CVR Partners LP (UAN) 2016 Q4 法說會逐字稿

Greetings and welcome to the CVR Partners fourth-quarter 2016 conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Jay Finks, Vice President of Finance. Thank you, Mr. Finks, you may begin.

Thank you, Doug, and good morning, everyone. We appreciate your participation in today's call. With me today are Mark Pytosh, our Chief Executive Officer; and Susan Ball our Chief Financial Officer.

Prior to discussing our 2016 fourth-quarter results, let me remind you that this conference call may contain forward-looking statements as that term is defined under federal securities laws. For this purpose, any statements made during this call that are not statements of historical facts may be deemed to be forward-looking statements. Without limiting the foregoing, the words outlook, believes, anticipates, plans, expects, and similar expressions are intended to identify forward-looking statements.

You are cautioned that these statements may be affected by important factors set forth in our filings with the Securities and Exchange Commission, and in our latest earnings release. As a result, actual operations or results may differ materially from the results discussed in the forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise, except to the extent required by law.

This call also includes various non-GAAP financial measures. The disclosures related to such non-GAAP measures, including reconciliation to the most directly comparable GAAP financial measures, are included in our 2016 fourth-quarter earnings release that we filed with the SEC this morning prior to the open of the market.

With that said, I'll turn the call over to Mark Pytosh, our Chief Executive Officer. Mark?

Thank you, Jay, and good morning, everyone, and thanks for joining us for today's call. The summary and financial highlights for the 2016 full year included revenue of $356.3 million, adjusted EBITDA of $92.7 million, and a net loss of $26.9 million. Looking more specifically at the 2016 fourth quarter, we reported revenue of $84.9 million, adjusted EBITDA of $18.3 million, and a net loss of $14.5 million.

During the fourth quarter, both of our facilities continued to post high on-stream rates. At Coffeyville, the gasifier ran at 96%, the ammonia unit operated at 91%, and the UAN plant at 93%, while at East Dubuque both the ammonia and UAN units operated at nearly 100%. For the fourth quarter, our combined operations produced 207,600 tons of ammonia. We converted the majority of the produced ammonia into 330,700 tons of UAN, leaving 62,600 tons of ammonia available for sale. We sold a combined total of 335,100 tons of UAN during the 2016 fourth quarter, at a product price at gate of $147 per ton, which was reflective of pricing for fill season that began in August. Our 2016 third-quarter product price at gate was $154 per ton.

For ammonia, we sold a combined total of 55,700 tons at a product price at gate of $352 per ton. This is compared to our product price at gate of 345 tons for the 2016 third quarter. I would note that East Dubuque's ammonia deliveries were less than anticipated for the fourth quarter as conditions across the region for the fall ammonia application season were difficult. We expect that shortfall in ammonia tons applied in the fall to be made up during the spring application.

Primarily as a result of the challenging nitrogen fertilizer pricing environment and the deferral of ammonia deliveries to the spring for East Dubuque, we are not in a position to pay a distribution for the 2016 fourth quarter. In my closing remarks I will discuss the industry conditions driving the much-improved pricing we've seen to date 2017.

Before that, Susan will discuss our detailed financial results. Susan?

Thank you, Mark. As a reminder, our acquisition of the East Dubuque facility occurred at the beginning of the 2016 second quarter, and as a result, year-over-year comparability is significantly impacted across the line items reported in our financials.

Looking specifically at the 2016 fourth quarter, net sales for the period were $84.9 million as compared to $66 million in 2015. The increase was attributable to the inclusion of East Dubuque in 2016's fourth quarter. Excluding East Dubuque, net sales would have decreased $17.1 million. The substantial majority of this decrease at Coffeyville was related to the lower year-over-year pricing for UAN, and to a lesser extent, ammonia. Partially offsetting the decrease was primarily higher sales volumes of UAN in 2016.

The increase in cost of materials and other for the 2016 fourth quarter to $21.5 million as compared to $9.5 million in 2015 was primarily attributable to the inclusion of East Dubuque. Excluding East Dubuque, cost of materials and other would have increased by $5.2 million, primarily due to increased sales volumes and related freight, as well as higher costs for railcar repairs and expense -- inspections during the 2016 fourth quarter.

Direct operating expenses for the 2016 fourth quarter increased to $37.9 million from $23.3 million in the prior-year period. Excluding East Dubuque, direct operating expenses increased nominally by $700,000. Selling, general and administrative expenses for the 2016 fourth quarter were $7.3 million as compared to $5.6 million for the fourth quarter of 2015. The increase was primarily associated with $1.9 million for the inclusion of East Dubuque.

The increase in 2016 fourth-quarter depreciation expense to $17.2 million from $7.2 million in 2015 was primarily due to the inclusion of East Dubuque in 2016. Interest expense and other financing costs were $15.8 million for the fourth quarter of 2016 as compared to $1.8 million for the same period last year. The increase was due to the increased borrowings due to complete the East Dubuque acquisition and a higher interest rate. Finally, we recorded a net loss of $14.5 million, or a $0.13 loss per common unit, in the 2016 fourth quarter. This is compared to net income of $18.7 million, or $0.26 per common unit, for the fourth quarter of 2015.

