CVR Partners LP (UAN) 2016 Q1 法說會逐字稿

Greetings, and welcome to the CVR Partners First Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only-mode. A 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 Business Analysis for CVR Partners. Please go ahead, Wes.

Well, thanks Kevin, and 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.

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 financial measures, including reconciliations to the most directly comparable GAAP financial measures, are included in our 2016 first quarter results press release that was issued this morning. Adjusted EBITDA is an example of such non-GAAP financial measures. Adjusted EBITDA represents net income adjusted for depreciation, amortization, net interest expense, and other financing costs, income tax expense, major scheduled turnaround expenses, non-cash share-based compensation, and expenses associated with the Rentech Nitrogen Partners acquisition.

So with this out of the way, I'll turn it over to Mark.

Thank you, Wes. And good morning and thanks for joining us on today's call. Following the record production levels, we posted a Coffeyville during the fourth quarter, we were pleased to follow that with another quarter of solid operating performance of the facility. Summarized financial highlights for the 2016 first quarter included revenue of $73.1 million, adjusted EBITDA of $27.9 million and net income of $18 million. In today's press release, we also announced the 2016 first quarter distribution of $0.27 per common unit, which will be paid on May 16, 2016 to unitholders of record on May 9, 2016. I would note that the distribution includes approximately $0.06 per unit to reflect Rentech Nitrogen Partners' available cash for distribution for the first quarter. The $0.27 distribution also includes a larger number of units, a 113.3 million as a result of the acquisition that closed on April 1. While we incorporated Rentech Nitrogen's first quarter distributable cash in our distribution, we did not include their first quarter results in our financial statements. I will talk about our acquisition in more detail in my closing comments.

As discussed on our last earnings call, during the Coffeyville plant turnaround in July, we performed extensive repairs and maintenance as well as modifications to allow us to run a higher rates of production. These activities have proven successful based on the high level production we continue to see at the plant. As we mentioned previously, we expect to further increase our ammonia production in the second half of the year once the new hydrogen plant at CVR refining's adjacent refinery comes online. At that point, we expect to taken up hydrogen to allow for additional ammonia production of 50 to 75 tons per day. This incremental ammonia will be sold into the fertilizer market and not upgraded to UAN, as the plant is operating at/or near-traded UAN capacity.

Looking into more detail on our first quarter operations, Coffeyville gasifier ran at almost 98%, the ammonia unit operated at 97%, and the UAN plant ran at 91%. During the first quarter, Coffeyville produced 113,700 tons of ammonia of which we converted the substantial majority into 248,200 tons of UAN.

Turning to pricing. For the 2016 first quarter, Coffeyville received an average realized gate price for UAN of $209 per ton. This is compared to the $263 per ton for the first quarter of 2015, and $221 per ton for the 2015 fourth quarter. For ammonia, Coffeyville received an average realized gate price of $367 per ton in the first quarter of 2016, versus $553 per ton in the 2015 first quarter, and $479 per ton in the fourth quarter of 2015.

I will now turn the call 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. As Mark mentioned, our first quarter of 2016 does not include the financial results for Rentech Nitrogen. We will include those results beginning with the 2016 second quarter. Net sales at Coffeyville for the 2016 first quarter were $73.1 million as compared to $93.1 million in 2015. The primary driver of the decrease was lower pricing for UAN and ammonia, reduced hydrogen sales to CVR refining's adjacent refinery and lower sales volumes of UAN. Partially offsetting the overall decrease for the period was higher ammonia sales volumes.

Cost of products sold for the 2016 first quarter was $16.3 million as compared to $25.8 million in 2015. The decrease was substantially associated with the reduction in third-party ammonia purchases and pet coke expenses. Direct operating expenses for the 2016 first quarter decreased to $23.7 million from $24.4 million in the prior year period. The primary driver of this slight decrease was lower utility expenses that were partially offset by higher costs for outside services.

Selling, general and administrative expenses for the 2016 first quarter were $6.4 million as compared to $4.6 million for the first quarter of 2015, contributing to the increase was $1.2 million of expense related to the Rentech Nitrogen acquisition, as well as higher service agreement expenses.

