CVR Partners LP (UAN) 2017 Q1 法說會逐字稿

Greetings, and welcome to the CVR Partners first-quarter 2017 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. 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 2017 first-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 forward-looking -- 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 2017 first-quarter earnings release that we filed with the SEC this morning prior to the open of the market.

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

Thank you, Jay, and good morning, everyone, and thanks for joining us on today's first-quarter call. The summary of financial highlights for the 2017 first quarter included net sales of $85.3 million, adjusted EBITDA of $20.8 million, and a net loss of $10.3 million.

During the first quarter we had strong production performances at both of our facilities, with each posting high onstream rates. At Coffeyville, the gasifier ran at 99%; the ammonia unit operated at 99%; and the UAN plant operated at 97%; while at East Dubuque, the ammonia unit ran just under 100%, and the UAN units operated at 98%.

For the first quarter, our combined operations produced approximately 219,000 tons of ammonia, a record for our combined Company since the merger. We converted the majority of the produced ammonia into approximately 342,000 tons of UAN, also a record for the combined Company. This left approximately 80,000 tons of ammonia available for sale.

We sold a combined total of approximately 322,000 tons of UAN during the first quarter at a product price at gate of $160 per ton. Our 2016 fourth-quarter product price at gate was $147 per ton.

For ammonia we sold a combined total of approximately 62,000 tons at a product price at gate of $308 per ton. This is compared to our product price at gate of $352 per ton from the 2016 fourth quarter.

The 2017 first-quarter ammonia pricing was lower than the 2016 fourth quarter because the majority of the ammonia demand was in Southern Plains. We saw additional customer demand in the first quarter which allowed growers to catch up from the lower-than-expected fall ammonia application season in this region.

Despite the normal seasonally slower quarter, we still produced approximately $2 million in distributable cash flow. The $0.02 distribution will be paid on May 15 to the unitholders of record on May 8.

I would point out that we disclosed in our 10-Q that we decided that there were more pressing preventative maintenance issues at East Dubuque. So we will be performing a 10- to 12-day turnaround at East Dubuque in the third quarter of 2017. And we're going to push back the Coffeyville turnaround to 2018.

In my closing remarks, I will discuss the industry conditions and outlook for the balance of the spring season.

But before that, Susan will discuss our detailed financial results. Susan?

Thank you, Mark. Good morning, everyone. 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 2017 first-quarter, net sales for the period were $85.3 million as compared to $73.1 million in the prior-year period. The increase was attributable to the inclusion of East Dubuque in 2017's first-quarter results. Excluding East Dubuque, net sales would have decreased by $14.6 million. The substantial majority of this decrease at Coffeyville was related to lower year-over-year pricing for UAN, and, to a lesser extent, ammonia.

The increase in cost, materials, and other for the 2017 first-quarter to $21.8 million as compared to $16.3 million in the prior-year period was primarily attributable to the inclusion of East Dubuque. Excluding East Dubuque, cost of materials and others would have decreased by $700,000.

Direct operating expenses for the 2017 first-quarter increased to $35.9 million from $23.7 million in the prior-year period. Excluding East Dubuque, direct operating expenses increased by $1.2 million, primarily due to higher electricity pricing of $1.3 million, and partially offset by lower maintenance cost.

Selling, general and administrative expenses for the 2017 first-quarter were $6.9 million as compared to $6.4 million for the first quarter of 2016. The increase was primarily associated with $1.8 million for the inclusion of East Dubuque, which was partially offset by $1.2 million of lower acquisition-related expenses.

The increase in 2017 first-quarter depreciation expense to $15.4 million from $7 million in the prior-year period was primarily due to the inclusion of East Dubuque in 2017.

Interest expense and other financing costs were $15.7 million for the first quarter of 2017 as compared to $1.7 million for the same period last year. The increase was due to increased borrowings to complete the East Dubuque acquisition, and a higher interest rate.

Finally, we recorded a net loss of $10.3 million or $0.09 per common unit in the 2017 first-quarter. This is compared to net income of $18 million or $0.25 per common unit for the first quarter of 2016.

Now turning to capital spending. During the 2017 first-quarter, we spent $4.1 million on capital projects, including $4 million for maintenance CapEx and the remainder for growth capital projects. For the 2017 full year, we expect combined spending for maintenance CapEx at our two facilities to be approximately $15 million.

Looking at the balance sheet, as of March 31 we had approximately $82 million of cash and cash equivalents, and approximately $647 million of total gross debt.

Finally, on our website you will find a brief presentation of certain selected financial information, including the estimated pro forma adjusted EBITDA for the 12 months ended March 31, 2017, of $98.6 million.

I would note that pro forma adjusted EBITDA does assume the East Dubuque merger and the 2017 second-quarter financing transactions occurred at the beginning of the 12-month period. Pro forma adjusted EBITDA does not purport to represent what the partnership's results actually would be.

