CVR Partners, LP (UAN) Q2 2021 Earnings Report, Transcript and Summary

Greetings, and welcome to the CVR Partners LP Second Quarter 2021 Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Mr. Richard Roberts, Senior Manager of FP&A and Investor Relations for CVR partners. Thank you. You may begin.

Thank you, Melissa. 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 second 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 23, 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 second quarter earnings release that we filed with the SEC yesterday after the close of the market. Let me also remind you that we are our 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 seem 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. Good morning, everyone, and thank you for joining us for today's call. To summarize financial highlights for the second quarter of 2021 included net sales of $138 million, net income of $7 million, EBITDA of $51 million, and the Board of Directors declared a second quarter distribution of $1.72 per common unit, which will be paid on August 23, 2021, to unitholds a record at the close of the market on August 13. During the second quarter of 2021, we operated the plant safely and reliably with consolidated ammonia plant utilization of 98%. Demand for UAN was strong throughout the quarter with supply impacted by a number of other nitrogen fertilizer plants that faced operating issues following the shutdowns related to Winter Storm Uri. Our combined operations produced approximately 217,000 gross tons of ammonia, of which 70,000 net tons were available for sale for the second quarter of 2021. This compares to production of 216,000 gross tons of ammonia, of which 79,000 net tons were available for sale in the prior year period. We produced 334,000 tons of UAN in the second quarter of 2021 as compared to 321,000 tons in the prior year period. During the second quarter of 2021, we sold approximately 370,000 tons of UAN at an average price of $237 per ton and approximately 80,000 tons of ammonia at an average price of $403 per tonne. Relative to the second quarter of 2020, UAN sales increased, while ammonia sales declined as less ammonia was required due to the strong fall 2020 ammonia application. Year-over-year pricing was 44% higher for UAN and 21% higher for ammonia. Nitrogen fertilizer prices have increased significantly since the start of the year and that strength continued through the spring planting season and into the summer. Fertilizer inventory levels remain tight across the U.S. due in part to Uri-related shutdowns earlier in the year and the deferred turnaround activity from 2020 that is now being completed. The continued strength in crop prices and tight inventory levels has kept pricing firm for nitrogen fertilizers. And we have a good order book already for the fall, 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. Before I get into our results, I would like to highlight that during the second quarter of 2021, we revised our reporting to include adjusted EBITDA, which excludes significant non-cash items that we believe may secure our underlying results and trends. For the second quarter of 2021, we reported net sales of $138 million and operating income was $30 million compared to net sales of $105 million and an operating loss of $26 million in the second quarter of 2020. Net income for the second quarter of 2021 was $7 million or $0.66 per common unit and adjusted EBITDA was $51 million. This compares to a net loss of $42 million or $3.68 per common unit and adjusted EBITDA of $39 million for the prior year period. The year-over-year increase in adjusted EBITDA was driven by higher UAN and ammonia sales prices, offset slightly by higher feedstock costs and operating expenses. Direct operating expenses for the second quarter of 2021 were $53 million compared to $40 million in the prior year period. Second quarter direct operating expenses include a $4 million charge for electricity expenses allocated to us by the city of Coffeyville related to Winter Storm Uri. Excluding this charge as well as inventory and turnaround impact, direct operating expenses increased by approximately $10 million, primarily related to higher stock-based compensation as a result of the increased unit price. Turning to capital spending. During the second quarter of 2021, we spent $4 million on capital projects, which was primarily maintenance capital. We estimate total capital spending for 2021 to be approximately $27 million to $31 million, of which $20 million to $22 million is expected to be maintenance capital. This excludes turnaround spending, which we expect to be approximately $8 million to $10 million of expense. Looking at the balance sheet. As of June 30, we had approximately $75 million of liquidity, which was comprised of approximately $43 million in cash and availability under the ABL facility of approximately $32 million. Within our cash balance of $43 million, we had approximately $2 million related to customer prepayments for the future delivery of product. In June, we completed a refinancing of substantially - of a substantial portion of our outstanding senior notes with a reduction to the coupon of over 300 basis points that will reduce our annual interest expense by over $17 million. Total debt outstanding at June 30 was $645 million, which is comprised of $550 million of the new 6.125% senior notes due in 2028 and $95 million of the 9.25% senior notes due in 2023. As we have discussed previously, we intend to take advantage of the improvements in the nitrogen fertilizer market and potential for 45Q tax credit income to repay the remaining 2023 senior notes outstanding over the next 2 years. In assessing our cash available for distribution, we generated EBITDA of $51 million at current cash needs of $15 million for debt service, $3 million for financing fees and $3 million for maintenance capital expenditures. We added back the $4 million non-cash electricity charge from the city of Coffeyville, while the actual cost may be paid over the next 10 years. We're currently evaluating our legal rights with respect to this surcharge. In addition, the Board of Directors of our general partner established reserves of $15 million to recapture prior negative cash available and $1 million for the planned turnaround at Coffeyville in the fall of 2021. As a result, there was $18 million of cash available for distribution and the Board of Directors of our general partner declared a distribution of $1.72 per common unit. Looking ahead to the third quarter of 2021, we estimate our total ammonia utilization rate to be greater than 95%. We expect direct operating expenses to range between 38 and $43 million, excluding inventory impacts and total capital spending to be between 9 and $12 million. With that, I will turn the call back over to Mark.

