CVR Partners, LP (UAN) Q1 2021 Earnings Report, Transcript and Summary

Greetings and welcome to the CVR Partners First Quarter 2021 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 Richard Roberts, Senior Manager of Financial Planning and Analysis and Investor Relations. Thank you, sir, you may begin.

Thank you, Christine. 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 2021 first 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. 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. Let me remind you that CVR Partners completed a 1-for-10 reverse split of its common units on November 23rd, 2020. Any per unit references made on this call are on a split-adjusted basis. 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 2021 first quarter earnings release that we filed with the SEC yesterday after the close of the market. Let me also remind you that we are a variable distribution MLP. We will review our previously established reserves, current cash usage, evaluate future anticipated cash needs, and may reserve amounts for other future cash needs as determined by our general partner's 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, capital expenditures, and cash reserves deemed necessary or appropriate by the Board of Directors of our general partner. With that said, I'll turn the call over to Mark Pytosh, our Chief Executive Officer. Mark?

Thank you, Richard and good morning everyone and thank you for joining us for today's call. The summarized financial highlights for the first quarter of 2021 included net sales of $61 million, a net loss of $25 million, and EBITDA of $5 million. We repurchased 24,000 CVR Partners common units for $0.5 million and there is no cash available for distribution this quarter. During the first quarter of 2021, we experienced some unplanned downtime at Coffeyville due to an outage of the third-party air separation unit in January. The ammonia plant at Coffeyville operated at 87% utilization for the first quarter of 2021 compared to 86% in the first quarter of 2020 that was also impacted by downtime too due to third-party outages. At East Dubuque, the ammonia plant operated at 89% utilization compared to 101% in the prior year period the result of strong operations following the plant turnaround in the fall of 2019. The severe winter weather in February caused a spike in natural gas pricing and we elected to shut-in production at East Dubuque for several days and sold our contracted natural gas volumes into the market. Our combined operations produced approximately 188,000 gross tons of ammonia of which 70,000 net tons were available for sale for the first quarter of 2021. This compares to production of 201,000 gross tons of ammonia of which 78,000 net tons were available for sale in the prior year period. We produced 272,000 tons of UAN in the first quarter of 2021, as compared to 317,000 tons in the prior year period. During the first quarter of 2021, we sold approximately 239,000 tons of UAN at an average price of $159 per ton and approximately 32,000 tons of ammonia at an average price of $300 per ton. Sales volumes in the quarter were impacted by the previously discussed downtime, as well as shipping restrictions, related to winter storm Uri. Year-over-year pricing was 14% higher for ammonia, but 4% lower for UAN, as the UAN prices were more reflective of the November-December price environment due to forward sales agreements. Nitrogen fertilizer prices have increased significantly since the start of the year and that strength continued into the spring planting season. Although, our first quarter results did not reflect increased spot market prices, we believe that stronger price environment will be more evident in our second quarter results. Continued strong crop prices are driving strong demand for crop inputs, which I will discuss further in my closing remarks. I will now turn the call over to Tracy to discuss our financial results.

