Earnings Call Transcript - UAN Q3 2020

Operator, Operator

Greetings, and welcome to the CVR Partners Third Quarter 2020 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 FB&A and Investor Relations. Thank you, sir. You may begin.

Richard Roberts, Senior Manager of FB&A and Investor Relations

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 2020 third 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. 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 2020 third 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, I'll turn the call over to Mark Pytosh, our Chief Executive Officer. Mark?

Mark Pytosh, CEO

Thank you, Richard. Good morning everyone and thank you for joining us for today's call. The summarized financial highlights for the third quarter 2020 included net sales of $79 million, a net loss of $19 million and EBITDA of $15 million. We repurchased 1.4 million CVR partners common units for $1.3 million, and there is no cash available for distribution this quarter. During the third quarter of 2020, we had strong utilization at both facilities. The Coffeyville ammonia plant operated at 97% utilization compared to the third quarter of 2019 at 98%. At East Dubuque, the ammonia plant operated at 99% utilization compared to 97% in the prior year period adjusted for last year's scheduled turnaround. Our combined operations produced approximately 215,000 gross tons of ammonia, of which 71,000 net tons were available for sale for the third quarter 2020. This compares to production of 196,000 gross tons of ammonia, of which 56,000 net tons were available for sale in the prior year period. We produced 330,000 tons of UAN in the third quarter 2020, as compared to 318,000 tons in the prior year period. During the third quarter 2020, we sold approximately 365,000 tons of UAN at an average price of $140 per ton and approximately 54,000 tons of ammonia at an average price of $242 per ton. Year-over-year pricing softened for UAN and ammonia, which are down 23% and 28% respectively. Natural gas pricing was lower as well, helping offset some of the UAN and ammonia price weakness. Although prices for nitrogen fertilizers have been softer this year, recently we've seen improvements in crop prices and farm economics that make us cautiously optimistic about an uptick in fertilizer pricing from these levels. The supply and demand balance for corn is looking more favorable and market conditions are improving, which I will discuss further in my closing remarks. I will now turn the call over to Tracy to discuss our financial results.

Tracy Jackson, CFO

Thank you, Mark. Turning to our results for the third quarter of 2020, we reported net sales of $79 million and an operating loss of $3 million compared to net sales of $89 million and an operating loss of $8 million in the third quarter 2019. Net losses for the third quarter of 2020 were $19 million or $0.17 per common unit and EBITDA was $15 million. This compares to a net loss of $23 million or $0.20 per common unit and EBITDA of $11 million for the prior year period. The year-over-year increase in EBITDA was driven by higher sales volumes and lower operating expenses, offset somewhat by lower prices for ammonia and UAN. Direct operating expenses for the third quarter of 2020 decreased to $39 million from $48 million in the prior year period. Excluding inventory and turnaround impacts, direct operating expenses decreased by approximately $3 million or 7% compared to the same period last year as we made progress on our cost reduction efforts. Turning to capital. During the third quarter of 2020, we spent $6 million on capital projects, which was primarily maintenance capital. We estimate total capital spending for 2020 to be approximately $18 million to $21 million, of which $13 million to $15 million is expected to be maintenance capital. Turnaround expenses year-to-date were less than $1 million and we do not currently expect any significant turnaround expenditures for the remainder of 2020. Turning to the balance sheet. At the end of September, we amended our ABL facility to extend the maturity out to September 30, 2022 while also reducing the total commitment to $35 million and improving the borrowing base including the elimination of cash and increasing the advance rate on certain eligible inventory receivables. As of September 30, we had approximately $74 million of liquidity, an improvement of $21 million over June 30, which was comprised of approximately $48 million in cash and availability under the ABL facility of approximately $25 million. Within our cash balance of $48 million, we had approximately $10 million related to customer prepayment for the future delivery of product. Total debt on the balance sheet remains at $647 million, which is comprised of $645 million of senior notes due in 2023 and $2 million of senior notes due in April of 2021. In assessing our cash available for distribution, we generated EBITDA of $15 million and current cash needs of $15 million for debt service and $3 million for maintenance capital expenditures. During the quarter, we repurchased just over 1.4 million common units for total cash consideration of $1.3 million. In addition, the board of directors of our general partner established reserves of $1.5 million for the planned turnaround at Coffeyville in 2021. As a result, there was no cash available for distribution. Looking ahead to the fourth quarter of 2020, we estimate our ammonia utilization rate to be between 95% and 100%. We expect direct operating expenses to range between $37 million and $42 million excluding inventory impacts and total capital spending to be between $5 million and $8 million.

