CVR Partners, LP (UAN) Q1 2022 Earnings Report, Transcript and Summary

00:03 Greetings and welcome to the CVR Partners First quarter 2022 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. 00:27 It is now my pleasure to introduce your host, Richard Roberts, Vice President of Financial Planning and Analysis and Investor Relations. Thank you sir, you may begin.

0:38 Thank you, Christine. 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. 00:50 Prior to discussing our 2022 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. 01:29 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 2022 first quarter earnings release that we filed with the SEC for the period. 01:54 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 seem necessary or appropriate by the Board of Directors of our general partner. 02:23 With that said, I'll turn the call over to Mark Pytosh, our Chief Executive Officer. Mark?

02:27 Thank you, Richard. Good morning, everyone, and thank you for joining us for today's call. The summarized financial highlights for the first quarter of 2022 include net sales of $223 million, net income of $94 million, EBITDA of $123 million, we repurchased approximately 112,000 CVR Partners common units for $12.4 million and the Board of Directors declared a first quarter distribution of $2.26 per common unit, which will be paid on May 23rd to unit holders of record at the close of the market on May 13th. 03:04 During the first quarter of 2022, we operated the plants safely with consolidated ammonia plant utilization of 88%. We experienced approximately three days of downtime at Coffeeville due to an outage at the third-party air separation facility and approximately two days of downtime due to a power outage. At East Dubuque, experienced approximately 11 days of downtime during the quarter due to a number of different outages. As I mentioned on our last earnings call, a major part of the plan for the upcoming turnaround at East Dubuque should address the issues that resulted in the downtime over the last two quarters. 03:39 In addition, during the upcoming Coffeyville turnaround the operator of the third-party air separation facility is planning to complete some work that should significantly improve the reliability of that asset. Our combined operations produced approximately 187,000 gross tons of ammonia, of which 52,000 net tons were available for sale for the first quarter 2022, this compares to production of 188,000 gross tons of ammonia of with 70,000 net tons were available for sale in the prior year period. We produced 317,000 tons of UAN in the first quarter 2022, as compared to 272,000 tons in the prior year period. 04:22 During the first quarter of 2022, we sold approximately 322,000 tons of UAN, at an average price of $496 per ton and approximately 40,000 tons of ammonia at an average price of $1,055 per ton. Relative to the first quarter of 2021, UAN and ammonia sales volumes were higher, driven in part by higher production from Coffeyville, where the plant ran at an improved utilization rate during the short turnaround work we completed in the fourth quarter. 04:53 Year-over-year, our pricing for the quarter was 212% higher for UAN, and 252% higher for ammonia. Our first quarter results were reflective of the price increases for nitrogen fertilizers that we witness in the fall with the energy crunch to began in Europe and Asia. Fertilizer inventory levels remain tight across the US and globally the ongoing conflict in Ukraine has caused another wave of supply concerns across the fertilizer and grain markets. 05:21 We have a good order book for the second quarter and are feeling more optimistic about pricing dynamics for the second half of 2022 and into 2023, which I will discuss further in my closing remarks. 05:33 I will now turn the call over to Dane to discuss our financial results.