Thank you, Mark. Turning to our results for the first quarter of 2021, we reported net sales of $61 million and an operating loss of $14 million, compared to net sales of $75 million and an operating loss of $5 million in the first quarter of 2020. Net losses for the first quarter of 2021 were $25 million or $2.37 per common unit and EBITDA was $5 million. This compares to a net loss of $21 million or $1.83 per common unit and EBITDA of $11 million for the prior year period. The year-over-year decrease in EBITDA was driven by lower sales volumes of UAN and ammonia and lower UAN sales prices. Direct operating expenses for the first quarter of 2021 were $37 million, compared to $35 million in the prior year period. Excluding inventory and turnaround impacts, direct operating expenses increased by approximately $5 million, primarily related to higher stock-based compensation as a result of the increased unit price and elevated natural gas and electricity costs as a result of winter storm Uri. Turning to capital spending. During the first quarter of 2021, we spent $3 million on capital projects, which was primarily maintenance capital. We estimate total capital spending for 2021 to be approximately $22 million to $26 million, of which $18 million to $20 million is expected to be maintenance capital. This excludes turnaround spending, which we expect to be approximately $8 million to $10 million. Looking at the balance sheet. As of March 31, we had approximately $77 million of liquidity, which was comprised of approximately $53 million in cash and availability under the ABL facility of approximately $25 million. Within our cash balance of $53 million, we had approximately $39 million related to customer prepayments for the future delivery of product. Total debt on the balance sheet remained at $647 million, which was comprised of $645 million of senior notes due in 2023 and $2 million of senior notes that were repaid in April of 2021. Refinancing of our 9.25% senior notes due in 2023, remains a key focus. As a reminder, these notes become callable at par in mid-June. Between continued strength in the debt capital markets and the recent improvement in the fertilizer market, we believe we should be able to refinance the notes at a favorable rate. We are also evaluating structures that could allow us to reduce our total debt outstanding over the next few years, which in addition to a lower interest rate, could further reduce our annual debt service costs and increase our ability to generate cash flow. In assessing our cash available for distribution, we generated EBITDA of $5 million, had current cash needs of $15 million for debt service and $2 million for maintenance capital expenditures. During the quarter, we repurchased just over 24,000 common units for total cash consideration of $0.5 million. In addition, the Board of Directors of our general partner established reserves of $1.5 million for the planned turnaround at Coffeyville in the fall of 2021, and released previously established reserves of $5.3 million. As a result, there was no cash available for distribution. Looking ahead to the second quarter of 2021, we estimate our ammonia utilization rate to be greater than 95%; we expect direct operating expenses to range between $35 million and $40 million, excluding inventory impact; and total capital spending to be between $4 million and $7 million. With that, I'll turn the call back to Mark.

Thanks, Tracy. Since our last earnings call, the strengthen in crop prices and farmer economics have continued into the spring planting season. For the 2021 planting season, the USDA currently estimates planted corn acres to be 91 million, and soybean acres to be 87 million, which we believe are conservative. Crop yield estimates are currently 172 bushels per acre for corn and 50 bushels per acre for soybeans. Assuming the planting forecast and crop yield estimates hold, the expected 2021 inventory carryout of 9.2% for corn and 2.6% for soybeans will be the lowest since 2014. This bodes well not only for the 2021 crop year, but should lend support for fertilizer demand in 2022 as well. Demand for corn has largely been driven by Chinese purchases of US corn and a continued uptick in demand for ethanol blending. New crop corn prices are currently at $7 a bushel, and soybeans are over $15.50 a bushel. While fertilizer prices have risen significantly since January 1, the affordability of fertilizer as measured against grain prices is well within historical norms. With high grain prices, there is also an added incentive to use incremental fertilizer to improve yields. The spring ammonia application period is largely complete and demand was strong. This strength in application coupled with the loss of US nitrogen production in February, due to Uri helped further tighten domestic supply and demand and led to low producer inventories. Since the beginning of 2021, urea prices have rallied significantly across the globe. NOLA urea prices rose to a peak of over $400 per ton in March in advance of spring application in the US. Spot prices for UAN increased by more than urea, during the first quarter and went from selling at a discount to urea on a nitrogen equivalent basis for most of 2020 to selling at a premium as it normally has for the last several years. Because of forward sales of UAN in November, December, when pricing was low our average netback prices were lower than the spot market in the first quarter, but reached an inflection point at the beginning of April. The realization of significantly higher UAN prices will be seen in the second quarter results. We continue to evaluate structuring alternatives for the pursuit of 45Q tax credits for activities we are currently performing. In addition to the final regulations published by the IRS in January, there are several pieces of proposed legislation moving through Congress that can provide additional flexibility and incentives for companies to pursue carbon capture and sequestration. Our focus has been on putting all the necessary pieces in place to maximize the value of the 45Q credits and we believe there is a meaningful potential for the partnership to monetize these credits. We've made progress, but more work remains to be done. Our overall goal is to reduce our debt level by approximately $100 million over the next two years, and 45Q credit proceeds will be part of helping us achieve this goal. In recent years, CVR Energy has been taking steps to reduce its carbon footprint and increasing its focus on sustainability. As part of the strategy CVR Partners has been focused on reducing our carbon footprint to sequestering CO2 at the Coffeyville facility through enhanced oil recovery, and nitrous oxide abatement at both the Coffeyville and East Dubuque facilities. As a result of these initiatives, we have contributed a reduction of our carbon footprint by over one million metric tons per year. We believe that our combined fertilizer plants have the lowest carbon footprint per ton of production of any North American nitrogen fertilizer producer. In addition to these reductions, we are exploring opportunities to further reduce our carbon footprint with additional initiatives and we'll report on those when they become actionable. Our ultimate goal is to be able to produce ammonia certified as blue at both of our facilities. As I mentioned, we did small repurchases of our units during the first quarter of 2021, but there's currently $12 million remaining under the Board of Directors repurchase authorizations and we will continue to evaluate future repurchases. While fertilizer market conditions have improved markedly in recent months, we have not changed our focus on maximizing cash flow generation by safely and reliably operating our plants with a keen focus on the health and safety of our employees, contractors and communities, prudently managing costs being judicious with capital, but targeting select investments in reliability projects and incremental additions to production capacity and maximizing our marketing and logistics capabilities. In closing, I would like to thank our employees for their commitment to being healthy and safe and allowing us to execute at a high level for another spring planting season. With that we are ready to answer any questions. Christine?

