CVR Partners LP (UAN) 2017 Q3 法說會逐字稿

Greetings, and welcome to the CVR Partners LP Third Quarter 2017 Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

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

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

Prior to discussing our 2017 third 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 2017 third 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, everybody, and thanks for joining our call this morning.

The summarized financial highlights from the 2017 third quarter included net sales of $69.4 million, adjusted EBITDA of $5 million and a net loss of $31.6 million.

Third quarter results were impacted by a scheduled 14-day turnaround at the East Dubuque facility. After the turnaround, we had 8 days of unplanned downtime to deal with exchanger repairs.

In the fourth quarter, we are also experiencing some additional downtime of approximately 12 days to complete some piping repairs on the reformer.

Due to the $2.5 million cost of the turnaround and the lost production of East Dubuque, the total impact on third quarter EBITDA was approximately $7 million. Remember that the third quarter is always our seasonally weakest quarter of the year for volume and product pricing.

The onstream rates for Coffeyville, the gas fire ran at 96.3%, the ammonia unit operated at 93.5% and the UAN plant ran at 93.9%, while at East Dubuque the ammonia unit ran at 76.3% and the UAN units operated at 77.1%.

For the third quarter, our combined operations produced approximately 181,000 tons of ammonia. We converted the majority of the produced ammonia into approximately 307,000 tons of UAN. This left approximately 46,000 tons of ammonia available for sale.

We sold a combined total of approximately 299,000 tons of UAN during the 2017 third quarter at a product pricing at gate of $138 per ton versus $154 per ton in the 2016 third quarter.

For ammonia, we sold a combined total of approximately 65,000 tons during the 2017 third quarter at a product price at gate of $214 per ton as compared to $345 per ton in the 2016 third quarter.

Heavy spring rainfall, particularly in the upper Midwest, resulted in difficult application conditions for ammonia. These conditions, coupled with the floor ramp up of new ammonia upgrading capacity, caused inventory levels to be higher at the end of June as compared to the second quarter of 2016. This left a market with excess tonnage going into the seasonally slower summer period and cost prices to fall further than fundamentals would have suggested. We expect the summer was the low point in pricing, and we've already seen prices rise significantly in the past 2 months. We believe ammonia inventory for the industry will be at normal levels by the end of the year.

On the second quarter earnings call, we announced that the company held back distributable cash flow of $12.9 million in the second quarter, which when combined with our results in the third quarter, allowed us to be close to breakeven from a distributable cash flow in the third quarter.

We will continue to remain vigilant and managing the business for cash until we see a clear recovery in the cycle.

In my closing remarks, I will discuss the industry conditions and outlook for the remainder of the year. But before that, Susan will discuss our detailed financial results. Susan?

Thank you, Mark, and good morning.

Looking specifically at the 2017 third quarter, our net sales for the period were $69.4 million as compared to $78.5 million in the same period -- same prior year period. The decrease was primarily attributable to the lower UAN and ammonia sales prices, partially offset by higher ammonia sales volumes. The decrease in cost of materials and other for the 2017 third quarter to $19.4 million as compared to $19.9 million in the prior year period was primarily attributable to lower regulatory railcar repairs and maintenance, partially offset by an increase in hydrogen purchases from CVR Refining.

Direct operating expenses for the 2017 third quarter increased to $40.3 million from $32.5 million in the prior year period. This increase was primarily due to the turnaround of East Dubuque as well as increased inventoriable costs being expensed due to overall higher ammonia tons sold in the 2017 third quarter.

Selling, general and administrative expenses for the 2017 third quarter were $6.1 million as compared to $7.3 million for the third quarter of 2016. The $1.2 million decrease is primarily due to the decreases in expenses associated with the East Dubuque merger.

Finally, we recorded a net loss of $31.6 million or $0.28 per common unit in the 2017 third quarter. This is compared to a net loss of $13.4 million or $0.12 per common unit for the third quarter of 2016.

Now turning to our capital spending.

During the 2017 third quarter, we spent $2.8 million on capital projects, which includes $2.7 million for maintenance capital and the remainder for growth capital projects.

For the 2017 full year, we expect combined spending for maintenance CapEx at our 2 facilities to be approximately $15 million.

