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CVR Partners LP (NYSE:UAN)

Q4 2013 Earnings Conference Call

February 20, 2014 10:00 AM ET

Executives

Wes Harris - VP of IR

Jack Lipinski - CEO

Stan Riemann - COO

Susan Ball - CFO

Analyst

Christopher Perrella - Bank of America

Chris Damas - BCMI Research

Operator

Greetings, and welcome to the CVR Partners Fourth 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 today, Mr. Wes Harris, Vice President of Investor Relations. Thank you, Mr. Harris. You may now begin.

Wes Harris

Well, thanks Latania and good morning everyone. We appreciate your participation in today’s call. With me today are Chief Executive Officer, Jack Lipinski; Chief Operating Officer, Stan Riemann; and Chief Financial Officer, Susan Ball. As we’ve done in the past before we discuss our 2013 fourth quarter and full year results, we are required to make the following Safe Harbor statements.

In accordance with federal securities 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 day. 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 fourth quarter and full year press release. Adjusted EBITDA is an example of such non-GAAP measures. Adjusted EBITDA represents net income adjusted for depreciation, amortization, net interest expense, income tax expense, and share-based compensation.

So with that, I'll turn the call over to Jack.

Jack Lipinski

Thank you, Wes and good morning everyone. We appreciate you joining us today. I’ll begin with a few key stats related to our financial performance. For the fourth quarter of 2013, we recorded a net income of $27.9 million on $84.3 million of net sales and our adjusted EBITDA was $36.6 million. For the entire year, we reported a net income of $118.6 million in $323.7 million net sales and again for the entire year our adjusted EBITDA was $152.8 million.

This morning we also announced a distribution of $0.43 per common unit for the fourth quarter of 2013. This distribution will be paid on March 10th to unit holders on record as of March the 3rd. This will bring our 2013 full year distribution to a record $1.98 per common unit. This is at the high end of the outlook of $1.85 to $2 that we provided where we reported our Q3 2013 results.

Looking at operations, the 2013 fourth quarter was highlighted by very high on-stream operating rates to all of our units. In addition we posted record UAN production primarily due to our expanded UAN plant that was placed in service in February of last year. During 2013 fourth quarter, the gasifier ran at 100% and both the ammonia synthesis loop and our UAN plants operated approximately 99%. In the fourth quarter, we produced 98,900 tons of ammonia. We purchased approximately 12,000 tons of third party ammonia as feedstock that was later upgraded to UAN and we sold hydrogen to CVR Refining’s adjacent refinery that was the equivalent of approximately 10,300 tons of ammonia.

During the period, we converted substantially all of our ammonia into a record 270,100 tons of UAN. That left the balance of 1,600 tons of ammonia available for sale. The average netback price we received for UAN and ammonia this past quarter was $253 per ton for UAN and $478 per ton for ammonia. This compares to our 2012 fourth quarter average netback price of $274 per ton for UAN and $676 per ton for ammonia.

I’ll discuss the prices we’re seeing in 2014 after Susan provides more detail on our financial results. Before I turn it over to Susan I want to mention couple of recent accomplishments of two safety milestones first in October employees at the fertilizer plant reached two years without a lost time accident. And second, in January of 2014 they achieved one-year without OSHA recordable injury. Safety has been and always will remain one of our top priorities and I want to thank our employees and management team for their continued support of our strong safety culture.

So with that I’ll hand the call over to Susan, our Chief Financial Officer. Susan?

Susan Ball

Thank you, Jack and good morning everyone. As Jack mentioned, net sales for the 2013 fourth quarter were $84.3 million as compared to $67.6 million in 2012. Contributing to this increase were higher sales volumes and related freight revenue of UAN partially offset by lower sales volumes and related freight revenue of ammonia due to the increased conversion of ammonia afforded by the expanded UAN plant.

Also contributing to the increase was lower 2012 fourth quarter production levels due to a three week scheduled major plant turnaround as well as increased hydrogen sales to the adjacent refinery for the fourth quarter of 2013. Finally, partially offsetting the overall increase in net sales was lower sales prices for ammonia and UAN in the 2013 fourth quarter.

Cost of products sold for the 2013 fourth quarter was $18.9 million as compared to $11.5 million in the fourth quarter of 2012. The increase was primarily associated with the net volume increases and related freight cost due to expanded UAN plant for 2013 as well as lower production volumes in the 2012 fourth quarter associated with the plant turnaround. Also contributing to the overall increase was the 2013 fourth quarter third party ammonia purchases that Jack previously mentioned.