Finally, we recorded net income of $18 million or $0.25 per common unit in the 2016 first quarter. This is compared to net income of $29.8 million or $0.41 per common unit for the first quarter of 2015.

During the 2016 first quarter, we spent $1.7 million on capital projects at Coffeyville including $900,000 for maintenance CapEx. For the 2016 full year, we expect maintenance CapEx spending of $7 million to $10 million for Coffeyville and between $10 million to $12 million at the East Dubuque facility. I would note that spending estimate for East Dubuque is for the nine-month period between April and December of 2016.

In terms of growth capital spending, East Dubuque is expected to increase reliability, production and plant efficiency through the replacement of its ammonia synthesis converter. The project is expected to be complete by the end of the summer at an estimated post-acquisition spend of $8 million to $11 million.

Now turning to the balance sheet. As of March 31, we had $52 million in cash and cash equivalents. In addition, our total term debt was $125 million. On April 1, in connection with the closing of the acquisition of Rentech Nitrogen, we entered into a $300 million senior term loan facility with Coffeyville resources, a wholly owned subsidiary of CVR Energy and [sole] member of the General Partner of CVR Partners.

We use the facility to pay the cash consideration and certain fees and expenses for the acquisition, as well as paid off the amounts outstanding under Rentech Nitrogen's credit agreement. In addition, we use the facility repay CVR Partners $125 million in the outstanding term debt that was due earlier this month. On April 1, we also entered into a $320 million senior-term loan facility with American Entertainment Properties Corp., an affiliate of Icahn Enterprises. Icahn Enterprises and related affiliates own 82% of the common shares outstanding of our parent company, CVR Energy. The currently unutilized facility may be used to make a change a control offer and if applicable, a cleanup redemption in accordance with the indenture governing our $320 million of the 6.5% senior lien secured notes assumed as part of the acquisition.

As an alternative, this facility may be used to make a tender offer for the second lien notes and in each case pay any related fees and expenses. Both of the facilities are for a term of two years with an annual interest rate of 12%. We view the two facilities as bridge financing that provides us with the enhanced flexibility given there are no related fees and either can be repaid at any time without penalty. In the coming weeks, we will have better clarity as to what will happen with the $320 million of the second lien notes. At that point, we will determine potential next steps, including the option of raising capital in the credit markets to pay down all or a portion of any borrowings under the two senior term loan facilities.

With that I'll turn the call back to Mark for his closing remarks.

Thanks, Susan. During the first quarter, we saw volatile prices for nitrogen fertilizer that were on average about 20% lower than the first quarter of 2015. Prices declined during the winter months, although very little products was bought or sold at these lower prices. A combination of leftover inventory from reduced fall application due to poor weather conditions, tons entering the US from other countries and customers waiting longer than normal to order product for spring delivery caused prices to fall. But as normal seasonal conditions returned in early March, prices recovered to levels comparable to the filled price from last summer and prices have stayed firm into April driven by the expectation of another size on planting of corn acres this spring in the United States.

The USDA confirmed this view at the end of March, when it came out with its initial planting estimate of 93.6 million acres which is 6% higher than last year's planting of 88 million acres. This estimate was much higher than industry consensus at the time and implies an even stronger need for nitrogen fertilizer this spring than what was anticipated in the time of our last earnings call in February. A lot of nitrogen has been applied since the start of the planting season and we expect additional orders during the coming weeks to meet the expected increase and demand from our customers.

Corn prices are critical variable for setting the UAN build price that usually occurs in June or July. Future corn prices are driven by a number of factors including the amount of corn that ultimately gets planted, harvest yields in the US and expected global supply and demand. During the fill, the Coffeyville plant typically sells forward a substantial portion of its second half production and agreed upon pricing with delivery spread over a multi-month period.

The East Dubuque plant also participates in the fill season and sells forward a significant amount of its UAN production. However, UAN represented only 52% of the East Dubuque facility's delivered nitrogen tons in 2015. For East Dubuque's marketed ammonia, which was 35% of its 2015 delivered nitrogen tons, most of its third quarter production we placed into storage in anticipation of shipping during the fall application season in the fourth quarter.

