CVR Partners LP (UAN) 2015 Q1 法說會逐字稿

Greetings, and welcome to the CVR Partners first quarter 2015 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 of Business Analysis for CVR Partners. Please go ahead, sir.

Thanks, Kevin, and good morning, everyone. We appreciate everyone joining us today for the call. As usual, with me today are Chief Executive Officer, Mark Pytosh; and Chief Financial Officer, Susan Ball.

Before Mark and Susan discuss our recent results, I will provide 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 2015 first quarter results press release that was 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 noncash share-based expense -- share-based compensation, excuse me.

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

Thank you, Wes, and good morning, everyone, and thanks for joining us for today's 2015 first quarter earnings call.

As a follow-up to our strong 2014 fourth quarter, I am pleased to report that we kicked off 2015 with a successful first quarter. Financial highlights for the period included revenue of $93.1 million, adjusted EBITDA of $38.4 million and net income of $29.8 million.

In today's press release we also announced a 2015 first quarter distribution of $0.45 per common unit. The distribution will be paid on May 18 to unitholders of record on May 11.

We've discussed on previous calls that our major plant turnaround is scheduled for the 2015 third quarter. In anticipation of the $6 million estimated expense for the three-week turnaround, our distribution for the first quarter of 2015 includes the impact of a $3 million reserve. We anticipate an additional $3 million reserve impact to our second quarter distributions.

During the third quarter we expect to release the $6 million reserve. This will help partially offset the full impact of the turnaround, which is a combination of the estimated $6 million of expense and three weeks of foregone production.

As we look beyond 2015 we anticipate moving back to a two-year cycle for turnarounds. As a result, our next major scheduled plant turnaround for Coffeyville is scheduled or targeted for the second half of 2017. At this point we are considering setting aside a similar reserve over the seven quarters preceding the 2017 turnaround.

Now turning our attention back to this year's first quarter, supporting our results for the period was continued solid operating performance at the plant. During the first three months of 2015 the gasifier ran at 99%, the ammonia unit operated at 94%, and the UAN plant ran at almost 98%.

Looking at product tons during the quarter, we produced 96,000 tons of ammonia. We purchased 21,200 tons of ammonia as feedstock and we converted the substantial majority of our ammonia into 252,100 tons of UAN.

For the first quarter of 2015 we received an average realized gate price for UAN of $263 per ton. This is compared to the $247 per ton we recorded in the 2014 fourth quarter and the $253 per ton we reported for the first quarter of 2014.

For ammonia we received an average realized gate price of $553 per ton in the first quarter of 2015 versus $547 per ton in the 2014 fourth quarter and $479 per ton in the first quarter of 2014.

I will now turn it over to Susan to discuss our detailed financial results. Following that I will provide some concluding remarks and then open it up for Q&A. Susan?

Thank you, Mark, and good morning, everyone.

As Mark mentioned, net sales for the 2015 first quarter were $93.1 million. This is compared to $80.3 million in 2014. The key factors contributing to the increase were higher sales volumes and prices for both UAN and ammonia, as well as the increased hydrogen sales to the CVR Refining's adjacent refinery.

Cost of products sold for the 2015 first quarter was $25.8 million, as compared to $21.7 million in 2014. Driving this increase was higher sales volumes and third-party ammonia purchases. Partially offsetting the overall increase were lower costs for regulatory required rail car inspections and repairs.

Direct operating expenses were $24.4 million for the 2015 first quarter, just slightly higher than the $24.2 million we recorded for the same period in 2014. Selling, general and administrative expenses for the 2015 first quarter and the first quarter of 2014 were similar, at $4.6 million for both periods.

Finally, net income for the 2015 first quarter was 39% higher year over year, at $29.8 million, or $0.41 per common unit. This is compared to net income of $21.5 million, or $0.29 per common unit, for the first quarter of 2014.

Now looking at our capital spend, during the 2015 first quarter we spent $2.7 million on capital projects, including $1.3 million for maintenance CapEx. For the 2015 full year we continue to anticipate to spend $10 million to $12 million on maintenance CapEx.

Finally, our liquidity at the end of the 2015 first quarter remained strong, as we had approximately $73 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 for his closing formal remarks.

Thanks, Susan.