Slightly offsetting the overall increase in cost of products sold was a lower overall cost per ton paid for our feedstock requirements. The average cost for consumed pet coke during our 2013 fourth quarter was $29 per ton as compared to $30 per ton in the prior year period.

Direct operating expenses were $23.4 million for the fourth quarter of 2013 as compared to $29.2 million in the prior year period. This decrease was primarily attributable to $4.6 million of turnaround cost during the 2012 fourth quarter and lower property taxes from the settlement with Montgomery County that we entered into in last in February of 2013. Partially offsetting the overall decrease in direct operating expenses was higher utility cost associated with the expanded UAN plant.

Selling general and administrative expenses reduced from $6 million in 2012 fourth quarter to $5.3 million for the 2013 fourth quarter. Depreciation and amortization expense increased to $7 million in the fourth quarter of 2013 from $4.9 million in the prior year period. This was substantially due to the UAN expansion efforts being placed in service in the 2013 first quarter. The increase in interest expense from $700,000 in the 2012 fourth quarter to $1.7 million for the fourth quarter of 2013 was primarily associated with decreased capitalized interest due to the completion of the UAN plant expansion project.

Finally, net income for the 2013 fourth quarter was $27.9 million or $0.38 per common unit as compared to $15.3 million or $0.21 per common unit in the fourth quarter of 2012. During the 2013 fourth quarter we spent $7.9 million on capital projects including $1.5 million for maintenance CapEx. Capital expenditures for the 2013 full year were $43.8 million with $3.5 million associated with maintenance CapEx. Almost $25 million of the remaining $40.3 million of the 2013 cap spending was associated with the UAN plant expansion.

Turning to the balance sheet, we ended the year in a solid financial position that provides ample flexibility to continue to grow our business. As of December 31st we had $85 million in cash and cash equivalents and $25 million available under our revolving credit facility. In addition our long term debt remained low at $125 million.

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

Jack Lipinski

Thanks Susan. Throughout most of 2013, we saw a decrease in corn and fertilizer prices driven by the expectation of the much better harvest in the prior year. However, during the past few months, the USDA has lowered their estimated level of year end corn inventory as they received national planting harvest out.

In addition giving lower corn prices they’ve increased their projection for corn exports and use this corn to produce ethanol. This has led the USDA to currently view year end stocks to use ratio of 11.1% which is almost 30% lower than their initial estimate of 15.5%. As the expected level of corn inventory has decreased, we have seen corn and UAN prices increase. According to grain markets Gulf, NOLA spot prices that’s New Orleans Louisiana spot prices, are currently between $290 and $295 per ton. This is significantly higher than the $230 per ton of UAN that was being quoted just four months ago. It’s important to note that while the current pricing has improved, it is lower than the same time last year when NOLA spot prices for UAN were quoted at $330 to $335 per ton.

Just as a reminder, we typically realize approximately $15 per ton of UAN price premium over NOLA given our plants location and relative transportation cost advantage. At this time of year we’re trying to accurately estimate prices for the second half of the year is obviously extremely difficult. As is typical summer fuel pricing will primarily be determined by the markets expectation of how the spring planting is progressing and what this could mean to year end corn inventory levels.

Looking a little at capital spending the expansion of our pressure swing absorption unit remains on schedule. This project will allow us to recover additional hydrogen from our existing streams to produce about 25 tons of additional ammonia which will then be upgraded to an incremental 50 tons per day of UAN. The completion and tie-in into this expansion will require a seven day plant shutdown which we expect to take place mid-year; either the last week of June or early into July.

During the seven day downtime we’ll undertake some additional maintenance projects including a partial change of the catalyst in the UAN plant. Just so everyone is clear on this, our next major scheduled plant turnaround is the fall of 2015. We have some smaller projects identified that will incrementally benefit our 2014 results. Just this week our recently constructed distributions facility in Dartmouth, Kansas went into operation similar to the terminal we built last year in Phillipsburg, the Dartmouth facility will allow us to optimize UAN prices we receive by dispersing a portion of our inventory into the spring planting season, when prices are typically higher. We’re also expanding our DEF stores and load-out facilities at the plant, similarly to how UAN is priced at a premium to ammonia DEF sales at a premium to UAN on a nitrogen content basis and again DEF is Diesel Emission Fluids.