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of William Stein, a private investor. Please proceed with your question.

Thank you for taking my questions. First I wanted to talk about pricing. I understand notwithstanding your comments about the positive inflection that happened in April that you don't normally guide this, I'm not asking you to do that. But if you were a securities analyst and outsider looking into your company, how would you go about trying to better understand what the likely price that the company would achieve in the market in the current and future quarters? Is spot ever even a consideration? Is it always forward pricing? What exchanges should we look at? Any color on that would be helpful. And then I have a broader follow-up question.

Sure. So the way to think about it is there is kind of three seasons. The spring pre-planting and sidedress, topdress. Then we have the summer fill season and then the fall application. And in many cases for either the spring and the fall application it's -- there is a lot of forward sales into that. But during the spring and the fall there is a lot of spot sales in and around those forward sales. So -- but in the first quarter and the third quarter probably less so because there is not any application. So there is not any immediate demand if there is a need. So it's more of a forward sales but -- and that's what the first quarter was. It's -- first quarters typically has a lot of forward sales and those are conducted usually in November and December because it's really stocking. I call pre-stocking for spring application. But in terms of pricing there are a lot of factors that go into pricing. Its supply/demand balances obviously in fertilizer. And we -- this year is an interesting year, because on the supply side we had a complete industry outage for between one and two weeks in February, because virtually all the plants were shut down, because natural gas, when it's skyrocketed, it didn't make sense to produce. So either you did, as we did, and you took a plant down and sold your contracted gas at very high prices, or if you were not under contract, you'd had to shut your plant down, because it didn't make economic sense to produce product. And so, the supply side coming into the spring actually was reduced fairly significantly due to the outages at the plants and that was industry-wide. So the supply side's in very good shape. On the demand side, demand is really the biggest driver of demands farm level economics. And we -- since last July, we've seen a sea change in farm economics in the United States. Grain prices are at close to 10-year highs. And as you look forward into the summer and the fall and we get -- that's the -- what we call the new crop year, corn prices, which are the big driver for nitrogen, are at very high levels. So the new crop price in July is at $7. Last July, the price was at $3.25. So the economics for the farmer would incentivize that farmer to use nitrogen to maximize corn production, because of the revenue base. Fertilizer overall is about 15% of the cost to a farm and nitrogen is about 8%. So it's not a big number. And with corn prices at $7 there's going to -- there is a lot of demand for nitrogen for corn. And so, as we look into the second half of this year, we see this -- the trend started in January continuing because of the grain prices. And tangentially, soybean -- high soybean prices also are positive, not because they directly consume a lot of nitrogen, but if you go back to farm level economics, if a farmer is getting paid a lot for soybeans, that's more money they have in their pocket to buy inputs for next year. So this is probably the biggest sea change we've seen in -- since maybe seven or eight or 10 years ago. Grain prices have gotten to a level that have changed the fundamental economics for farming in the United States.

