CVR Partners LP (UAN) 2017 Q4 法說會逐字稿

Greetings, and welcome to the CVR Partners LP Fourth Quarter 2017 Earnings 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 Dave Lamp, our Executive Chairman; Mark Pytosh, our Chief Executive Officer; and Susan Ball, our Chief Financial Officer.

Prior to discussing our recent 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 operation 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 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. Good morning, everyone, and thanks for joining us for today's call. Our summarized financial highlights for the 2017 full year included net sales of $331 million, adjusted EBITDA of $66 million and a net loss of $73 million. Looking more specifically at the 2017 fourth quarter, we reported net sales of $78 million, adjusted EBITDA of $7.7 million and a net loss of $27 million. Fourth quarter results were impacted by approximately 12 days of unscheduled downtime at the East Dubuque Facility. We also had a few maintenance days on the UAN plant at Coffeyville. The total negative impact on fourth quarter EBITDA was approximately $5 million. The onstream rates were, at Coffeyville, the gasifier ran at 100%, the ammonia unit operated at approximately 100% and the UAN plant ran at 89% while at East Dubuque, the ammonia unit ran at 86% and the UAN units operated at 87%.

For the fourth quarter, our combined operations produced approximately 200,000 tons of ammonia. We converted the majority of the produced ammonia into approximately 306,000 tons of UAN. This left approximately 64,000 tons of ammonia available for sale or upgrade to other niche nitrogen products. We sold a combined total of approximately 303,000 tons of UAN during the 2017 fourth quarter at a product price at gate of $132 per ton versus $147 per ton in the 2016 fourth quarter. For ammonia we sold combined total of approximately 84,000 tons during the 2017 fourth quarter at a product price at gate of $264 per ton as compared to $352 per ton in the 2016 fourth quarter.

The fall ammonia application was very strong in 2017 with our volumes up 51% from 2016, where the application was difficult due to poor weather conditions in the upper Midwest. As a result of the strong fall application, inventory levels were lower and we enter the spring application with the market in good balance. Due to the challenging nitrogen fertilizer pricing environment and the downtime at the East Dubuque facility, we are not in a position to pay a distribution for the 2017 fourth quarter. 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, everyone. Looking specifically at the 2017 fourth quarter, net sales for the period were $78 million as compared to $85 million in the same prior year period. The decrease was primarily attributable to lower ammonia and UAN sales prices, and lower UAN sales volumes, partially offset by higher ammonia sales volumes. Cost of materials and other of $22 million remained flat for the 2017 fourth quarter, as compared to the $22 million in the prior year period.

Direct operating expenses, excluding depreciation and amortization for the 2017 fourth quarter, increased to $42 million from $38 million in the prior year period. This increase was primarily due to increased inventory costs being expensed associated with the overall higher ammonia tons sold in the 2017 fourth quarter. Selling, general and administrative expenses for the 2017 fourth quarter were $6.8 million, which was a slight decrease as compared to the $7.3 million for the fourth quarter of 2016. Finally, we recorded a net loss of $27.4 million or $0.24 per common unit in the 2017 fourth quarter. This is compared to a net loss of $14.5 million or $0.13 per common unit for the fourth quarter of 2016.

Now turning to our capital spending. During the 2017 fourth quarter, we spent $3.1 million on capital projects, including $3 million for maintenance capital spend and the remainder for growth capital projects. This brings our full year capital spend to $14.5 million. In 2018, we expect our combined spending to be approximately $20 million, of which $18 million is for total expected maintenance CapEx at our 2 facilities.

A full plant turnaround at our Coffeyville facility is planned for the second quarter of 2018, which is expected to last 15 days and cost approximately $7 million. Looking at the balance sheet, as of December 31, we had approximately $49 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.

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

Thanks, Susan. On our last earnings call at the end of October, we discussed the significant recovery we've seen in urea prices from the summer of 2017. Urea pricing has remained steady at these higher levels since November and begun to increase recently as customers prepare for spring. We attended the TFI conference last week and participants were cautiously optimistic about spring conditions because, one, customer inventory levels are on the lower end of normal for this time of year, urea imports are down significantly from last year as India and Latin America have experienced solid demand, and U.S. prices remain below global prices. China is expected to have minimal urea exports in the spring this season. There are production problems at various U.S. facility that have constrained the availability of domestic product in certain geographies. And most customers expect approximately 90 million acres of corn to be planted in 2018.