Since closing the acquisition of Rentech Nitrogen on April 1, I'm pleased to report that our extensive integration planning efforts allowed us to hit the ground running. The two companies have similar cultures and operating philosophies. So, our two management teams have been able to work together seamlessly. The first step was to remove a large portion of the corporate overhead on the Rentech side without adding significantly to CVR's overhead, which has been accomplished. We're also beginning to see the benefits in marketing and operating initiatives between Coffeyville and East Dubuque. We are confident that the combined synergies will over time achieve the $12 million we outlined in the August announcement.

The operating management team the both plants are working closely together to leverage their collective expertise on a number of activities including final planning for East Dubuque's plant turnaround scheduled for the latter portion of the 2016 second quarter. We expect the turnaround to last approximately 30 days with related spending of between $5 million and $7 million.

The strategic rationale for the acquisition remains firmly in place and we look forward to capitalizing on the opportunities afforded by our expanded footprint in new geographic markets, broaden customer relationship and diversifying feedstock. Additionally CVR Partners' strong presence in the southern plains region will be further enhanced through our UAN marketing arrangement we recently reached with LSB Industries for it's Pryor, Oklahoma facility.

When combined together with our Coffeyville and East Dubuque facilities, we will be able to offer our customers products in a broad geographic area, which we believe will be a greater value to them going forward. We expect the industry to continue to evolve in the next one to three years, and we'll look for additional opportunities to grow our business. As I've said many times in the past, CVR Partners will be thoughtful and patient in this process and pursue only those initiatives that are accretive to distributable cash flow and maintain our strong balance sheet.

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

Thank you. We'll now be conducting your question-and-answer session. (Operator Instructions) Adam Samuelson, Goldman Sachs.

Yes, thanks. Good morning, everyone.

Morning, Adam.

So, I guess my first question on the spring market and Mark in your prepared remarks you alluded to pricing returning to kind of where summer fill, I understand that you are returning near where summer fill levels were in the second half of last year and kind of FOB plant prices were in the mid kind of 220s last -- in the second half last year, but it's a bit stronger of an increase relative to your 1Q realization than you might see in the industry market pricing and then I just wanted to make sure I understood the comments correct?

What I would say is, it's still to be determined, because we -- I think April and May will be strong and June typically it tails off a little bit every June seasonally. So it's -- we had a drop in price and I think everyone saw the urea prices come down in January and then we had a big recovery and then the orders came flowing in because the customers had held off probably for another 30 days to 45 days longer than normal and then everyone came back in. And on top of that, the acreage numbers now turning out to be much larger, so we don't really -- we haven't seen that full demand profile appear yet on the 93 million acres. So, I don't really -- I can't really answer intelligently yet how that's going to play out, but it feels like there's going to be a big push for demand to fill out that acreage in the second quarter.

Okay. And that's helpful. And as you look at in your necessity for Coffeyville in your market areas, you've seen corn acres grow at the expense of wheat. Does that have any benefit or changed the timing of the order cadences, maybe you get some more top dressed corn later and into the spring, than you normally would for wheat acreage in your market area?

I would say, usually that's marginal in terms of the shifting of the acres in the corn and the wheat. Usually, the beans take a pull back more than the wheat acreage, but -- and [wheat] took much lower consumer for our plants than corn is, I would -- I would say that the weather has been -- there has been some storms that have flown through, so you get burst of activity and then they back off and then, then you got the side-dress, the reason I'm saying in the May and June is the side-dress side hasn't come on yet and we don't really know what how strong -- we think that's going to be very strong, but we don't really know yet, it has -- the orders are not coming in for side-dress. But I would say that the market started well in Texas, at least the way we see in Coffeyville that starts in the south and moves north, now we have East Dubuque, so we follow the map and the weather all the way to the north. So, usually January and February start in Texas and then we move Kansas, Nebraska then all the way up in East Dubuque, and we've seen that flow out. East Dubuque has been very strong in April, getting their usual run that we saw so the ammonia run was real strong in April, once the weather broke in East Dubuque. So we -- I called we've returned to normal, we started the first quarter in an abnormal conditions and it got to normal by March. And so, we've seen that product flow. And if anything it should come on a little stronger here in the second quarter if the 93 million acres are accurate.