Looking at the balance sheet. As of September 30, we had approximately $70 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 selected financial information, including adjusted EBITDA for the 12 months ended September 30, 2017 of $76.4 million.

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

Thanks, Susan.

This year's corn harvest is approximately 55% complete as compared to 75% on average for the same period for the previous 5 years. The USDA is estimating a yield of 171 bushels per harvested acre of corn for 2017. This is a little lower than last year, but still a good result given volatile weather conditions for the 2017 season.

On our last earnings call in late July, we discussed that the fill season was underway. During the UAN fill season, product prices were lower than last year's fill. One factor was U.S. domestic market prices were lower than international prices because buyers were factoring in the new U.S. production capacity. Because of these low absolute prices, customers were more aggressive with their purchases in 2017 compared to 2016.

Even with the new production at the Wever, Iowa facility, customers were proactive with their purchasing. This was a change in behavior from what we have seen over the past year where customers were waiting longer to purchase product, thinking there would be new production coming online.

Since the UAN fill season in late July, global urea prices have increased by over $100 per ton with firm demand from all regions of the world at these higher prices. Higher prices have led to more exports of U.S. product to Latin America and Europe which has firmed the U.S. market. Urea prices of around $250 to $270 per ton at NOLA are up from lows of $160 to $170 per ton in July but still approximately $30 per ton below global prices. These urea prices are also about $40 to $50 per ton higher than at this time last year.

These durably higher urea prices have led ammonia and UAN prices higher to more closely match product prices on a nitrogen-equivalent basis. As a result, product prices per ton sold in the fourth quarter and for the first half of 2018 delivery are expected to be significantly higher than the pricing from this summer and higher than pricing in the first half of 2017. We don't expect to see the full impact of those higher prices until the first quarter of 2018.

While we are pleased to see the signs of improvement in the market, management will remain focused on the issues that we can control, including operating our plants at high onstream rates, prudently managing costs, being judicious with capital and maximizing marketing and the logistics activities.

We are well-positioned with our production, marketing and logistics for this market, but remain conservative in our approach to manage for cash until the recovery takes hold.

Before I turn to Q&A, I'm going to turn the call over to our Executive Chairman, Jack Lipinski.

Thank you, Mark. Thank you, everyone.

Listen, I don't normally join these calls because I leave them in Mark's capable hands. You may have seen the announcement this morning that after 12.5 years, I'm retiring as the CEO of CVR Energy. And with that, I will be retiring as the Executive Chairman of CVR Partners.

I appreciate all your help and support and interest in our company over the years. It's been a long time since we took it public. I, like Mark, believe that better days are ahead of us. The market is turning. But I just wanted to spend a moment saying thank you and wishing Mark and the rest of our employees the very best. I stood on their shoulders over the years, they're great people, and this is a great company.

So Mark, if you want to take it back over.

All right. Well, thanks, Jack, and thanks for your guidance all these years.

With that, I think we're going to turn it over to Q&A. Michelle?

(Operator Instructions) Our first question comes from the line of Adam Samuelson with Goldman Sachs.

Jack, you'll be missed. Congratulations on the retirement.

Thank you.

I guess, my first question on marketing and price realizations. Mark, can you comment a little bit on your own price realizations versus industry benchmarks and how you think that might be evolving today and into the future with the new U.S. capacity from Wever and Port Neal and [CF] at Donaldsonville. And your own mix of production between Coffeyville and East Dubuque, UAN and ammonia. I would -- ammonia in particular, I would've thought you would've had a larger mix of East Dubuque tons that would pull that realization up. But any thoughts there?

