CVR Partners' CEO Discusses Q1 2013 Results - Earnings Call Transcript

| About: CVR Partners, (UAN)

CVR Partners, LP (NYSE:UAN)

Q1 2013 Results Earnings Call

May 2, 2013 11:00 AM ET


Wes Harris - Vice President, Investor Relations

Byron Kelley - Chief Executive Officer

Stan Riemann - Chief Operating Officer

Susan Ball - Chief Financial Officer


Ted Drangula - Morgan Stanley

Mathew Korn - Barclays

Adam Samuelson - Goldman Sachs


Greetings. And welcome to the CVR Partners First Quarter 2013 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, Wes Harris, Vice President, Investor Relations for CVR Partners. Thank you. Mr. Harris, you may begin

Wes Harris

Thank you, Melissa, and good morning, everyone. We appreciate your participation in today’s call. With me today our Chief Executive Officer, Byron Kelley; Chief Operating Officer, Stan Riemann; and Chief Financial Officer, Susan Ball.

Before we start to discuss our 2013 first quarter results, we are required to make the following Safe Harbor statements. In accordance with federal security laws, statements in this earnings call relating to matters that are not historical facts are considered forward-looking statements.

These forward-looking statements are based on management’s beliefs and assumptions using currently available information and expectations as of this date. These forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, including those noted in our filings with the SEC.

In addition, today’s presentation includes various non-GAAP financial measures. The disclosures related to such non-GAAP measures, including reconciliations to the most directly comparable GAAP financial measures are included in our 2013 first quarter results press release.

Adjusted EBITDA is an example of such non-GAAP measure. Adjusted EBITDA represents net income adjusted for depreciation, amortization, net interest expense, income tax expense and share-based compensation.

So with these formalities out of the way, I’d like to turn the call over to Byron Kelley, our Chief Executive Officer.

Byron Kelley

Well, thank you, Wes. And let me extent my welcome to each of you for joining us today. We are really pleased to have you with us on the call. If you’ve seen our press release you obviously know we are had an excellent first quarter from several different fronts that led to record UAN production and more importantly to a record quarterly cash distribution.

During the quarter we posted net income of $35.6 million on $81.4 million of net sales and this compared to net income of $30.2 million on net sales of $78.3 million in the 2012 first quarter.

Our first quarter 2013 adjusted EBITDA was $43.8 million and this represents a 15% increase from the $38 million we recorded for adjusted EBITDA in last year’s first quarter.

The strong financial performance in the first quarter 2013 resulted in week’s announcement of a distribution of $0.61 per common unit, which is 17% higher than the $52.3 per common unit we distributed for the first quarter last year. Our 2013 first quarter distribution will be paid on May the 15th to unitholders of record of May the 8th.

A key highlight of the quarter was successful completion of our expanded urea ammonium or UAN plant. Our operations team did a great job of ensuring that there was minimal disruption during the startup of the new plant, which started up in late February. By mid-March we were up to full production rates and had continued to produce a consistent high rate since that time.

As a reminder, the approximate $130 million expansion does provide us the ability to convert essentially all of our ammonia production into more highly valued UAN. This increases our capacity to more than 1 million tons of UAN annually, which is approximately 50% higher than previous levels. The 2013 first quarter also benefited from higher on-stream rates fall in the successful turnaround that we had in October of last year.

During the first quarter the gasifier ran at more than 99% of the time, the ammonia sent to this loop came in at a rate of almost 99% and the UAN plant operated at nearly 93%. This compares to the first quarter of 2012, when gasifier was at 98 -- 93% of the time the sent to this loop at 92% and the UAN plant ran at a rate of about 84%. So substantially higher, the turnaround led to sent higher reliability rates in the first quarter of this year.

These higher on-stream rates combined with the increase production during March from our expanded UAN plant drove a 26% increase in net production available for sale during the first quarter of this year.

More specifically, of the 111,400 tons of ammonia produced during this period we converted 80,700 tons into a record 196,200 tons of UAN. This left the balance of 30,700 net tons of ammonia available sale.

