CVR Partners, LP (UAN) Q3 2016 Earnings Report, Transcript and Summary

Greetings, and welcome to CVR Partners Third Quarter 2016 Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Wes Harris for Business Analysis. Thank you, Mr. Harris. You may begin.

Thanks, Doug, and good morning everyone. We appreciate you joining us for today’s call. With me is Chief Executive Officer, Mark Pytosh; as well as Chief Financial Officer, Susan Ball. Before Mark and Susan discuss our results, I'd like provide the following Safe Harbor statements. In accordance with Federal Securities 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 today. 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 financial measures, including reconciliations to the most directly comparable GAAP financial measures, are included in our 2016 third quarter press release that we issued this morning. Adjusted EBITDA is an example of such non-GAAP financial measures. Adjusted EBITDA represents net income adjusted for depreciation, amortization, net interest expense and other financing costs, income tax expense, major scheduled turnaround expenses, non-cash share-based compensation, loss on extinguishment of debt, expenses associated with the East Dubuque acquisition, and business interruption ensured proceeds. So with that out of the way, I’ll turn it over to Mark.

Thanks, Wes, and good morning, everyone. The summary of our financial highlights for the 2016 third quarter included; revenue of $78.5 million; adjusted EBITDA of $17.4 million; and a net loss of $13.4 million. Looking at our two facilities in more detail, Coffeeville continues to post high on-stream rates. During the quarter, the gas fire ran at 96%. The ammonia unit operated at almost 95%, and the UAN plant ran at 94%. Similarly, East Dubuque also saw high on-stream rates in the period as ammonia unit operated at 94% and the UAN plant ran at 93%. As a reminder, we installed a new ammonia synthesis converter during East Dubuque scheduled major plant turnaround that we successfully completed during this year's second quarter. Since that time, the plant is producing ammonia at an average rate for above 1,075 tons per day, which is more than 100 tons per day higher than levels we saw heading into the turnaround. For the third quarter, our combined operations produced 200,800 tons of ammonia. We converted a majority of the produced ammonia in the 317,200 tons of UAN, leaving 60,300 tons of ammonia available for sale. We sold combined total of 296,000 tons of UAN during the 2016 third quarter at a product price at gate of $154 per ton. This compares to a product price at gate of $199 per ton for the second quarter of 2016. For ammonia, we sold a combined total of 47,700 tons of product price at gate of $345 per ton. Our product price at gate for 2016 second quarter was $417 per ton. While the nitrogen fertilizer pricing environment was challenging during the 2016 third quarter, we are pleased to be slightly free cash flow positive for the quarter. I would note that free cash flow would have been several million dollars higher, if not, for the impact of lower available volumes due to the East Dubuque turnaround in the second quarter. I will now turn the call over to Susan to discuss our detailed financial results. Following that, I will provide some concluding remarks, and then open it up for Q&A. Susan?