Thanks, Tracy. Weather conditions for spring fertilizer application and planting were good in 2021. The USDA currently estimates planted corn acres were 93 million and soybean acres were 88 million. The corn and soybeans, temperatures and moisture levels over the next month will be critical to driving harvest yields. Drought condition remain in parts of the Northern plains, but the heart of the Midwest has been getting timely rains. So, the corn crop looks okay overall. Assuming the USDA's planted acres and crop yield estimates hold, the expected 2021 inventory carryout of 7.6% for corn and 3% for soybeans continues to be at the low end of the 10-year range, while corn and soybean prices remain near 10-year highs. Spring ammonia application went well and when combined with the fall 2020 application, it was the largest combined application since we purchased East Dubuque in 2016. Demand for UAN was strong and consistent through the quarter and continued into July for sidedress and topdress. Our inventory levels were very low at the end of the quarter, so we were well positioned coming into the summer. On the supply side of the market due to concerns for employee and contractor safety and restrictions from COVID-19 protocols, many North American nitrogen fertilizer producers delayed major plant turnaround scheduled for 2020 into 2021. Many of these turnarounds that were delayed have or will be starting in the third quarter. So, we expect industry production levels should be lower in the second half of this year compared to 2020. Additionally, during Winter Storm Uri, most North American nitrogen fertilizer production facilities ceased operations for 1 to 2 weeks due to shortages of natural gas or excessively high prices. Many of the plants that were taken down during Uri have had subsequent operating issues that resulted in additional outages and lower production. The impact of these 2 factors, tide nitrogen fertilizer inventory levels at the end of the planting season compared to the past several years. Since our last earnings call, all nitrogen fertilizer prices have remained firm. As compared to the past 5 years, we did not see the normal seasonal decline in nitrogen fertilizer prices into the summer. Sales for summer ammonia fill fall prepay and UAN fill were completed in late June and July at price levels comparable to spring spot pricing. We have a solid order book for both UAN and UAN going into the fall, but have more product to sell for the fourth quarter shipment. And our sales effort, we factored in our planned fall turnaround for the Coffeyville plant that is expected to start in early fourth quarter. We continue to evaluate structuring alternatives for the pursuit of 45Q tax credits for the carbon capture and sequestration through enhanced oil recovery activities that are ongoing at the Coffeyville plant. As part of these efforts, we continue to monitor several pieces of proposed legislation moving through Congress that could provide additional flexibility and incentives for companies to pursue carbon capture and sequestration. At our East Dubuque facility, we are evaluating the progress of a couple CO2 sequestration projects in Iowa, Illinois that might create a sequestration opportunity for the plant. While those projects are in early stages, considerable effort is being made to bring those projects from the drawing board to reality. Some of the proposed legislative changes could aid the development of these projects. As Tracy mentioned, we are pleased to complete the refinancing of our debt structure in June that will reduce our annual interest expense by more than $17 million. We also intend to reduce our debt outstanding by $95 million over the next couple of years. This reduction in debt cost should allow us to invest more in the business or make additional distributions to our unitholders. With greatly improved nitrogen fertilizer market conditions and the debt refinancing, we currently believe that we can both pay distributions and repay debt from our operating free cash flow. We are especially pleased to be paying a distribution of $1.72 per unit, our first since the fourth quarter of 2019. While fertilizer market conditions are strong, we're not changing 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 and reliability projects and incremental additions to production capacity, maximizing our marketing and logistics capabilities and targeting opportunities to reduce our carbon footprint. In closing, I would like to thank our employees for their excellent execution during the second quarter and their continued commitment to being healthy and safe in everything we do. With that, we're ready for the Q&A session, Melissa.