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

Thanks, Susan. Spring planting is starting to move along more quickly now. We expect planted corn acreage in the US to be approximately 90 million acres. While this is down from the 94 million acres planted last year, we still believe it will be a solid year of demand for nitrogen fertilizer.

Since the February earnings call, nitrogen markets have been volatile, with urea prices moving up and down multiple times. In the US, several importers speculated that the spring application would come early; and, as a result, purchased urea vessels from foreign producers to position product for early March. You may recall we had an early start in the spring of 2016, and the market was short of product. In 2017, the timing of the spring application is closer to normal, so the excess supply of urea margins has caused US prices to fall.

As we mentioned on the 2016 Q4 call in February, our marketing team sold product from both plants at good prices, well through the first quarter. This allowed us to effectively pick our spots going into the spring, and helped us avoid chasing the market while urea pricing was volatile. We expect demand to strengthen as we move through a pre-plant application and our customers replenish their supply for the sidedress season.

We have a decent order book for this time of year, and expect to sell more product in the coming weeks to close out the fertilizer year ending in June.

As new US production capacity continues to ramp up, we expect to be in a transition period from significant quantities of imported tons to a greater supply of domestic production. As this spring period has shown, large tons of urea can create a lot of volatility if there's too much or too little imported product.

During the next fertilizer year, we expect the flow of product to be driven more significantly by domestic production and logistics. We expect this change in availability should begin to reduce the in-season price volatility of the future.

Currently, both of CF's expansion, the Donaldsonville and Port Neal, have been marketing product to customers. OCI's Weaver, Iowa, facility was not marketing to customers in the first quarter, but has indicated that it is ramping up production the coming weeks. We expected to begin marketing production quantities in the next fertilizer year.

Getting these plants to full production will help the market as we enter the 2018 season as customers may continue to restrain from purchasing product as they may wait for the production from the new plants. As this production has been delayed, imported urea has filled the gap in the market, and, at times, provided more than the market needs.

With the new domestic trade flows established, we expect to see more reliable customer buying patterns going forward. To use a sports analogy, it appears that we are in the eighth inning of this expansion cycle. And as the market grows accustomed to the new domestic production, particularly in the second half of the year. With much less new production capacity coming into the market in 2018 and beyond, and if Chinese producers continue to maintain lower production levels, we believe the market will be able to balance sooner rather than later.

But while we wait, the management team will remain focused on what we can control, including operating our plants at high onstream rates, prudently managing our costs, being judicious with our capital, and maximizing our marketing and logistics activities. And as we move closer to recover, 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 questions. Doug?

(Operator Instructions). Adam Samuelson, Goldman Sachs.

Maybe first, continuing on some of the discussion you'd had, Mark, on spring pricing and market trends, can you talk about kind of how buying activity? And do customary patterns progress through the first quarter? Prices were going up through January, and maybe into mid-early February and then were basically on a straight line downward, at least on urea, through the balance of the quarter and into April. But UAN was not quite following in lockstep. Maybe talk about how your customer activity progressed through the quarter first.

Sure. If you remember from the last call, we said we had taken a fairer order book in December and January. And while urea was pretty volatile in February, March and April, both ammonia and UAN have been pretty stable. And so we haven't seen that kind of price movement on either of those two. And we have been selling product at times during March and April, so we were selling UAN and ammonia during that period.

We just didn't feel the price pressure that urea had felt, and that was because there was so much imported product in January and February that was working off. But you didn't have the same sort of volume pressure in UAN and ammonia. So we felt we haven't seen the same kind of price pressure in those two areas.

So the book has been -- prices have held pretty decently through March and April. And what we've seen from the customer base is they are probably buying a little closer to when they get grower demand directly, and then they fill their -- build their book. They are buying less of -- pre-purchasing less, and then holding it in their tanks and then doing it. It's more of a just-in-time purchasing. And we've seen that -- that goes back to the fall. We have seen that going on for a while; that's because of anticipation of the new production.

So doesn't really change anything on the pricing element. It's just that the timing of those purchases has been more, I call it, ratable, as opposed to big, chunky forward purchases. And this doesn't really change the way we run our business because it has fit our production pattern really well.

That's very helpful. And can you talk about maybe some of the farm-level demand in your key market areas? It has been a somewhat slower start to actual planting. I know there was some field work done in early March, but that has definitely -- that slowed, as it got wet. Are you actually seeing people putting UAN for pre-plant at this point? Or talk about where you are seeing the move into the field right now.

We've seen some movement, mostly in the South, Southern part and the West, in UAN. Up north, it has been a slower -- the weather has been a combination of cold and wet. So the Northern season has been a little slower start there, and we're just starting to see some UAN movement up north.

Ammonia has had a good run in the Southern Plains in the first quarter, which picked up what was not done in the fall. And then we started to see the ammonia -- the ammonia run is pretty far along now up around East Dubuque, but that was a slower start this year than last year because of weather. But the demand has been firm, but it's just the weather -- it's been more challenging for the growers. They come in for two or three days and then they pause while we wait for it to dry up again. So the weather has played more -- been more kind of fits and starts this year.