Thank you, Mark, and good morning, everyone. As our acquisition of the East Dubuque facility occurred at the beginning at this year's second quarter, year-over-year the comparability is significantly impacted across the line items in our reported financial. Results for last year's third quarter were impacted by Coffeeville scheduled plant turnaround also that lasted approximately 18 days. Subsequent to Coffeeville's turnaround, the air separation unit operated at Linde that feeds oxygen and nitrogen to the facility was impacted by three separate unexpected shutdowns. The result was approximately 18 days of additional downtime at Coffeeville in the third quarter of 2015. Now given this back-drop, net sales for the 2016 third quarter were $78.5 million as compared to $49.3 million in 2015. The increase was substantially attributable to the inclusion of East Dubuque in this year's third quarter. Excluding the East Dubuque, net sales would have decreased by $3.1 million. The substantial majority of this decrease at Coffeeville was related to lower year-over-year pricing for UAN, and to a lesser extent ammonia. Partially offsetting the decrease was higher sales volumes in UAN in 2016, given the previously discussed downtime in last year’s third quarter for the Coffeyville facility. The increase in cost of products sold for the 2016 third quarter to $19.9 million as compared to $14.5 million in 2015 was primarily attributable to the inclusion of East Dubuque. Excluding East Dubuque, cost of products sold would have decreased by $1.5 million, primarily due to less purchased ammonia and lower pricing for pet coke receipts from CVR Refining adjacent refinery. Partially offsetting the decrease was increased freight expense and higher costs for railcar repairs, and inspections during this year’s third quarter. Direct operating expenses for the 2016 third quarter decreased to $32.5 million from $33.2 million in the prior year period. Excluding East Dubuque, direct operating expenses decreased by $10.8 million. This was primarily due to the $6.6 million of turnaround expenses for Coffeeville in last year’s third quarter, as well as lower year-over-year repairs and maintenance costs and certain other expenses. Selling, general and administrative expenses for the 2016 third quarter were $7.3 million as compared to $6 million for the third quarter of 2015. The increase was primarily associated with $2 million for the inclusion of East Dubuque, which was partially offset by approximately 800,000 of lower merger related expenses. The increase in depreciation expense to $16.4 million from $7.4 million in 2015 was primarily due to the inclusion of East Dubuque in this year’s results. Interest expense was $15.6 million for the third quarter of 2016 as compared to $1.8 million for the same period last year. The increase was due to increased borrowings to complete the East Dubuque acquisition and the higher interest rate. Finally, we reported net loss of $13.4 million or $0.12 per common unit in the 2016 third quarter. This is compared to net loss of $13.5 million or $0.18 per common unit for the third quarter of 2015. During the third quarter, we spent $6.4 million on capital projects, including $3.4 million for maintenance CapEx. The $3 million spend on growth CapEx during the period was substantially associated with paying our naming invoices related to the installation of the new ammonia synthesis converter at East Dubuque during the 2016 second quarter. For the 2016 full year, we expect combined spending for maintenance CapEx at our two facilities of approximately $15 million. The full-year estimate includes nine-months of spending for East Dubuque as we closed the acquisition on April 1. Looking at the balance sheet as of September 30th, we had $65 million of cash and cash equivalents, and $624 million of net debt. On September 30th, we entered into a senior secured asset based revolving credit facility with an aggregate principal amount of availability of up to $50 million. Included is an incremental facility that increased in borrowings of up to $25 million in the aggregate, subject to additional lender commitments and certain other conditions. Any low proceeds may be used for capital expenditures and other general corporate purposes. Finally, pro-forma adjusted EBITDA for the 12 months ended September 30, 2016 was $150.5 million. I would note that the pro-forma adjusted EBITDA assumes the East Dubuque merger and the 2015 second quarter financing transactions occurred at the beginning of the 12 months period. Pro-forma adjusted EBITDA does not report support direct returns, what the partnership’s results actually would have been. And I also will note that we have included a brief presentation on our Web site with certain slides to financial information, and the information associated with our debt to capitalization and ratios. With that, I'll turn the call back to Mark for his closing remarks.

