Cvr Partners, LP Q1 FY2022 Earnings Call

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. As a reminder, this conference is being recorded. 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.

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. 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. 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. 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.

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. 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 Coffeyville 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, we 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. 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 which 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. 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. 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 witnessed in the fall with the energy crunch that began in Europe and Asia. Fertilizer inventory levels remain tight across the US and globally, and the ongoing conflict in Ukraine has caused another wave of supply concerns across the fertilizer and grain markets. 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. I will now turn the call over to Dane to discuss our financial results.

Thank you, Mark. In 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. 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. The year-over-year increase in EBITDA was driven by higher UAN and 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. 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. 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. 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%. 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. 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.

Thanks, Dane. Russia’s attack on Ukraine has had 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 wheat, corn, and Russian exports of nitrogen fertilizers, particularly ammonia and urea. Formal and informal sanctions placed on export products and 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 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. For ammonia production, natural gas costs alone are 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 costs should be lower. 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. Factoring these lower planted corn acres and higher soybean acres, inventory carryout 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. Spring application got off to a late start due to the cold and wet weather. We are seeing strong demand at our plants and expect that demand to extend through the end of the second quarter and into the summer. While planted acres are expected to be down, supply fertilizer is tight in the markets and appears to be well supported at these price levels. 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 of 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 in the second quarter compared to the first quarter, generally reflecting an escalation of prices from the first quarter. The issues that caused the downtime in the first quarter are expected to be addressed in the turnarounds planned 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, and we're working through detailed due diligence and structuring and currently expect to complete a transaction in the coming months. 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 target capacity increases to our existing footprint. If approved, these projects would take several years to complete, but we believe there would be some attractive opportunities within our plant footprint. We are currently not 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 costs, 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. 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.

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

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 and the spring planting season?

Yes, Rich. It’s Mark. It's a little bit early to call that, because there are still variables in the planting rates, so I am not ready to call volumes. What I would tell 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 indeed occur that we don't get as much ammonia applied, then we would see a pickup in demand a little bit later for urea and UAN. So, the fact is that you need to have a certain amount of nitrogen on the ground to meet yield targets. If it's unmatched by ammonia, then it will get picked up through urea and UAN. I think this year we'll probably see incrementally more demand in urea and UAN versus ammonia.

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

We are currently in discussions regarding prices for the third quarter, so it's still early. We need to see how spring unfolds and get the crop planted. However, we have begun to gather some pricing insights from customers for Q3. We don't have a significant volume yet, but we have an idea of their thoughts.

Got it, okay. And then maybe lastly for me, just in terms of all of the cash that you guys are generating and 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?

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. As we've seen prices escalate, generally the psychology goes with it. Asset prices are up substantially, and I would just tell you that we're very returns focused, so we are not going to chase assets to deploy the capital; it's got to meet a full cycle return for us. I would say that we're going to continue to look for opportunities, but the bid-ask spread is pretty wide at this stage.

Our next question comes from the line of William Stein, Private Investor. Please proceed with your question.

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?

So I’ll keep it general, because I don’t want to put the deal out there, but if I were to structure it, there were going to be two buckets: there’ll be an upfront payment as part of the structure, and then there will be ongoing payment. So there will 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. We are close to finalizing that, and we expect to see those cash streams coming out of 45Q.

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 are inventory levels too low to predict that?

There were two main issues affecting us. We faced production challenges, which resulted in lower inventory levels. Additionally, we experienced a significant drop in ammonia supply, so we were already at a low inventory as we entered January 1. Currently, inventory levels are tight. This situation is common across the industry, as other producers are also managing tight inventories. While we had some ammonia available for the spring season, most of it will be used for spring planting. At our Coffeyville facility, we expanded the urea plant last fall, and we are using a lot of the ammonia due to higher production levels of UAN. Consequently, we have less ammonia available for sale, but we have increased UAN offerings, which is a positive outcome. The performance of our plants exceeded expectations following the equipment upgrades in the fall.

Hey, and then one maybe related to a longer-term question, if you indulge me. In Q1, you posted earnings per share and free cash flow per share that my analysis indicates were greater for this quarter than they were for the entire year of 2013. The last time your stock was trading 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 is because of 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.

Okay. There are 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 the one we experienced back in the 2011 to ‘15 timeframe. We have a severe energy shortage in certain markets, and it doesn't look like it's going to be solved in months; it's more like years. We require either natural gas or coal to produce nitrogen fertilizers. Those markets are dislocated and look like it’s going to take some time to fix that. The input cost is generally much higher than they were in the last cycle. Global prices have risen, and it doesn't look like there will be a recovery or major reduction in energy pricing in the near term. It’s going to take a while. 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 be at a much different price point for the durable cycle. As mentioned, the combination of the energy issues globally, and the grain issue globally present a food security and energy security issue, that I think will take two to three years for that to reach a new equilibrium. I don’t see the dynamics in our marketplace changing greatly for the next year or two. I think they will be pretty similar to what it is today.

Hence, pretty supportive of prices for even the medium term. Thank you for taking my questions.

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.

So again, I want to thank everybody for your interest in CVR Partners and our employees, and wish everybody a safe day. We look forward to reviewing our second quarter earnings in the summer. 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.