CVR Partners, LP (UAN) Q4 2021 Earnings Report, Transcript and Summary

Greetings, and welcome to the CVR Partners, LP Fourth 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, VP of FP&A and IR. Thank you, Richard. You may begin.

Thanks, Paul. Good morning, everyone. We appreciate your participation in today's call. With me today are Mark Pytosh, our Chief Executive Officer; Dane Neumann, our Chief Financial Officer; and other members of management. Prior to discussing our 2021 fourth quarter and full year 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 also 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 fourth 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. Good morning, everyone, and thank you for joining us for today's call. The summarized financial highlights for the full year 2021 included net sales of $533 million, net income of $78 million, EBITDA of $213 million. We repurchased over 24,000 CVR Partners common units, and the Board of Directors declared total cash distributions for the full year 2021 of $9.89 per common unit. Looking more specifically at the 2021 fourth quarter, we reported net sales of $189 million, net income of $61 million, EBITDA of $93 million, and the Board of Directors declared a fourth quarter distribution of $5.24 per common unit, which will be paid on March 14, 2022, to unitholders of record at the close of the market on March 7, 2022. We saw a significant improvement in the nitrogen fertilizer market in 2021, which drove strong earnings and cash distributions for CVR Partners. In addition to the improved market fundamentals, we continued our focus on safe and reliable operations. We are proud to report continued improvement in our environmental health and safety metrics, including a 67% year-over-year reduction in environmental events. We're providing more ESG disclosures and published our first internal ESG report for 2020. Work is progressing on the 2021 report that we plan to release publicly later this year. During the fourth quarter of 2021, we operated the plant safely and reliably with consolidated ammonia plant utilization of 90%. We experienced approximately 10 days of downtime at the Coffeyville facility due to 2 separate outages at the third-party air separation plant and approximately 7 days of downtime for turnaround work in October when we made the tie-ins for the urea upgrade project. We also experienced approximately 11 days of downtime at the East Dubuque Facility. A major part of our 2022 turnaround plan at East Dubuque should address the issues that resulted in the downtime during the fourth quarter. Our combined operations produced approximately 197,000 gross tons of ammonia, of which 70,000 net tons were available for sale for the fourth quarter of 2021. This compares to production of 220,000 gross tons of ammonia, of which 75,000 net tons were available for sale in the prior year period. We produced 288,000 tons of UAN in the fourth quarter of 2021 as compared to 335,000 tons in the prior year period. In addition to the downtime that I mentioned, we also elected to maximize ammonia production available for sale at East Dubuque at times in the quarter due to the strong pricing and demand environment. During the fourth quarter of 2021, we sold approximately 265,000 tons of UAN at an average realized price of $347 per ton and approximately 105,000 tons of ammonia, an average realized price of $745 per ton. Year-over-year pricing increased significantly for UAN and ammonia, which were up 150% and 179%, respectively. The tightness in the nitrogen fertilizer market that began in early 2021, persisted through the fourth quarter, with the energy crunch in Europe and Asia, adding to the supply concerns and driving pricing for ammonia and UAN higher. We had a good fall harvest in the U.S. and the weather was favorable for our strong ammonia application. The outlook for spring planting and demand for crop inputs remain strong. We have a good order book for the spring and fertilizer pricing has remained firm but volatile in urea, which I will discuss further in my closing remarks. I will now turn the call over to Dane to discuss our financial results.