At the end of March the USDA released its Prospective Plantings report that included a planting estimate of 89.2 million corn acres for this year. This is less than 2% lower than the 90.6 million acres of corn that the USDA estimates were planted in 2014. As such, a significant amount of nitrogen fertilizer is being applied by farmers during this year's spring planting season.

To date we have sold a significant amount of our expected production of UAN for the 2015 second quarter. Combined with the actual first quarter pricing, we continue to expect our average gate price for the six-month period of 2015 will be similar to the same period for last year.

As we have discussed in the past, we will not have a solid view of pricing levels for the second half of 2015 until we get closer to the fill season, which typically begins in the second half of June or early July. At that point the industry will estimate the potential strength of the fall harvest and the related impact on year-ending corn inventory levels. This will have an influence on the market view of how much corn could potentially get planted next spring, which in turn could impact this year's fill prices.

Also impacting fill pricing will be the additional nitrogen supply in Iowa and Louisiana scheduled to begin coming online toward the end of this calendar year. It is important to keep in mind that even with this new capacity the US will remain a net importer of nitrogen fertilizer, with domestic prices influenced by the cost of imported tons into the US.

Given this backdrop and solid industry fundamentals, we continue to have a positive view on the long-term health of the US nitrogen fertilizer business; and with our plant's strategic location near the Corn Belt, CVR Partners is well positioned for success.

We also continue to search for attractive strategic opportunities to expand beyond our current operations. We'll be thorough and judicious in our evaluation of all internal and external initiatives and will invest in opportunities that are expected to grow our distribution. Our focus continues to remain, as it has historically, on safely and efficiently operating the business and prudently deploying capital for the long-term benefit of our unitholders.

With that, we are ready to answer any questions you have. Kevin?

(Operator Instructions)

Adam Samuelson, Goldman Sachs.

Congratulations on the strong quarter. Maybe first help us think through, I mean, we're through April at this point. I mean, you're a decent way through spring demand. What visibility, if any, do you have on summer fill season at this point, or just is it just too early to tell?

It's really too early to tell. And it -- we -- it was a bit of a late start, so we're -- it's picked up momentum here in the last week, and so things are moving faster and we're getting back on track to normal planting. But we really need to get through the middle of May to get the corn in and then start to look at what the sidedress is going to look like, and that'll really kind of tell us where things are shaping up going into the summer.

So it's too early to tell. But what we're seeing so far is that it's been a decent planting season, a little bit behind. But things move pretty fast these days, so they'll catch up here pretty shortly.

Okay. And maybe along those lines, how do we think about the pace of this 2Q versus 1Q price realizations? I mean, clearly industry fundamentals globally have been softer. Domestic UAN has held in a little bit better certainly than urea. And I think the Verdigris downtime probably is contributing to that. But think -- help us think through the cadence of the spot sales in the second quarter relative to sort of the first quarter price realization.

Sure. We had -- we've been selling -- we sold tonnage for into the second quarter in the first quarter. UAN's held up pretty decently in the quarter. Urea's been soft. I don't think that's any surprise out there.

And urea is the front end. The dry product gets -- is applied first, and we're in kind of the throes of that. But, so urea, that softness is -- it hasn't had as big an effect on UAN, but it's certainly made it a little softer than it otherwise would have been, but not dramatically changing the price profile.

We typically -- we would typically see in any given year slightly lower prices toward the end of the quarter as you get closer to the fill season than the front end. And so it doesn't really look -- I wouldn't say it looks any different than what we normally see there. And, but UAN's actually held up pretty good.

And UAN, we think there'll be a pretty decent sidedress. And in our region Texas looks pretty good this year. And so Texas last year consumed a bunch of the UAN towards the end of the quarter, and it looks like this year you're going to have a similar run down in Texas, and that'll help us where we're located in Coffeyville.

So, yes, it's been a little bit softer, but it hasn't had a dramatic effect. In fact, urea's recently rallied pretty decently in the last two weeks, so should help us as we get towards the end of the quarter and into the fill.

Okay, that's helpful. Maybe just one more for me on capital allocation. Any new color or thoughts on growth investments or the M&A landscape as you see it today relative to the last time we spoke a few months ago?

Yes, I think that we continue to see some interesting opportunities out there. I think the landscape is evolving with the new capacity coming on and some changes in what people are -- where they're headed strategically.

So we're -- we continue to evaluate opportunities for ourself and seeing if there's a good economic opportunity for us that would increase the distribution. But I think the rest of this year and into next year we're going to see some opportunities in the nitrogen business.