Yes. Let's start because there's a bunch of pieces to that. Let's start with the ammonia, because the mix in ammonia was different this quarter. And if you recall from the second quarter, we had our UAN plant down in June in Coffeyville. And so we ended up with a lot more ammonia inventory in Coffeyville than we would normally at June 30. And we really don't have that kind of ammonia season in the summer in the Southern Plains. So we ended up -- the pricing was cheaper around the Coffeyville market, and so the mix shifted to Coffeyville. That was an unusual -- that was kind of a onetime event. So that's why the pricing was lower. I would say, we're definitely priced within the market in the Southern Plains, but the percentage of our sale tons were greater in the Southern Plains than they are normally. As you know, we largely upgrade most of our ammonia to UAN at Coffeyville, but we had that outage in June, and so we had a bunch of tonnage that we sold at -- where prices were low. The Southern Plains was unique this year in that the season -- the planting season wasn't very good and there were issues with the Magellan pipeline and the unit expansion was late. So when you combine all those factors, there was a lot of ammonia in the Southern Plains, and that forced prices lower at a time when there's really not a great -- there's not a great ag market. So it was -- the spread there was disproportionately difficult. I think your other -- I think what you're asking on the other question is, will we continue to have the Northern Plains premium at East Dubuque in that marketplace relative to Coffeyville, and I think the answer is yes, there's still a good spread between the 2 plants. It was down a little bit this year as customers adjusted to the new Wever plant. There were a lot of buying out of the Wever facility. But as that plant's kind of settling into the market, we expect the spread to be -- it may not be quite as wide as it used to, but we expect there to still be a decent spread, and that's really driven by transportation economics between NOLA, Coffeyville and all the way up to East Dubuque. So we think that spread will hold. It's -- I think things have calmed down quite a bit, and we're seeing the spread during -- as we're selling tons into the first half of '18 kind of revert closer back to normal levels.

Okay. That's helpful. And then maybe along those lines, any color on how much of your 4Q tonnage and even first quarter and maybe even a little bit of second quarter, how much has been forward sold? And maybe forward sold at summer fill prices versus prices more in line with where they are today.

Well, as you know, in the fill, we take a lot of work -- they cover a lot of the second half of the year, so that'll carry into the fourth quarter for those fill prices. We'll have a little bit into next year, but not -- most of it will be priced on where market conditions are now.

The difference this year and last year is, one, in the month of October, their producers were still selling UAN at prices at or below the fill price, which is that actually, the current market is well above the fill price, so very different market dynamic. And we weren't really taking any orders in October for the first half of the spring -- the fall for '17. And this year, we are seeing demand for the first half of '18, which we're seeing earlier demand for the first half of the year than we did last year. I would say that the market feels much more constructive this year than it did in the fall of '16.

Okay. And then at East Dubuque, I think the Tessenderlo thiosulphate plant has or is in the process of starting up. And any comments on the volume that you'd be sending over the fence there and any range on the economics of those tons?

I'm not going to comment on how much volume. They'll be a nice customer. That plant is up and running. It's ramping up. It didn't start at full rate. I think by the end of this quarter, it'll be at full rate. We had the ribbon-cutting about a month ago, and it's -- it will be a nice new customer for us. The economics will be comparable to what our economics are in the rest of the plant, that's the way our contract works with them. And we have the same kind of arrangement down in Coffeyville where we sell -- periodically sell them ammonia. So they'll be up and running. And I think that's going to be -- it's complementary plant, complementary product to UAN. So we would expect to maybe see some potential opportunities to work together to target some customers there.

That's helpful. And if I could squeeze one more in. I think your direct operating expenses this quarter they stepped up versus the prior quarter. And I think in your prepared remarks, you alluded to more inventoried ammonia costs running through the P&L. But any color on that direct operating expense number, and what you think about that going forward?

Yes. No, it really was associated with costs that normally would be inventoried with the volumes going down, more tons sold, so we had to increase direct op. But that was probably more unique to this quarter given East Dubuque's turnaround during the quarter as well with idle time and more costs being expensed.

Our next question comes from the line of Lin Shen with Hite.

First of all, Jack, congratulations and I wish you well.

Thank you.

So Mark, I guess I have 2 questions. I just want to follow up the previous question about your price realization versus benchmark price. I think you mentioned that there are some changes of the customer behavior given they are seeing new production on line, so they are seeing new supply in their area. So can you talk about that? What do you think, maybe some long-term change for the spread for East Dubuque, the spread you can achieve?