Thank you, Mark. Turning to our results for the full year 2021, we reported net sales of $533 million and operating income of $134 million, compared to net sales of $350 million and an operating loss of $35 million for the full year 2020. Net income for the full year 2021 was $78 million or $7.31 per common unit and EBITDA was $213 million. This is compared to a net loss of $98 million or $8.77 per common unit and EBITDA of $41 million for the full year 2020. As a reminder, our full year 2020 results were reduced by a $41 million noncash goodwill impairment related to the Coffeyville facility taken in the second quarter. The year-over-year improvement in EBITDA was driven primarily by higher prices for ammonia and UAN, offset slightly by higher feedstock costs and operating expenses. For the fourth quarter of 2021, we reported net sales of $189 million and operating income of $72 million, compared to net sales of $90 million and an operating loss of $1 million in the fourth quarter of 2020. Net income for the fourth quarter of 2021 was $61 million or $5.76 per common unit and EBITDA was $93 million. This compares to a net loss of $17 million or $1.53 per common unit and EBITDA of $18 million for the fourth quarter of 2020. Consistent with the full year results, the increase in EBITDA was driven primarily by higher pricing for ammonia and UAN. Direct operating expenses for the fourth quarter of 2021, excluding inventory and turnaround impacts increased by approximately $50 million year-over-year, primarily related to higher share-based compensation expense and increased natural gas and utility costs. Turning to capital spending. During the fourth quarter of 2021, we spent $12 million primarily on maintenance capital. For the full year 2021, we spent approximately $26 million, of which $16 million was for maintenance capital. We currently estimate total capital spending for 2022 to be between $36 million and $39 million, of which $32 million to $34 million is expected to be maintenance capital. This excludes turnaround spending, which we expect will be approximately $25 million to $30 million for the planned turnarounds at Coffeyville and East Dubuque in the summer. Looking at the balance sheet. As of December 31, we had approximately $148 million of liquidity, which was comprised of $113 million in cash and availability under the ABL facility of $35 million. Within our cash balance of $113 million, we had approximately $34 million related to customer prepayments for the future delivery of product. During the fourth quarter, we redeemed another $15 million of the remaining 2023 9.25 senior notes outstanding. Subsequent to year-end, we redeemed the final $65 million of the 2023 notes that were outstanding. With the debt refinancing completed in June of 2021 and the full redemption of the remaining 2023 senior notes earlier today, we have reduced total debt on the balance sheet by $95 million and reduced our annual debt service cost by approximately $26 million per year, a reduction of over 40%. In assessing our cash available for distribution, we generated EBITDA of $93 million for the quarter and reserves of $10 million for interest, $9 million for maintenance and capital expenditures, $4 million for the planned turnarounds at Coffeyville and East Dubuque in 2022, a release of $2 million of previously established reserves related to the turnaround work at Coffeyville completed during the quarter, and $675,000 of utility pass-through from the city of Coffeyville related to Winter storm Uri. In addition, the Board of Directors of our general partner established reserves of $15 million to repay a portion of the 2023 senior notes in the fourth quarter. As a result, there was $56 million of cash available for distribution and the Board of Directors of our general partner declared a distribution of $5.24 per common unit. Looking ahead to the first quarter of 2022, we estimate our ammonia utilization rate to be between 92% and 97% for the quarter. We expect direct operating expenses to be $50 million to $55 million, excluding inventory impacts, and total capital spending to be between $4 million and $7 million. With that, I will turn the call back over to Mark.