Now turning to capital spend. During the 2016 fourth quarter, we spent $5.9 million on capital projects, including $5.4 million related to maintenance CapEx. For the 2017 full year, we expect combined spending for maintenance CapEx at our two facilities of approximately $15 million. Looking at the balance sheet, as of December 31, we had approximately $56 million of cash and cash equivalents, and approximately $647 million of total debt.

Finally, on our website you will find a brief presentation of certain selective financial information, including estimated pro forma adjusted EBITDA for the 12 months ended December 31, 2016, of $121.4 million. I would note that 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 to represent what the Partnership's results actually would have been.

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

Thanks, Susan. On our last earnings call at the end of October we discussed the significant upward movement we were seeing in global urea pricing for the first quarter of 2017 deliveries. Shortly thereafter we began to see forward UAN pricing increasing as well, which is consistent with what we have seen historically as nitrogen prices typically trend in the same direction. More recently we have often seen a significant rebound in ammonia prices for spring ag deliveries. While we have seen a strong increase in overall nitrogen pricing, US urea pricing still remains below global prices at this time.

Contributing to the improved price environment from what we expect was the cyclical low seen in the second half of 2016 is a number of factors. First, despite another large corn harvest this past year, the expectation is that there will be around 90 million acres of corn planted in the US in 2017. While this will be a bit lower than last year's planting of 94 million acres, the amount of nitrogen fertilizer required for the spring will be sizable.

Second, retailers, dealers, and distributors did not purchase as much product as in last year's fill season, given their expectation that the increased capacity slated to come online in the US would be fully available for this spring. While we do expect the expanded and new facilities to participate somewhat in the planting season, it is now clear that the amount of additional supply will be lower than what was originally anticipated by customers. This has led to increased demand to meet spring needs for domestically produced product.

Another key factor supporting increased prices is lower urea production in China, which has reduced the amount of urea being exported by China into the global marketplace. From 2011 to 2015, China grew its urea exports by almost 300%, from 3.6 million metric tonnes to 13.7 million tonnes. However, in 2016 the combination of low global urea prices and higher feedstock costs for coal resulted in China cutting its blended plant utilization rate from almost 70% in May to approximately 55% by the end of the year. As such, it is estimated China only exported 8.9 million metric tonnes of urea last year, which was 4.8 million tonnes, or 35%, lower than 2015.

We have capitalized on the improved demand and pricing in the US by selling our expected produced tons through the end of the first quarter and part way into the second quarter. We expect to sell the remaining second-quarter tonnage at higher prices as we believe there may be room for additional price upside as we approach the end-season demand. While retailers, dealers, and distributors made good progress in December and January securing additional inventory, they still need to purchase additional supply to meet farmer demand for planting and side-dress application.

Where our second quarter of 2017 price [to settle] will be impacted by the pace at which the additional domestic supply comes online and the level of imports into the US, at this point we do not expect any potential increase in Chinese operating rates and resulting exports or imports into the US from other sources to have a dramatic impact on available supply for the spring. While it is difficult to predict the intentions of the Chinese producers, the significant reduction in Chinese exports is helping the US market absorb the additional domestic production as it has been coming online. We expect this dynamic to help reduce the volatility in nitrogen fertilizer pricing as we head into the next fill season.

As the US market becomes more domestically supplied, there will be fewer imports needed to balance the market. With less tons directed to the US, the risk of buildup or shortage of inventory at ports and inland terminals should be reduced. Historically, the inherent inefficiency of importing significant tonnage to meet demand has been a key driver in many of the volatile price swings we have seen in the US. As the market completes the transition this year, we will remain focused on what we can control, including operating our plants at high on on-stream rates, prudently managing our costs, being judicious with our capital, and maximizing our marketing and logistics activities.

Also during this period of industry transition, we expect further consolidation to occur. As such, we will continue to evaluate potential opportunities to grow the business through strategic transactions that are accretive to distributable cash flow, but do not increase our financial risk profile.

With that, we are ready to answer any questions. Doug?

(Operator Instructions)

Adam Samuelson, Goldman Sachs.

Thanks. Good morning, everyone.

Good morning, Adam.

Mark, maybe I wanted to dig in a little bit more on how the spring season is setting up. You commented that you're basically sold through part of the second quarter at this point. Can you talk a little bit about when those forward sales occurred?

Certainly, spot prices have improved considerably from where they were in the fall. Just any color you can provide on if you were forward sold at the end of December, November, January, et cetera?

Adam, if you go back to December, we were really selling first quarter tons and that price continued to rise into January, and we kind of, December/January, were focused mostly on filling out the first quarter delivery schedule and it's been more recent that we've taken a little bit into the second quarter. It's not a significant piece of the second quarter at this point.