It appears to us that the global trade flow changes driven by new production capacity are settling in. And with much smaller capacity additions slated for the next several years, market pricing will likely be led by crop conditions and a global cost curve, largely driven by natural gas or coal cost and freight rates. We think with very efficient production facilities, low natural gas costs and proximity to the market, the U.S. appears to be a long-term winner in the nitrogen fertilizer industry. However, while we believe conditions are improving, our business plan will remain focused on operating our plant for the high onstream rates, prudently managing our cost, being judicious with capital and maximizing our marketing and logistics activities. We are well positioned with our production, marketing and logistics but remain conservative in our approach to managing the business for cash until the recovery fully takes hold.

With that, we're ready to take questions. Operator?

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

Yes. I guess, first, Mark, maybe expanding on some of those last comments that you made. Can you talk a little bit about the order book as it sits today for spring kind of -- and talk about kind of the sales that you'd already done for the first half and the second half of '17? I guess, specifically, I was a little surprised to see that the UAN netback actually declined sequentially in the fourth quarter. I'm guessing that's just a mix of tons between the plants and how much was priced at summer fill, but how much is left from summer fill to move forward because you've seen kind of industry benchmark pricing move up pretty strongly from where it was in mid last year?

I think there are about 4 questions in there. So I'll try to take them one at a time. I think one of the things that you saw and let's talk about UAN pricing quarter-over-quarter. In the fourth quarter we typically mostly sell UAN out of Coffeyville, at East Dubuque we're largely selling ammonia because of the fall application. And so the price relative to the third -- the UAN is a big mover in the third quarter for East Dubuque. So that's more reflective of the Southern Plains price in the fourth quarter. So it was lower than the East Dubuque price. And so the mix of what we sold was more weighted to Coffeyville. So that's why the price was lower.

And as you'll recall, back in the summer we put on a pretty good fill book and we were running that off in the fourth quarter. As we rolled into this year, we've seen pretty consistent demand since the beginning of the year. We -- in fact, going back to December, we were -- we had orders coming in but we've had pretty consistent demand, we've been selling through the first quarter and we've got a good book on for the spring, and pricing has continued to firm.

So we're trying to put on more second quarter volume at this point, and people are coming back. One of the triggers this past few days has been we've had moisture in Kansas and Oklahoma, which will help the wheat run, and we do expect customers coming in for product. Everyone was kind of waiting for that. So it looks like the wheat run is going to pick up momentum here in the next couple of weeks. So we'll see some more product move in the Southern Plains and that should facilitate more orders coming in. But pricing is high, higher than it's been since, we're kind of back to spring of '16 level of pricing for the spring. And since TFI, there's been increases in both UAN and ammonia since last week. And so pricing has been firming into the spring. Last year, when we got to the end of February, pricing was already starting to fall. This year it looks like it's going to rise into the spring as opposed to fall. So very different dynamic in 2018 versus '17.

Okay. Well, that's very helpful. Maybe just on that last point, I mean that would seem to indicate some expectation at least for the first half where you have some visibility at this point that your kind of average kind of netbacks would be comparably above the price, am I reading that right?

Yes. I think it will be above last year in the first half. So yes, I mean, if you look at our order book and kind of where pricing stands today, we should beat last year from a pricing perspective in the first half. And as you know, the second half, a lot of variables to be played out before we get to a sense for what that second half is going to look like. But I would just tell you that the market conditions are just much in balance in a macro sense this year versus last -- last year we had a lot of urea that showed up and that just stayed in the market through the spring. And actually it ended up -- a lot of that got reexported by, like, June, July last year. So we had a really volatile spring and this year the overall -- I'd say, that the inventory level that where things are much more comfortable this year versus last year.

Okay. And then just the turnaround at Coffeyville, choosing to do it this year in the second quarter versus prior year third quarter. Do you see that actually impacting your sales volume in the second quarter, which would traditionally be your highest netback quarter?

It will. What we -- there's -- we think there is some opportunity to increase the rate coming out of the turnaround. So we think we'll call some of that back. We tried to pick a time that we thought was a lull period in the activity level. So usually, there's a big push to apply and then there is a lull, and then there is a big top dress, side dress push coming behind that. So we've tried to time our turnaround to do it. We pushed that off from last year. So we're -- it'll be 2.5 years since the last one. So we think that the increased rate will be able to call back some of the volume that we would have been looking to sell there. So we think it's the right time to do it.

Okay. And then just last one from me, on the distribution, I understand you didn't pay one this quarter. Given the EBITDA level, that makes sense. But there's also a little bit of cash burn kind of regardless. Do you foresee needing to kind of recoup that cash burn before you would consider distribution in what should be a better pricing environment? Or help us think about that decision point (inaudible) better pricing.

