CVR Partners LP (UAN) 2016 Q3 法說會逐字稿

Greetings and welcome to CVR Partners Third Quarter 2016 Conference Call. At this time all participants are in a listen-only mode. (Operator Instructions.) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Wes Harris, Vice President of Business Analysis. Thank you Mr. Harris, you may begin.

Well thanks Doug and good morning everyone. We appreciate you joining us for today's call. With me is Chief Executive Officer, Mark Pytosh as well as Chief Financial Officer, Susan Ball.

Before Mark and Susan discuss our results, I would like to 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 third quarter press release that we 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, loss on extinguishment of debt and expenses associated with the East Dubuque acquisition and business interruption insurance proceeds. So with that out of the way, I?ll turn it over to Mark.

Thanks Wes and good morning everyone. The summary of our financial highlights for the 2016 third quarter included revenue of $78.5 million, adjusted EBITDA of $17.4 million and a net loss of $13.4 million. Looking at our two facilities in more detail, Coffeeville continues to post high on stream rates. During the quarter the gas fire ran at 96%, the ammonia unit operated at almost 95% and the UAN plant ran at 94%. Similarly East Dubuque also saw high on stream rates in the period as the ammonia unit operated at 94% and the UAN plant ran at 93%.

As a reminder, we installed a new ammonia synthesis converter during East Dubuque's scheduled major plant turnaround that was successfully completed during this years second quarter. Since that time, the plant has produced ammonia at an average rate of about, [of above], 1,075 tons per day which is more than 100 tons per day higher than the levels we saw heading into the turnaround. For the third quarter our combined operations produced 200,800 tons of ammonia, we converted the majority of the produced ammonia into 317,200 tons of UAN leaving 60,300 tons of ammonia available for sale.

We sold a combined total of 296,000 tons of UAN during the 2016 third quarter at a product price at gate of $154.00 per ton. This compares to a product price at gate of $199.00 per ton for the second quarter of 2016. For ammonia we sold a combined total of 47,700 tons at a product price at gate of $345.00 per ton. Our product price at gate for the 2016 second quarter was $417.00 per ton. While the nitrogen fertilizer pricing environment was challenging during the 2016 third quarter, we were pleased to be slightly free cash flow positive for the quarter.

I would note that free cash flow would have been several million dollars higher if not for the impact of lower available volumes due to the East Dubuque turnaround in the second quarter. 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, good morning everyone. As our acquisition of the East Dubuque facility occurred at the beginning of this year's second quarter, year-over-year the comparability is significantly impacted across the line items in our reported financials. Results for last years third quarter were impacted by Coffeeville's scheduled plant turnaround also that lasted approximately 18 days. Subsequent to Coffeeville's turnaround, the air separation unit operated by Linde that feeds oxygen and nitrogen to the facility was impacted by three separate unexpected shutdowns. The result was approximately 18 days of additional downtime at Coffeeville in the third quarter of 2015.

Now, given this backdrop, net sales for the 2016 third quarter were $78.5 million as compared to $49.3 million in 2015. The increase was substantially attributable to the inclusion of East Dubuque in this years third quarter. Excluding the East Dubuque, net sales would have decreased by $3.1 million. The substantial majority of this decrease at Coffeeville was related to lower year-over-year pricing for UAN and to a lesser extent ammonia partially offsetting the decrease with higher sales volumes of UAN in 2016 given the previously discussed downtime in last years third quarter for the Coffeeville facility.

The increase in cost to products sold for the 2016 third quarter [to] $19.9 million as compared to $14.5 million in 2015 was primarily attributable to the inclusion of East Dubuque. Excluding East Dubuque, cost of products sold would have decreased by $1.5 million primarily due to less purchased ammonia and lower pricing for pet coke received from CRV Refining adjacent refinery partially offsetting the decrease was increased rate expense and higher cost for rail car repairs and inspections during this years third quarter.

Direct operating expenses for the 2016 third quarter decreased to $32.5 million from $33.2 million in the prior year period. Excluding East Dubuque, direct operating expenses decreased by $10.8 million. This was primarily due to the $6.6 million of turnaround expenses for Coffeeville in last years third quarter as well as lower year-over-year repairs and maintenance costs and certain other expenses.

