CVR Partners, LP (UAN) Q4 2012 Earnings Report, Transcript and Summary

Greetings, and welcome to the CVR Partners Fourth Quarter 2012 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Wes Harris, Vice President of Investor Relations for CVR Partners. Thank you, Mr. Harris. You may begin

Good morning, Manny. Good morning, everyone. We appreciate your participation in today’s call. With me today are our CEO, Byron Kelley; our Chief Operating Officer, Stan Riemann; and our CFO, Susan Ball. Before we start to discuss our 2012 fourth quarter and full year results, I’d like to make the following Safe Harbor statements. In accordance with federal security laws, statements in this earnings call relating to matters that are not historical facts are considered forward-looking statements. These forward-looking statements are based on management’s beliefs and assumptions using currently available information and expectations as of this date. These forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, including those noted in our filings with the SEC. In addition, today’s presentation includes various non-GAAP financial measures. The disclosures related to such non-GAAP measures, including reconciliations to the most directly comparable GAAP financial measures are included in our 2012 fourth quarter and full year results press release that we filed yesterday after the market closed. So with that, I’ll turn the call over to Byron Kelley, our CEO. Byron?

Thank you, Wes, and good morning to everyone, thank you for joining us today. This morning I’m going to begin with a high level review of our 2012 fourth quarter and full year results. Susan will follow with the discussion of the detailed financials after that discussion. I will conclude later with comments regarding our business and some industry trends as well as provide our outlook and formal guidance for 2013. Then after that we’ll be happy to answer questions that you may have related to the business. The 2012 fourth quarter closing marked another successful year for us for both our CVR Partners and for our unitholders. We began the fourth quarter with our scheduled plant turnaround during which we perform maintenance activities designed to maximize our operating efficiency of the plant. As a result of that turnaround just as we expected we saw ammonia production rates increase significantly somewhere in the neighborhood of 8% or 9% once we finish turnaround. During the turnaround we also installed some critical assets and tie-ins that related to our urea ammonium nitrate plant expansion which I’ll touch more on as we go through the presentation. As expected with the turnaround, our 2000 fourth quarter results were impacted due to the downtime and the incremental repair and maintenance expenses associated with the time we were down. During the 2012 fourth quarter we did post a net income of $15.3 million on $67.6 million of net sales. This is compared to net income or $41.2 million on net sales of $87.6 million in the fourth quarter of 2011. Our 2012 fourth quarter adjusted EBITDA which represents net income adjusted for depreciation, amortization, interest expense and income, income tax expense, share-based compensation and turnaround expenses was $27.1 million as compared to $48.4 million in the…

Thank you, Byron, and good morning everyone. Echoing Byron’s comments, we are pleased to report another quarter and full year solid financial results for the benefit of our unitholders. As previously mentioned, fourth quarter 2012 net sales were $67.6 million compared to $87.6 million in 2011. Again this decrease was primarily attributable to the lower UAN sales volumes due to the turnaround as well as lower prices for UAN during the 2012 fourth quarter. Partially offsetting the overall decrease was higher sales volumes of ammonia due to a UAN plant compressor issue in December. As a result we did not convert as much ammonia to UAN on a relative basis. In addition, we did not sell as much hydrogen to the adjacent refinery of Coffeyville in the 2012 fourth quarter as in the prior year period. Cost of product sold for the 2012 fourth quarter was $11.5 million compared to $14.4 million in the fourth quarter of 2011. Contributing to the decrease was lower consumption of pet coke tons and freight and distribution costs due to the turnaround. Also contributing to the quarter-over-quarter decrease, was a lower blended price for the pet coke consumed. As we have discussed in the past, we typically purchase over 70% of our pet coke from the adjacent refinery, the remaining 30% of our pet coke requirements are purchased from a third-party supplier under a contract that begin in March of 2012 and runs through the end of 2013. During the 2012 fourth quarter, our average cost for consumed pet coke, including third-party purchases, shipping, and handling was $30 per ton. This is compared to $40 per ton for the fourth quarter of 2011. Direct operating expenses excluding depreciation and amortization was $29.2 million for the fourth quarter of 2012 as compared to $21.1 million…