Yes, when we sit down with the Board, that'll always be a discussion of do we want to go back in time and call that back. I think a lot of it's going to depend on the conditions at that moment. If we're at a point where we're distributing would we want to go back in time, we didn't burn that much cash. And so it'll be a Board discussion when we get there. And I get a lot of it is going to be what are the conditions at that time. If it's strong, I'm not sure how much you will look in the rearview mirror, but if it is not as clear then we'll probably spend more time talking about that.

(Operator Instructions) Our next question comes from the line of Richard Kus with Jefferies.

So first question from me. Just on UAN just as a follow-up on the pricing there for the first half of 2018. Do you think you can effectively get back to even or up on a year-over-year basis in Q1? Or do you think just the first half ends up averaging out a little bit better?

I would say that we're probably going to be pretty steadily above last year through the first half.

Okay, very good. And then if I look at the performance in Q4, I'm just trying to figure out what's going on on the cost side because your alumina -- your ammonia volumes were up, your ammonia pricing was up. UAN looks to me like it was relatively flat. And you should have -- all versus Q3, and you should have probably gotten a bunch of costs back from maintenance that you did in Q3. So I guess, what else was impacting you to kind of limit your EBITDA improvement on a sequential basis?

Well, we had a bunch of costs in there for the turnaround in our business. I guess, you call it turnaround, unscheduled downtime, it was about the length of a turnaround at East Dubuque. So the costs were heavy. The plant runs and we had maintenance cost to fix the issues we were having there. So it was almost as if at East Dubuque, you had from a days down perspective like another turnaround. So the expenses were going to be high in the fourth quarter.

I see. And there wasn't anything else going on that would have kept you kind of from posting mid-teens of EBITDA?

No, that was the big mover there. The pricing, obviously, brought us down. We -- adjusted, it would have been down about a 1/3, which, I think, is in line with where the pricing was for the quarter versus last year, but that downtime cost us on the expense side.

Our next question comes from Alan Glenn with Concord and Main Ltd.

Can you review for us the debt covenants that you have?

We don't have any maintenance covenants. So we only have incurrence covenants. So there is no maintenance covenants in our debt structure.

Our next question comes from Tim Raeke from Alcentra.

I was just going to follow-up on the -- can you maybe just give a little more color on what did happen at East Dubuque for it to cause the unexpected downtime? And just want to make sure, I caught it, it was $5 million was sort of the cost?

Yes, there was a little bit of downtime and the UAN plant cost us a little bit there. But most of it was in East Dubuque and we were having trouble with some tubes and the boiler feed water and the reformer, boiler feed water unit and we had to repair a tube leak and to do that, you have to -- we have to -- it's the front end of the plant, we have to take the whole plant down to repair that. So we took the plant down, it took about 12 days to complete the repairs. So...

And there's nothing that's going to linger -- I mean, it got right back up and running, no restart or whatever has to happen.

It got back up. We had some linger -- we had some issues in the first quarter and we think we're past that now. But yes, we think we've addressed the issue that we had there. We had -- up until the turnaround last year, we had a good long run there at East Dubuque. It's -- the plant has been running well since we acquired it 2 years ago. And our expectations are to have a good long run from here.

That was sort of the context of my question was, I think, the prior owner had some sort of issues, but this doesn't sound like it's related to anything there.

No, you can't lay that on the old owner. That's our -- those were our issues and we had something that we dealt with there. And we feel good -- we felt like we've addressed that. So our intention is to -- we're going to be very focused on getting a good long run out of the plant.

Okay. And then just a follow-up on the CapEx front. So $7 million, I think, is what you were saying that turnaround at Coffeyville will cost and that's sort of -- that's the delta between kind of what you had for CapEx in '17 and '18?

No, the $7 million Susan referred to was the expense. But we were a little light in our CapEx last year. And we got a couple of things that we're going to do and the turnaround typically, we have a little heavier maintenance CapEx in a turnaround year, especially at Coffeyville. So it's a little bit higher this year and we've got some -- a couple very small growth projects that we're working on at -- in the business. So that's why it's a little higher this year. It's partly maintenance and then partly some very small growth initiatives.

So within the $20 million is the CapEx for the turnaround and then the $7 million is sort of the delta on the cost -- on kind of the lost EBITDA opportunity that you'd have in Q2?

That's correct. The $7 million is actual expense, expense.

It's expense and then you have lost production.

So it's kind of like it would similar to the $5 million that you lost at East Dubuque in Q4, but obviously, on purpose downtime.

Yes. Little bit -- little bit different than that but it's the same kind of idea. Yes.

Yes. The $7 million is the true expected expense and the $21 million is the capital spend, which Mark mentioned, the maintenance CapEx and profit and growth.

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

All right. Well, thank you very much for being on the call today. And we look forward to talking to you here in another couple of months for first quarter results. 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.