Selling general and administrative expenses for the 2016 third quarter were $7.3 million as compared to $6 million for the third quarter of 2015. The increase was primarily associated with $2 million for the inclusion of East Dubuque which was partially offset by approximately $800,000 of lower merger related expenses. The increase in depreciation expense to $16.4 million from $7.4 million in 2015 was primarily due to the inclusion of East Dubuque in this year's results. Interest expense was $15.6 million for the third quarter of 2016 as compared to $1.8 million for the same period last year. The increase was due to increased borrowings to complete the East Dubuque acquisition and the higher interest rate.

Finally, we reported a net loss of $13.4 million or $0.12 per common unit in the 2016 third quarter. This is compared to a net loss of $13.5 million or $0.18 per common unit for the third quarter of 2015. During the [2015] third quarter we spent $6.4 million on capital projects including $3.4 million for maintenance capex. Three million dollars spent on growth capex during the period was substantially associated with paying the remaining invoices related to the installation of the new ammonia synthesis converter at East Dubuque during the 2016 second quarter.

For the 2016 full year we expect combined spending for maintenance capex at our two facilities of approximately $15 million. The full year estimate includes nine months of spending for East Dubuque as we closed the acquisition on April 1. Looking at the balance sheet as of September 30 we had $65 million of cash and cash equivalence and $624 million of net debt.

On September 30 we entered into a senior secured asset-based revolving credit facility with an aggregate principle amount of availability of availability of up to $50 million included as an incremental facility that permits an increase in borrowings of up to $25 million in the aggregate subject to additional lender commitments and certain other conditions. Any loan proceeds may be used for capital expenditures and other general corporate purposes.

Finally, pro forma adjusted EBITDA for the 12 months ended September 30, 2016 was $150.5 million. I would note that the pro forma adjusted EBITDA assumes the East Dubuque merger and the 2016. Second quarter financing transactions occurred at the beginning of the 12 month period. Pro forma adjusted EBITDA does not report directly to what the partnerships results actually would have been -- I also will note that we have included a brief presentation on our website with certain selected financial information and the information associated with our debt capitalization and ratios.

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

Thanks Susan. This years corn harvest is approximately 61% complete as compared to an average of 62% at the same time during the previous five years. The USDA is estimating a yield of approximately 173 bushels per harvested acre for 2016. This is similar to their yield estimate for last year despite an anticipated 8% increase in harvested acres.

Based on challenged prop conditions in certain regions due to excessive heat and moisture in the final weeks of the growing season, it will be interesting to see if the USDA's projections actually come to fruition. Nevertheless, similar to the past couple of years, it will be another large corn crop.

On our last earnings call in late July we discussed that the fill season was beginning to get underway. This years fill season was different from the prior five years in that customers purchased approximately 30% to 50% of the volume of a typical fill season. This was driven by their belief that they will be able to purchase their additional volume needs in the coming months from existing production supplemented by the new production expected to come online by the spring.

Therefore, in our opinion, pricing already reflects the new capacity scheduled to come online. We have a great marketing and logistics team that sold a large percentage of our second half UAN production for Coffeeville and East Dubuque as well as [LSP]'s prior Oklahoma facility. While pricing was lower than we would have liked, we were in a good position to manage inventories while working with customers to prepare for spring application. The spring season will be busier than normal next year because of the combination of pent up demand from customers driven by lower fill purchases and the expectation of new production capacity coming online in the next six months.

Importantly, we have recently seen increased customer interest in product for the balance of 2016 and the first quarter of 2017. In the last few weeks, there have been significant global price increases for fourth quarter and first quarter delivery of urea. This should bode well for UAN and ammonias pricing for these three nitrogen fertilizer products typically trend in a similar direction. Urea prices, which are by far the largest volume nitrogen fertilizer produced and used globally, bottomed in price during the fill season in July at approximately $170.00 per ton at [Nova]. It is currently quoted at around $210.00 for 2017 first quarter delivery. During the fill season we observed that [Nova] urea barge activity fell significantly when prices reached the $170.00 price level. Based on the low import volumes at that price level, it appears to be a [poor] price for producers globally.