Thanks, Susan. This year's corn harvest is approximately 61% complete as compared to an average of 62% at the same time during the previous five years. The USDA is estimating a yield of approximately 173 bushels per harvested acre for 2016. This is similar to the yield estimate for last year, despite an anticipated 8% increase in harvested acres. Based on challenged crop conditions in certain regions due to excessive heat and moisture in the final weeks for growing season, it will be interesting to see that the USDA's projection is actually come to fruition. Nevertheless, similar to the past couple of years, it will be another large corn product. On our last earnings call, in late July, we discussed that the fill season was beginning to get underway. This year's fill season was different from the prior five years, and that customers purchased approximately 30% to 50% of the volume of the typical fill season. This was driven by their belief that they will be able to purchase their additional volumes needs in the coming months from existing productions supplemented by the new production expected to come online by the spring. Therefore, in our opinion, pricing already reflects the new capacity scheduled to come online. We have a great marketing and logistics team that sold the large percentage of our second half UAN production for Coffeeville and East Dubuque, as well as all [LSPs] prior Oklahoma facility. While pricing was lower than we would have liked, we are in a good position to manage inventories while working with customers to prepare for spring applications. The spring season will be busier than normal next year, because of the combination of pent-up demand from customers, driven by lower fill purchases and the expectation of new production capacity coming on online in the next six months. Importantly, we have recently seen increased customer interest in product for the balance of 2016 in the first quarter of 2017. In the last few weeks, there have been significant global price increases for fourth quarter and first quarter delivery of urea. This should bode well for UAN and ammonia's pricing for these three nitrogen fertilizer products, typically turned in the similar direction. Urea prices, which are by far of the largest volume nitrogen fertilizer produced and used globally, bottomed the price during the fill season in July at approximately $170 per ton at Nova. It is currently quoted at around $210 for 2017 first quarter delivery. During the fill season, we observed that Nova urea barges can be felt significantly when prices reach the $170 price level. Based on the low import volumes at that price level, it appears to be a poor price for producers globally. The UAN pricing tended to follow urea during the summer, and similar to urea, low UAN fill pricing significantly slowed barge activity at New Orleans, suggesting that we may have seen prices reach their low for this cycle. Since the UAN prices have not recovered like urea, but there has not been enough transactional activity in the last month or two to draw conclusions. But we feel, for the spring, that with demand returning and even with the new capacity, the market should firm from these low levels as we believe customers have already factored the new production into their demand pattern. While we believe we’ve seen the lows in market pricing for this cycle, we aren’t assuming a rapid recovery, and we’ll remain focused on the things we can control. This includes operating our plants at high on-stream rates, prudently managing our costs, being judicious with our capital, and maximizing or marketing or logistics activities. We believe this strategy will us optimize free cash flow and places us in a stronger position for success once recover from the low product cycle. As we’ve said on prior calls, we think the industry will continue to consolidate as demonstrated by the buyer Monsanto, and Agrium-Potash announcements this quarter. But given current market conditions, we will prudently evaluate opportunities without increasing our financial risk profile. With that, we are ready to answer any questions you may have. Doug?

Thank you. Ladies and gentlemen, we will now be a conducting a question-and-answer session [Operator Instructions]. Our first question comes from the line of Adam Samuelson with Goldman Sachs. Please proceed with your question.

Mark, first, wanted to talk about the UAN market little bit more, and maybe your reflection. You talked about it in your prepared remarks. But you’ve seen this run-up in urea in the last call it 60 days. You have not seen the UAN price move at all, or in any sort of with the consequence. The gap there is wider than it's been in some time. Do you think that’s really just the deferring supply dynamics of domestic UAN capacity ramping over the next four-five months? Or more concerned about the corn acreage for next year, and demand prospects, something else just talk for that little bit?

No, what I would say, Adam, we just said. This is not the typical time of the year where you have a lot UAN buying. So, I think that the expectations that folks have, this is from the customer side, is that prices will rise as they step into market and buy. There is just not -- we haven’t seen as much transactional activity like you seen in urea. Urea is -- there is been a lot of things, a lot of movement there globally, particularly going into Latin America and Europe. So, I think it’s just some timing issue. And I don’t think that, I think that the UAN -- typically, UAN is at a premium to urea, it’s now trading at a slight discount to urea. So that’s an unusual pricing. But I think everyone’s expectation is that pricing is going to firm into spring here. So, our expectations that pricing going to come up from -- there is a lot more from where we’re at today.

And you touched on a little bit, but premium versus urea. I mean, it had a wide range in the past but consistently a premium. Are you worry, or are you concerned that that premium narrows, the domestic capacity on UAN versus domestic demand were pretty well matched versus still an import need on urea that you might see that domestic UAN premium narrow somewhat over the next 12-18 months, and beyond?

No, I expect that once the mark with the buying, because you were buying at the same time. I still think that you’d see similar premiums to what you’ve seen historically. It's just that right now there has not been as much buying -- and this is the lowest amount of buying activity we’ve seen in UAN in recent years. But it sounds like the products not going to be used. It’s going to be purchased. It’s going to be applied. It’s just -- it’s in a lag because the farmers can -- the wholesalers and retailers have decided just to kind of widen steps, but demand is going to come through. And then I think the market will drive itself, and that premium will appear as it is. The demand is going to be there for that product. It's superior for stores. It's superior for applications in certain conditions. So that's why it's valued at an premium. And I don’t think that's going to change.

And then many just a question on distribution and the balance sheet, and I appreciate you’ve given the pro-forma LTM leverage, understanding that there is some significantly higher price environment in that LTM, that probably aren’t going to be quite as good over the next year. The leverage is already at 4%. How do we think about what -- how you intent to manage that leverage over the next 12, 18, 24 months? And especially in regards to distribution and actually returning cash up to unit holders where this quarter there wasn’t any understandably given the earnings base. But you get into more seasonally stronger quarters. How we think about that versus the leverage?