Thanks, Dane. Since our last earnings call, the strength in crop prices has persisted with March corn, recently at $6.50 per bushel and soybeans at $16 and stronger grain prices across the NYMEX curve through 2024. The fall harvest went well and the USDA currently estimate planted corn acres were 93 million, with expected yields of 177 bushels per acre and soybean acres were 87 million with yields of 51 bushels per acre. The expected 2021-2022 inventory carryout of 10.4% for corn and 8% for soybeans continues to be at the lower end of the 10-year range. The fall ammonia application was one of the largest in recent years. We shipped most of the inventory we had available to sell and the industry as a whole came out of the fall with very low inventory levels entering the winter. The supply challenges continue in Europe, where natural gas prices remain at approximately $25 an MMBtu, China and Egypt continue to restrict imports -- exports of urea, and Russia has reduced its export activities as well. We are closely watching the Russia-Ukraine situation that could impact Russia's ability to export nitrogen fertilizers due to potential economic sanctions. Nitrogen fertilizer prices rose through the fourth quarter, and we were able to put on a book -- a good order book into the spring. We still have more product to sell, but we have a good foundation of orders to capture the higher market prices that developed in the fourth quarter. Prices were higher in the fourth quarter versus the third quarter, and this pricing strength is currently expected to hold through the first half, both through the first and second quarters of 2022. In January, the Department of Commerce provided a preliminary determination of countervailing duties against UAN imports from Russia and Trinidad, with cash deposit requirements ranging from 10% to 34% from Russia, and up to 63% from Trinidad. The ultimate impact from these duties remains to be seen. However, we would expect to see a reduction in core volumes that should be supportive for pricing in the U.S. At our Coffeyville facility during the outage at the air separation plant, we completed the installation of an additional CO2 compressor and ammonia pump, which has led to an increase in UAN production capacity of approximately 100 tons per day. This increased UAN production capacity should provide a quick payback for that capital project. We continue to progress on creating a structure that will allow us to claim and monetize 45Q tax credits for the carbon capture and sequestration through enhanced oil recovery activities that are ongoing at the Coffeyville plant. Since our last call, we've entered into due diligence and structuring discussions with tax equity investors, and we would expect to close the deal by the end of the first quarter or early in the second quarter. The Build Back Better legislation did not get passed by Congress, but we continue to monitor other pathways for Congress to pass climate change legislation that could potentially increase the price of carbon capture credits, as was proposed in Build Back Better. We believe that higher 45Q credit values for carbon capture and sequestration could accelerate the development of one or more proposed third-party sequestration projects in Iowa and Illinois that could be an opportunity for our East Dubuque Facility. As Dane mentioned, we reduced our debt outstanding by $15 million in the fourth quarter. And this morning, we retired the remaining $65 million of the 2023 9.25% senior notes. With the retirement of the 25 -- $95 million of 2023 notes, we have completed our targeted debt paydown. The combination of the debt paydown and refinancing of the old notes in June 2021 has lowered our annual interest expense by $26 million. We are also pleased that we'll be paying a distribution for the fourth quarter of 2021 of $5.24 per unit. With the improvements in the nitrogen fertilizer markets over the past year and the reductions in our annual debt service costs, we're evaluating opportunities to further improve and diversify our business. We look forward to providing additional details over the coming quarters as we progress these evaluations. While fertilizer market conditions are strong, we are maintaining 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 fourth quarter and their continued commitment to being healthy and safe in everything we do. With that, we're ready to answer any questions. Operator?

[Operator Instructions] Our first question comes from Brian DiRubbio with Baird. Please proceed with your question.

Just a few questions for me. Can you help me just get to a pro forma liquidity number between the payout of the distribution and the redemption of the old first lien notes? Just trying to get a sense of what liquidity is going to look like at this point, pro forma for those 2 items?

Yes. So as you know, as a variable rate MLP, we do distribute all of our available cash. So as a result, we will have maintained minimum liquidity rates similar to what we have in the past and the build that we've seen in cash as a result of the strong operating performance has not had a material impact on that minimum balance. As we as we go forward, the appropriate reserves will be put in place to accommodate for that excess pay down of debt.

Got it. Can you remind us what the minimum liquidity level is?

From a cash perspective, our minimum target is usually $20 million to $30 million. That will probably elevate with the higher prices, and then the ABL facility of $35 million.

I think, Brian, what Dane is trying to say is that we're comfortable in making the distribution payment and paying the notes here in the first quarter. We have adequate cash on the balance sheet to maintain that level higher and plus, our ABL liquidity.

No, understood. And that's helpful, that color. I guess, can you help us understand, last year, we definitely saw a drop in imports from -- for UAN. Do you have any sense of what that was versus what we saw in 2020 or 2019?

Well, I would say that really, the drop in imports was back half loaded or really, fourth quarter. And I think that when the first preliminary indication came from the Department of Commerce on antidumping duties, that kind of slowed things down and that picked up pace in the fourth quarter. So I think that was the biggest issue, was the fear from the producers that there would be duties or cash deposits required in that. And so, imports started to slow, and we expect that, that's slowing to continue into the first half of '22. And we're seeing it already in the marketplace, a reduction in imported product from Russia and Trinidad.

Okay. Great. And then just 2 final ones for me. Mark, the past, we've sort of debated, do you keep Coffeyville as a pet coke facility? Would you convert it to nat gas? I think the last time, you said you were -- thought that the diversification of having pet coke was an advantage there. Is that still your thinking on that plant?