Included within the 111,400 tons of ammonia production was approximately 1,500 produced from hydrogen we purchased from CVR adjacent refinery pursuant to our feedstock agreement.

During the first quarter of 2012 we -- as comparison to '13 in '12 we produced 89,300 tons of ammonia. Of this amount, 64,300 tons were converted into 154,600 tons of UAN, and that left the balance of 25,000 net tons of ammonia for sales in 2012 first quarter. During that period, we also sold a net of 8,400 ammonia equivalent tons of hydrogen to the refinery.

During the 2013 first quarter, our average net back ammonia price of $160, excuse me, $663 per ton was up $50 per ton, compared to the $613 we recorded in the prior period year. For UAN, the average net back price for the 2013 first quarter was $295 per ton, which was about $18 lower than 313 ton we -- $313 per ton we realized in the first quarter of '12.

In addition to higher production and continued strong pricing for our products, the 2013 first quarter benefited from lower operating expenses year-over-year. As Susan will discuss in more detail, our cost of product sold decreased significantly from the first quarter of 2012.

Cost of product sold for 2013 first quarter was $10.6 million, compared to $12.6 million in the prior year’s quarter. Driving the decrease was lower blended price per ton for pet coke consumed and that was partially offset by some higher freight and distribution cost.

As we’ve discussed in the past, we typically purchased over 70% of our pet coke from the adjacent refinery, the remaining 30% of our pet coke requirements are purchased from a third-party supplier under contract that begin in March of 2012 and runs through the end of this year.

During the 2012 first quarter, our average cost for consumed pet coke, including third-party part purchases, shipping and handling was $31 per ton. This is compared to $42 per ton in the first quarter of 2012.

At this point, Susan, I’m going to turn it over you and let you talk about more of the details.

Susan Ball

Thank you, Byron, and good morning, everyone. As Byron discussed, first quarter of 2013 net sales were $81.4 million, compared to $78.3 million in 2012. This increase was primarily attributable to higher UAN sales volumes due to the expansion and higher prices for ammonia during this year’s first quarter. Partially offsetting the overall increase was decreased prices for UAN and lower sales volumes of ammonia.

Cost of product sold, as Byron mentioned, for the 2013 first quarter was $10.6 million compared to $12.6 million in the first quarter of 2012. Driving the increase was a lower blended price per ton for pet coke consumed. That was partially offset by higher freight and distribution cost.

As we’ve discussed in the past, we typically do purchased over 70% of our pet coke from the adjacent refinery, again the remaining 30% of our pet coke requirements are purchased from a third-party supplier under a contract that did begin in March 2012 which runs through the end of this year.

During the 2013 first quarter, our average cost for consumed pet coke, including third-party purchases, shipping, and handling was $31 per ton. This is compared to $42 per ton for the first quarter of 2012.

Direct operating expenses, excluding depreciation and amortization, was $22.6 million for the first quarter of 2013 as compared to $22.9 million in the prior year period. The decrease was associated with lower repairs and maintenance expenses, and a decrease in property taxes due to the partial settlement with Montgomery County that we entered into in late February.

Partially offsetting the overall year-over-year decrease was the combination of higher utilities, personnel, insurance, chemicals and reimbursed cost. Selling, general, and administrative expenses were $5.6 million for 2013 first quarter as compared to $6 million for the first quarter of 2012. Contributing to the decrease was lower cost for outside services and personnel partially offset by higher management services expenses.

Depreciation and amortization expense increased from $5.4 million in 2012 first quarter to $5.8 million in the first quarter of 2013. This increase was substantially due to the UAN expansion assets being placed in the service during the first quarter of this year. Net income for the 2013 first quarter was $35.6 million or $0.49 per common unit compared to $30.2 million or $0.41 per common unit in the first quarter of 2012.

Turning our attention to capital expenditures, during the 2013 first quarter, we spent $18.1 million on capital projects, including 600,000 for maintenance capital expenditures. The substantial majority of our capital spending during the first quarter was associated with the UAN expansion projects.

