CVR Partners, LP (UAN) Q4 2018 Earnings Report, Transcript and Summary

Greetings, and welcome to the CVR Partners, LP Fourth Quarter 2018 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 call is being recorded. It is now my pleasure to introduce your host, Mr. Jay Finks, Vice President of Finance and Treasurer. Thank you, sir. 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 2018 full year and fourth quarter 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 operations 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 measure, are included in our 2018 fourth quarter earnings release that we filed with the SEC. 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 thank you for joining us for today’s call. 2018 was a successful year for CVR Partners. During the year, we were focused on safe and reliable operations, improving our market capture and maintaining financial discipline. Some of our specific accomplishments include, we achieved significant year-over-year improvement in environmental health and safety areas at both facilities. We maintained high utilization rates, excluding planned downtime at our Coffeyville facility. We completed a new railroading racker Coffeyville facility began loading UAN railcars during the second half of 2018, providing unit train capabilities, increase access to the BN rail line and reduce distribution costs. We completed Coffeyville's planned turnaround on time and on budget. We identified and are in the process of developing a plan to construct a backup oxygen unit in Coffeyville in order to reduce the impacts of possible third-party outages. And we consolidated back office locations, reducing certain overhead costs and staffing. To summarize financial highlights for 2018 full year, including net sales of $351 million, a net loss of $50 million and adjusted EBITDA of $90 million. Looking more specifically, at the 2018 fourth quarter, we reported net sales of $98 million, a net loss of $1 million, adjusted EBITDA of $33 million. And the Board of Directors declared a fourth quarter distribution $0.12 per common unit, which will be paid on March 11th to unitholders of record on March 4th. In the fourth quarter of 2018, we changed our measured reliability to focus on production as compared to a time-based metric. We feel this better illustrates production reliability and capture capacity during the period. During the fourth quarter of 2018, we had strong performance at both facilities. At Coffeyville, the ammonia plant operated at 96% utilization for the quarter compared to 94% for the fourth quarter of 2017. At East Dubuque, the ammonia plant operated at 95% utilization compared to 88% to the prior year periods. For the fourth quarter of 2018, our combined operations produced approximately 209,000 tons of ammonia, 357,000 tons of UAN and 59,000 tons of ammonia or available-for-sale compared to production of 200,000 gross tons of ammonia, 306,000 tons of UAN and 64,000 of ammonia that were available for sale in the prior year period. We sold approximately 364,000 tons of UAN during the fourth quarter of 2018 at an average in net back price of $180 per ton, which was 36% increase over the prior year period. In addition, we sold approximately 46,000 tons of ammonia during the fourth quarter of 2018 at average net back price of $324 per ton, which was 23% increase over the prior year period. Ammonia sales volumes were down significantly year-over-year in the fourth quarter of 2018 due to a combination of excess moisture and cold weather. Current estimates from MPK fertilizer advisory service indicate that the U.S. corn-belt fall ammonia application season was down from early season expectations by 50% for the U.S. corn-belt and 40% for the northern plains surrounding East Dubuque. While our 2018 fourth quarter results were negatively impacted by the weather, we were able to retain these unshipped fall contracts and inventories, which were resold for second quarter 2019 shipment. In December, we reduced East Dubuque's ammonia production rate to help manage our inventory levels. I'll now turn the call over to Tracy to discuss our financial results.