Yes. It's actually -- in the last year, it flipped to being -- it was -- people were concerned about pet coke now that's turned into a strategic advantage with gas. Starting with Uri last year, Coffeyville has actually been probably more competitive. I would tell you that in the last year, the refiners, it's been more beneficial to run heavier crudes, so we're actually -- we've seen some more pet coke coming into the marketplace, and in our area, particularly in the Mid-Continent. And so we have adequate supplies. We've got good agreements with a series of the refiners in the Mid-Continent, and we can also draw off the river for that product. So we feel very comfortable with pet coke and it's now become, I'd say, again, a good diversifier and a strategic advantage for us. And so -- but we always have the optionality if the markets flip significantly down the road, we can we can convert that plant to natural gas if we need to.

Got it. And just on that, how much of your pet coke was sourced from your sister company?

We've been getting on the order of about 40% of our needs from the sister company. So -- but our slate of the people that we buy from has been pretty consistent. We haven't -- that hasn't really changed the last 3 years by any great amount. We have -- there's a series of refineries within trucking distance of our facilities. So we've been able to draw from that group, and it's been pretty consistent year-over-year.

Understood. Final question for me. You mentioned you're making other investments with all the cash that you're going to be generating. Any sense of direction, how we should be thinking about that? Are you thinking about M&A activity to consolidate? Or are you looking at diversification activities to reduce your exposure to some of the nitrogen fertilizers?

I think it's a combination of factors, and we're going to be very disciplined in our approach. So expect -- we're going to be methodical and disciplined in anything that we do, any capital we're going to deploy there. We've been, I'd say, protective in the balance sheet in the last 5 years since we bought East Dubuque and the refinancing and the paydown open up some optionality for us, but we're not going to squander it in a rush to do transactions. But we do think that either looking at things that could diversify us in other fertilizers or in nitrogen, obsolete nitrogen is our power outlet. We're not looking to diversify away from nitrogen, but there's pretty limited field of opportunities in nitrogen. So we're looking at what else might be -- take advantage of our skill set, our marketing skill set and our operating skill set. So -- but we're not going to rush into anything. We're going to be methodical and thoughtful and very returns-focused in our approach. So we're going to have a high hurdle rate to be able to consider deploying capital. We're also going to look at internal projects, decarbonization projects or brownfield expansions, not big ones, but potentially, add-ons to the facility to give us capacity without having to spend a lot of capital. So the balance sheet allows us to consider all that. But again, it's going to be a high hurdle rate to deploy.

Our next question is from William Stein, a private investor. Please proceed with your question.

First, I want to say congratulations on continuing this relatively long history of operating efficiently and safely. And now, we also have commodity prices becoming more favorable. So great quarter, great results and congratulations on that. My first question is a clarification on something you mentioned in the prepared remarks and an answer to the first question, the decision to pay down the remaining expensive debt. I think in the past, you've stated that you would do this from the tax credits. I think you stated in your opening comments, Mark, that you're hopeful that you may have an agreement on that. I assume if you do get it, that the cash from that will participate in funding this paydown. If you don't get it, if you don't get paid on tax credits in the coming quarter or so, should investors be prepared to view your Q1 distribution as being reduced by an amount related to this paydown? Or would you find another source of cash? And then I have a couple of follow-ups.

Okay. Well, we're doing it in advance of receiving funds for the 45Q. We feel comfortable that we'll ultimately reach a structure that will meet the 45Q requirements. So we do expect that to be able to put that in place. The funds won't come until later. I think the way I sort of described it on the previous calls was that between our operating cash flow which is really -- as you saw in the fourth quarter, it's been significant, and those 45Q credit dollars down the road, that we had the free cash generation to both pay down debt and make distributions. The fourth quarter, for example, we paid down $15 million in debt, and we paid a $5.24 distribution. Our feeling on one end of this year is between our free cash flow and the 45Q payments that we had plenty of money to both pay down debt and pay distributions. So we think to pay down debt and we're complete with the paydown today, but we think that creates shareholder value and the distributions on top of that. We're returning capital to shareholders. So we do have to take into account the payment of the debt, and you'll see that we've reduced the amount available for distribution, but our free cash flow generation from operations has been very strong. And so we felt comfortable, because of that generation that we could take advantage of. And we're going to save about $3 million by paying it early rather than doing it ratably over the year. So we saved the company about $3 million by stepping in early. So we just didn't want to leave that money on the table.

