CVR Partners LP (UAN) 2018 Q1 法說會逐字稿

Greetings, and welcome to the CVR Partners, LP First Quarter 2018 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. You may begin.

Thank you, Michelle. Good morning, everyone. We appreciate your participation in today's call. With me today are Mark Pytosh, our Chief Executive Officer, and other members of management. 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 2018 first 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 our call today. Before I begin, I would like to thank Susan Ball for all her contribution to CVR Partners and the success over many years. Susan has been instrumental to our success. She will be missed but we wish her all the best in the future. The summarized financial highlights for the 2018 first quarter included net sales of $80 million, a net loss of $19 million and adjusted EBITDA of $13 million. First quarter results were impacted by approximately 12 days of unscheduled downtime in January at the East Dubuque Facility. The total impact on first quarter earnings was approximately $3 million. The onstream rates were Coffeyville, the gasifier ran at 100%, the ammonia unit operated at approximately 100%, and the UAN plant ran at 99%. While at East Dubuque, the ammonia unit and UAN plant ran at 87%.

For the first quarter, our combined operations produced approximately 199,000 tons of ammonia. We converted the majority of the produced ammonia into approximately 339,000 tons of UAN. This left approximately 59,000 tons of ammonia available for sale, while the rest was upgraded to other fertilizer products. We sold a combined total of 345,000 tons of UAN during the first quarter of 2018 at a net back price of $153 per ton as compared to $160 per ton in the first quarter of 2017. For ammonia, we sold a combined total of approximately 36,000 tons during the 2018 first quarter at a net back price of $322 per ton as compared to $308 per ton in the first quarter of 2017. The fall ammonia application was very strong in 2017 compared to difficult weather conditions in the fall of 2016. As a result of the strong fall application, inventory levels were lower and we sold less volume in the first quarter of 2018 compared to first quarter of 2017. Also affecting ammonia sales volumes in the first quarter of 2018 was the unplanned downtime at East Dubuque. Due to the challenging nitrogen fertilizer pricing environment and the downtime of the East Dubuque facility, we are not in a position to pay a distribution for the first quarter 2018.

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

Thanks, Mark. We reported a net loss of $19 million or $0.17 per common unit and adjusted EBITDA of $13 million in the first quarter of 2018. This is compared to a net loss of $10 million or $0.09 per common unit and adjusted EBITDA of $21 million for the first quarter of 2017. Net sales for the period were $80 million as compared to $85 million in the same prior year period. The decrease was primarily attributable to lower ammonia volumes partially offset by higher UAN sales volumes. Cost of materials and other of $22 million remain flat for the first quarter of 2018 as compared to $22 million in the prior year period. Additionally, we had higher direct operating expenses for the first quarter of 2018 of $39 million as compared to $36 million in the prior year period. The increase was primarily due to increased inventory cost being expensed due to overall higher UAN tons sold in the first quarter 2018.

Turning to capital spending. During the 2018 first quarter, we spent $2.7 million on capital projects, including $2.3 million for maintenance capital spend. In 2018, we expect our combined spending to be approximately $21 million, of which $18 million is for maintenance CapEx at our 2 facilities. A full plant turnaround at our Coffeyville facility began in mid-April, which is expected to last 15 days. We estimate expenses associated with the turnaround, exclusive of the impacts of the 15 days of lost production, are approximately $7 million. We are on budget and on schedule.

Looking at the balance sheet. As of March 31, we had approximately $61 million of cash and cash equivalents, and availability under the ABL facility of $49 million. We feel our total liquidity position of approximately $85 million at the end of the quarter is adequate going forward. Our long-term gross debt, including current portion, was approximately $647 million. With that, I'll turn the call back over to Mark.

Thanks, Jay. Spring planting has been off to a slow start this year as temperatures are well below normal averages, and we've had a lot of rain, snow throughout the Corn Belt. Demand is to increase this week and the next couple weeks look promising in terms of temperature and dryness, and we can easily catch up and get back on track for corn planting. The USDA is estimating planted corn acreage to be approximately 88 million acres. While this will be down from 2017, we still expect a solid demand year for nitrogen fertilizer, and the lower acreage should help with reducing corn inventory carryover into the 2019 planting season. Since our last earnings call, urea prices have declined about $20 to $30 per ton, but UAN and ammonia are only down a small amount during this period. We will have a better idea about pricing for the rest of the season, the season being June 30, once preplant application gains momentum. We believe that customer inventory levels are lower than normal, and we expect good demand through the side-dress season.