That's very helpful and it sort of segues into the second question I have, which is very big picture. You're probably aware there’s a lot of investors, I suppose, are writing these articles on Seeking Alpha and such and perhaps trying to forecast exactly what's going to happen quarter-to-quarter. I just want to ask you to maybe take a very big step back from sort of the week-to-week month-to-month sort of changes and exact calculations and what's going on in the business and instead compare the business today relative to what it looked like, let's say, nine or 10 years ago when we last saw corn at this level and we last saw fertilizer at this level. If memory serves, on a split adjusted basis, distributions were about $20 a year and the stock was between $200 and $300. I'm not asking you to say, yes, that's exactly what's going to happen this time around. I wouldn't expect you be able to forecast that, but I'm hoping you can frame up for investors what the difference in the business is today relative to, let's say, nine, 10 years ago, last time you saw those farm economics as you described them looking the way they are today. I think your business is much bigger today, because you've done an acquisition and maybe what offsets that is a higher level of debt, but are there other things that we should think that maybe this cycle looks totally different and profitability will be much worse or lower, or how can you maybe frame that comparison for us? Thank you.

Sure. So, as a company, we obviously are different, because we've added East Dubuque. What I would say is, if you step back and set aside our company for a minute but the cycle, this business is cyclical. And farming, ag is a cyclical business. We've been through a very difficult period of time and -- but, the market has reemerged. And our business is really fundamentally driven by farm level economics. And the most important thing is just the durability of the recovery and the reasons. And that to me, I think, there is some different factors driving the demand for corn and where we are. And I'm not saying that we're changing the overall cycle of the industry, but I think that this has legs to it this recovery, because the need for corn and actually for soybeans is a little different than before. We're blending more for renewable fuels. That seems -- that was the driver from -- if you went from 2005 to 2012 that drove the corn market. When ethanol came in and started being blended, that drove the first leg of this. Now we're in the second leg, where there is a big push towards sustainability and renewable fuels. And soybeans, is now part of that too, because of the biodiesel work. And so farming, which used to be only for food, is now -- also has another leg on it, which is for fuels blending. And so, I think, it's a little different market than before. I would just say that in this recovery the opportunity for us as a company is we took on debt to buy East Dubuque, and we've been patiently waiting for the financial markets and this industry to recover before we reset our cost of debt. And so things have kind of come in a good direction there and we intend in over the coming months to make that happen. But we -- by being patient and waiting for that, the company is going to benefit. So when we refinance effectively the purchase of East Dubuque, which was five years ago, we're going to -- we kind of reset the capital structure and the cost. And we're going to -- we've been, I think pretty clearly stating that we'd like to also reduce the overall debt level on the company and that resetting will put us in a stronger position as we move ahead past the refinancing. So, I'd say this is kind of finalizing the repositioning of the company post-East Dubuque, and -- in an industry that I think has got a lot of momentum. And the key for us isn't quarter-to-quarter, it's durability of recovery. We want farm economics to last for years, not for quarters. So, as I stated in my comments, this next stretch which is I'm already looking into the fall and the spring, really with grain prices doing what they're doing, I think gives us great confidence in where we are in this cycle. We're at the very early stages, but the key to any business is the health of the customer and the willingness to buy your product and our customer is as healthy as they've been in a decade.

Thank you.

Our next question comes from the line of Brian DiRubbio with Baird. Please proceed with your question.

Good morning. Maybe a couple of questions for you. Starting out, am I reading this right that the gain that you received from selling the natural gas back, when you shut down East Dubuque, was about $4.6 million?

That's correct.

Okay. So can you help us understand as you talked about the unplanned outages and some of the other challenges you had in the quarter, what was the totality of those expenses that you were impacted by?

We don't want to quantify something at that level. What I would tell you is that the gain that we had at East Dubuque was largely offset by a combination of loss production that we had less tons to sell. And if you looked at our volumes that we sold it was lower -- decently lower than last year. And the other is that we took the opportunity, while the plant was down to accelerate maintenance activities. So between those two, it was not the windfall in the quarter that it might appear to be. We largely offset that with lower product sales and cost pulling forward maintenance costs that we would have done later in the year. So that's sort of what happened in the quarter.

Okay. That makes sense. And I guess as we think about the forward sales that you made in November, December, are you fully satisfied with those sales? Whereas as we'll see in the second quarter is the -- those sales will be out of the P&L and we'll see now sales at the more representative current spot rates?

Yes. That's correct. So we cleared all that out in the first quarter and the second quarter for a product that we were selling during the first quarter into the second quarter and spot loans.