For the full year 2013, we expect to spend approximately $43 to $53 million on capital projects, excluding capitalized interest. This amount includes $7 to $9 million for maintenance of capital expenditures and $36 to $44 million for growth projects, including $23 million on the UAN expansion projects. It’s important to note that all of this plan spending will be fully financed by cash on hand that originated from our IPO in April of 2011.

As of March 31, we had $153 million in cash and cash equivalent as well as $25 million available under our revolving credit facility. In addition, at the end of the 2013 first quarter, our long-term debt was $125 million. Our solid balance sheet provides us the ability to quickly capitalize on the growth opportunities that we are pursuing.

With that, I’ll turn the call back over to Byron.

Byron Kelley

Thank you, Susan. Our strong start that we’ve had in this first quarter obviously places us in an excellent position to materially grow our business this year. Supporting this outlook, are also a number of positive industry fundamentals. We continue to expect that there will be a substantial planning of corn acreage this year due to the damaging effects from last years -- on last year’s corn crop from the severe drought in the majority of the Midwest and other key growing regions.

While the USDA originally increased its projection for last year’s yielding stock-to-use ratio from 5.8% to 6.8%. The country still remains in a position where corn inventories are at the second lowest level and more than 80 years in relation to total use.

USDA’s March prospective planning report projected for this spring season that 97 million acres of corn will be planted. Like others in the industry, we are closely watching the pace of planning due to the recent flooding and related wet conditions in a number of areas in the Midwest.

As these conditions are driving later the normal planning, we believe that actual acres planted this year could move down to the 94 million to 96 million range. While a bit lower, this level will still represent a near-record corn planting season. The more significant impact of late planning actually probably relates to yield. The current USDDA projection for corn yields in 2013 is approximately 163 bushels per acre which I believe is overly optimistic even under normal weather conditions.

Beginning in 2003, in the years that we plant at less than 90 million acres, the average yield has only been 153 bushels per acre. And this average actually excludes 2012 where we know new to the drafts, we had yields of only 123 bushels per acre. Further, in years, when we had planted in excess of 90 million acres, the yield average dropped to 149 bushels per acre.

So utilizing a more realistic yield number especially in light of a like planning season, it is easier to see a scenario with actual stock-to-use ratio could be well below the USDA’s current forecast of 16.7%. Let me give you an example.

If we planted this year, 95 million bushels and we saw a yield of 150 bushels per acre, we would see a carryout ratio of about 6.5%. So you can see with the weather conditions, as certainly expected we’re going to see yields move down into that range and nothing new, the 163 bushels per acre the government is talking about.

As such, we really expect that it will take at least two years to rebuild corn inventory back to historical level. And this of course bodes well for the nitrogen fertilizer producers.

Let’s move our focus back to our current business a little bit. We have orders in place. For the first quarter, we have about 75% of our anticipated production already booked going through the second quarter. We only have some production remaining really in the last couple of weeks of June that has not already been booked and counted for.

This order book combined with the fact that our cost structure for the most part is fixed and that we do not have margin exposure related to the rising natural gas prices, provides us significant visibility for our anticipated result for the first half of 2013. Now, you added this to the solid industry fundamentals I’ve discussed earlier and our recently completed UAN plan expansion, no schedule turnaround, well, all of that really puts in place a number of signs pointing to what we expect will be a record year for the partnership in 2013.

As such, we are reaffirming our cash available for distribution outlook of $2.15 to $2.45 for the year. This indicates an increase of between 19% and 35% over our 2012 full year distribution of $1.81 per unit.

Looking forward, I remain pleased with our businesses positioned for this year and beyond, supported by a strong balance sheet and substantial financial flexibility. We remain focus on growing the partnership through a number of important initiatives.

As a follow-up to the outside storage distribution facility we built last year at Phillipsburg, we are targeting all the key locations in the Corn Belt where the construction or lease of distribution terminals could prove beneficial in our efforts to optimize the prices we receive for our products and thus increase cash flow in the future.