At this time last year, we were experiencing domestic competitors marketing new production capacity, causing a change in trade flows. Now that all of that new production is onstream and the trade flows are normalizing, the market is more settled in 2018. We believe customers have grown accustomed to purchasing more of their urea needs from domestic producers that can provide a steady supply as well as just-in-time deliveries to meet their demand. Ammonia and UAN are supplied largely from domestic production. China has not been very active in the export market this year, allowing the new production to fulfill the need.

As we finish the planting season the second quarter, we expect the nitrogen fertilizer market to be in better balance than last year, and expect the second half 2017 pricing to have been the low of this downturn. However, even as conditions approve, our business plan will remain focused on operating our plants at high onstream rates, prudently managing our cost and in this regard, in collaboration with our parent company, CVR Energy, we have been restructuring our organization to reduce G&A cost, eliminate unprofitable activities and improve decision making. Our SG&A was lower in the first quarter by $1 million versus 2017, and we expect further savings during the rest of 2018. We're going to continue to be judicious with our capital and maximize our marketing and logistics activities. We think we're well positioned with our production, marketing and logistics, but we're going to remain conservative in our approach to manage forecast until the cash -- until the recovery fully takes hold. With that, Michelle, we're ready for Q&A.

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

Maybe starting off just on pricing and the realized ASP in the quarter, Mark, it was down $7 a ton year-on-year for UAN, and if I go back to the last quarter call, I think there was expectation that pricing could be up year-on-year in the first half of 2018 versus '17 and even potentially approach the levels of the spring of 2016. And I'm just trying to reconcile those 2 dynamics of what happened in the first quarter.

Sure. So there's got 2 different dynamics. One is the orders that we've taken this year, which are at much higher prices and higher than last year, and as we said, probably approaching the 2016 year. We had carryover tons that we hadn't delivered yet from the fill season and that blends down that average price in the first quarter for UAN. Ammonia was higher than last year but UAN, we call it a blended number of the fill tons at much lower prices and then everything we've sold this year has been at much higher prices than the fill. So it's kind of a blended number. So those are the 2 dynamics in that. And we -- as we get into the second quarter, we will benefit from 100% at the higher pricing.

And was -- anyway to quantify that? And I guess, the corollary is, of the second quarter, how much of your -- what you have left to price, understanding that the side-dress season, which could be pretty important this year given the late planting. Are we thinking about what price versus kind of still left in the market?

Yes. And I don't want to post our inventory levels for our competitors, but we've sold -- we've got a good book already, but we still have more to sell into the second quarter. So pricing's been good since January. And so our book is good. And what we're saying is the market's sort of been flat. It's down a little bit from the February call, but just a little bit and have sort of been flattish, and we expect demand to pick up here. Now product's moving. We've seen product move a lot here in the last few days. And so we expect a sort of a ramping up of the demand, and I think it'll be at, I think, at very good prices as we finish out this spring. So we have more to sell. But we already have a good book at higher prices sitting there today and we'll supplement that with the spot sales for the next couple months. But we don't have the whole quarter to sell, we have a book on. And so you'll see a very different price profile in the second quarter versus the first.

Okay. And as I think about coming out of the turnaround at Coffeyville, expectation is you get the full 2 months, kind of May, June, kind of running at full rates. They can go into that side-dress season? Is there any pickup in production that you'd expect from -- at Coffeyville after the turnaround?

Yes. We -- if you look at our run rate in the first quarter, actually in the last 2 or 3 quarters, we've had some issues with our ammonia synthesis loop, and so we're going to pick up decent production on the ammonia side. I won't give exact number but it's probably on the order of 100 tons a day of incremental ammonia production coming out of this turnaround. So we'll -- our economics coming out will be better than what we had going in.

Okay. And then in the prepared remarks, you alluded to some SG&A reductions and you were down $1 million or so year-on-year. Is that a reasonable run rate for the balance of the year? Or is it not quite that sizable (inaudible)?

We think so. We're -- obviously, we're working through some plans. Our parent company has been on a -- we are on a mission to reduce our cost, and I'd say that that's a good number to start with. And hopefully, we'll squeeze some more out as we go. But as you've seen, we've been watching ourselves and we've had a renewed focus with the arrival of Dave Lamp as CEO of the parent company. And so we're hoping to bring that down further as we go into the summer here.

Okay. And then last one for me. Is there anything on the plant side that you could do on the operating expense side? Or is really the focus more on just on the SG&A, the administrative functions?