Great. Then final one for me just on pet coke costs. Obviously, not much of a difference year-over-year, but sequential came up really, really high. I guess, two questions part of that. How much did you source from Coffeyville? And what are you seeing in terms of pricing for pet coke at this point?

I would tell you that the Coffeyville quarter-to-quarter was down. They obviously -- the refinery was impacted by the winter storm. And so the production rate was lower and they also were running lighter crudes, so we did source less. Our third-party pet coke has been pretty steady, but that we bring in easily by barge and then truck it to the plant. So that's been pretty steady and we've been able to access pet coke when we needed it. But we also draw from other refineries in the Kansas, Oklahoma market and they all too were affected by the weather storm. So, overall, we have to source more, I would say, off of the river versus typically drawing from our nearby refineries. And that kind of will normalize in the second quarter, because they're all back up and running. In fact the refineries are starting to raise rates back closer to where they were in 2019 rather than 2020, which is they were running 70% to 80% utilization. Now they're more closer to 85% to 90%.

Perfect. Appreciate the color. Thank you.

Our next question comes from the line of Roger Spitz with Bank of America. Please proceed with your question.

Thanks very much. Good morning. So, just returning on prices, so, seasonally generally speaking you've said for Q1 prices we should base those price levels based on the November, December forward pricing, if I heard that correctly. Could we go on for Q2, Q3, Q4? How should we think about pricing for each one of those, is like Q2, it sounds like it should be closer to the prevailing spot? Thank you.

Yes. So yes so Q2 is going to be much more closer to prevailing spot. There is a mix and the season peaks in May and then it gradually declines through the end of June. But we're -- the second quarter will look a lot -- probably if you've been following the complications that have pricing out there. In the second quarter, we were selling much more into that market. That started sort of February March for April, May. So we were selling into that at much higher prices in the first quarter. And we haven't gotten into the second half. It's too early. We're just trying to get through the planting season and then Sidedress and Topdress. Clearly, I think our view is that the second half is going to look a lot different than the second half of 2020, much higher when it settles. And so, we expect a very different outlook for the second half compared to second half of 2020 which was a very low period -- on lower periods in this past cycle.

Got it. But I mean historically -- seasonally in Q3 and then historically in Q4 do those -- because you talked about some of those being forward sales how should we think about historically? How should we think about Q3 prices? Is that also somewhat prevailing spot in Q4? Maybe we look back to some prior time because that's more forward sales?

Yes. I would say that for UAN -- I'm going to use UAN because that's...

Yes.

UAN is -- we don't sell urea. That's why I'm not quoting urea. But follow they follow each other. The UAN reset will typically be in July. And again the price typically -- if you took the peak spring price and looked at July, it was lower. It is decently lower. And so we would expect a similar relationship. I just don't think it will fall as far this year, as it has the last few years because of all the dynamics with crop pricing and the supply-demand outlook for the producers. So I expect that we're likely to end this spring season with pretty low to manageable inventory levels fertilizers. So going into the summer, it should be a pretty comfortable summer fill discussion with customers because I think the supply demand dynamics will be good and the underlying farm economics are going to be good. We're already starting to hear farmers expressing interest on buying inputs in the second half earlier than normal because they're going to have money in their pocket this year when they sell this year's crop and they typically buy inputs to help manage their tax situations. So they have that cost embedded in there. So I think conditions are going to be quite solid in the second half. And I think the supply side is in good shape and the demand side is in good shape. So feel good about the go forward.

Happy to hear it. One other thing, you gave the turnaround expenses of $8 million to $10 million. Last call I think you said those would be spent in the fall which I take to be more or less Q3 or maybe into Q4. But it sounds like in your answer before that you use an opportunity to do some maintenance perhaps, while the plants were down because of winter storm Uri. When should we model in the $8 million to $10 million of that turnaround expense for this year?

Well the maintenance that we did was on the East Dubuque plant which is not going to be in turnaround this year. The $8 million to $10 million will be for the Coffeyville plant. And I would put that in the fourth quarter. Our current schedule is a fourth quarter turnaround.

Thank you very much.

We have reached the end of the question-and-answer session. I would now like to turn the floor back over to management for closing comments.

Again wanted to thank everybody for their interest in CVR Partners and joining the call and we look forward to speaking with you next quarter for the 2Q results. Thank you very much.

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