12 heads and a number of smaller sized projects. For 2015, we expect to spend approximately $10 million to $12 million on maintenance CapEx.

Looking at our liquidity, as of December 31, we had approximately $80 million in cash and cash equivalents and $25 million available under our revolving credit facility. In addition, our long-term debt remained low at $125 million.

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

Thanks, Susan.

Since our last earnings call on October 30, we have continued to see strong UAN market pricing. Like others in the industry, we are waiting to see what the spring corn planting will look like in 2014. Despite the record harvest last year, we expect 88 million to 90 million acres of corn will be planted in 2015. In fact, this morning the USDA came out and announced an estimate of 89 million acres of corn planted. This is slightly lower than the approximate 91 million acres that the USDA estimates were planted last year. Given this backdrop, we anticipate continued strong demand for UAN.

At this point, we have sold substantially all of our expected production of UAN for the 2015 first quarter and a significant percentage of our anticipated production for the second quarter. As such, we currently expect average gate prices for the first half of 2015 will be similar to 2014. As we look to the second half of 2015, we will not have a solid view of UAN pricing levels until we get closer to the fill season, which typically begins in June or July. At that time, the industry will take into consideration how much corn was planted this spring, how well the crop has done since planting and projected yields for the fall harvest.

Also impacting pricing for this year's fill season will be the additional nitrogen supply scheduled to begin coming online toward the end of this year. Sources include the new OCI plant, Weaver, Iowa and CF's expanded facility in Donaldsonville, Louisiana. While pricing could be choppy as the new tons are absorbed into the market, it's important to note that the US will remain a net importer of nitrogen fertilizer once all of these plants are fully online. As such we expect domestic prices will continue to be influenced by the cost of tons imported into the US.

Although pricing for the back half of the year is still to be determined, we currently expect 2015 will be a beneficial year for the Partnership and its unit holders. As discussed in my opening comments, it's important for investors to keep in mind our plant turnaround project scheduled for the third quarter. We currently expect the combination of foregone production and subsequent sales for the estimated three weeks of down time and $5 million to $6 million of spending for repairs and maintenance will impact our 2015 full-year distribution by up to $0.20 per unit.

As we look beyond this year, while there's always the risk of short-term volatility given the inherent nature of the commodity cycle, the longer term fundamentals for the US nitrogen fertilizer industry remain intact. The anticipated combination of increasing global population, decreasing arable land per capita, continued evolution to more protein-based diets in developing countries, sustained use of corn as a feedstock for the domestic production of ethanol, and positioning at the lower end of the global cost curve provides a very solid foundation for nitrogen fertilizer producers in the US.

In addition we expect that nitrogen producers like us, located in or near the corn belt, will continue to enjoy a cost advantage compared to producers with facilities located further from the corn belt. Given this environment, we believe external opportunities will present themselves that should allow us to expand beyond our current operating footprint. As we have done in the past, we will always identify and exceed on internal initiatives designed and incrementally grow distributions for our unit holders. As such, we continue to have a positive long-term outlook for the industry and our business specifically.

We appreciate your interest in the Partnership and look forward to keeping you apprised of our progress. With that, I think we're ready to open the line for Q&A. Kevin?

(Operator Instructions)

Our first question today is coming from Adam Samuelson from Goldman Sachs. Please pretend with your question.

Thanks, good morning, everyone. A question on the market and the sales strategy. I believe the historical practice as a company has always been, you really fill up most of the spring wire book in December and January and most of the fall and second half order book in June, July. Have you left a little bit more tons unsold into the second quarter to capture some market opportunities? Could you talk about how the sales strategy for the first half maybe differs, if at all, from prior years?

I wouldn't say that it's really different from prior years. We had a lot of availability in the book, which we typically would have. In the fill season, we might sell a little bit into the first quarter, but the second quarter we usually wouldn't start filling until late in the winter and into the first quarter.

We saw a -- we've seen a good wheat top dress season already, which started a little bit earlier than normal and has been consuming tons. There's been some production issues in the corn belt plants, so we have seen a relatively tight UAN market and see continued inquiry about second quarter tons. We would expect to go in strong through into the fill season this year. With that kind of planting on 89 or 90 million acres, we should see a good strong spring planting season. We feel really good about the market in the first half. We have a good first quarter. Now, we just need to maintain these high levels of production so we can deliver a lot to have tons into the marketplace.

That's helpful. As you think about a weak and shortened fall application season on ammonia in the fourth quarter, do you have an estimation of how much nitrogen content and incremental UAN demand you could actually see in the US in the second quarter?

It's a little bit hard to, I would say, quantify the pieces there. I would say that the ammonia application will fall, because of the size of the corn crop. And not getting that crop out of the field as rapidly as normal has probably shifted tonnage to UAN going into the spring plant. There's some catch up that needs to be done. It depends -- a lot of it is geographic, so where the corn crop was heavy, will be probably where there will be greater UAN going into those markets because they didn't get as much ammonia application, so we see that.