Mark Pytosh, CEO

Thanks, Tracy. Since our last earnings call there has been a marked improvement in crop prices and farm economics. USDA estimates for planted corn acres were lowered in September to 91 million acres from the initial estimate of 97 million. During the summer, there were drought conditions in parts of the Midwest and the unusual derecho storm that struck Iowa and other parts of the Midwest damaged over 10 million acres of corn. On the demand side, ethanol blending remains at lower levels than last year due to lower gasoline consumption, but this has largely been offset by an increase in other domestic and Chinese demand for corn. Eventually, as a vaccine or therapeutics are developed for COVID-19, we expect to see an uptick in gasoline consumption and ethanol blending, and in turn an increase in corn demand for that usage. Soybean demand from China has been far greater than expected as well. As a result of drought conditions and the derecho storm, the USDA is currently forecasting lower expected yields and harvested acres and therefore much lower expected corn inventory levels. All of these factors have led to a rally in crop prices. Since the July low prices, corn has rallied from $3.08 cents per bushel to over $3.95 per bushel and soybeans have rallied from $8.70 per bushel to over $10.50 per bushel. Weather conditions have also been favorable in September and October and the harvest is largely complete, leaving the fields ready for ammonia application. We expect solid demand for ammonia this fall and have already seen the ammonia run begin in the upper Midwest. We consider healthy farm economics to be one of the most important factors for fertilizer demand in the coming years and market conditions have improved substantially in that regard. While urea prices have exhibited strength since July, especially with multiple India tenders, ammonia and UAN prices have been largely flat for the past three months. As we enter the fall among the application, we could see growing interest in these two inputs relative to urea. We think the markets may gravitate towards the traditional pricing relationships among ammonia, urea and UAN, where today ammonia and UAN are favorable on a price per pound of nitrogen. Since the last earnings call, natural gas prices have risen over a dollar per MMBTU and the curve shows natural gas prices rising further for the rest of the year and into the winter. Higher natural gas prices will lower the incremental incentive for producers to run at full capacity. I also want to highlight a press release we issued on October 5 about CVR's efforts to reduce its carbon footprint. Recently, our Coffeyville facility certified its first carbon offset credits for reducing nitrous oxide emissions in one of our acid plants. Previously, we installed similar units at both of our acid plants at East Dubuque and have been on average obtaining the vast majority of our nitrous oxide emissions over the past five years. Coupling these efforts with our ongoing process for carbon sequestration through enhanced oil recovery at our Coffeyville facility, we are now able to reduce our carbon dioxide equivalent emissions by over one million metric tons per year between the two plants. With the reduced carbon footprint at Coffeyville, we could seek to certify our ammonia production as blue and we believe that as part of the energy transition, new customers going forward will be seeking blue ammonia as a potential energy source that is produced with a low carbon footprint. Finally, on our first quarter earnings call, we discussed the continued listing notice that we received from the New York Stock Exchange in April as a result of our average closing unit price falling below $1. We have until January 1, 2021 to regain compliance. As such, the Board of Directors of our general partner has authorized a 1 for 10 reverse split of our common units effective after the close of the market on November 23. Unit holders will receive one unit for every 10 units owned at the closing business on November 23, with fractions rounded to the nearest whole unit. We continue to believe our units are undervalued. However, we consider the reverse split a necessary step toward regaining compliance with the New York Stock Exchange listing standards. I want to reiterate that the partnership will continue to focus on maximizing free cash flow by safely operating our plants reliably and at high utilization rates, prudently managing our costs, being judicious with our capital but selectively investing in reliability projects and incremental additions to production capacity and maximizing our marketing and logistics activities. In closing, I want to thank our employees for their commitment to being healthy, safe and flexible and helping the company execute at a high level during the third quarter while managing the impact of COVID-19. We're all looking forward to returning to more normalized conditions. With that, we're ready to take questions.

