CVR Partners LP (UAN) 2018 Q3 法說會逐字稿

Greetings and welcome to the CVR Partners, LP Third Quarter 2018 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: Mark Pytosh, our Chief Executive Officer; Tracy Jackson, our Chief Financial 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 third quarter earnings release that we filed with the SEC yesterday after the close 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 thank you for joining us for today's call. The financial highlights for the 2018 third quarter include a net loss of $13 million, net sales of $80 million, adjusted EBITDA of $19 million, and there is no cash available for distribution this quarter.

During the third quarter, we had strong operating performance of all the facilities. The [onstream rates were Coffeyville, the gasifier and the ammonia unit] ran at 100% and the UAN plant operated at 97%. While at East Dubuque, the ammonia unit ran at 99% and the UAN units operated at 98%.

For the third quarter, our combined operations produced approximately 338,000 tons of UAN and 63,000 tons of ammonia available for sale. We sold a total of approximately 310,000 tons of UAN during the third quarter of 2018 at a net back price of $170 per ton, which was a 23% increase over the third quarter 2017.

In addition, we sold a total of approximately 38,000 tons of ammonia during the third quarter 2018 at a net back price of $297 per ton, which was a 39% increase over the third quarter of 2017.

The ammonia volumes sold in the third quarter 2018 represent a normal seasonal selling pattern. In 2017, we had poor spring ammonia application conditions in northern plains and downtime in the Coffeyville UAN plant in the second quarter of '17.

This caused ammonia inventories to be much higher than normal at the end of the second quarter of 2017, so we sold significantly more tonnage in the summer ammonia fill season, making our third quarter 2017 sales volumes unusually high.

This year, we expect ammonia sales volumes to be much higher in the fourth quarter, compared to the third quarter as we enter the fall ammonia application period. I will now turn the call over to Tracy, to discuss our financial results.

Thanks, Mark. We reported a net loss of $13 million or $0.12 per common unit and adjusted EBITDA of $19 million in the third quarter of 2018. This is compared to a net loss of $32 million or $0.28 per common unit and adjusted EBITDA of $5 million for the third quarter of 2017.

Net sales for the period were $80 million, as compared to $69 million in the prior-year period. The increase was primarily due to higher UAN net back prices, partially offset by lower ammonia sales volumes. The decrease in ammonia sales volumes was primarily attributable to less inventory available for sale at the beginning of the third quarter of 2018, as compared to last [year's] due to the reasons Mark just discussed.

Direct operating expenses for the third quarter of 2018 decreased to $35 million from $40 million in the prior-year period. The decrease year-over-year was mainly due to the third quarter 2017 turnaround at the East Dubuque facility, which resulted in turnaround expenses of $2.5 million, coupled with decreases in repairs and maintenance costs and personnel costs as a result of turnaround activity.

Turning to capital spending. During the third quarter 2018, we spent $6 million on capital projects, including $5 million for maintenance CapEx. In 2018, we expect our combined spending to be approximately $20 million to $25 million, of which, $17 million to $20 million is for maintenance CapEx at our 2 facilities.

Looking at the balance sheet, as of September 30th, we had approximately $61 million of cash, including $25 million related to customer prepayments for future delivery of product and availability under our ABL facility of $50 million. We feel our total liquidity position of approximately $86 million at the end of the quarter is sufficient going forward.

Our long-term gross debt, including [current portion] , remains unchanged. In arriving at no available cash for distribution, we had cash needs of $15 million for debt service, $5 million for environmental and maintenance capital expenditures and a release of previously established reserves of $1 million. We [are] variable distribution MLP, we will review our remaining previously established reserves and evaluate future anticipated cash needs.

We may also reserve amounts for other future cash needs as determined by the board. As a result, our distributions, if any, will vary from quarter-to-quarter due to several factors, including, but not limited to, operating performance, fluctuations in the prices received for finished products, maintenance capital expenditures and cash reserves deemed necessary or appropriate by the Board of Directors of our general partner.

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

Thanks, Tracy. This year's corn harvest is approximately 50% complete, slightly ahead of the 5-year average. However, the soybean harvest is at 53%, 16% behind the 5-year average. In the past week, the weather has improved and it appears that momentum is growing to complete harvest. The USDA is estimating a yield of approximately 180 bushels per acre for the 2018 season, which would be a record yield for corn in the U.S.