That's helpful. And then maybe just a mechanical question on the plans for distribution with East Dubuque and it's two parts; A, I know when it was the sole plant to Coffeyville, you'd started to take this reserve for turnarounds to help balance the years where you did and did not have a turnaround and now you've seemed little more balanced schedule where East Dubuque and Coffeyville in alternate years, is there still going to be an expectation that you're going to do that, to do that, that reserve to smooth the quarterly distributions? And then second, in the second quarter with the purchase accounting, I would imagine that most of the East Dubuque inventories that you bought I guess sold in the second quarter. There's very little margin on that plus the turnaround, is that reasonable to estimate there's going to be very little actual cash available for distribution from East Dubuque in 2Q?

Well. Let me start with the reserve and then, I'll let Susan talk about the cash issue. On the reserve, I think that what we're examining is whether we need to do that anymore. The whole theory when we were a one-plant company as we didn't want to have the big peaks and valleys, when we were in the turnaround and have the distribution fall so much. But now we have two plants, we will have the contributor and one in turnaround. So, that naturally will smooth itself out, so I would suspect it probably won't be doing that reserve going forward, because now we have a natural hedge, because one plant will be operating while the other one's down. Let me..

And then with respect to -- good point on the purchase accounting, we are still evaluating and looking at the impacts, but at this point we're anticipating, that's step up in that inventory value, which to your point and we'll reduce the expected margin, really we believe we will view that as a non-cash adjustment, so we would adjust it out, because it is part of the purchase consideration. But that is not a final determination, but that's our view on how we believe will be treating that for Q2.

Got it. That's very helpful. I appreciate the color.

Thanks, Adam.

(Operator Instructions) Brent Rystrom, Feltl.

Good morning, thank you. Just a couple quick questions, as I look at the 93.6 million acres and I think constructively of how farmers look at the soybeans versus corn trade off, right now we're kind of at the point where beans looked like they provide as much or more profitability than corn and the working capital required to do corn versus soybeans, it is about 60% higher, $450 versus $280 . Have you seen in your southern markets a strong flow of those increased acres or is that not happened?

Yes, I -- Brent, I think it's a little early to call back. I would say that it doesn't -- it doesn't feel like we're getting -- that it's created that much incremental demand at this point, but we still have the side-dress season in the corn and so I don't -- I'm not sure, if there's been -- we've seen the full effect of that yet, although talking to some of the bigger customers, my sense is that system will be empty by June, because of the -- all the product it's going to get pushed out in the next two months. So, I do think that we'll see that. I have been reading a little bit about; there has been a little bit of shifting from corn to beans here in the last month because of the rise in bean prices and so there may be some conversion there, but even if it falls a little short of that 93 million acres, there still a lot of demand, it's going to [put half] to go through. So, I don't think we've got the full brunt of the demand there. We started slowly, so all we've done is catch up here in the last two months. We've caught up to the lack of buying in January and February, and so that -- I'd say we got to a normal spring application. I haven't seen that extra few million acres in our shipment profile. But again, I expect to see some pretty, pretty heavy incremental shipments ahead now and in late May and June to match up with the side-dress seasoning.

And then speaking of side-dressing, when I think traditionally of the East Dubuque side-dress market that was a market that was generally June application for your side-dressing, sometimes in the late planted years which we've had several them up here over the last few years, that side-dressing would sometimes shift to late June, early July. It looks like with the weather window we're going to get the next week here that I'm guessing will have corn pretty much planted in East Dubuque's markets easily by May 15, if not sometime late next week. So, that would imply that you're going to have heavy side-dress season in the 2Q for East Dubuque, is that something that you would expect given the weather is so much drier than it has been the previous three years up here in the Midwest?

Well, I mean, I think that we are prepared for that. And even if it's slid into July, we'd have the inventory to be able to deliver, we are going to be -- we are in a turnaround in the quarter, so we'll have less products to sell, so

My point is actually kind of the opposite, it feels like side-dress is going to come if not normal time, June, it might actually come earlier in June, because we're planting considerably earlier this year than we have the previous three years?

Yes, and again I -- we will be able to address that whether it comes in June or July. We're kind of indifferent because we have the storage there at East Dubuque. So, whether that's June or July, it might affect how you all look at quarters, but it won't affect the product and material balance of the plan and delivering to customers, whether they ask for June or July will be able to deliver to them.