Thank you, Susan. As we move forward into 2013, we certainly believe that we’re in an enviable position to materially grow our business throughout the year. Supporting our outlook for strong industry fundamentals including what is anticipated to be a robust planting of corn in the spring. Driving this expectation is really the damaging effects on last year’s crop due to the drought in the majority to the Midwest, and other key growing regions. The USDA estimates last year’s yield was 122 bushels per acre and that the industry ended the year with the carryout of 647 million bushels, and this indicates a stocks-to-use ratio of only 5.8% which is the second lowest in the last 50 years. Assuming normal weather, we expect that it will take several years to rebuild this inventory back to historical levels which bodes well for us fertilizer manufacturers. The USDA is estimating 96 million acres of corn will be planted this spring, and we agree with them on this level of planting. So now I’ll touch on that later. But we certainly agreed that we expect 96 million of acres of corn to be planted this spring. Again, this bodes well for the fertilizer producers, to the nitrogen producers. And it’s driving a strong pricing environment for fertilizer prices throughout this year, we believe. Ammonia prices actually over the past couple of months, they may have retreated a little bit from those abnormal highs we saw later last year. However, they were still very strong in January and February. And from a UAN, if you look at current spot prices, current spot prices tend to be higher than it were last year. We have UAN orders booked substantially for all of our anticipated production for the first quarter in 2013, and more than half…

(Operator Instruction) Our first question is from Ted Drangula of Morgan Stanley. Please go ahead. Ted Drangula – Morgan Stanley: Hey, guys. It’s a very good year and pretty good outlook.

Yes. Thank you, Ted. Ted Drangula – Morgan Stanley: I had a couple of questions on I guess the nitrogen market in general, it seems like the UAN prices have been really doing well here since the beginning of the year whereas urea is kind of been going the opposite direction, I know you guys don’t really sell any urea but do you see any in a relationships there between the two markets, or is there any concern that urea may drag UAN down or you think it might go the other way and I guess in the end what’s your outlook for UAN here as we move through the year?

Ted, I’d say generally for maybe as me showing up here, there was this long-term historical relationship between urea and UAN seemed like in beginning of last year we started seeing some disconnect at some things you couldn’t always explain, so it’s hard to know, just quite, I mean obviously there’s a tie there. But I think what you’re going to see right now, one reason you’re seen strong UAN. We have gotten some moisture in some of the drought regions, certainly enough to have a positive impact on spring wheat crop. And so we expect that that’s driving a lot of the UAN. Where they’re now, they’re going to need to get fertilizer and herbicides into the ground pretty quick probably not ideal moisture content for putting ammonia into the ground but certainly UAN will work well for that. And we think that’s been driving some of the stronger prices you see on UAN and obviously UAN as a liquid has that advantage over urea. Gone through the year, I mean the real question mark for all of us and when you start talking about pricing is nobody ever at this time of the year has any idea what’s going to happen in spring season and the fill season. But I will say that we’ve had certainly good indications on a very good UAN market in the first two quarters of this year. Ted Drangula – Morgan Stanley: Great. And I guess a follow up would be, on the pricing side some of the things I read out there show these really good prices in the Corn Belt. And I know you going to realize whatever it is like $30 to $40 below that often times. Are you able to in the business you’ve booked so far can you give us a little color on how you’re doing against that or is it really product trading, $390 in the Corn Belt, that’s – those are some pretty amazing prices?

Well I think a couple things concerning, first, obviously, I don’t want to release any prices of what we’ve been getting. I think there are things you have to think through when you see that price in terms of a lot of the product sales that we recognize in the first quarter and everybody else recognized in the first quarter or actually sales made last year in a different pricing environment but certainly the spot prices that you’re seeing for crop shipments are high and we’re glad to see that and then it’s good for our business. But I really not going to – until we finished the first quarter, I’m not going to talk about first quarter pricing in any detail. Ted Drangula – Morgan Stanley: All right. Thanks.

Okay. Thank you, Ted.

Thank you. Our next question is form Matthew Korn of Barclays. Please go ahead. Matthew Korn – Barclays: Hello, everyone. And again congratulations on a great 2012. I just – could you talk maybe a little bit about the current grower sentiment in your regions coming out of the USDA outlook, and seeing conditions in states like Nebraska where they’re still very challenging. Is there concern about lingering moisture issues that kind of we’re an outsider overlooking and is that adding any uncertainty about maybe what to plant and how much to plant?