Thank you, Mark. Before I cover our results, I would like to outline that during the first quarter of 2018, we revised our internal and external use of non-GAAP measures to eliminate any adjustments to EBITDA for business interruption insurance recoveries. As Mark mentioned, we also changed our measure of reliability from onstream rates, which is a ton based metric to utilization, which was a production based metric. Turning to our results for the full year 2018, we reported operating income of $6 million, a net loss of $15 million or $0.44 per common unit and adjusted EBITDA of $90 million. This is compared to operating losses of $10 million, a net loss of $73 million or $0.64 per common unit and adjusted EBITDA of $63 million for the full year of 2017. The approximate 50% increase year-over-year in adjusted EBITDA was primarily due to the improved net back pricing with 17% and 14% for ammonia and UAN respectively. For the fourth quarter of 2018, we reported net sales for the period of $98 million, operating income of $8 million, a net loss of $1 million or $0.01 per common unit and adjusted EBITDA of $33 million. This is compared to net sales of $78 million, operating losses of $11 million, a net loss of $27 million or $0.24 per common unit and adjusted EBITDA of $8 million for the prior year period. These improvements were also driven predominantly by improved net back pricing, as well as an increase in UAN sales volumes of 20%, partially offset by 45% lower ammonia sales volumes. Decrease in ammonia sales volumes was primarily attributable to weather issues in the corn-belt as Mark just discussed. In the fourth quarter of 2018, we recovered approximately $6 million from a 2017 business interruption insurance claim. Direct operating expenses for the fourth quarter of 2018 decreased to $38 million from $42 million in the prior year period. Excluding inventory impacts, direct operating expenses increased by approximately $1 million year-over-year, primarily due to natural gas costs. Turning to capital spending. During the fourth quarter of 2018, we spent $4 million on capital projects, which was primarily maintenance capital. For the full year 2018, we spent approximately $20 million of which $16 million was for maintenance capital at our two facilities. This compares to our spending plan for this year of $21 million of total capital and $18 million of maintenance with a slight difference due to timing. We estimate total capital spending for 2019 to be approximately $20 million to $25 million. Looking at the balance sheet, as of December 31st, we had approximately $62 million in cash, including $24 million related to customer prepayments for the future delivery of product and full availability under the ABL facility of $50 million. We currently believe that our total liquidity position of approximately $87 million at the end of the year is sufficient going forward. Our long-term gross debt of $647 million, including current portion remains unchanged. Available cash for distribution of $14.1 million or $0.12 per unit is derived from our positive adjusted EBITDA for the quarter after consideration of reserves of $15 million for debt service and $4 million for environmental and maintenance capital expenditures. We are variable distribution MLP. We will review our previously established reserves to evaluate future anticipated cash needs and may reserve amounts for other future 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'll turn the call back to Mark.

Thanks, Tracy. We had confluence of weather factors that made normal farming conditions difficult during the fourth quarter of 2018. There was a lot of moisture in the late summer and early fall, which delayed the harvest of corn soybeans. After the harvest was completed, temparatures fell rapidly limiting nitrogen application in many areas across the corn-belt, and farmers were just not able to do field work or apply normal levels of ammonia in preparation for the 2019 planting seasoning. As a result nitrogen fertilizer and producer sales were down and demand was shifted from the fall to spring. Due to the decreased fall demand, most of our customers' follow orders were canceled and then reorder from springs. As such, we have a significant order book for spring ammonia. Inventory levels for both customers and competitors have been higher than normal and have led market pricing to soften in the short-term, because demand for product was lower while we wait for spring application to begin. In addition to our large ammonia spring order book, we sold most of the 2019 first quarter UAN production volumes during the fourth quarter. We now are in a comfortable UAN inventory position as we wait for spring season to start. However, the challenge for spring will be the logistics have moving a lot of nitrogen during a tight application window. Most of the industry estimates for planted corn acres of 92 million to 94 million compared 89 million last year. Therefore, farmers will be required to catch up in the lower fall ammonia application plus 3 million to 5 million incremental planting corn acres. It is uncertain whether there will be a long enough ammonia application window to refinish the lost tons or if there will be incremental demand for UAN urea to achieve the targeted levels nitrogen for planting. In either case, we expect that the inventory levels will quickly be reduced if and when spring weather emerges, which should lead to customer repurchasing to meet end season demand. CVR is well positioned to meet the needs of our customers with improved logistics and we are preparing to facilitate our customers' need when the season begins. We are pleased to see the evidence of the market recovery for nitrogen fertilizer in the second half of 2018 and to be able to provide a distribution to our unitholders for the fourth quarter. While we are pleased to see the early stages of this recovery, we will continue to focus on maximizing free cash flow by safely operating our plans reliably and at high utilization rates, prudently managing our cost, being judicious with our capital and maximizing our marketing and logistic activities. In closing, I want to thank all of our employees for their contributions for making 2018 a successful year for CVR Partners. With that, we are ready to answer any questions. Mitchell?

Thank you. At this time, we'll be 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.

So, I guess, Mark, let's just dig a little bit more into the market commentary on pricing and specifically around how the UAN market has progressed? Obviously, summer fill pricing was considerably lower than where fourth quarter stock pricing was then markets have come off some since then. And I'm just trying to get a better sense of how much 4Q was summer fill pricing versus the higher spot levels in 4Q and the impact of the market softening you have seen more recently. Just trying to triangulate between those as I think about how the first half for you guys is shaping up from what's in your book.