[Operator Instructions]. Our first question comes from the line of Richard Kus with Jefferies.

So, the first one for me is, I was a little bit surprised on the price realization that you guys were able to get in Q2. What percent of your order book or what percent of, I guess, the volumes that you sold during the quarter were actually pre-sold than that lower pricing levels of Q1?

I don't have the exact percentages in front of me, but we typically sell a fair amount of our product - both products forward to anywhere from, call it, 1 to 6 months. So, the spring - there was a large component of the spread that was priced in, call it, February, March as prices were rising. And into the second quarter, the ammonia, we typically, in the spring, we price a big part of that in the December time frame for prepay. So, customers purchase it on a prepaid basis in December. So that that had a big pricing element from a few months ago. So, that's typical. We typically, again, would sell 1 to 6 months in advance. So it's more reflected, I would call, the second quarter pricing reflective of a combination of the first and second quarter market price in whatever way you would define that. But that's - the second quarter was kind of a combination.

And then your comments imply that you should see a pretty big step-up in pricing than more towards what you really saw from a market standpoint in Q2 as we look to Q3, is there a much pre-sold volume then at lower pricing in Q3 or should we be looking for that step-up in pricing?

In that case, by the time we were pricing third quarter this year, the market had moved in the spot, I call it, the spot pricing. So, we didn't sell any product in June and July. So, it's kind of reflected current spot.

And then from a demand standpoint, obviously, things remain robust. How should we think about the - your shipment levels as you look to Q3 acknowledging that it's a seasonally slower quarter, but how do you expect those shipment levels to trend relative to last year given the environment?

So, typically, in the third quarter, ammonia shipments are lower because we're waiting for fall applications. So, they tend to be lower in the third quarter, but UAN is pretty consistent. So, I would expect a high degree of shipments in UAN. And - but even in ammonia, this - we've sold some product for the third quarter. So, we should see decent shipments in ammonia. Obviously, the big movement will be in probably the November time frame for the fall application, but we should see good ammonia movement, but I'd call it typical UAN movement, which should be pretty good.

And then lastly from me. On the cost side, I know last quarter on the direct operating cost you guys had talked $35 million to $40 million, you came in at $53 million. Could you maybe go through what the difference was there one more time? I know you had mentioned a few special items there.

Well, the two biggies are - we have this electricity charge. So, during Winter Storm Uri, we were one of the few plants that operated. We did receive surcharge from our electricity provider. They're proposing that to be paid over a 10-year period. We're challenging that and the assumptions behind it. But we took a charge for the net present value of the whole thing in the quarter so that was $4 million. And then we had a larger stock-based comp, so our SG&A number was high because of the increase in the stock price. Those were the 2 bigger numbers that would - sort of outside the normal, what I call, operating environment.

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

You said in your commentary that you're looking to both pay distributions and reduce debt, particularly the 9.25%. How are you going to balance that over the next couple of years? Obviously, you took advantage this quarter, paid the distribution to shareholders. But how are you balancing the decision to pay the distribution and the amount versus repaying the balance of the 9.25%?