No. We're looking at the expense side as well. Again, this is part of the overall corporate initiative to chip away at routine expenses whether those are operating expenses or SG&A. We are benefiting and looks -- the year looks pretty good. The curve looks pretty good for natural gas. So we may get a pickup at East Dubuque for that, and so we're hopeful that we're going to get both -- I cited SG&A, but it's -- we're working on the operating expenses as well.

Our next question comes from the line of Richard Kus with Jefferies.

So as you talked about the spring season being a little bit delayed here, can you give us a little bit of color what you think the increase in volume ends up being this year relative to last year as you go from Q1 to Q2?

We don't really give the forward forecast for that, but this year will be -- it'll have a little more waiting in the second quarter, particularly for ammonia because sometimes, we will have ammonia deliveries in March and we really didn't have a significant amount this year, particularly at East Dubuque. So it will all basically fall in the second quarter. And so the year's wading a little more to the second quarter this year versus -- it's always stronger in the second quarter but it'll be stronger this year than in previous 2 years.

Got it. So ammonia should be more normalized in Q2 relative to what we saw in Q1 then?

Yes. And if we -- if you adjust it at a 6-month block, we'll be back to normal. We'll get that product out there. It's moving. It started moving here recently. And so -- and a planting season, the preplant lasts like 10 to 15 days. So if you lose 2 weeks, you don't lose the season, you just move it back a little bit. And that's basically what's happened. It's move from early April to later April.

Got it. And could you guys maybe give a little bit of an idea of what you think the downtime that you're taking in Q2 is going to end up taking out the volumes? Or shouldn't that have too much of an impact?

Well, if you look at our cover posted, what we produce at Coffeyville in 15 days, it's probably around 42,000 tons to 45,000 tons of UAN, because we upgrade virtually everything in the UAN there.

Got it. And so at the end of the day, that just kind of end up being lost for you in that case?

It does. It does.

Okay. Got it. And then with regard to the unplanned downtime that you had in Q1, I think you had mentioned the cost on that was about $3 million. Is there going to be any spillover of unabsorbed fixed costs in the Q2 from that?

We don't expect any. And I'd say the one thing that's come out of that is that it'll -- from -- since January, the plant has run at its highest production levels on ammonia that we've seen since we bought the plant. So the plant seems like -- it seems like everything -- we've sort of dealt with the issues there and we're running at very high rates, north of 1,100 tons a day of ammonia.

(Operator Instructions) Our next question comes from the line of Charles Neivert with Cowen.

This year, the perspective planning numbers for corn was at $88 million. Obviously, it's down a little from the year before. But if you look at your particular area, since you are very localized especially in the Illinois area, does that seem to be the case? Or is corn going to be more normal versus like last year's number in your area? Is that -- is there any hit to the acreage you guys think are going to be planted based on your contact with customers?

Charlie, we are only seeing a little, I call, marginal movement of acreage around. And there's always that kind of a flurry near the end with the final decisions made. Corn has been a little stronger. So we may not believe as much as people think. I would just tell you from looking at demand the plant pull from the -- at the 2 plants, you don't really feel, I'd say, a noticeable difference in demand for product. And so I would -- it's going to be down a little bit. I think the better factor for us, because I think that demand is a good demand with it marginal being delivered domestically as opposed to import of product is, if we can get the corn inventory balances a little better, more favorable, we get the corn price higher. That's probably on a intermediate to long term, more important than if we did another 1 million acres or 2 million acres. I'd rather see corn price at $0.50 or $1 a bushel higher than where it is today. That would be better for us long term.

Okay. And then also does Coffeyville serve the wheat markets? Where it is? And if it does, is it -- do you think there's any issue around side dress because some of the damage to the wheat crop that might just have farmers saying, "Let's not bother putting anything down?"

We do serve the wheat-- Kansas is wheat country. And we do serve in that market. I would tell you it's actually been a little better than we would have expected so far this year. We need some moisture there. Probably most important thing in the next, call it, 3 to 4 weeks would be some moisture to limit the damage to the crop. But we've seen a pretty good -- I'd say, from a pretty tough situation in wheat generally, we've got more demand out of that than we thought we might see there. So it's a tough market. It's much tougher than corn and soybeans. And -- but that market's hanging in there in Kansas. But the moisture in the next few weeks will be important to kind of clean out the -- and finish out the planting season here.

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

Yes. Just want to thank everybody for being on the call, and we look forward to talking to you next quarter. 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.