While we've said all along, we’re an variable rate MLP and we distribute cash when we produce free cash flow, and we’ll continue to do that. Obviously, by completing the financing in June and putting the ABL plus on the cash at the end of our balance sheet, we’re very comfortable lining our way through this and coming out of this cycle. So we’re not -- we don’t have any concerns about that. I think as pricing firms up that we’re going to do a better seasonal period and better pricing, you will start to see distributions return. But we’re only going to distribute when we have free cash flow. So we're going to buy our philosophy, which is when we generate cash, we provide distributions to our unit holders. But if we don’t produce it, we’re not going to be paying distribution. So, we’ll continue on with where we are. But I think we’re on great footing by basically completing the East Dubuque acquisition and completing the financing. We put ourselves on a good position and to weather through this cycle on. So, we’re very comfortable with where we are. Obviously, we’d like to have a lot more cash flow be making big distributions. But we’re very comfortable with where we are in the cycle.

Our next question comes from the line of John Gibbons with Credit Suisse. Please proceed with your question.

Quick question around, given the lighter fill season that you guys referenced this fall, does that -- and looking ahead to the Q1, Q2 of next year. Should that pull more fill demand for Q1 as compared to Q2? Or do you expect it to be historically balance between Q1 and Q2? Just sort of trying to get a sense around how that break-down looks?

Q1 will be bigger than it's been, from a demand perspective, because there is a need. And that will need to be positioned before the spring application. So that it would -- I would expect the Q2 probably normal next year, but Q1 probably be abnormally large, because people aren’t positioned for the spring, and I'll tell you that. And so the demand in the first quarter, I expect to be much larger, because they will ultimately fill those tanks. And so that will come back in to fill it. So, I do expect a larger demand. The good news for us is that we’re well positioned through the end of the calendar year, and then little bit into the first quarter. So we’re positioned for the next few months, but we’re also on a position to be able to meet that demand in the first quarter. But it's going to be abnormally large compared to historical. While, there’s usually strong demand, but this year it will be -- and that’s why I referenced in my comments about it being a busier spring than normal, because the system is still light compared to where it should be in preparation for the spring.

And can you just make a comment on Q3 inventory levels across the industry. Obviously, it’s in the further higher, given the slighter fill season. But sort of a sense on what the outlook is and how that will impact going into the fill season next year?

We always felt like this would be a little bit of an aberration while because we’re in that between period and coming into this fill and the new capacity. So people held back. I think when we get into fill next year that capacity will already be on, and we’ll probably -- we were closer to maybe a more historical pattern. But the inventories in the industry are not high at the producer level. We did -- normally we would sell forward for six months or so. So no one sold this far out as they have. But you saw it all the way through the third quarter. And people can continue to buy I call it, just in time during the fourth quarter. So, the producers have been able to manage their inventory. There is not an overhang of producer inventory and the customer inventory is quite low in comparison to historical levels. So the producers I think are in good shape. But normally, we would have sold further out in time but in terms of inventory. So, like our inventories, we’re super light on September 30th, like we were at June 30th. We were able to sell product all the way through. And I think most producers were in the same area that we were, but system was very light on June 30th last year because of the planting season. And it hasn’t replenished to great extent. So, products that move through there, just we’re not seeing them buying out six months, they’re buying more out three months as opposed to six months.

And then one last housekeeping item. The next turnaround scheduled for Coffeeville, that is scheduled Q3 of next year for us, and I’ll leave it there?

Second half next year...

Our next question comes from the line of Brent Rystrom with Feltl. Please proceed with your question.

Any particular thoughts that harvested, I was running about a week, we can have leader. Is that having any impact on the fall season up there? I know that trends aren’t quite low enough yet. But I’m just curious what you’re hearing out in the field?

Well, we did here that soil tip just dropped below 50, so we’re getting pretty close to the ammonia. I don’t think that we’re -- that the harvest is going to slowdown. It’s not going to create like last year, really. I think it is okay. I think we should have pretty good ammonia run, knocking on what that we don’t get too much rain out there. But it feels like it should be a descent run, and it should be starting here pretty soon.