Even with the larger crop, the carryout is expected to drop to approximately 12% in 2018. Given the current relative economics of planting corn versus soybeans, many industry analysts believe that planted corn acres will be higher in 2019 versus 2018, increasing the overall demand for nitrogen fertilizer.

Also, planted wheat acres are projected to increase 15% to 20% in 2019, the first increase in 5 years. As we stated on the last earnings call, summer ammonia and UAN fill prices were significantly higher in 2018, compared to 2017. Since that call, urea, ammonia and UAN prices have risen by a further 25% and are at levels last seen in 2015.

Urea demand has been strong in all regions of the world since the summer. Even with the price increases in urea, we have not seen an uptick in exports out of China and Iranian exports for fall shipment have shown restraint due to the potential for U.S. sanctions.

Additionally, high natural gas prices outside of the U.S. are favoring U.S. production and making nitrogen fertilizer imports into the U.S. less competitive. These higher fall prices were not reflected in our third quarter results, but are currently expected to increase our net backs as we go through the fourth quarter and into the spring. While we did not sell as many UAN or ammonia tons in the summer fill in 2018, we currently expect our fourth quarter results to reflect these improved net backs.

Domestic trade flows are continuing to mature, and we believe our customers are increasingly comfortable with the market being largely supplied by domestic production. We continue to focus on maximizing the value of our logistics capability to provide product to customers with low-cost logistics.

As the nitrogen market recovers, we will focus on maximizing free cash flow by safely operating our plants reliability at high onstream rates, prudently managing our cost, being judicious with our capital and maximizing our marketing and logistics activities. We expect that the improving market conditions may give us the opportunity to return to making cash distributions in the future. With that, we're ready to answer any questions. Michelle?

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

Mark, may be just continuing on some of the discussions you had about market commentary and fall pricing today being comfortably higher than where it was in the summer. Any way to calibrate, kind of, how much left of the summer fill program has to flow-through the fourth quarter results? Just trying to make sure we're thinking about the price realizations appropriately given, kind of, how stark is the difference in price today versus where it was in July.

Yes. We don't typically quantify that how much were sold or -- at one time, but what I would just say generally, Adam, is that, last year, we sold in the fill, we sold a lot of tonnage and it went through -- largely through the end of the year. So that continues to the end of the year. This year, we did not do that. And so you'll see, in the fourth quarter, a blending of the higher pricing, because we still have tons to sell, we had tons to sell, we've been selling it. And so you'll see a blending of that in the fourth quarter and then the first quarter will be -- we've sold some tonnage there, but not a lot. So that will be really, kind of, current market for the first quarter. So it will be a transitional quarter, but you'll see an uptick in the fourth versus the third, because prices were rising during the quarter.

Right. And then just coming back to -- you made the point about potential distributions in the future. I mean, is it fair to look at the third quarter level of profitability as, kind of, from here, if things continued with the $19 million of EBITDA, less the debt service, less the maintenance CapEx, that, kind of, gets you to about breakeven distributable cash flow. From here, if we have confidence, the prices stays at the -- around -- near or at these levels or above through the spring, what would cause you not to pay distribution?

I think the risk factor, without getting quantitative with you, the risk factor would have been if we had production issues, significant production issues. But remember that the issue with the third quarter is, third quarter is seasonally lower than the fourth, the fourth is seasonally higher, because you have the fall ammonia run. So the fourth quarter has the benefit of seasonality. And so just irrespective of pricing, assuming the plants ran the same, the fourth quarter seasonally would be higher than the third from a volume perspective. So that would just give you a sense of directionally where we're headed. But fourth quarter is usually, from a volume perspective, a great quarter for us as is the second. So...

Right. Yes, I know that makes sense. It's just like the $20 million of EBITDA or $19 million, that covers your fixed charges basically, between the interest and the maintenance CapEx?

That's a fair assessment.

Yes.

Okay. And then just as we look at -- I mean, any colors on the market broadly, kind of, import competition [as you've seen progressed -- evolving today] , I know, it's early to really be seeing UAN imports into the U.S., but just how you are seeing that product moving as the UAN market, in particular, moves away from that barge market, how you're seeing customers, kind of, act differently or just the domestic distribution channel change?