And so you'd say that the opportunity set is richer today than it was 3, 6 or 12 months ago? Is that a fair characterization?

I do. I think it's -- some things are picking up. We're seeing more activity and different activity, and so there's more to look at now than there was six months ago.

Okay, great. I appreciate the time.

(Operator Instructions)

Lin Shen, HITE Asset Management.

I just wanted to follow up about this Q2 price question. You mentioned that you expect the first half of this year the price is going to be similar to last year. And now, already reporting Q1, the price is better than last year's price, so that I guess should we expect their Q2 price is going to be weaker than last year?

It's too early to call that versus last year. But typically we would see -- last year was a little bit different, but we would typically see a little bit of a decline in pricing again as you get towards the end of the fill season. So fundamentally we'd see the normal seasonal pattern there. But I wouldn't say it's a -- we don't see a big change in the pricing structure in the marketplace right now.

Great. And also, to prepare for the turnaround in the third quarter, you're going to reserve $3 million this quarter and $3 million next quarter. Does that mean that in the third quarter you will only lose about three weeks of volume but nothing -- because you're going to reserve other capital for these first two quarters? Am I right?

Yes, that's correct. And so the expense that we would normally show on the P&L would have already been reserved. So the only impact on our results will be fundamentally from the lost production.

Great. And now for the last question for me is that you mentioned that you are seeing more activity in the -- and opportunity in the M&A market. One of your competitors already publicly announced that they already hired a banker to -- basically their asset is for sale, which is a very good location. So I'm just wondering here what do you think about, like, do you think their market is going to be compatible for you to bid any asset, or you think that probably the buyer is limited, probably you have a good chance?

Well, I think that we typically would look at any kind of nitrogen assets that are out there in the marketplace, and there are several things that are out in the market that we're looking at. And so that's where our core strength is in this company, and we would be typically looking at that.

But I think there are going to be several things that are going to be potentially interesting for us and that it's going to come down to whether the economics make sense for us or they don't. But I think that things are changing in the nitrogen business. The structure of the market is changing, and that will provide some opportunities for CVR.

Could just one follow-up that, I mean, the only one we're aware is there your competitor, another MLP, has also tried to sell asset. But you mentioned there are a couple of things. So can you talk a little bit more about other than that?

Well, we don't really comment on activity that's out there, but there are other assets that are out in the marketplace. So it's not just that plant.

Oh, really. And also the last one is -- so I'm just wondering, you talked this before, your sponsor, CVI, probably will like to provide capital, if necessary. I'm just wondering see that [was relating] these for the sponsor to help you to make some deals.

Well, I think that we have the flexibility with our C-corp parent to -- it gives us flexibility to look at things, and if we need capital we have a ready source of capital to draw upon if needed, if a transaction's large enough. So it gives us the flexibility to look at a lot of different things that might not initially fit well under the MLP but come later. But it gives us that option to look at something that could potentially in the future help us and be dropped down into the MLP. So that gives us a little bit of a leg up, and that gives us the flexibility to be creative. And we will use that if we -- if needed.

Great. Thank you very much. Appreciate it.

(Operator Instructions)

Vincent Andrews, Morgan Stanley.

This is Neel Kumar calling in for Vincent Andrews. We've been reading trade journals about some farmers possibly substituting ammonia for urea, given the difference in pricing. And we're just wondering if you've seen this trend at all.

I would say that there was probably here in this spring application some use of urea, more than -- it probably took some acreage this year relative to both -- UAN and ammonia have been priced at a premium to urea. So we think urea took some acreage. I wouldn't say it was a dramatic shift into urea, but I'd say on the margin urea probably took some.

But UAN is a lot easier to apply. UAN is better when conditions are dry. So UAN is -- I think we're still going to have good share there. So, and we had a good ammonia run, as well. The interesting thing was because the crop was so large last fall, the ammonia run was constrained, and so we saw a bigger -- even though urea was cheaper, there was a bigger ammonia run to catch up to what didn't get applied in the fall. So ammonia prices stayed strong in the marketplace.

So, again, urea was softer, but it's really firmed up here, and I think that we're probably reaching an equilibrium. It didn't pull the UAN down. So I think that period was a little bit artificially low for urea in that time period.

Great. Thanks.

We have reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

Well, again, thanks for everyone participating today, and we look forward to sharing with you our second 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.