05:37 Thank you, Mark. The first quarter of 2022, we reported net sales of $223 million and operating income of $104 million, compared to net sales of $61 million and an operating loss of $14 million in the first quarter of 2021. 05:52 Net income for the first quarter of 2022 was $94 million or $8.78 per common unit and EBITDA was $123 million. This compares to a net loss of $25 million or $2.37 per common unit and EBITDA of $5 million for the prior year period. There were no adjustments to EBITDA in either period. 06:11 The year-over-year increase in EBITDA was driven by higher UAN in ammonia sales, volumes and prices offset slightly by higher feedstock costs and operating expenses. Direct operating expenses for the first quarter of 2022, were $60 million, compared to $37 million in the prior year period. Excluding inventory and turnaround impacts, direct operating expenses increased by approximately $17 million, primarily related to higher electricity and natural gas costs and higher share-based compensation, as a result of the increased unit price. 06:42 Turning to capital spending, during the first quarter of 2022, we spent $6 million on capital projects, which was primarily maintenance capital. We estimate total capital spending for 2022 to be approximately $38 million to $42 million, of which $36 million to $39 million is expected to be maintenance capital. This excludes turnaround spending, which we expect will be approximately $26 million to $31 million of expense. 07:07 Looking at the balance sheet as of March 31st, we had approximately $172 million of liquidity, which was comprised of approximately $137 million in cash and availability under the ABL facility of $35 million. Within our cash balance of $137 million, we had approximately $80 million related to customer prepayments for the future delivery of product. 07:28 As we mentioned on our last earnings call in February, we redeemed the final $65 million of the 2023 9.25% notes outstanding, completing our plan of reducing outstanding debt by $95 million. Between the refinancing of the senior notes completed in June of 2021 and the $95 million reduction in debt outstanding, we have reduced our annual debt service costs by approximately $26 million per year, a reduction of over 40%. 07:54 In assessing our cash available for distribution, we generated EBITDA of $123 million and had net cash needs of $22 million for interest costs, maintenance CapEx and other reserves. Of the $101 million or $9.57 per common unit remaining, we had cash needs of $65 million for the repayment of the remaining 2023 Senior Notes and $12 million for the repurchase of 112,000 common units. As a result, there was $24 million of cash available for distribution and the Board of Directors of our general partner declared a distribution of $2.26 per common unit. 8:28 Looking ahead to the second quarter of 2022, we estimate our ammonia utilization rate to be between 92% and 97%. We expect direct operating expenses to range between $55 million and $60 million, excluding inventory and turnaround impacts and total capital spending to be between $12 million and $17 million. 08:46 With that I will turn the call back over to Mark.

08:49 Thanks Dane. Russia’s attack of Ukraine set a major impact on global agriculture markets. Immediately in February exports of grains and fertilizers came to a virtual standstill in the Black Sea as ports were closed. This impacted Ukrainian and Russian exports of weaker corn and Russian exports of nitrogen fertilizers, particularly ammonia and urea. 09:13 Formal and informal sanctions placed on exports products in individuals closely associated with Russian leadership by Western countries has dramatically reduced Russia's ability to export nitrogen, phosphate or potash. Additionally, the natural gas shortages present in Europe since September 2021 are now likely to persist through the rest of 2022, due to limits on availability of Russian natural gas exports. The shortages of natural gas in Europe continue to cause a curtailment of nitrogen fertilizer production and with limited Russian exports, supply conditions have been very tight into the spring 2022 planting season. 09:52 For ammonia production natural gas cost alone is currently $1,200 per short ton in Europe. Given the drawdown and available nitrogen fertilizer inventories, we don't expect supply conditions to improve materially until 2023. Longer term given Europe's stated shift away from using Russian natural gas to imported LNG, baseline nitrogen fertilizer production costs will likely rise for European producers and favor our US production where gas cost should be lower. 10:23 While input costs have risen substantially in the past 18-months, so have grain prices. With corn at $8; soybeans at $16.50; and wheat at $10.50; farm economics remain attractive. However for spring planting we have heard from wholesalers, retailers and co-ops that availability of inputs is as much a concern as price. Consistent with this feedback the USDA's spring 2022 planting intentions report from last month estimated planted corn acres will be $89.5 million, down 4.1% from $93.4 million in 2021 and soybean acres are estimated at $91 million, up 4.3% from $87.2 million acres in 2021. 11:07 Factoring these lower planted corn acres and higher soybean acres inventory carry out levels are likely to be below 10% for both corn and soybeans. Keeping them at the lower end of the 10-year range. Inventory levels for corn and wheat may be drawn further than these estimates due to potential grain export shortages from Ukraine and Russia. Overall grain market conditions currently bode well for nitrogen fertilizer in 2023, due to the likely need for additional corn and wheat planted acres. 11:38 Spring application got off to a late start to the cold and wet weather. We are seeing strong demand at our plants and expect that demand extend through the end of the second quarter and into the summer. While planted acres are expected to be down the supply fertilizer is tight in the markets appear to be well supported at these price levels. 11:57 Product netbacks in the first quarter were higher by over $750 per ton for ammonia and over $330 per ton for UAN relative to the first quarter of 2021, reflecting the escalation and market prices it started in the fourth quarter. We have sold much of our 2Q volumes at this point and netback prices are expected to be higher than in the second quarter, compared to the first quarter generally reflecting an escalation of prices from the first quarter. 12:24 The issues that caused the downtime in the first quarter expected to be addressed in the turnarounds plan for both plants in the summer. Both turnarounds are scheduled for the third quarter and we are focused on improving reliability for the long-term. In 2023, we don't currently plan any turnaround activity at either plant. We continue to progress on monetizing the 45Q tax credits for the Coffeyville facility, we're working through detailed due diligence and structuring and currently expect to complete a transaction in the coming months. 12:56 As Dane mentioned, we completed our targeted debt pay down by retiring the remaining $65 million of the 2023 Senior Notes in February. Our total debt now stands at $550 million and with an interest rate of 6.125%, we are comfortable with our debt level and interest cost through a full market cycle. We also completed the repurchase of 112,000 units for $12.4 million and when combined with the $2.26 declared distribution we returned $3.43 per unit to our unit holders this quarter. We are also evaluating some brownfield development projects at both plants that could be targeted capacity increases to our existing footprint. If approved, these projects would take several years to complete, but we've made believe there would be some attractive opportunities within our plant footprint. 13:52 We are currently contemplating any greenfield development projects, 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 cost, being judicious with capital, but targeting select investments in reliability projects, and incremental additions to production capacity, maximizing our marketing and logistics capabilities, and targeting opportunities to reduce our carbon footprint. 14:28 In closing, I'd like to thank our employees for their excellent execution during the first quarter and their continued commitment to being healthy and safe in everything we do. 14:37 With that, we're ready to answer any questions, Kristine?