What I would say is that the only UAN that we've seen coming into the States, from an import perspective, is either the East Coast or the West Coast. It's not coming through NOLA anymore. So we don't generally see any imported products coming through NOLA up [in] Mississippi. It would enter the Eastern Corn Belt from the East Coast or the Pacific Northwest California from the West Coast. So that's really the only imported UAN product. And the customers, with the new capacity, basically, all running at full rate. The customers are drawling from those points where the logistics are the best. So all the new capacity is -- has sorted itself out and that moves based on where your plant is and what logistics you have generally, it's a combination of rail barge and truck, but the customers have gotten comfortable with that, at this point, this plant is a good drawl from that point and that's how our plants have settled out, where they come to the plant and say, Coffeyville touches these points, were they are most competitive [and needs to be the same way] . So all the plants have sorted themselves out and the customers are used to that. The other thing about the customer buying pattern is that, I would say, the customers are buying more ratably than they have in the past, because they can -- they don't have the time lag of imported products, so they can drawl from the plants and so that actually leads to more ratable buying and the buying pattern since the summer fill has been almost [ratable] . Pretty regular people come and go in the markets and buy product every week or every couple of weeks. And so we we've seen, kind of, regular flow from the customers during -- since the fill season. So they didn't buy as much in the fill, so they've been buying as we go and the prices reflected that, the demand's been consistent between the summer and -- even with higher prices, the demand stayed consistent.

It's helpful color. And then just around East Dubuque, I mean, any specific commentary around pace of harvest in the, kind of, more northern, kind of, Corn Belt in Northwest Illinois, kind of, Northeast Iowa, Wisconsin, just as you think about it? And risk of missing a fall window if, from a weather perspective, the ground is too wet or temperature gets too cold too quickly. Just any thoughts there?

Yes, it was a little slow, and I'd say, more on the Iowa side. The Illinois side is actually ahead from normal. The Iowa side has been wet, but that we've seen some dryness in the last week and a lot of progress made and I don't -- we don't -- we're not normally in the market at this point, we're normally a week or 2 from now. So I don't see anything that's going to necessarily barring unforeseen lots of rain. I see it being relatively normal, it's been cooler out there, so the flow of temperature is in a good place and as they can get corn and beans out of the field, I think, they will come in right behind that. And so I expect that to be kicking off here pretty soon. So I think it will be normal from the seasonal perspective.

Our next question comes from the line of Charles Neivert with Cowen.

Quick one. If we were to look at -- you guys sold 310 of UAN and had 338 of production and you obviously didn't sell as much ammonia. If we look at the fourth quarter, as it stands now, would we expect 4Q to -- you guys to be -- are you already largely sold out on 4Q volume, assuming you can run -- you run your business -- you're full out. Therefore, the numbers for sales and tons should be bigger than production in fourth quarter? Is that what we're looking at in 4Q? So we undersell the third quarter, but we should, in effect, oversell the fourth?

I would say that it's a little early to make that call. It's only the 3rd week of October. The demand's been there and there's always -- we're waiting for the ammonia run and we'll see what we send out there. But I expect a pretty normal selling pattern and we will largely sell out -- we usually sell out all our UAN in the fourth quarter subject to shipping schedule [and] the like. So I think it'll be pretty normal there and then just waiting for the fall ammonia run. But we've got a good book on by now, but it developed over the course of the third quarter. So it wasn't -- we didn't price it in the fill, we priced it over time. That will all be -- that product will be delivered here in the fourth quarter and then obviously, anything that doesn't get delivered, will be into the first.

Got it. Do you have any scheduled turnarounds on the next couple of quarters or you're going to be able to wait until -- everything wait until after the spring applications?

We're -- our next scheduled turnaround is -- would be in the fall of next year. So nothing in this regard.

Okay. If you look at your areas, the 2 places that you guys have production, I mean, how much soybean is in the area that's likely to go over the corn? I mean, that shouldn't be a benefit, there's probably going to be more pull locally or are you just really so much into corn areas or other areas that there's not really going to be much change in terms of your customer breakdown or customer distribution? I mean, do you expect something?

Yes, I'd say it in 2 different ways, because there's really 2 different markets. Up and around East Dubuque, I'd say, there's going to be some conversion of beans to corn there. That's a -- it's not just augur, there's we are talking to the customers, so it's pretty much a consensus view that there will be some transfer of acres from beans to corn. So we would expect to see some more drawl out of -- and that will have a bearing on the fall ammonia run, because if the acreage is really going to be out, there's going to be more pull out of East Dubuque and the ammonia run. So we'll be able to test that theory here in the coming month or so. At Coffeyville, because of its footprint all over the Western United States, the biggest issue actually that will benefit Coffeyville is it looks like there's going to be a better wheat run this year than there's been in 5 years. And Coffeyville, locally, it gets a good drawl out of the wheat market in Kansas and Oklahoma. So I think, this year, we may see more pull out of the wheat side than we've seen in the few years. And that would benefit Coffeyville, that you don't see wheat up around East Dubuque, but you see it around Coffeyville.