Operator, Operator

Thank you. We will now be conducting a question-and-answer session. Our first question comes from the line of Adam Samuelson with Goldman Sachs. Please proceed with your question.

Adam Samuelson, Analyst

Yes. Thanks, good morning everyone.

Mark Pytosh, CEO

Good morning, Adam.

Adam Samuelson, Analyst

Hi. So I guess Mark first I wanted to maybe fill a little bit on the marketing strategy given kind of where the UAN market is persistent. Did some of the volumes in the third quarter kind of still capture any of the spring pricing? I guess I am trying to wrap my head around third quarter marking kind of new quarterly record on UAN sales. But that's a low point of the year from a pricing perspective and I just want to know if that included some of the spring pricing kind of charge?

Mark Pytosh, CEO

I would say not really much effect from the spring pricing. The fill occurred earlier this year, so we came into the third quarter basically with the fill book. So the third quarter pricing is really the fill pricing particularly for UAN. But even ammonia, the summer fills are done early this year. So the third quarter does not have any spring pricing in it fundamentally. Yes, it’s a rounding error.

Adam Samuelson, Analyst

In this context, are you approaching the summer fill differently this year to allow for more flexibility as you progress into the later part of this year and potentially capitalize on a rising market, or are you considering how to leverage earnings for nitrogen at some point?

Mark Pytosh, CEO

Yes, we understand that we haven't been selling much in the second half, and we have the flexibility to adjust delivery timings. This allows us to take advantage of pricing opportunities and wait for the market to improve. Over the past couple of years, we've seen a good increase toward the end of the year and the first quarter. Historically, there's been a rise in pricing by September or October, although the market has been slower to pick up during those months recently. Typically, we see price increases in December and January. We can take orders and capitalize on market opportunities, and we are waiting to gather more information about demand and pricing, especially with the upcoming fall ammonia application. Overall, we feel more optimistic about the future compared to our last earnings call. Conditions have improved significantly concerning farm-level economics. A healthy financial situation for our customers is crucial for business success, and that has notably changed since our last call.

Adam Samuelson, Analyst

And then, final one for me just looking at the capital structure of the business, I mean you've got about $80 million of fixed charges between the interest on the bonds and the sustaining capital run rate that's kind of the EBITDA, kind of level you got to clear before you're generating any cash. Do you think that the business has the wherewithal to weather through this or how are you evaluating or thinking about different kinds of capitalization opportunities at some point, you're going to have to deal with those bonds when they come due or before then, but I'm just trying to think about kind of different options as you evaluate them?

Mark Pytosh, CEO

We haven't used much cash, even in 2017 we only used a little bit. I'm comfortable with our financial structure and we aren't in a hurry to refinance until the market conditions are favorable. From a cash flow perspective, whether this year or next, we feel secure about our cash and cash flow. It's really about being strategic when we refinance that debt. I don't anticipate any significant changes to our capital structure; we aren't worried at all and feel stable. We've managed to weather the toughest part of the market downturn, which occurred towards the end of the first quarter and into the second quarter when demand was uncertain. We're recovering more quickly than expected, albeit in ways we didn't predict. While we aren't overly optimistic, we feel good about our position for 2021. We'll be strategic about refinancing opportunities in the debt markets when they arise.

Adam Samuelson, Analyst

All right. Great. I really appreciate the color. Thank you.

Mark Pytosh, CEO

Thanks, Adam.

Operator, Operator

Thank you. 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.

Mark Pytosh, CEO

Well, I just want to thank everybody for being on the call today and hope that you're safe and healthy and we look forward to talking to you in February for our fourth quarter call. Thank you very much.

Operator, Operator

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.