In addition, we are growing our presence in the Diesel Exhaust Fluid market and looking for additional opportunities to expand our sales mix and other higher margin products. As part of our ongoing efforts to increase efficiency of our plant assets, we have two products under review collectively -- under review currently that collectively could materially increase our production of ammonia.

We also have another project been analyzed that would allow us to expand into additional specialty agricultural products. Preliminary indications are positive for all three projects. If after our full review is complete, we decide to move forward with all three, two of those projects could come online next year and the third in 2015.

As we move -- follow through our analysis in study of these projects, probably out about 90 days or so, we’ll be in a position to come back and give you more details about the progress and what we think those projects will really lead to in terms of benefits for the company. Complementing our announced expansion that we just completed and the pending initiatives I’ve just mentioned, we also continue to be interested in expanding our business for our client assets and we currently have a number of opportunities that are under internal review.

In conclusion, we are in an enviable position to post what is expected to be a record year for the partnership. Market fundamentals remain strong and our past strategic initiatives are beginning to materially increase our distributable cash flow.

We appreciate the continued support that we’ve seen from you our unitholders and we look forward to updating you the progress that we’re making towards the future and our results for this year as we move through the remainder of 2013.

So with that operator, we will open the floor for questions.

Question-and-Answer Session


(Operator Instructions) Our first question comes from the line of Ted Drangula with Morgan Stanley. Please proceed with your question.

Ted Drangula - Morgan Stanley

Yeah. Hi, guys. Congratulations on a very good quarter.

Byron Kelley

Thank you, Ted.

Ted Drangula - Morgan Stanley

Yeah. So, I guess I had a question on the second quarter, which obviously seasonally is a big one for fertilizer and nitrogen. So you guys have 75% of yourselves booked and I guess you are somewhat inflated then from all of the stuff that’s going on out there and I’m hearing about snowstorm scenarios north of you but and fieldwork has been delayed in a lot of cases. How do you guys see the season playing out and I guess are you happy that you’ve -- it sounds like you might be happy. You’ve booked 75% of your production. I don’t know if it’s all going to sell sold. How do you guys think about that?

Byron Kelley

Well, we are happy we have that production levels booked and it’s not untypical for us to have this level of production booked this time a year. And so we like our book in terms of production and this is really like where we are positioned for the first half of the year as you know, nobody is going to have information about the second half of the year, which will get over in the June.

But yeah, we like our position. It might not be a bad time just to comment about the impact of the late planning though. I think there are two or couple of areas that where the late planning comes into play through that’s reduce acreage. I think there is some thought that it could be anywhere from no change on the government’s projection to as much as one to three million acres. But even if you saw that decline, we are still looking for second highest year of planning that we’ve seen probably in the history of corn planning in the U.S.

I think the bigger impact will really be around yields and if you start getting past May, the 15th from planning you will start seeing projections for yields to come down. As I said earlier, I think to optimistically begin with but as you move through May, you start having impact on the yield and so. But I think most people feel like that we still going to plan. The pretty big crop this year, probably as I said earlier in the 94 million plus acre range, I think the yields will come down to a number that’s still gong to look favorable to a farmer. But actually may have some benefit longer-term because we will have a lower stock-to-use ratio coming out of this year.

I think the real question is what’s the impact on nitrogen if that happens? If we see the width based on the sort of late wet weather, the real impact from nitrogen, assuming the planning moves forward somewhere in the month of May is really only related to if we have some reduced acreage. And there actually could be a positive benefit in there for those of us who are in the -- they are selling UAN because with the weather being wet, you are going to see a shift to UAN and urea away from ammonia. So there could actually be some positive impacts from us based on kind of products that we produced and I don’t think anybody believe we are not going to still see a big corn crop this year.

Ted Drangula - Morgan Stanley

Okay. Great. And then I guess just thinking about how the pricing dynamics are from first quarter, second quarter. Can you just give us some, maybe just some directional color on have prices kind of held in or should we expect them to be up for how -- for your results in 2Q verus 1Q? And then on the volume side, I would expect we will probably see ammonia coming down. I think you’ve said in the past, you would be selling a few tons but maybe less than 10,000 or something in UAN going up quite a bit, maybe just some help there. Thanks.