Well I mean I don’t think there’s any question that the fact that we know we started with some low moisture content in some of those regions has had people – some of the farmers holding back a little bit. Certainly with some of the moisture that we’ve seen in North Texas and in few areas of Kansas and some in Nebraska has gotten and as I mentioned earlier little more about wheat and we’re seeing movement there. I think we would still likes to see more moisture related to corn crop and it’s really going to be a little wait and see to see where that develops. Obviously, you’ve got some areas in the U.S where it’s not dry and you’re going to see a lot of corn. But as – this is something we’ve got to watch as we go through it. So I would say a little more optimism over the last few weeks than maybe the month of – first month of the year. But certainly more optimism on wheat but a little earlier to make a call on the corn as to how much impact it’s going to have in some of those regions. Matthew Korn – Barclays: All right. And if I could maybe a follow-up, a small one, could you talk maybe a little bit more about the property tax situation that you’re looking at beyond 2016 and maybe what maybe the potential outcomes you’re looking at today for the 2008 case and to the extent you can what that would mean as far as your tax bill?

Well, I mean I think the case is filed and basically again it’s a determination of classification. If we win that case then on an appraisal value you would see appraisal pretty much what I talked about that we see in the settlement period for 2013 through 2016 essentially that would stay in place. If we don’t win that case then the appraisal would go back and we would not have the $10.5 million advantage or savings that we’re seeing now. Whether or not the court finds some way to split it in the middle, I don’t know. So that effort will be ongoing and we’ll continue to pursue that and we think it’s important to win that. We’re also just so you know we’re also pursuing with other industries in Kansas a legislative effort to get some clarification around these how the assets are classified. This is the end result of this has ramifications far in excess of just us, it’s pretty much all of the industry in about – it’s in the industry in Kansas, so there’s a lot of concern about all the other industries that all of a sudden they start seeing some reclassifications. The general feeling is this is not what the legislative intended when they set up the original tax laws and so we’re hoping to get some help there and so we’re battling this basically on two fronts. Matthew Korn – Barclays: Thank you very much.

Thank you. (Operator Instructions) The next question is from Kenneth Cramer of Citigroup. Please go ahead. Kenneth Cramer – Citigroup: Do you see any increase in demand from overseas buyers?

I think the question was, have you seen any increase in demand from overseas buyers.

At this point, not really. I mean nothing abnormal. In regard to the – if you’re telling my buyers of corn, the answer not a lot, down at $7 corn, we’re utilizing essentially all of that corn – pretty much domestically. You can look at the levels of exports we’ve had in the last year or two. And that really isn’t going to change a lot at $7 corn and so our product though is also domestically all of our UAN product is sold for domestic utilization. The U.S. is a net importer of both nitrogen and UAN and so in general I don’t think you’re going to see any increases of exports of those products either. Their seasonal exports sometime not by us, we sell all of our product domestically. Kenneth Cramer – Citigroup: Thank you.

Thank you. The next question is from (inaudible) of Morgan Stanley. Please go ahead.

You get 70% of your pet coke from the refinery next door and the refinery next door is 59% unionized and there are contracts coming due with the Metal Trades Unions and the United Steelworkers Union that expire March of this year which is in 30 days. If those negotiations are not settled could they stop production at CVR Partners because you don’t give any pet coke?

Byron, I can – let me handle this?

Yes, Stan, go ahead. Stan Riemann, he’s our Chief Operating Officer.

The answer to your question is no. We finished our labor contract in December. So our labor contract is not subject to what happens in March. So, there’s not going – there will be no shutdown of refinery over labor issues. And it’s a four year contract we signed in December.

Well, when you said we, don’t you mean CVR Partners? I’m talking about CVR Refining.

So am I. I’m the Chief Operating Officer of CVR Refining as well.

Because when CVR came public and I’m reading – I read – what I was discussing to you was reading the prospectus. And the prospectus, of course, is dated in January and you’re talking about the settlement in December.

I mean we’re confusing the two. There’s two labor agreements there’s one at Wynnewood and there’s one at Coffeyville.

Right.

And the one at Wynnewood was entered into last summer and the one at Coffeyville was entered into this winter. That was the actual sign day was December or not I don’t know but it is completed. And we do not have a union negotiation in March, it is behind us.

Okay, good. Thank you very much.

Thank you.

Thank you. We have no further questions in queue at this time. I would like to turn the floor back over to management for any additional remarks.

Well, we thank you again. We thank you for your participation today. Always glad to answer your questions. If you have follow up questions you can call either me or Wes Harris. And we’ll be glad to get you some answers. Again, we appreciate everybody’s support of our business. We are excited about 2013, I think it’s going to be a great year. And we’re glad to have you as our partners as we move through that year. So again thank you very much and have a good day.

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.