UAN pricing tended to follow urea during the summer and similar to urea low UAN fill pricing significantly slowed barge activity at New Orleans suggesting that we may have seen prices reach their low for this cycle.

Since the fill, UAN prices have not recovered like urea but there has not been enough transactional activity in the last month or two to draw conclusions but we feel for the spring that with demand returning and even with the new capacity, the market should firm from these low levels as we believe customers have already factored the new production into their demand pattern. While we believe we've seen the lows in market pricing for the cycle, we aren't assuming a rapid recovery and will remain focused on the things we can control; this includes operating our plant for the high on stream rates, prudently managing our cost, being judicious with our capital and maximizing our marketing and logistics activities.

We believe this strategy will help us optimize free cash flow and places us in a stronger position for success once we recover from the low point of this cycle. As we've said on prior calls, we think the industry will continue to consolidate as demonstrated by the buyer Monsanto and Agrium-Potash announcement this quarter, but given current market conditions we will prudently evaluate opportunities without increasing our financial risk profile.

With that we are ready to answer any questions you may have, Doug?

Thank you, ladies and gentlemen we will now be conducting a question and answer session. (Operator instructions.) Our first question comes from the line of Adam Samuelson with Goldman Sachs, please proceed with your question.

Yeah, thanks, good morning everyone.

Good morning Adam.

Morning Adam.

So I guess Mark first, wanted to talk about the UAN market a little bit more and maybe your reflection, you talked on it in your prepared remarks but you've seen this run up in urea in the last call it 60 days. You have not seen the UAN price kind of move at all or in any sort of consequence. The gap there is wider than it's been in some time, do you think that's really just the differing supply dynamics, those domestic UAN capacity ramping over the next four or five months or more concern about the corn acreage for next year and demand prospects, something else just [talk about that] a little bit.

No, what I would say Adam is just that this is not the typical time of the year where you have a lot of UAN buying so I think that the expectations that folks have, and this is from the customer side, is that prices will rise as they step in to market and buy. They're just not -- we haven't seen as much transactional activity like you've seen in urea. Urea is -- there have been a lot of things, a lot of movement there globally particularly going into Latin America and Europe. So I think it's just a timing issue and I don?t think that -- I think that the UAN, typically UAN is at a premium to urea, it's now trading at a slight discount to urea so that's an unusual pricing.

But I think everyone's expectations that pricing is going to firm into the spring here and so our expectations are probably just going to come up from the levels where we're at today.

And you touched on it a little bit but that premium versus urea, I mean, it's had a wide range in the past but consistently a premium. Are you worried or are you concerned that that premium narrows as the domestic capacity on UAN versus domestic demand that were pretty well matched versus still an import need on urea that you might see that domestic UAN premium narrow somewhat over the next 12, 18 months and beyond?

No, I expect that, you know, once the buying -- we're buying at the same time, I still think that you'd see similar premiums to what you've seen historically. It's just that right now there's not been as much buying. This is the lowest amount of buying activity that we've seen in UAN in recent years but it's not like the product is not going to be used. It's going to be purchased, it's going to be applied, it's just in a lag because the farmers and the wholesalers and retailers have decided just to kind of buy it in steps but the demand is going to come through and then I think the market will write itself and that premium will appear as it is because the demand is going to be there for that product. It's superior for storage, superior for application in certain conditions so that's why it's valued at a premium and I don?t think that's going to change.

Okay, and then maybe just a question on distribution and the balance sheet. I appreciate you giving the pro forma LTM leverage understanding that there's some significantly higher priced environments in that LTM that probably aren't going to be quite as good over the next year. The leverages is already at four, how do we think about how you intent to manage that leverage over the next 12, 18, 24 months and especially in regards to distribution and actually returning cash up to unit holders where this quarter there wasn't any, understandably given the earnings base but you get into more seasonally stronger quarters, how do we think about that versus the leverage?

Yeah, so what we said all along, we're a variable rate MLP and we distribute cash when we produce free cash flow and we'll continue to do that. Obviously, you know, by completing the financing in June and putting the ABL plus all of the cash that we have on our balance sheet, we're very comfortable winding our way through this, coming out of the cycle. So we're not -- you know, we don?t have any concerns about that.