The other component, in addition to the weak top dress, is we have been seeing good moisture in Texas. There will be incremental consumption of tonnage in Texas this year, that in previous years we didn't see as much of that. We would expect to see -- we had a good year last year, looks like this year is shaping up to be similar. We're seeing, if anything, it's tight. The UAN is pretty tight in the mid continent. We expect that to continue all the way through the planting season.

All right. Thanks, that's very helpful. Mark, in your closing remarks, you talked about future cap allocation opportunities, i.e the cash has been sitting on the balance sheet now for a while. There hasn't been any, really anything done about it in certainly the last year, and the CapEx outlook at least $10 million, $12 million of maintenance doesn't suggest any big internal initiatives underfoot. Can you talk about the opportunities to really deploy that excess cash balance and use the balance sheet more aggressively, and confidence you have that something might actually be done there in 2015?

I would tell you, Adam, that we always felt that there would be some evolving landscape in the nitrogen side of the business. You've probably have seen the Rentech announcement. We believe there's going to be more changes coming on the horizon. We have preserved our powder waiting for those opportunities to come along to deploy it. We're in a great position. We have got a strong balance sheet. We're going to be disciplined in how we evaluate the economics. It's got to be beneficial for the unit holders.

We think that with the new capacity and some changes on the landscape, there's going to be more opportunity to deploy capital and participate in the changing landscape. We're pretty excited about the opportunities the next two or three years. There's going to be some changes, so we'll be looking to participate. We have the balance sheet and the parent company balance sheet to participate in larger events.

Okay. That's helpful. One quick last one for me, the three-week turnaround in the third quarter. It's my understanding that these turnarounds typically have been two weeks in the past, or am I just mistaken? If it's a three-week turnaround, what's changing that?

It's typically been between two and three weeks. I think it's been high teens days, it's been the traditional, so there's nothing unusual about our turnaround. It's a normal turnaround this year. We have gone through a long stretch, because our last one was 2 1/2 years ago. This will be a three-year turn, but there's nothing unusual in our turnaround this year.

The plant has been running well. We had a tough stretch last summer, but we have had a really decent run here through the fourth and into the first, so we're going to continue to maximize what we have until we take the plant down. We've got some, I think, some great initiatives, small things that are going to go through the in our turnaround to try to improve the efficiency of the plant for fall work.

We're going to tackle probably more than normal. That's not going to change the schedule, but we do want to squeeze some efficiency out of that plant when we take it down for that period. That will be part of our turnaround plan this year.

All right. Great. Thanks very much.

Thanks, Adam.

(Operator Instructions)

Our next question today is coming from Doug Christopher from Crowell Weedon. Please proceed with your question.

Thank you. Thank you for taking my question. Regarding the extra spending on the tank cars or the more intense spending this last year, could you give us an approximate maybe how much that was?

It was a little over $8 million. What it does for us is we continue to -- is that the tank car capital or the tank car inspections?

Well, the inspections. Where would it be in the income statement?

Okay. The inspections were more like $11 million.

Okay.

But just to comment while we got onto that topic, if I might, because I thought you were heading that way. The purchasing the tank cars is expanded our footprint to deliver tonnage to the greater part of the US. As the market evolves and the new capacity comes on, this gives us the option to move tonnage to other markets and continue to move and achieve the highest gate pricing that we can, so that we were fortunate enough to get pretty quick into the queue. We've expanded our fleet and that really gives us an advantage to deliver UAN tonnage in a lot of different markets in the US effectively. That was a good investment for the Company this year, and it's going to help us as we get into 2016 and beyond.

Thank you. Where would that be included in the income statement? Is that a direct operating expense? What is that, the inspections?

It's in the cost of products sold.

Okay. Good. Was that more evenly spread through the quarters?

It was pretty -- I would say pretty evenly hitting each quarter, a little heavier towards the second half.

Okay. Thank you. Then lastly, in describing the prices, expecting prices to be similar to last year. When you said that, do you expect it to be similar on the same quarter, year-over-year comparison, or similar to the prices for the year?

The way I look at it is the first half and the second half.

Okay.

The first half, the pricing and the second, they look -- the first half is what we have visibility on, is similar. It might not be exactly the same in each of the quarters, but as -- if you aggregated the tonnage for the first half, it would look similar to last year. Those were good priced tons last year, higher than the second half. So, we should see good pricing on the tonnage in the first half of the year.

Thank you very much.

Thank you. We have reached the end of our question-and-answer session. I would like to turn the floor back over to Management for any further closing comments.

Again, just want to appreciate everyone attending this morning. Thank you very much, and we'll be talking to you in a couple months on our first-quarter results. Thank you very much.

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