Again, it will come down to a Board decision about how much they want to allocate to debt repayment and how much would be available for distributions. But I think that the theory that we're operating under is, I would consider kind of a steady pace of repayment is the way to think about it. And so do a decent debt paydown, but we do expect, given where pricing is, that there would be still a significant amount of free cash flow available for distribution even after those payments are made.

And the plan is still within the next two years to extinguish that stub piece?

That's correct, before initiation.

The section 45Q tax credit, so where do you stand in terms of being able to monetize the ones that you have today? I know you were looking at several different structures. Any updates on that?

We're continuing to press back if we're progressing on the structure. There are some, I would say, some new information out of the IRS, which clarified some issues with respect to the carbon capture equipment, which affects our structure and so we're sort of on the view that when we've got a bow wrapped around this, we'll be weigh it out there, but we're making progress. It's moving around. As an example, on the infrastructure, legislation and then the big one that comes behind that, there are some various proposals on carbon capture, which a combination of increasing the length of the time, the claim credits, the price of the credit. So, all of that's going to factor in to completing our - wrapping up of the structure which is what are the credits worth and how long can we claim them, because that affects the value of our asset in effect. So, we're working through that. We're - our plan is to keep moving along and see how the legislation falls out. I think it's generally very favorable for us. But who knows with activities in D.C. what will come out of the various pieces of legislation? But there's clearly, I think, a desire to provide more incentive for carbon capture and in different forms. So, we're going to hopefully take advantage of that.

I think the only thing I would add is tying those two things together. So, we - the plan is to kind of ratably pay down that stub amount before maturity in the early 2023. But once we are able to monetize the 45Q credits, we'll likely take out the remainder of the balance, whatever it is at that time and take advantage of the interest savings that's available to us.

And then just looking at the sales and production data schedule that you provided, caught my eye, there was a fair amount, I don't know, 16% drop in the use of natural gas in terms of volume and cost of materials and other. It was 2,711,000 versus 3,216,000 of MMBtus. Any reason why you had that large drop. There wasn't really any drop in production. Page 7 of the press release.

I'm looking at the press release. Yes. I'm not sure off the top of my head that we can explain it. We often want to get back to you on that. But it wasn't an effect of the change in production, because we - our production was right in line with last year. So, our...

Yes, I know, East Dubuque magically more efficient versus last year?

No, it didn't get more efficient.

I think it's probably inventory build of ammonia at East Dubuque, but we will have Richard check it if you guys can connect after the call.

[Operator Instructions]. Our next question comes from the line of William Stein, Private Investor.

Mike, I want to address a comment you made about cyclicality in pricing. I think you just noted that at some point, relatively recently, you've transitioned to selling at prices that are closer to spot. The price that you realized during Q2 were pretty far away from that. If we plug-in spot pricing to the volumes that you delivered in Q2, there appears you might have had something on the order of $6 or $7 per share in cash available for distribution. But as you highlighted on this call and in the press release today, we're in a very strong part of the cycle right now. As investors, should we anticipate that the current pricing environment rolls over at some point relatively quickly and goes back down to things - how things have been for the last, I don't know, 7, 8 years or so or is there any reason to be a bit more optimistic that the current pricing environment can persist for some time, because it seems to me that if it can, it's relatively realistic that you could do much higher distributions, something on the order of $20 a year, I think given your stock price of about $60, that addressing this would be of great interest to investors.