Byron Kelley

Yeah. Certainly, you are going to see our UAN production up. Plants are running well. We are running it today. We are running at some very high rates on conversion. I think and generally I think we’ve talked in the past that we will end up 50 tons to 60 tons a day maybe of ammonia, so not a lot of ammonia are going to be there. So yeah, we are going to be really a UAN seller and a producer and seller for all type of purposes in the second quarter.

Obviously, we don’t put out any information on our pricing in advance. We are pleased with what we’ve seen in the second quarter. And we -- you can see some spot prices out there that are posted and spot prices are still very strong for UAN right now. But, like we said, we sell forward but when we look at our overall book, we are happy with it and all those prices are probably going to be a little bit stronger than you saw this quarter. But I’m not going to provide anymore specifics on that around the pricing. But it’s shaping up to be a good quarter for us.

Ted Drangula - Morgan Stanley

Great. Thanks.

Byron Kelley

Thanks, Ted.


Thank you. Our next question comes from the line of Matthew Korn with Barclays. Please proceed with your question.

Mathew Korn - Barclays

Good morning, Byron, Dan and Susan, everyone.

Byron Kelley


Mathew Korn - Barclays

Could you maybe talk a little bit about the outlook for your pet coke costs and I think remind us maybe when the contract ends for your ex-refinery purchases and also maybe discuss a little bit of -- the current cost level puts you on the UAN cost curve relative to the higher natural gas price?

Byron Kelley

Okay. Well, first of all, the contracts -- the third-party contracts goes through this year. Right now, we are paying what I would say market prices for what we buy from the refinery and that’s based off of the price index and we will call that number, just call it $30. I mean, it fits on transportation but I will just call it right at $30.

And when this contract will expire at the end of year, we would have expect that contract also to move the market prices and right now we think the outlook for pet coke is pretty much what you see today.

I don’t think you see a lot of more downward movement but I don’t think you see any upward movement. They maybe a few dollars downward left in that number. So we hope by the end of this year that really all of our pet coke prices are more in line in that price, so let’s just call it $30 a ton.

To your second question had to do with sort of width. With pet coke prices in that range, where do we come out in regard to natural gas prices and comparing to that. If you look at a Henry Hub price and then add in some -- just like Henry Hub and call it.

Let me back up from that, about $3 delivery price to the plan that we will be competing with. So if you assume there is 25% transportation in that number, then you are back to on Henry Hub price of about 375. I think our numbers like 395 less transportation, so maybe you are down at closer to 370 on the Henry Hub price, which obviously we are back down on the positive side of that equation when you look at the forward curves.

Mathew Korn - Barclays

And maybe just another thing kind of a different angle here. But is there any expectations after the recent event, the disaster in West Taxes, any additional regulation safety requirements on all kinds of legislation maybe impacting the industry that you are hearing. Does that add any maybe potential complications for building additional storage facilities, anything like that that you are hearing?

Byron Kelley

Well. It’s little early to hear a lot. I think for sure, what you are seeing is we know there is going to be a lot of discussion around, what type regulation are in place for that type of facility. And obviously we are a very different type of facility, we are manufacturing facility. There were storage and blending facility. We already come under much more stringent and regulatory, both environmental and safety requirements.

And I personally don’t anticipate that we are going to see anything that’s really going to backed up to your manufacturing facilities into any kind of significant change. You may well see a lot focus on the state regulatory levels for regulating the type of assets that within West Taxes. In terms of our terminals, maybe there is some big discussions around that. But I would say, first of all, we don’t store any ammonium nitrate at our terminals. We only store in UAN and that is a pretty benign product.

Mathew Korn - Barclays

Thanks very much.

Byron Kelley

Okay. Thank you.


(Operator instructions) Our next question comes from the line of Adam Samuelson with Goldman Sachs. Please proceed with your question.