But the demand has been solid. It comes and goes, but the demand has been firm. And we expect there will be another wave of demand, once the application is done here and getting ready for sidedress.

Okay. And maybe just finally, can you maybe -- I know this is probably the first full spring where you own East Dubuque. But obviously, you can look at how the plant has marketed in the past. But both between Coffeyville and East Dubuque, at this point, at the end of April, how full is your second-quarter order book versus maybe prior years, or any contacts there about spot business that's left to be done?

We're in good shape at both plants. And they are very different because Coffeyville is a rail-serviced plant and East Dubuque is truck. But you gave us a hard time on the last call about selling. But one of the things that we try to do is when we see activity, we generally will sell into that so that we are never really under pressure to have to feel like we have to sell product because we are building inventory.

And I felt really good about how we are positioned for the rest -- between now and the end of the planting year. So I feel good between now and June 30. We have some more to sell, but there will be some demand that will come in to take those tons.

So we are very well positioned at both plants where we manage it very closely, and we are looking for those pockets. We don't want to be too long or too short, so sometimes you give away a little bit on price to do that. We have been very comfortable through the spring season, and I felt like others haven't been as comfortable as we have been at times.

Great. That's very helpful. I'll pass it on.

Charles Neivert, Cowen.

A quick question on the CapEx that you are doing, both in East Dubuque and in Coffeyville. Is there any expectation -- what's going to come out of it, so to speak? Are we going to see greater efficiency in the plants, better uptime, a little bit of gain in capacity? Or is it just pure maintenance; got to replace a few things just to keep them from breaking down? How would you categorize or think about the CapEx you are going to be doing?

Yes, Charlie, I put it in the latter bucket. We've had two great quarters here, and our capital spend will be targeted at maintaining these kind of onstream factors. So we don't have any planned capacity expansion projects at either plant. But if we could maintain these run rates at the two facilities, we would be thrilled. And so our capital is focused on preventative maintenance to maintain high onstream.

Got it. And you had said you were going to -- it's a 10- to 12-day turnaround is what you're looking at at East Dubuque. How about the one in -- I know Coffeyville is 18, but how long is that one anticipated for? And they are going to deal with the gasifier, as well.

Yes. We will do the whole plant there. It will probably be about 15 days, in that area. That would tend to be a little bit longer because you got more plant to do there, a little more complexity. So that would be about 15 days. That plant has been running really well, so we don't really -- we are not concerned that we are going to miss out on the preventative maintenance opportunity. That plant has had a great run, and we feel comfortable moving that back from here.

Are you looking at 3Q as well, looking for, obviously, the latest production quarter to work into, or probably the lowest pricing quarter to work into? Or we haven't set timing on that yet?

We have not set timing on the 2018 one. But the third quarter is a good time for East Dubuque because that's a lull period, seasonally. So we are good in 2017. Then we have to decide how we are going to thread the needle.

The difference between Coffeyville is, given that it's a rail-based facility, even if we are down and in season, we could hold on to inventory and we would be in good shape there. So the East Dubuque plant is much more sensitive because of the truck business.

Got it. All right, thanks very much.

Rich Thompson, [Varde] Partners.

I was hoping you could talk a little bit about year-over-year pricing relative to some of the market indicators that you report. It just looks like year-over-year declines for your business look more severe than the market would have implied. So I was trying to understand what's going on there.

Yes. I'm not sure which market indicators. A lot depends -- I looked at the potash announcement, but their footprint is very different than ours and nitrogen.

Yes. Sorry; I was just looking like on your news release, the ammonia Southern Plains of 387 in Q1 2017, versus 375 in Q1 2016 versus your ammonia sales; and somewhere for the UAN just looks like year-over-year change is a bit more severe. I was just curious.

Yes. So on the Southern Plains, that's a pretty composite, across a number of states and geographies there. So it's very hard to compare that exactly to what the Coffeyville facility would be. So it's difficult to say what's in there. I'm not sure how good the data set is, quite frankly.

And in the corn belt -- the corn belt, first quarter, is not a particularly active period for ag. It's not a big application period, so I'm not sure how much data is behind that number. The second-quarter pricing will be more reflective because of all the activity in ag that occurs in the Northern Plains.

So that's not a great answer, but I don't -- I think where we're pricing is pretty comparable when you look at -- CF hasn't reported yet, but you can look at their numbers when they come out. We're much more comparable to what they are. And if you looked at LSB, who reported on Monday, we had pretty similar pricing dynamics with where they are. Our numbers are pretty tight on where the market is these days.

Got it. And rolling forward into Q2, is it -- should we assume ballpark with where Q1 came out?

The second quarter is going to be better than the first quarter.

Okay, great.

So that's our (technical difficulty) strongest quarter, so you will see a good number there in the second quarter.

Great. Thanks a lot.

If there are no further questions in queue, I'd like to hand the call back over to management for closing comments.

Okay. Once again, thanks, everyone, for joining our call. And we look forward to talking to you when report our second-quarter results in July. 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.