So, there are several questions in there. So, I'll start - let's start at the top. We - I think I've said in a number of past calls, we typically are a seller - our market is based on when our customers are wanting to buy products. So that changes periodically year-to-year because of a variety of factors, seasonality, weather, pricing, things like that. So, we tend to sell product when the customers are buying because that's when there's liquidity. So, this past year customers bought earlier going into the spring. So that's why when you look at the second quarter, it's kind of a blending of first quarter and second quarter. We have to participate in the market when the customers are buying. So, we can't just sell everything at spot pricing and expect that we're going to move all of our inventory or production through the system. So, but the difference between the second quarter and the third quarter was we have sold forward the third - into the third quarter, but the pricing was set at basically late June and July, which was effectively the market pricing was spot spring pricing. So, that pricing was much better looking into the third quarter based on where spot pricing was at that time. So, that's - I just want to be clear. The market provides liquidity to us at multiple times during the year and we try to participate when it's available. And so we sell - I wouldn't call it ratable, but we sell it when liquidity is offered. So, it's - we can't - I don't think I can lay out and it's different every year. So, it'd be hard to tell you that there's an exact pattern that holds. But let's go to the market, though. What I would tell you is the underpinnings of our business are very solid right now. And it starts really at the farm level. Grain prices are high and higher than they've been in the last - really basically the last 6 or 7 years, maybe back to 10 years, going back to 10 years and that's because demand has been good for grain, and supply has been I think rushing to keep up with that, but weather is always a factor in controlling it. And grain prices going into the end of this season and then to the fall, our carryout inventory is going to be one of the low points in the last 10 years. So, inventory levels are look good. But if you look forward on the grain pricing for December, grain prices look very good through the end of this calendar year, which sets up very well for the spring of '22. So, the demand side it looks really good. And that - and grain prices look good, which means farmers are making money and that's - any business and a critical part of the business is if your customers making money, our customer is making money and really the prospects look very solid there. On the supply side, we've had - I described in my comments, but we've had a confluence of factors where demand picked up and supply has been - there have been issues with production. And part of it was the winter storm and part of it was the turnaround schedule. And I described the turnaround schedule here in the U.S., but also globally a lot of production is catching up on turnaround. So, the inventory levels for this time of year are that just appear to be at the lowest that they've been in a number of years, because production also has had limits. And it's going to take us some time to catch up to that. So, I think that the supply-demand balance looks quite good going into '22. And I think our prospects look really good. We don't give forward forecast. So, I'm not going to comment on the distribution levels and things like that. But we - our goal is to be balanced in our thought process and pay down some debt and provide distributions on top of that and we feel very good about our prospects there. So, that's a rambling answer to your question, but did I answer all your questions?

I think so, Mark. I wonder if you have any comment on your expectation for this stronger part of the cycle. I think what you just said is you would anticipate it to remain strong in 2022. Any sort of change in the volatility of the cycle beyond that or is it just too far out to tell?

We are a cyclical business, so I'm not going to pretend like the cycles aren't going to come back. They always do. I would just say a couple of things that are interesting for our business for the go forward; #1, the growing consumption of grains in renewable fuels is a factor that could have a bearing on the go forward. This is on the farm side. There's more soybeans being consumed in making renewable diesel and there are some prospects for corn participating in either renewable diesel or in additional ethanol blending. And so grain demand, there could be, I'd say, a more of a secular change based on the growing use of renewable fuels. The other is the production of blue or green ammonia that would be used in other sectors outside of agriculture, like in power or transportation, we don't - right now, we don't have that. That would be a new market for ammonia and that would take away some of the production that would be used for ag. And so that's - I think most companies, we are - we've been looking at being able to produce blue ammonia at both of our plants. Right now we think we can certify Coffeyville, the blue ammonia plant. And then if we take the appropriate steps to do the same at East Dubuque, but that would be a new market, and it would not be an agricultural market, and that would mean that the agricultural market has to compete with a new source of demand. The other factor, at least over the next few years is this anti-dumping case that's the case filed with the Department of Commerce on ITC. And if you go back to some of our conference calls from '19 to '20, we're talking about the entry of product from Russia and Trinidad into the U.S. We believe that this subsidized product that based on the price of natural gas and was dumped here in the U.S., particularly after the EU put tariffs on UAN. So, if in fact, that they ultimately do provide or put a duty on UAN that also could be more of a multiyear change to our business. So, there's some really interesting, I'd say, factors that could lengthen the cycle, could affect our business in a more structural way and I would say that we're optimistic about it. But a lot of this has to play out in front of us going forward.

Thank you. Ladies and gentlemen, that concludes our time for questions-and-answers. I'll now turn the floor back to management for any final comments.

All right. Well, appreciate everyone's time today, and we look forward to talking to you on our third quarter results coming up. Thank you very much.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.