I think as pricing firms up and we get into a better seasonal period and better pricing you'll start to see those distributions return but we're only going to distribute when we have free cash flow so we're going to abide by our philosophy which is when we generate cash we provide distributions to our unit holders but if we don?t produce it we're not going to be paying distribution. So, we'll continue on where we are but I think we're on great footing by basically completing the East Dubuque acquisition and completing the financing. We put ourselves in a good position to weather through the cycle and so we're very comfortable with where we are. Obviously we'd like to have a lot more cash flow and be making big distributions but we're very comfortable with where we are in the cycle.

Okay, that's really helpful, I'll pass it on.

Thank you.

Our next question comes from the line of John Gibbons with Credit Suisse, please proceed with your question.

Hey guys, good morning. Quick question around given the lighter fill season that you guys referenced this fall, does that, and sort of looking ahead to the Q1, Q2 of next year, should that pull more fill demand for Q1 as compared to Q2 or do you expect it sort of to be historically balanced between Q1 and Q2; just sort of trying to get a sense around how that breakdown sort of looks.

Q1 will be bigger than it's been from a demand perspective because there's a need and that will need to be positioned before the spring application. So, that it would -- I would expect Q2 to probably be normal next year but Q1 will probably be abnormally large because people aren't positioned for the spring and they'll tell you that. And so the demand in the first quarter I expect to be much larger because they will ultimately fill those tanks. They'll come back in to fill it so I do expect a larger demand.

The good news for us is that we're well positioned through the end of the calendar year and a little bit into the first quarter so we're positioned for the next few months but we're also in a position to be able to meet that demand in the first quarter but it's going to be abnormally large compared to historical -- well, there's usually strong demand but this year it will be -- and that's what I referenced in my comments about it being a busier spring than normal because the system is still light compared to where it should be in preparation for the spring.

Got it thanks, that's very helpful. And can you just sort of make a comment on Q3 inventory levels sort of across the industry. Obviously they're higher given this lighter fill season but do you sort of have a sense on what the outlook is and how that will impact sort of going into the fill season next year?

Yeah, we always felt like this would be a little bit of an aberration while -- because we're in that between period coming into this fill and the new capacity so people held back. I think when we get into fill next year that capacity will already be on and we'll probably revert closer to maybe more historical patterns but the inventories in the industry are not high at the producer level. We didn?t -- normally in a fill we would sell [forward] for six months or so, so no one sold as far out as they have but you sold all of the way through the third quarter and people can continue to buy sort of, [I call] just in time during the fourth quarter. So, the producers have been able to manage their inventories, there's not an overhang of producer inventory and the customer inventory is quite low in comparison to historical levels. So, it's not -- the producers, I think, are in good shape but normally we would have sold further out in time but not in terms of inventory.

So like our inventories were super light on September 30 like they were June 30. We were able to sell product all the way through so -- and I think most producers were in the same kind of area that we were. The system was very light on June 30 last year because it's big planting season and it hasn't replenished to a great extent. So products that move them through there are just -- we're not seeing them buying out six months, they're buying more out three months as opposed to six months.

Great, thanks. And then one last sort of housekeeping item. The next turnaround scheduled for Coffeeville, that's scheduled Q3 of next year for us and I'll leave it there, thank you.

Yeah, the second half. The second half of next year.

Great, thank you.

Our next question comes from the line of Brent Rystrom of Feltl, please proceed with your question.

Thank you. Any particular thoughts, the harvest in Iowa is running about a week, week and a half later, is that having any impact on kind of the fall season up there? I know the temps aren't quite low enough yet but I'm curious what you're hearing out in the field?

Well, we did hear that the Iowa soil temp just dropped below 50 so we're getting pretty close to the ammonia. I don?t think that we're -- that the harvest is going to slow down, it's not going to [be] like last year it was late. I think it's okay. I think we should have a pretty good ammonia run. You know, knock on wood that we don?t get too much rain out there but it feels like it should be a decent run and it should be starting here pretty soon.

Do they still sell urea out of East Dubuque?

We sell specialty urea out of there and that's marketed by Coke but it's not from a volume perspective, not a significant percentage of the production at East Dubuque.