The fourth quarter price that we have and we showed in our results, it was really taking the two plants, their fill numbers for the most part. There was some spot pricing in there but it was largely the fill price. But we worked off although most of our fill book, if not all of it, in the second half of '18. And so the first quarter pricing will be reflective of what the spot market was largely in the fourth quarter. So we sold some this year but we sold a larger percentage of our book for the first quarter in October, November, and December.

And that would there should a nice step up from where you were in summer fill then, that’s very helpful. And then just the rail loading at Coffeyville, the ability to do unit trains. Can you talk about the opportunities that that provides to actually improve the netbacks there? Just help me think through the update for additional market reach into some high netback markets.

So let's step back at the rail loading rack there. The Coffeyville is largely a rail shipping facility. It's one of the few facilities out there that has equal access to both the UP and the BN, plants generally are either UP or BNs. We are UP and BN. So that’s what the loading rack was then opened up a whole set of geographic points that we weren’t able to serve economically in the past. So in the market now it's largely domestically served, we have a very large geographic footprint from the Coffeyville facility. And that facility, given where we put the rack and how that feeds into the BN system, some of the bigger co-op customers and retail distributors like to buy unit train quantities at various points in the marketplace, not every where that doesn’t go everywhere. Just there are certain parts that are big consumers of nitrogen that one of our unit train rather than buy an individual cars. And so what we have been able to do is that opens up certain geographic points on the market for us to ship large quantities to one point for a big customer that once in all delivered at the same time. So that will allow us to move product in season to position, especially now if you look at what's coming in the spring, people are going to want large volume deliver to a point. And so being able to deliver unit train makes us competitive with the other producers.

And then just a couple of modeling finance ones. Did you provided CapEx outlook for 2019? And I'm sorry if I missed it.

So, it will be pretty comparable to this year, probably around the $20 million levels…

I have provided $20 million to $25 million.

And that included little bit of growth, is s there some growth in there?

Yes, there is a little bit of growth in there, not any major projects some targeted smaller projects but it's largely maintenance.

And then just finally the bonds, is there any -- I believe they are callable in the second quarter…

They are callable. And we will continue to monitor the market and pricing structure and what duration is available, as well as closely monitor the fed and what actions they take this year.

If things would stand today, do you think that could be a meaningful -- is that an opportunity to call? Do you think the credit markets will be amenable to or open it up to potentially get some cost reduction on the bond…

It's certainly possible…

Through refinance…

Yes, it's certainly possible that that would occur.

And your next question comes from the line of Charles Neivert with Cowen & Company. Please proceed with your question.

Few questions, one, looking at gas price. I mean, you guys did say there was some impact in the fourth quarter from natural gas pricing. Does it look like 1Q will be down in any significant manner? Or was it just relatively short burst and really see a big decrease quarter-over-quarter?

We had a spike. The market had a spike in gas and coming into the winter. It's kind of moderated. So, I would its going to moderate in the first quarter not too high not too low. If you look out into the spring, it obviously is coming down a lot as it holds in there. So I think there will be some opportunity as we get into the normal weather. But that spike was not confirmed it backed off after December. So, the first quarter is moderated from that fourth quarter number.

And if I look at -- I mean, you guys obviously don’t sell a lot into NOLA per se, and pricing I assume is a little bit better. But have you guys seen movement in pricing in the regions you tend to sell to similar to what was being going in NOLA, not obviously same level but similar? Or is it been less volatile, tying into a tighter range? I mean your experience, not just the markets'.

Well, what I would tell you is the old school measurement off NOLA plus transportation, I think is probably not the best comparable measure, because there is not as much activity through NOLA, not as much liquidity. And generally, a lot of the customers are pricing within a producer point to their point, so it’s a very different pricing structure. The product has not been moving, it's not a NOLA in the first quarter, it's not a liquid market, because there is just not a lot of movement in product between the weather and the system being pulled from the fall, or at least with certain products, the barges, that’s been much more volatile, because barges that come in that don’t have a place to go have to generally be liquidated. And you are liquidating into a non-liquid market liquid there. It's just not been a liquid market, so the interior markets are more stable. But it's not that they are disconnected, but they don’t have the volatility. If you go through the corn-belt, you don’t see these bigger swings that you saw in NOLA here in the first…

So these big declines in NOLA and I know you guys don’t deal with much urea. But in NOLA, urea and other products are not being reflected in the places that you guys are generally selling into. And like you said, it's because of thin market trader-to-trader type of trades and things of that nature. So that’s not what you are seeing?