Adam Samuelson - Goldman Sachs

Yeah. Thanks. Good morning. I was hoping, Byron, you could comment just some thoughts. You see a large disconnect. The spring between urea and UAN prices and you also have seen a large disconnect between Noah and some of the inland prices and certainly compression and international markets. And you haven’t really seen that kind of move up where you were at, maybe just some thoughts there and what gives you confidence that the disconnect can really stand place, as you move out of the spring assuming really no meaningful change at Noah.

Byron Kelley

Well. I mean I think, we are going to start with urea and why we are seeing really a downward in your real prices. We are not seeing that stronger trend in the UAN prices and as there have been a lot more imports and a lot of that has been, whether it’s directly to indirectly really related to what challenges done in terms of their exporting a lot higher you really normally see.

Some of the discussion around that is expected to see that come back into more normal levels for the reminder to the year. They have been working on some inventory. But as UAN goes in the market area, first of all, we really saw a strong demand in the spring that held up I think UAN prices nicely in light of what was going on with urea and we note for certainly we have a strong point for ammonia prices.

So and then as I get into what’s ahead of us over the next few months, I really think that the planning conditions are very favorable to UAN. And I really expect to see UAN prices stay up quite nicely throughout the second quarter.

And as far as the product moving up the river and barges, yeah, you’re right, we haven’t seen an impact. I have been a little surprise, maybe there but again I think that the liquid fertilizers, the UAN fertilizers have continued to hold strength pretty much in all areas across kind of just because of their ability to get the product out in the fields.

Adam Samuelson - Goldman Sachs

And maybe just on that point, I mean, as you think about on a kind of dollar, pound, nitrogen content per pound basis. I mean, is this spared between urea and UAN. It is very wide right now relative to historical norms. Is there -- I mean, is that just the ease of applicability of UAN versus urea. Are you really supportive of that on a sustainable basis or do you think of that’s got an arrow at some point.

Byron Kelley

Well, I mean, I think if you got to go back, historical basis, not looking just the last year, I mean we saw last year -- we saw urea actually had a price springing over UAN. But if you back up a number of years that really has not been the case and we saw the UAN curve sort of switch back over on urea curves, beginning around mid year, last year and continue to growth. And so right now, I would say the premium is -- for current premium is probably little high but the trend is more in the normal range that we’ve seen over the last say four years.

And so I would expect to see this especially as we move through the spring and the advantages our products got. We’re going to see that spread stay. It may now stay, I don’t know what is it maybe 15 plus premium right now on a pound basis, margin pound basis but I think you’re going to see that premium stay there.

Adam Samuelson - Goldman Sachs

Okay. It’s helpful. And then just on the capital projects, I appreciate that you’re still working through some of the detail there. And I’ll get some additional parity over the next several months. But maybe at a high level just rewind us kind of some your targeted return hurdles and fairly you got some excess cash on the balance sheet and you just make us, maybe some parameters on some of the targeted returns there.

Stan Riemann

Well, I mean generally when we look at investing in growth capital and you just look at an internal wider return basis, we’re ‘14, ‘15 sort of becomes the norm. Although when we were talking about plant enhancements, we’re looking at things that could be more in 18% to 20% range when you’re just coming in and doing improvement to watch you guys. So we’re looking at the mid-to-high teens as a normal expectations we have for investing capital into enhancement and into growth products.

Adam Samuelson - Goldman Sachs

Okay. That’s helpful. Thanks very much.

Stan Riemann

Thank you


Ladies and gentlemen, we have come to the end of our time for questions. Mr. Kelley, I’d like to turn the floor back to you for any closing comments.

Byron Kelley

Again, let me thank all of you for joining us today. We are excited about the quarter we just had but even more so, we’re excited about the year that’s ahead of us and about the value, we think we’re going to able to deliver to our unitholders. And so again, we appreciate your interest, we appreciated all the confidence that our unitholders are placing and investing to us and we look forward to why it should it be a very successful year. So we thank you again. Have a good day.


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

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