And then I just wanted to make sure I heard it right. Did you mention the turnaround in East Dubuque will be $8 million to $10 million, was that correct?

No, $5 million to $7 million.

$5 million to $7 million.

The converter is $8 million to $11 million, that's the other -- the new ammonia converter going in will be the final dollar amounts $8 million to $11 million.

Okay. Looking at East Dubuque, I think intuitively, maybe not correctly but intuitively a lot of people have assumed that there is a long-term opportunity if you can figure out a distribution mechanism to realize the better pricing in the heart of the corn belt, but East Dubuque has possibly from some of your production in Coffeyville. Is that a reasonable expectation and if it is, can you give us a little bottom there?

Yes, I would say that our expectation is that ultimately we will be able to enhance the delivery to the customer base at East Dubuque, not everywhere because of the rail -- the rail points, but we'll be able to supplement if needed the service into the customer base at East Dubuque and conversely, there's some customer terms that probably that we historically, ship in Coffeyville that East Dubuque is better suited to take. So, there is opportunity for us and the customer base, obviously we're the tons are going very different, but the larger customers are the same customers at both Coffeyville and East Dubuque. So, there's a good opportunity for us and we're already seeing some things develop where the Coffeyville tons can supplement what East Dubuque has been able to deliver to customers there. So, we're very excited about, that's one of the reasons we did the transaction once that we thought there was compatibility with Coffeyville and East Dubuque, and we're seeing that and that will grow overtime. There's going to be some good opportunities for us.

If we are -- had Bunge was just on with their call just prior to your call and they were talking about a very aggressive onset of the drought in Brazil and the impact -- negative impact that's having on the Safrinha corn crop. With the El Nino just completed and with historic odds of a 50%, 45% chance of La Nina following an El Nino, if we were to get a La Nina in the past, how is that affected Cofeeyville as far as side-dress. So, if we get an onset of La Nina in early onset, let's say in June, the side-dressing tend to happen at similar rates anyway, because it's too early for the farmer to know that La Nina is already going to hurt his yields?

Yes. I think you'd probably see some marginal changes, but not a significant change there. I think that they would continue -- it'd be too early to make that call and to pull back. And so, I think you'd see a normal side-dress there, maybe a little lighter, but not significantly lighter, because it just be too early (inaudible) that early for that season.

And then my final question relates to just the ongoing openings that we have with either just starting or pending plant expansions at CF with it's two plants with its potential third plant with OCI, and then with LSB, imminently ramping in El Dorado. Can you kind of give us a sense of how you think what potential impact [Donaldsonville], Port Neal, Wever or El Dorado might have, are any of those in particular situationally more of a threat or an issue than others?

The -- well, Donaldsonville, they're producing UAN now, so they're marketing that UAN, and that probably will have, and we've seen already even going back to the fill last summer that CF has been marketing sort of pre-marketing some of that Donaldsonville capacity. So, they're going to be a bigger factor, and they are going to (inaudible) display some imported -- previous imported tons. And I think the market's factoring that in. El Dorado is not going to have a real effect, they're product base, there's not going to be heavily way in fertilizer, so that's not a big change. Port Neal, it's going to be urea and (inaudible)urea expansions coming on later this year, maybe fourth quarter. And then OCI probably would have the greatest effect in the East Dubuque market, but there are some logistical issues about where that product's going to move, but it's -- they're saying now I think in the fall or the fourth quarter on the OCI, the Wever plant and unclear that it's about a year and a half behind. So, it's unclear if that's the right data or not, there are challenges there. But, I think the market -- I think the market in last fill season and this fall is already starting to reflect back -- there's a little bit of a pre-marketing that's been occurring on that capacity. So, I think the market is absorbing that as we speak and then, when this wave is over, there isn't any new capacities swaying for the US on -- there are a couple of rumors, but I don't think anything will get built for several years after these plants are completed.

Alright, thank you.

Thanks, Brent.

Thank you. We reached to the end of our question-and-answer session. I'll just turn the floor back over to management for any further or closing comments.

I want to thank everybody for being on the call today, and we look forward to talking to you next quarter. Thank you very much.

Thank you. That does conclude today's teleconference. You may disconnect your lines and have a wonderful day. Thank you for your participation today.