14:41 Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Richard Kus with Jefferies. Please proceed with your question.

15:14 Hey guys, congrats on a good quarter and thanks for answering my questions. So firstly, for me, as you look at Q2, I guess, you mentioned that the spring planting season got started a little bit later this year. Can you talk maybe about how you expect volumes to trend this year just in terms of ammonia and UAN, as you look at the second quarter in the spring planting season?

15:42 Yes, Rich. It’s Mark I -- it's a little bit early to call that, because it's -- there were still, I'd say in the planting rates and so I am not ready to call volumes. What I would telling you typically in a spring where less ammonia was applied that generally has to be made up with urea and UAN. So if it does, in fact, if we don't get as much ammonia applied been -- we would see a pickup in demand a little bit later for urea and UAN. So there -- the simple fact is that you need to have a certain amount of nitrogen, on the ground and to meet yield targets. So if it's unmatched by ammonia, then it will get picked up urea and UAN, I think this year we'll probably see incrementally more demand in urea and UAN versus ammonia.

16:46 Got it. Okay, that's helpful. And then you mentioned Q2 is substantially booked out, have you guys started booking in the Q3 yet?

16:54 We have just -- we are in, I’d say price discussions on Q3 and so it's pretty early there, again with the spring got to play out, we've got to get the crop in the ground. But we have had some price discovery with customers for the third quarter. So, but we have its own like, a lot of volume yet, but we have a sense for what people are thinking about.

17:19 Got it, okay. And then maybe lastly for me, just in terms of all of the cash that you guys are generating in -- are likely to generate for the remainder of this year. You talked about maybe some targeted CapEx, some unit repurchases and then dividends, obviously, things of that nature now that you've reached your gross debt target? Are you thinking about any potential inorganic opportunities in terms of M&A? Or is that not really something that you're thinking about at this point?

17:47 Yes, I would say all the options are on the table, one of the challenges in this environment in M&A is what expectations are for the buyer and the seller. And I would -- as we've seen prices escalate that generally the Psychology goes with it. So asset prices are up substantially, and I would just tell you that we're very returns focused, so we won't -- we're not going to chase assets to deploy the capital, it's got to meet a full cycle return for us. And so I would say that we're going to continue to look and look for opportunities, but I’d -- the bid-ask spread is pretty wide at this stage.

18:31 Understood. Okay, I appreciate it. Congratulations.

18:34 Thanks.

18:37 [Operator Instructions] Our next question comes from the line of William [Stein] (ph), Private Investor. Please proceed with your question.

18:49 Great, thanks for taking my questions and congratulations on the good results. First, I'd like to ask about the 45Q tax credits. I understand this is still in process, but can you sensitize us, so we can maybe have proper expectations around the magnitude and timing of cash flows from these? Is this going to be an ongoing source of cash for the company and thus for unit holders or is this going to be more of a one-time event?