You've probably seen urea prices have been lower in the last week. This is typically-- the middle of February is a low period where no one is buying because they are waiting another, probably two weeks, before the spring application pre-purchasing will begin.

Although, we've been seeing some weak top dress. There's been some earlier spring application of ammonia, so there has been some truck activity out of the-- certainly out of Coffeyville. But we are partially bought-in there, but we think when the customers come back in in the coming weeks to reload for the spring that the market will firm from here because there's not a lot of large activity.

That said, there's a little bit that's come in, but in the forward look there is not nearly as much barge activity. So it will have to come from the domestic production.

That is helpful. And in that vein, can you talk a little bit about your distributor/retailer customer buying patterns, and where they did not engage in that summer fill last year, how that might have changed as prices started to move up through 4Q and through January?

So we had a much lighter fill season purchase than we had previously in previous years. And what happened -- what we saw was in early December, a number of the big customers came back in and bought another layer at higher pricing in December, and that really started to lift the market and so they took a smaller piece in July. Then they took another piece in December and January.

And we expect them to be back -- they didn't purchase as much as they had historically, so there's another like to come as we go into the spring and that will pretty much, I think, drain the domestic system as we get through this application period in the spring. So it was done in three steps. It normally would have been two steps; this year it was three steps.

Helpful. And then just a clarifying question to Susan. I just want to make sure I heard correctly, you said $15 million of CapEx all in maintenance and turnaround for the year?

That is correct, Adam.

Great. Thank you very much.

Charles Neivert, Cowen.

Good morning. A couple of quick things: one, in terms of what you guys are selling right now out of East Dubuque, have you been able to discern at all if there's any crop switching going on over there, meaning some of the sales lightness, so to speak, in the fall may have also been allowing the farmers some flexibility to choose which crop they're going to deal with? Obviously, laying down nitrogen means you are planting corn. So have you been able to pick up anything from that?

And then secondarily, your soon to come neighbor I guess, OCI, have you heard anything about -- have they been in the market at all or have you seen any of their products floating around lately?

I'll start with your second question first. This is OCI Wever; they sold a little bit of product in the second quarter. They're not active in the spring application, the immediate short-term. I don't think they have any real scalable production at this stage.

So I don't see them participating in the April -- April is a big month up at East Dubuque, so I don't see them participating in any significant degree there. They might catch the tail end of it, but they'd have to be pretty much running at a full production day to produce enough volume to sell in there. So that's one of the reasons that the market is probably going to be firmer there because a lot of customers were building in an expectation that that volume would be available, and it's not likely to be, not in time, going to be available.

On the first question, it's probably early to call whether there's going to be -- how much shifting there will be over to soybeans this year. I'm not hearing based on the way customers are purchasing into the second quarter, into the spring application, that there's a huge shift there. There might be some marginal shifting of acreage there.

Corn price is pretty decent right now. The NYMEX price is like $3.75 a bushel. So I don't really see a big shifting going on there.

The biggest we had at East Dubuque was soil temperature didn't get below 50 until late, and then it started raining. And so we just did not get a lot of ammonia on the ground, but all the customers -- I was at [TFI] last week, all the customers have come back and said that they are largely going to tick that up in the spring and so that product is going to move in the spring application to put that nitrogen in the soil.

But the other dynamic, which is interesting, is we did not have a good fall wheat run out of Coffeyville, but that market is really the top dress there because they did not put it in the fall, the top dress are coming back on there and so we're seeing more demand more demand out of Coffeyville than we were expecting going into the wheat run, but that is a catch up from what was not a great fall normally in the wheat run. So that market has been pretty firm around that part of the country for the producers.

Okay. So let me make sure I understand. So from what you can see in East Dubuque, it does not look like there's going to be-- like you said, on the margin there might be a little crop switching, but most of the issue on low fall sales was a combination of weather and anticipation of lower pricing as opposed to the flexibility call?

Yes. Soybeans were not really the discussion. The discussion was, the weather was not good and we're not putting it out there, and oh by the way, that's great because I will be able to buy Wever tons in April. And so that was the dynamic in East Dubuque.

Okay. Got it. Appreciate it. Thanks very much.

Ronald Betten, Wells Fargo.

Hello, Mark, thank you. As you know, we've met and I represent the retail clients. When can we expect a distribution again?

Well, Ron, we don't provide a forward view of forecast for the Company, but obviously with improving market conditions it improves our prospects for getting back into distributions again. So let's see how this first half plays out, and looks like pricing is going to be a lot firmer than the second half of 2016, and then we will talk to the board about what we're going to do from a cash flow perspective. So stay tuned for the first half here.

Okay. Obviously, as again, representing all the retail investors, you know what our number one priority is.

It is ours as well. But in the market environment we were in in the second half, we were not in a position to make distributions. With conditions improving, that will improve our prospects for getting back into distributions.

Thank you.

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

I just want to thank everybody for being on the call today and we look forward to talking to you about our first quarter results in a couple of months. Thank you.

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.