Cvr Partners, LP Q1 FY2021 Earnings Call

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. 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 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 a 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.

Thanks, Tracy. Since our last earnings call, the strengthening 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 and 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 through 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 to 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 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.

Thank you. We will now be conducting a question-and-answer session. 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.

The way to think about the situation is there are essentially three seasons: spring pre-planting and sidedress, topdress, then summer fill season, followed by fall application. In many instances, there are numerous forward sales for both spring and fall applications, with a significant amount of spot sales occurring alongside these forward transactions. However, in the first and third quarters, this is likely to be less pronounced due to a lack of application, which leads to minimal immediate demand, making it more reliant on forward sales. Typically, the first quarter has a lot of forward sales happening in November and December as pre-stocking for spring application. Regarding pricing, several factors play a role, particularly supply and demand balances in fertilizer. This year has presented unique challenges as there was a complete industry outage lasting one to two weeks in February due to skyrocketing natural gas prices, which resulted in most plants shutting down. Companies were left with a choice: either shut down their plants and sell their contracted gas at elevated prices or produce at a loss without a contract. Consequently, the supply side heading into spring was significantly reduced due to these outages across the industry, though the supply situation is now quite stable. On the demand side, farm-level economics are currently being heavily influenced by demand. Since last July, there has been a notable shift in farm economics in the U.S., with grain prices reaching near 10-year highs. Looking ahead to summer and fall, high corn prices, which are critical for nitrogen demand, are also recorded at exceptional levels. The new crop price in July is at $7, compared to $3.25 last July. This pricing structure persuades farmers to utilize nitrogen to boost corn production for greater revenue. Overall, fertilizer constitutes about 15% of farm costs, with nitrogen being approximately 8%. Thus, with corn prices at $7, nitrogen demand for corn is expected to be substantial. As we progress into the latter half of this year, we anticipate this trend continuing due to the favorable grain prices. Additionally, elevated soybean prices also contribute positively—not directly through high nitrogen consumption, but indirectly as farmers with better returns from soybeans have more disposable income for inputs next year. This marks a significant shift we've observed over the past seven to ten years, as grain prices have reached levels that fundamentally alter farming economics 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 writing these articles 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. Farming and agriculture is a cyclical business. We've been through a very difficult period of time, but the market has reemerged. Our business is really fundamentally driven by farm-level economics. The most important thing is just the durability of the recovery and the reasons. To me, I think there are some different factors driving the demand for corn and where we are. I'm not saying that we're changing the overall cycle of the industry, but I think that this recovery has legs to it because the need for corn and soybeans is a little different than before. We're blending more for renewable fuels. 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. Now we're in the second leg, where there is a big push towards sustainability and renewable fuels. Soybeans are now part of that too, because of the biodiesel work. Farming, which used to be only for food, now also has a leg on it for fuel blending. I think this recovery is kind of finalizing the repositioning of the company post-East Dubuque in an industry that has a lot of momentum. The key for us isn't quarter-to-quarter; it's the durability of recovery. We want farm economics to last for years, not for quarters. As I stated in my comments, this next stretch, which I'm already looking into the fall and the spring, really with grain prices doing what they're doing, 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 lost production that we had, resulting in fewer tons to sell. If you looked at our volumes that we sold, it was lower than last year. 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 costs 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 and December, are you fully satisfied with those sales? Whereas we'll see in the second quarter, those sales will be out of the P&L and we'll see 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 will reflect the product that we were selling during the first quarter into the second quarter and at spot prices.

Great. Then final one for me just on pet coke costs. Obviously, not much of a difference year-over-year, but sequentially it came up 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?

The Coffeyville performance decreased from the previous quarter due to the impact of the winter storm on the refinery. Production rates were lower, and lighter crudes were processed, leading to reduced sourcing. Our third-party pet coke supply has remained stable, typically brought in by barge and then transported by truck to the plant as needed. We also tap into other refineries in the Kansas and Oklahoma area, which were similarly affected by the winter storm. Consequently, we have relied more on sourcing from the river instead of our usual nearby refineries. This situation should return to normal in the second quarter as these facilities are resuming operations. In fact, the refineries are beginning to increase their production rates closer to levels seen in 2019, moving from 70% to 80% utilization to a range of 85% to 90%.

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 to prices, seasonally generally speaking you've said for Q1 prices we should base those price levels 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 Q2 going to be closer to the prevailing spot?

Yes. Q2 is going to be much more closely aligned with the prevailing spot. There is a mix, and the season peaks in May and then it gradually declines through the end of June. The second quarter will look a lot different compared to Q1 as we'll be selling much more into that market. That started sort of February, March for April and May. We haven’t gotten into the second half yet. It's too early; we’re just trying to get through the planting season and then sidedress and topdress. Clearly, our view is that the second half is going to look a lot different compared to 2020, much higher when it settles. We expect a very different outlook for the second half than the second half of 2020, which was a very low period in this past cycle.

Got it. Historically, in the third quarter and then in the fourth quarter, you mentioned some of those being forward sales. How should we consider the historical context? How should we view prices in the third quarter? Is that also reflective of forward pricing for the fourth quarter? Perhaps we should look back at some previous periods since that aligns more with forward sales?

Yes. For UAN, we don’t sell urea, so I'm not quoting urea. However, UAN prices tend to follow urea prices. The UAN reset usually occurs in July, and typically, if you compare the peak spring price to July, it is lower, and significantly so. We anticipate a similar trend this year, but I don’t expect the decline to be as steep as in previous years due to various factors including crop pricing dynamics and the supply-demand outlook for producers. By the end of this spring season, we expect manageable fertilizer inventory levels. This should lead to positive discussions with customers over the summer as the supply-demand dynamics remain favorable and farm economics appear strong. We’re hearing that farmers are showing interest in purchasing inputs for the second half of the year earlier than usual, as they will have funds available from selling this year's crop and typically buy inputs to manage their tax situations. Overall, I believe conditions will be solid in the second half, with both supply and demand sides looking good, which gives me confidence moving 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 used an opportunity to do some maintenance perhaps while the plants were down because of winter storm Uri. When should we model the $8 million to $10 million of that turnaround expense for this year?

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. I would put that in the fourth quarter. Our current schedule is for a fourth quarter turnaround.

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.