The spot market is softer than it was into beginning of the year but it's not a deep market, because there is not as much transaction. Generally and this year in particular again because of the weaker fall, there is not as much of a burning need to buy in January, because you are not applying until March or April and so the buying activity is lower. The interior has been less volatile but it's down too versus where it was like in the fourth quarter.

Typically, when do you guys see this most significant movement of product? Is it March? Is it April? I mean, again, based on where you guys do most of your work. When do you start really seeing the tons move assuming weather isn’t crazy in one direction or the other? Or where would you bracket at it early season to a late movement where would those tend to range?

Well, I think I've said on previous calls I'm not the best weather forecaster around…

Well we will take weather out. Let's just say if you get an early season when does it typically -- when would it start? And if it's late start, when would it be? What's the range of timing that I should look for these things to start happening?

Typically in a typical season, without excess moisture or excess cold, we would start seeing product movement in February in Texas. And then it moves -- if you just looked at the map and you said, okay, February is all the way south then you go up into Oklahoma, Kansas kind of February, March and then you keep climbing north and then you get into April for Nebraska, Iowa. So as the warm weather creeps north, you just -- our markets full but normally we would see -- it's been a little bit cold to slow start to the spring. So February hasn’t been moving as much, but we are seeing some movement in Kansas and bits and pieces here. So it’s a little bit of a late start and that’s why I was talking about logistics, because there is an enormous amount of product that needs to get on the ground. And just normal will be Texas and then go north and there are all the way to April.

Do you see customers still holding back on purchasing, trying to tying things out a little bit better where you could end up with an even bigger squeeze than where you are talking about now, because it's not just a late start but people trying to hold off and do things as late as possible. Assuming we are going to see the same amount of nitrogen down anyway you look at it, but are people trying to look like they are trying to jam it into the back end of this thing?

There is always -- it's the psychology if at all. It typically reacts too far on both sides of the curve. And so now because of the inventory and the system they are holding back. So it turns to react more negatively, it's not very liquid. And then when you go to the other side, it tends to do overact on the upside, because everyone runs to the entrance to the door at the same time. And you have to back up logistics. If you can't, we are not choppering in tons to locations we are railing them or trucking them. And so there is import barge in the case of the players who are on the river, that’s not a one week move. You really need to backup 30 days lead time to get that product to market. And so that’s my comment again about logistics is we are going to have a lot of tonnage it wants to grow to the ground and those windows are measured in a week or two or three. And so that’s a lot of tonnage to go into a two or three week window.

Yes, I'm just trying to get a sense of judge and how many people are dragging their feet and how many people are for lack of better word, were in line with their timing. Last question, you guys said that you now, if I got this right, you took back product that you were going to deliver 4Q because of weather, because it didn’t go on the ground. And I assume you just gave back deposits and now you've resold it into what looks like second quarter. Will you better off or worse off because of that? If you had sold it and if it had gone out in 4Q, do you get better pricing, the same pricing, worse pricing?

Well, I'm not going to try to quantify all that, because there are too many moving parts to get through that, I would say an easy answer. What I would tell you is that the spring pricing was better than the fall pricing. However, we weren’t able to put tonnage on the ground. We would have liked to have had both the spring pricing and a lot of volume movement both periods. Now, that’s the perfect scenario. We do have a very good spring book on, so we were able to work with the customers to move it from the fall to the spring. But we would have loved to have sold a little more tonnage in the fall just to get that money too. So it's not a free launch here it's going to cost -- it costs us something in the fourth quarter that we won't get all of it back. But the spring pricing was better than the fall.

I think that covers me for now. It's good that you're now starting to pay that, make that payout now. And given the way things are moving in 1Q, 2Q this year, looks like that is something that should continue. So that’s good. I think that’s it from me.

Thank you. We have reached the end of our question-and-answer session. I would like to turn the call back over to Mr. Finks for any closing remarks. End of Q&A:

Again, this is Mark. I would like to thank you all for your interest in CVR Partners. Additionally, I would like to thank all of our employees for their hard work and commitment towards safer, reliable and environmental responsible operations. We look forward to reviewing our first quarter 2019 results during our next earnings call. 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.