Sure. So I'll start with the back end of your question first. We still believe that there'll be a decent spread between the pricing in East Dubuque versus Coffeyville because of the transportation economics. And again, what I would say is that it compressed a little bit this year to -- as the market was shifting, the trade fills were shifting with the Wever plant. That used to be product that would come up the river into the terminals and then be distributed out. Now that product's being made in Iowa. And so just to accommodate that shift, the market, I'd say, was a little narrower this year. But again, looking out into '18 where we're starting to sell product above plants, I see kind of the normal spread between Coffeyville and East Dubuque. And so there's always, in my opinion, now that the capacities kind of gotten into the marketplace, we're going to see that settle into a decent spread between the 2 plants because of the transportation differential. And so I think I've lost my train of thought on the first half of your question.

So I guess maybe from the customer point.

Customer pattern, customer buying patterns. What I kind of said in my comments, but I'll give a little more color there. In the last year, with the new capacity coming in, last year, we had Port Neal and Donaldsonville was up and running -- and then we had Wever and the people were waiting for a [behemoth] expansion for coke. The customers had been buying a little bit less and waiting and buying more ratably. What we've been seeing now is almost kind of coming back to the way it was 1.5 years ago where they're buying at the times of the year in advance and they're acting the way they used to, not saying it's going to completely go back, but their behavior is getting back to what we were accustomed to. And so I'd say the market -- and that's -- what it's telling us is that the markets kind of settled in gradually to this new capacity and the buying that's been the historical pattern. I think we're reverting back closer to what it was historically and not just holding back and waiting for what they perceive as opportunity. So we've seen the customers beginning to change their patterns as the markets kind of settle down here in the last few months.

Great. Last question. Can you remind me, do you have all your natural gas hedged for the rest of the year and how much is hedged for 2018?

We -- so last year, we hedged for the winter months and for a big chunk of our consumption, and we've done the same for the winter crossing between '17 and '18. So we've done another significant hedge, gas for the winter. The risk -- the biggest risk period for us as a company is a gas spike in the winter. And so we've typically taken that off of the table when there were good market conditions. And we've already done that for this winter coming up.

What was the average price? Do you disclose it?

We don't disclose that.

(Operator Instructions) Our next question comes from the line of Owen Douglas with Robert W. Baird.

I got a quick one here. A lot of good ones have already been asked. But just trying to better understand this. So you mentioned about the customer buying behavior already starting to kind of recognize that there is not too much additional capacity coming online. In your experience, based on prior cycles, what's the typical lag you'd say between when that capacity comes online and you start to see a return to the economics of producing nitrogen?

Sure. I don't know that there's a precedent for how this market's played out because a lot of -- and it's unique to the U.S. -- this is in particular concentrated in the U.S., a lot of capacity came on. So we've had a big spike in the last, really, the last 18 months or so. And what I would say is that starting about 18 months ago, our customer buying pattern changed and customers were buying in smaller chunks on a more of a ratable fashion and we're buying less than they have historically at different times of the year. They were buying the acreage plant, and the consumption's been higher, but the way they bought it was a little bit different.

What we're seeing as we've got into the fall, looking out into the spring of '18, we're seeing a reversion back to the pre-capacity expansion approach. And so the customers are starting to buy more like they did historically. So we -- it feels like we've -- the market has adjusted to the capacity. I'm not saying it's fully there yet, but the buying pattern is sort of back to where it was. And I think that -- I feel like the price spread between the U.S. and international markets will compress in the coming months. There's still -- even with the higher prices, there's still a spread between the U.S. price and the global price. And that should compress back to there not being a differential. So in the coming months, that's probably the last step of this process.

Okay. So you think this is really going to be a sort of first half of 2018? And just as we think about the weak quarters in the year, just recognize the seasonality in your business, do you think that sort of changes the dynamic in terms of the seasonal kind of profitability of your business?

I don't think so. I think will be -- I think '18 will be a very normal seasonal pattern for us. This third quarter, the prices were extremely low this quarter for all the reasons we talked about already. But as I look out into '18, I think what we see there is -- we're not declaring victory there, but some real recovery appears to be shaping up for -- at least for the first half of '18.

Our next question comes from the line of John Gibbons with Crédit Suisse.