Do you guys still sell urea out of East Dubuque?

We sell specialty urea out of there, and that’s marketed by coke. But it’s not, from a volume perspective, not a significant percentage of the production at East Dubuque.

And then I’ve just got couple of other questions, one is housekeeping. And on the market indicators section of your report, where your list ammonia plain pricing ammonia, corn-belt pricing. Is that end of quarter pricing? Or is that average for the quarter?

It's kind of an average...

Did you guys have any thoughts and for making out couple of days go with the 90 million acre estimate for corn next year, any thoughts from your perspective on that?

A lot of people think that the historical on around on that -- it’s pretty early at we’re going to see what happens with the end of harvest and inventories. But I think that that's a pretty -- seems like that's starting to emerge as the first cut at next year it's 90 million, which I think as a coming off of 94 million, is a really good number. So it feels like it's going to be pretty good. Corn prices are hanging in the 350. So it's not great, but it's not bad. So it feels like it’d be pretty decent season next year. And most of the customers are saying that too. They still think it will be a -- it won't be a record, but it will be a good planting season. Everybody grumbles about the pricing do every year, but I think we’ll still see a planting season in 2017.

So, if you take the price and the volume, you've actually got a recovery in corn for the first time in 3.5 years. The yield on the chief risk curve right now looks it's going to be a 55 billion value for the crop versus 49 billion last year. So, it feels like it's bottomed. Just had an conceptual question, I'm thinking about pricing in the spring. Obviously, was a short spring sell, short spring wash, spot pricing could be very impactful on the first and second quarter. If the demand comes together as it always does, which it should, I would imagine you’re going to have a spike in spot price, just given how little is pre-sold. Do you think that impacts more the first quarter or second quarter when that spike happens?

I would think it would probably split in a little bit. What we've typically said -- and you will see a -- but again it will be bigger this year, because it's just because of the lack of buying. But we typically see a lift from one -- we’ll keep more leading product to get positioned for planting. But then there is the planting goes on for a while and people try to replenish for side dress or top dress. So there is a demand push in the first quarter. Then there was another way that comes in behind that April-May. So you can see it happened both ways. But just probably, I said, a little more impactful to the first because of the lack of buying this year as compared to previous years. There is -- the system is relatively light compared to where it’s been. And so there is going to be a need to hit that position before the first half occasion in the spring.

Thank you.

In the subset we just show up the before. You can’t just have the product, I'll show up the day before in applications, it's got to get positioned weeks to a month or two in advance before. So they’re ready to go, because there has been -- as you don’t Brent because you’re in the business. If that application occurs in a short window, so it could be 10 or 20 days, or it all has to move.

Our next question comes from the line of Lynn Chen with Hedge. Please proceed with your question.

I just want to clarify that, it seems to me that given the fill season has very slow, we should expect a relatively soft fourth quarter this year. But it's also you said that as bulk producer inventory is pretty low. So I’m assuming you will produce as normal even it’s not pre-sold as normal. So, can you just talk a little bit about the volume expectation for this quarter, and also the earnings expectations?

The fourth quarter is going to be, from a volume perspective, strong. While they didn’t buy as much as not every day, but this is like how far out do you buy. That’s, when I say that they didn’t buy as much. They, in the past, they would buy only for six months or longer. They did buy as much. But we sold a bunch of product in July and then we’ve been selling during the fourth quarter. So, we’re fundamentally sold out for the fourth quarter, or pretty close. So, the volume will be strong in the quarter. So there is not going to be any -- seasonally, it's usually pretty good quarter for us. And it will be especially for East Dubuque, because you’ve got the fall application out there. So the quarter, volume for the quarter is going to be, should be very strong, and better than the third. That’s our normal pattern. So, the sale to the newly issued, the length at but it’s not how much. We were successful at selling a lot of products. So, our plans have been running at high on-stream rates. We’re hoping to continue that through the rest of this quarter, and sell all the products that we make. So that’s -- we should see good volumes here in this quarter.

There are no further questions in the queue. I’d like to hand the call back over to management for closing comments.

Okay. Well, thanks again. Thanks everybody for getting on. And we look forward to talking to you pretty much right on the hills of getting near spring next quarter. So, thank you very much.

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