Yes, yes, I mean, if you see a wheat increase in acres, is it giving -- is it taking it from -- what's it taking it from?

When you talk to wheat guys, there are milo and sorghum, I mean, there -- it's not -- it's been a difficult market. They've -- those -- Kansas is not a bean market, they don't go from corn to bean or wheat to bean. So some of it's corn, but I think, it's just taking away from, I'd say, kind of, downgraded product, but we're going to see more -- we're definitely going to see more wheat acres, that's a consensus view of the customer base.

Is the pricing in -- generally, in wheat strong enough that you're also going to get probably the -- with any luck, assuming this pricing generally holds, the benefit of things like cider season and all of those things that -- as they come through, you've got winter and then the winter wheat coming out -- will go in and then come out in the spring and then spring wheat goes in, I mean, that whole cycle is a benefit, right?

Yes, well -- and the issue is that we've had a couple of really rough weather years in Kansas, where it's been really dry and hard to get that rotation. But this year, there's good moisture in the soil, and we're starting to see a pull in interest in the first quarter at -- in the wheat run, so we're starting to see indications. It's too early to -- for a big call there, but there's indications that there's going to be pull for the wheat run in the first quarter, and we've seen pretty light wheat run from the last several years out of Coffeyville.

Okay. I think that, covers -- you guys haven't said how much -- what your commitment is for 4Q, based -- again, assuming production at reasonably high rates, you're not certain yet what -- or how much have you committed already to sale and what, sort of, left that you have that could be sold at whatever prices that come through, assuming you're going to sell it out, but how much is left?

We don't like blagging to our competitors what we're planning to do, so we don't tend to like to talk about that. We're comfortable where we stand, we have tons to sell, but we're comfortable where we stand and the market demand is there. But I don't want to quantify that, because I don't want to [blag] where we stand on our book.

Okay. When you guys were dealing with third quarter, I mean, I assume -- is it -- did you guys make that conscious decision to back down the amount of product you make available through the fill programs? That was [accounted] as -- or it wasn't that the demand wasn't there, the demand was there, you just decided to cut it off at a certain level and then let it go to a more normal market pricing. Is that the way I would classify it?

Yes. We decided to not sell as much and I think, others did too and we weren't the only ones that -- yes. But we all saw the demand there and we knew -- the -- most of the customers told us that they didn't buy a full book either. So we -- our assumption was and that's why I was describing it as ratable buying. [They bought a block in July, was smaller than last year] and -- but we -- our expect -- everyone's expectations that they'd be back in like September for an another round and that's continued on in September, October and so the demand's been steady. But when you have domestic production, now they can buy that way without the risk of, boy, are the barges going to make it before the river closes and things like that. So we don't have those variables anymore. And that makes the customers comfortable, because they can steadily buy.

Right. When does the river close? Or is it -- when do you guys…

Parts of it have been off and on here, because of the rains up there, parts of the -- we go all the way up north -- and that's created some variables in the urea market, which we're not in, but there were some river closings up there due to flooding, but we're not far from the beginning of the river closing.

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

Quickly, I think, the pet coke stock price is higher than usual given the refinery running light. Do you see the costs going to stay here or do you see some improvement in 2019?

I think as we get into '19, the costs that we're going to see there might be slightly higher, but all of the refineries are running lighter crude these days, and we've taken that into account in our 2019 planning and sourcing. And so we expect to be able to manage the costs effectively. We have a group of refineries that are close to Coffeyville, and we're going to work on our drawl from those different refineries to feed the pet coke. So this year, we've had to go out into the market more than normal just because there's more lighter crude going through the Coffeyville refinery. But as we plan for '19, we have various avenues that we can pursue and we're doing that, and I feel comfortable we'll end up in a good economic spot for the price of pet coke for 2019.

Thank you. We have reached the end of our question-and-answer session. I would like to turn the call back over to management for any closing remarks.

Again, I would like to thank all of you for your interest in CVR Partners. Additionally, I'd like to thank all of our employees for their hard work and commitment towards the safe, reliable and environmentally responsible operation. We look forward to reviewing our fourth quarter results during our next call, in the New Year. Thank you very much.

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.