Okay, and then just a couple of other questions; one, the housekeeping on the market indicators section of your report where you list ammonia, [claims] pricing, ammonia Corn Belt pricing, is that end of quarter pricing or is that average for the quarter?

Average for the --

That's kind of an average. Yeah.

Great. Did you guys have any thoughts, Informa came out a couple of days go with a 90 million acre estimate for corn next year, any thoughts from your perspective on that?

A lot of people seem to be circling around on -- you know, it's pretty early yet, we?re got to see what happens with the end of harvest and inventories. But I think that that's a pretty -- seems like that's starting to emerge as the first cut at next years 90, which I would think is coming off of 94 million, is a really good number. So it feels like it's going to be pretty good. Corn prices are hanging in the 350's so it's not great, but it's not bad. So it feels like it?d be pretty decent season next year. And most of the customers are saying that too. They still think it will be a -- it won't be a record, but it will be a good planting season. Everybody grumbles about the price, they do every year but I think we?ll still see a good planting season in 2017.

Well, if you take the price and the volume, you've actually got a recovery in corn for the first time in 3.5 years. The yield on the chief risk curve right now looks it's going to be a $55 billion value for the crop versus $49 billion last year. So, it feels like it's bottomed.

Just had an conceptual question, I'm thinking about pricing in the spring. Obviously, with a short spring fill, short spring book, spot pricing is going to be very impactful on the first and second quarter. If the demand comes together as it always does, which it should, I would imagine you?re going to have a spike in spot pricing just given how little was presold. Do you think that impacts more the first quarter or second quarter when that spike happens?

I would think it would probably split in a little bit. What we've typically -- so you'll see a -- but again it will be bigger this year, because just because of the lack of buying. But we typically see a lift from one -- where people are needing product to get positioned for planting but then there's -- the planting goes on for a while and people try to replenish for side dress or top dress. So there's a demand push in the first quarter. Then there's another wave that comes in behind that April/May. So you can see it happened both ways. But it will probably be, I would say, a little more impactful to the first because of the lack of buying this year as compared to previous years. There's -- the system is relatively light compared to where it?s been. And so there's going to be a need to get that position before the first application in the spring.

Thank you.

The stuff doesn?t just show up the day before. You can?t just have the product all show up the day before applications, it's got to get positioned weeks to a month or two in advance before so they?re ready to go because there's been -- as you know Brent, because you?re in the business, that application occurs in a short window, so it could be 10 or 20 days where it all has to move.

Thank you very much, appreciate it guys.

Thanks.

Thanks Brent.

Our next question comes from the line of Lynn Chen with Hedge, please proceed with your question.

Hey, good morning, thanks for taking my question. I just wanted to clarify that it seems to me that given the fill season is very slow, we should expect a relatively soft fourth quarter this year. But it's also you said that as bulk producer your inventory is pretty low. So I?m assuming you will produce as normal even, you know, it's not pre-sold as normal. So, can you just talk a little bit about the volume expectation for this quarter, and also the earnings expectations?

Yeah, you know, the fourth quarter is going to be, from a volume perspective, strong. While they didn?t buy as much [is not] every day, but it's the length, how far out do you buy? That?s -- when I say that they didn?t buy as much, they -- in the past they would buy fully for six months or longer. They did buy as much but we sold a bunch of product in July and then we?ve been selling during the fourth quarter. So, we?re fundamentally sold out for the fourth quarter, or pretty close. So, the volume will be strong in the quarter.

So there is not going to be any -- you know, seasonally, it's usually a pretty good quarter for us and it will be especially for East Dubuque, because you?ve got the fall application up there. So the quarter, volume-wise, the quarter is going to be, should be, very strong and better than the third. That?s our normal pattern. So, the fill season, the only issue is the length of it, not how much. We were successful at selling a lot of products. So, our plants have been running at high on stream rates. We?re hoping to continue that through the rest of this quarter and sell all the products that we make. So that?s -- we should see good volumes here in this quarter.

Okay, great thank you.

There are no further questions in the queue. I?d like to hand the call back over to management for closing comments.

Okay. Well thanks again. Thanks everybody for getting on and we look forward to talking to you pretty much right on the heels of getting near spring next quarter. So, thank you very much.

Ladies and gentlemen, this does conclude today?s teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.