19:20 So I'll keep it general lines, because I don't want to basically put the deal out there, but if there is going to be two buckets, there's going to be -- there'll be an upfront payment as part of the structure, and then there will be ongoing payment. So there'll be sort of two cash streams that come out of the 45Q credits, a one-time payment and then ongoing payments for the life of the project. And we're sure to finalizing that, as we're getting there and -- but we'll see to sort of cash streams coming out of 45Q.

19:59 Great. Next, your inventory is nearly at an all-time low, I think normally in Q1, you build inventories in this quarter you built ammonia, but you actually consumed inventory of UAN, was that because of production problems that you cited at East Dubuque? Or was there something else going on? And do you feel you're going to be able to meet demand and drain additional inventory during Q2 or inventory levels to low to predict to do that?

20:31 So there were two different issues going on there, we did have production issues, so we have lower inventory coming in. But we have such a big fall in ammonia that we already were low coming into January 1, so inventory -- and this has been going on for a year. I mean, we've low inventory even seasonally since Uri hit last February. And this is what -- when I refer to tight industry conditions, it’s pretty similar for others. All the producers have been carrying tight inventories and we did have ammonia available for spring. But most of that will be consumed in spring planting, pre-plant and so we were able to make enough to support our customers. 21:24 At Coffeeville, if you recall back in the fall, we did expansion in the urea plant and actually we're consuming a lot of the ammonia, because we're producing at a higher level -- producing UAN at higher level. So we're not having as much ammonia available for sale. But we have more UAN for sale, so that's a good problem to have. And the performance of the plants exceeded our expectations when we put that equipment in, in the fall.

21:58 Hey and then one maybe relate to longer-term question, if you indulge me in Q1 you posted earnings per share and free cash flow per share that my analysis is right, these were greater or just the quarter than they were for the entire year of 2013. The last time your stock was trading at over $300, it’s clear that part of that improvement related to having more capacity following the acquisition in 2016 and maybe other things as well. But clearly a big part of this, because of a better pricing, of course, the result of the balance between supply and demand. You’ve talked a little bit about what might happen with supply in the very near-term. But I'm hoping you can just indulge me for a minute and talk about sort of near, medium and long-term anticipated changes in supply and demand factors. Thanks so much.

22:53 Okay. So there is always two parts of the cycle for what we do, one is on the production side and it's partly related to performance of facilities, part of that's related to input cost. This is a very different cycle than we experienced back in the call 2011 to ‘15 timeframe. We have a severe energy shortage in certain markets and it doesn't look like that so an issue, it's going to be solved in months it's more like years. And so we require either natural gas or coal to produce nitrogen fertilizers. And that -- those markets are dislocated and look like it's going to take some time to fix that. And so the input cost generally are much higher than they were in the last cycle. So, global prices have risen and it doesn't look like there's going to be, I'd say recovery or reduction -- major reduction in energy pricing in the near-term. I think it's going to take a while. 24:09 In Europe, as I said in my point, Europe is going through a transition from taking pipeline delivered natural gas from Russia to taking a lot of LNG and the cost of that is going to -- at a much different price point, you know, for durable cycle. So that the energy side is very difficult. And then with the Russia-Ukraine, in addition to availability of Russian fertilizers, the grain market doesn't look -- we're going to draw a lot of inventory out of grains and our business is only as good as farm economics drive it, and the grain prices are very high and look like again, this is going to take time measured in years to fix the grain market back to being normal. I think it will take two to three years, it’s takes two or three planting cycles to recover from the loss of the grain inventory, that's occurring with the Russia-Ukraine situation, we are in a pretty tight pulling in before that happens. 25:20 So I think that the supply-demand dynamics are very different and they are every cycle, but this one is the combination of the energy issues globally, as well as a grain issue globally. We have a food security issue and an energy security issue globally, and I think it's going to take two to three years for that reach a new equilibrium. And so I don't see the dynamics in our marketplace changing greatly here for the next year or two. I think it's going to be pretty similar to what it is today.

25:58 Hence, pretty supportive of prices for even the medium term [Technical Difficulty] taking my questions.

26:06 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.

26:14 So again, I want to thank everybody for your interest in CVR Partners and our employees and wish everybody a safe day and we look forward to reviewing our second quarter earnings in the summer. Thank you very much.

26:31 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.