Fair enough. Next question relates to the split between ammonia and UAN in the quarter. I think you answered this, but I just want to clarify. It appears you sold much more ammonia than you usually do in Q4, but you upgraded less to UAN and sold less UAN relative to sort of that typical seasonal pattern. It sounds like that's partly related to operational constraints, but maybe, more related to market pricing and opportunities to sell ammonia at a high price. Do I have that sort of mix correct, that it's more sort of opportunistic selling as opposed to production related?

Yes. I would say that it was -- the bulk of it was opportunistic market, and we've done that in the past when we have these opportunities. But the fall ammonia run, obviously, East Dubuque is a much bigger ammonia market for our plant compared to Coffeyville. But even at Coffeyville, we had a great fall ammonia run. The weather was perfect. We had a long season for -- ammonia is like 6 weeks, which for us, is long. And our customers kept coming back to us, so we decided to pull back in our UAN upgrade for a period of time, and that was just to satisfy the market. And we were getting pricing there that was very attractive because prices were escalating during the quarter, so we took advantage of that. And then once the season ended, then we reverted back to what I call normal production slate, where we were doing more regular upgrade. Coffeyville's largely full upgrade and then East Dubuque is -- we upgrade a fair amount there to UAN. So we're back to normal going into the spring, but we have done that periodically where the market offers it to us and we're able to dial back there from -- away from UAN to ammonia for a period of time.

Great. You already answered a question on sort of long-term trends and expansion opportunities, so I'd like to squeeze one more in on a bit more of an operational topic, if I can. It relates to pricing and inventory. There are some investors and in particular, a bunch of people that write on Seeking Alpha, not me, by the way, who always write about an expectation for the company to sell out all of your production and then all inventory in some quarter. And that always seems to be just over the rainbow. My understanding is that, that concept's just not feasible in a process manufacturing operation like yours. And I think I understand this dynamic, but maybe, you can help explain why you're never going to really like sell out and empty all the silos. Is that the right way of thinking? Maybe you can explain that a little bit to us.

Sure. Yes, sure. Sure, William, there's kind of 3 variables there. Number one, ideally, we'll run 100% production capacity, 24/7, so every day of the week. We don't have unlimited storage at our sites. And so I think that we generally have to sell forward so that we -- the goal of the operation is to run maximum production. That makes you the lowest quality -- it lowers your cost as low as they can be for production, and we don't have unlimited storage. So you always have to sell some portion of production forward so that you can maintain full production and you don't get caught where you run out of storage capacity for product. So in those situations, you might have to dial back your production level. So that's one issue. The other issue is that the buying patterns of our customers. We have people that buy -- they buy both forward tonnage and spot tonnage. And we have to be in the market selling when there's liquidity. And when I define liquidity, I mean, when a customer -- big customers are buying product. So every year, we have the UAN fill season in the summer, where customers buy somewhere between the third quarter product and the fourth quarter product. And if you don't participate in that, then they could satisfy their needs with other -- from other producers. So you have to participate. They have similar dynamics in the ammonia season for the fall and the spring. And so you have to participate when the customers are buying. And so that -- we meet the liquidity when it's there. We can't sell all our product at spot prices. I think that's a common fallacy that a lot of people, when they look at this business, why can't you sell all your production spot market? Because if the liquidity dries up, then we don't have an outlet for our product, and we might fill up all our tanks and not have a storage for the product. So we have to balance that. And sometimes, we look really smart and sometimes, we look really stupid because we're either in front of the curve or behind the curve. And in a rising pricing environment like 2021, we always look behind the curve, but because we were selling forward, as we came into this year, the market was very strong in the fourth quarter, and so we were able to sell first half '22 product at much higher prices than we experienced during the rise in 2021. And so we've got a good book on we can run comfortably full out production 24/7, and we have a good book of business so we can satisfy the customers. We still have some more to sell in the second quarter, but we're in great shape and the market pricing is much higher than it was in the second half of '21.

There are no further questions at this time. I would like to turn the floor back over to management for any closing remarks.

Again, I want to thank everyone for joining our call today, and we look forward to reviewing our first quarter results with you in a couple of months. Thank you very much.

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