Just a quick question, follow-up on sort of where we are at the corn harvest. Mark, you mentioned I think you said 50% versus sort of historically 75%. I guess, all else equal, that would be sort of negative for fall application and there were also some fall application issues last year, if I'm not mistaken, around just colder weather. Can you just talk about how this fall -- this application is sort of shaping up compared to last year?

Yes. There's a couple of things there. From talking to customers here in the last week or 2, one, I didn't quote the soybean, that's pretty far along. So there's going to be a bunch of -- some of application will be tiered. So the first piece of this -- and also you need soil temperature to be below 50 degrees, so that -- we're getting into that zone up in the Corn Belt. But the soybeans are out in the field, so I think the first leg of the application is going to be the rotation from soybeans to corn. And so I think there'll be a pretty good application rolling out here probably in the next week or so starting, and that will cover the soybean fields. And then by then, the corn harvest will be much further along and we should be able to roll from the farmers who are going to plant corn on top of their beans from this past year, that will be the first leg, and then we're going to roll into corn, I think, call it another week or 10 days out from there. So I -- ammonia is so cheap right now that I expect the application to be a good -- relative -- ammonia has had a huge discount to urea. So I do expect the big application season because the economics are very advantageous. So I think it will be a good application. We still have the weight of making sure weather's okay and we don't get too much rain, but I think it's going to be a good fall application this year.

Got it. Very helpful. Just a follow-up sort of on one of the previously asked questions and in your comments around strong selling prices into Q4 and then first half of '18. I guess, if you can give any color just around on what percentage of volumes you guys are selling into '18 and a little bit just around your preference of -- and with Wever and others coming on basically, would you rather sell now into the first half of '18 at current prices? Or are you bullish enough on prices that you would potentially hold back some volumes and try to sell into higher prices in the first half? How are you guys sort of thinking about that?

Yes. I mean, if you look historically, we've done it, I would call it, ratably. We're not a trading job. We're not going to try to predict where the market will be in April. So we will sell it -- we've sold tonnage at both plants in the first half, all the way through the second quarter next year at very good prices. It's not a huge percentage of our volume at this point, but peak -- the customers -- we've just -- today is November, I forgot, today is November 1. But we weren't getting those orders for the first half of '17 last year, and this year, we're getting them. And again, we're not -- the customers are dipping their toe in the water and it tells you that they think that the market's going to be -- at least today, they think the market is going to be firmer, so they're buying earlier. And we're not going to try to sell all our volume here in the next month. But we will ratably, at good prices, will take some down and we'll start building a book for the spring. And I guess the message that we're trying to convey today is that the customers -- this isn't our views. Our customers who have a more constructive view of the marketplace and are coming to us to buy tonnage in the first half of '18. Last year, they were not.

Got it. Got it. Very helpful. Last one, can you just expand a little bit on the just the operational downtime at East Dubuque in Q4, sort of what went down? And do you expect basically all the issues to be resolved in those 12 days of downtime? Historically, you guys have operated at pretty high rates and done well. Just any color around that would be great.

Yes. This is the age-old conundrum of the way these plants operate. They're built to run full out. And one of the issues you have sometimes is when you cycle the plant. So we took the plant down in July and we did a lot of repairs and we cleaned the plant. It's brand-spanking new. The plant sometimes is temperamental when it comes back up and we've had a couple of issues that resulted. And I think our goal now is to knock these issues off and let the plant run for an extended period of time. It had a great run for, I mean, like 6 quarters. And then we took the plant out for turnaround, suddenly, we had a couple of issues, which are frustrating. But our hope is that this is the last one, and we'll just let this plant run full out for a long time before we take it down for a turnaround. But it's mystifying sometimes when they come back up that they're temperamental because they didn't like -- they cool off. They've been running for a long period and then they don't act the way you think even though you've prepared everything and it's all shiny, brand new and pretty. So this was frustrating for us after 6 quarters of 95% to 100% onstream. So hopefully, we're -- this is behind us now.

Thank you. There are no further questions at this time. I would like to turn the call back over to management for any closing remarks.

Again, thanks for everybody. Just one last shout out to Jack Lipinski and we appreciate all his help over the years. And we look forward to talking to you on the fourth quarter results coming in, in the spring. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.