In addition to our growth initiatives, we continue to evaluate and pursue additional options and opportunities to grow our business a little longer time for the benefit of our unit holders and just one last thing as far as production for this year, we would expect that our UAN production for the calendar year 2014 will approximate 1 million tons, so with that I’ll open it up to the floor for questions, Operator.

Question-and-Answer Session

Operator

(Operator Instructions) Our question comes from Christopher Perella with Bank of America; please proceed with your question.

Christopher Perrella - Bank of America

Thank you. Could you comment on the volumes that you've already placed for the first half of the year? And then I also had a question on the pet coke contract that you were negotiating at year end.

Jack Lipinski

Okay, well for Q1 we have approximately 90% of our orders place and for Q2 we still have primarily I guess June and probably half of it is committed right now, so those number increase every day as we take additional orders, and June is generally looked at as the first part of the fill season, so sometime in May or early June we will know what next quarter’s going to, next half’s prices will be but by then we should be sold out.

Christopher Perrella - Bank of America

Alright. Was most of that selling done in the fourth quarter or basically in January and February of this year?

Jack Lipinski

Well, if you take a look at the at quarters you always take quarters in advance, so Q1, a lot of Q1 was taken in the fourth quarter, it was obviously open book, we’ve always leave open to take more current prices, so we did take some orders in the fourth quarter for Q1, Q2 has primarily been taken in Q1. Stan, would you like to comment on that at all.

Stan Riemann

I think that’s accurate, we filled the book as we normally do, last summer we added to it consistently all along and right now it has a good mix of Q4, Q1.

Christopher Perrella - Bank of America

Thank you. And then the contract for the pet coke that you bought from third parties, has it been settled?

Jack Lipinski

Yes.

Christopher Perrella - Bank of America

On similar terms to the old one or was there a material change there?

Jack Lipinski

No, it’s virtually identical.

Operator

Our next question comes from Vincent Andrews with Morgan Stanley, please proceed with the question.

Unidentified analyst

Hi, this is Ian in for Vincent. Could you talk a little bit about expectations for 2014 distribution per unit?

Jack Lipinski

We have chosen not to do that, we prefer to give operation guidance, if at any given time you can see the fluctuation in the prices they’re firming and actually rising right now and we actually will be going back to a situation where we provide operational guidance rather than financial guidance.

Unidentified analyst

Okay. Well, then to that being, can you talk a little bit about expectations for UAN volumes in 2014 and then what the other non-pet coke COGS might be?

Jack Lipinski

Okay, well again I mentioned in just a moment ago that we would expect our UAN production to approximate 1 million tons of UAN, some incrementally small volume of ammonia just in and out, ammonia is not our primary product and then we will be increasing our DEF sales as we go along, Susan if you’d like to talk at all to the COGS or anything like that but basically we don’t see any significant changes in our COGS structure year-over-year. As a matter of fact, because of lower settlement on property taxes which everyone knows about, you know our cost have actually moved down slightly. Susan, do you have anything to add.

Susan Ball

Yes, with respect to the cost of product pricing is going to be similar to on the pet coke to what you’ve seen in 2013 and again the costs included in there primarily the pet coke cost and transportation cost.

Operator

(Operator Instructions) Our next question comes from Chris Damas with BCMI Research; please proceed with your question.

Chris Damas - BCMI Research

Good quarter, Jack. Can you give me the rationale for why you bought merchant ammonia when you could've converted that hydrogen? Was it because the refinery needed it? And what margin did you achieve on the merchant ammonia conversion?

Jack Lipinski

Basically what happens is the sale price of hydrogen to the refinery is at a premium to ammonia net back to the fertilizer plant, so the fertilizer operation earns additional income by selling hydrogen than the fertilizer company purchased outside ammonia to convert it into UAN. It was a net positive to the price of the ammonia purchased.

Chris Damas - BCMI Research

Right. That sounds good. I'm curious as to the freight cost to bringing in outside ammonia. Was that from the Gulf?

Jack Lipinski

No, it was basically truck, it was local.

Chris Damas - BCMI Research

So prior maybe? All right. Good job.

Jack Lipinski

Thank you.

Operator

At this time I would like to turn the call back over to management for closing comments.

Wes Harris

Well, this is Wes, again thanks everyone for joining us today, if you’ve got any additional questions I’ll try to make Jack available and Susan available, they’ve got a busy day with two other companies report but I’ll definitely be available, so thanks again and we’ll talk to you in May.

Operator

Thank you ladies and gentlemen, at this time this does conclude today’s teleconference, you may disconnect your lines at this time, thank you and have a great day.

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