CVR Partners' (UAN) CEO Mark Pytosh on Q4 2015 Results - Earnings Call Transcript

| About: CVR Partners, (UAN)

CVR Partners, LP (NYSE:UAN)

Q4 2015 Earnings Conference Call

February 18, 2016 11:00 A.M. ET

Executives

Wes Harris - VP of Business Analysis

Mark A. Pytosh – President and CEO

Susan M. Ball - CFO and Treasurer

Analysts

Adam Samuelson - Goldman Sachs

Operator

Greetings, and welcome to the CVR Partners Fourth Quarter 2015 Conference Call. At this time all participants are in a listen-only mode. A 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 of Business Analysis for CVR Partners. Please go ahead, Wes.

Wes Harris

Well thanks, Kevin and good morning everyone. We appreciate your participation in today's call. With me today are Chief Executive Officer, Mark Pytosh and Chief Financial Officer, Susan Ball.

Before Mark and Susan discuss our recent results, I will provide 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 today. 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 financial measures, including reconciliations to the most directly comparable GAAP financial measures, are included in our 2015 fourth quarter and full year results press release that was issued this morning.

Adjusted EBITDA is an example of such non-GAAP financial measures. Adjusted EBITDA represents net income adjusted for depreciation, amortization, net interest expense, and other financing costs, income tax expense, major scheduled turnaround expenses, non-cash share-based compensation, and expenses associated with the Rentech Nitrogen Partners merger. With these formalities out of the way, I'll turn it over to Mark.

Mark A. Pytosh

Thank you Wes and good morning and thanks for joining us today for the 2015 fourth quarter and full year earnings call. We are very pleased with the performance of the Coffeyville plant in the fourth quarter as we had record quarterly production of ammonia and UAN. The summarized financial highlights for the 2015 fourth quarter included a revenue of $66 million, adjusted EBITDA of $28.5 million, and net income of $18.7 million.

In today's press release we also announced a 2015 fourth quarter distribution of $0.27 per common unit. I would note that the distribution includes an adjustment of $3 million or $0.04 per unit to replenish working capital for future operating needs as a result of our 2015 third quarter shortfall. The $0.27 per unit distribution will be paid on March 7th to unit holders of record on February 29th.

Financial highlights for the 2015 full year included revenue of $289.2 million, adjusted EBITDA of $106.8 million, net income of 62 million, and distribution of $1.11 per unit. As discussed on our last earnings call. During our planned turnaround in July we performed extensive repairs and maintenance across the entire Coffeeville facility as well as modifications to allow us to run at higher rates of production. These activities have proven successful based on the production levels we saw in the fourth quarter and year-to-date in the first quarter.

In the second half of 2016 we expect to further grow our ammonia production once the new hydrogen plant comes online at CVR refining adjacent refinery. At that point we’ll be taking enough hydrogen to result in additional ammonia production of 50 to 75 tons per day which we will sell under the fertilizer market and not upgrade to UAN.

Looking into more details of this year's fourth quarter operating performance during the period, the gasifier and the ammonia unit both operated at 99% and the UAN plant ran at 98%. During the fourth quarter we produced 116,100 tons of ammonia adding in the ammonia equivalent tons of hydrogen we sent to the refinery during the period, it would equate to an ammonia production rate in excess of 1300 tons per calendar day. Also during the fourth quarter we converted the substantial majority of our ammonia into 270,500 tons of UAN.

Turning to pricing, since last summer we have seen nitrogen fertilizer prices fall to their lowest levels from the past several years. However in late June early July we took billed season orders that locked in UAN pricing for the significant majority of our 2015 second half of the year production. For the 2015 fourth quarter we received an average realized gate price for UAN of $221 per ton. This is compared to the $247 per ton in the fourth quarter of 2014 and the $227 per ton for the third quarter of 2015. For ammonia we received an average realized gate price of $479 per ton in the fourth quarter of 2015 versus $547 per ton in the fourth quarter of 2014 and $478 per ton in the third quarter of 2015.

Another important highlight of our fourth quarter was continued progress on our planning for the integration of the operations of the East Dubuque facility upon closing of our merger with Rentech Nitrogen. We have found the team at East Dubuque very knowledgeable and I expect a smooth integration once the deal closes.

Last month the S4 went effective with the SEC, and earlier this week the unit holders of Rentech Nitrogen approved the completion of the merger conditioned on the sale or spend out of Rentech's Pasadena facility. We are not in a position to discuss the specific timing of this process but continue to target closing the merger transaction by the end of the first quarter. The strategic rationale for the merger remains firmly in place and we look forward to expanding our footprint into new geographic markets as well as broadening our customer relationships. We also expect a benefit from East Dubuque usage of natural as a free stock.

I will now turn the call over to Susan to discuss our detailed financial results following that I will provide some concluding remarks and then open up for Q&A. Susan.

Susan M. Ball

Thank you, Mark and good morning everyone. As Mark mentioned, net sales for the 2015 fourth quarter were $66 million as compared to $74.4 million in 2014. The primary driver of the decrease was lower pricing for UAN and lower sales of ammonia. Partially offsetting the overall decrease for the period was higher UAN sales volumes.

Cost of products sold for the 2015 fourth quarter was $9.5 million, as compared to $15.4 million in 2014. The decrease was primarily associated with a reduction in railcar repair and then inspection cost, third party ammonia purchases, pet coke expenses, and other product cost. Direct operating expenses for the 2015 fourth quarter increased to $23.3 million from $21.7 million in the prior year period. The primary driver of the increase was a nonrecurring utilities reimbursement that occurred in the 2014 fourth quarter.

Selling general and administrative expenses for the 2015 fourth quarter were $5.6 million as compared to $3.8 million for the fourth quarter of 2014. Contributing to the increase was approximately $800,000 of expenses related to the Rentech Nitrogen merger as well as higher services agreement expenses in share based compensation. Finally we reported net income of $18.7 million or $0.26 per common unit in the 2015 fourth quarter. This is compared to net income of $24.8 million or $0.34 per common unit for the fourth quarter of 2014.

During the 2015 fourth quarter, we spent $4.6 million on capital projects including $2.3 million for maintenance CAPEX. For the 2015 full year we spent $17 million on capital projects including $9.6 million for maintenance CAPEX. We ended the 2015 fourth quarter with $50 million in cash and cash equivalents and $25 million available under our revolving credit facility. In addition our long term debt was a $125 million.

Last week Coffeyville Resources, LLC, a wholly-owned subsidiary of CVR Energy and a full member of the general partner of CVR Partners agreed to guarantee the $125 million in outstanding term debt due in April 2016. As a result the term debt is presented as long-term on our balance sheet as of December 31, 2015. We are currently considering various capital structures and refinancing options in regard to our credit facility that matures in April and in contemplation of the Rentech Nitrogen merger. We anticipate these options will be adequate to fund any necessary cash requirements. With that I’ll turn the call back to you, Mark.

Mark A. Pytosh

Thanks, Susan. In last week’s quality [ph] report, the USDA included a planting estimate of 88 million corn acres in the U.S. for 2015 and a year-end corn inventory stocks-to-use ratio of 13.6%. This is compared to the USDA’s estimate from a year ago of a stocks-to-use ratio of 13.4% leading into the 2015 planting season. As such we currently expect a similar number of corn acres will be planted in 2016 as in 2105. This implies a strong need for nitrogen fertilizer for the spring application.

In addition, based on industry reports and our observations in our key selling markets, it appears only 50% to 60% of the typical amount of nitrogen was applied in the fall. This further indicates that a significant amount of nitrogen fertilizer will be needed -– will need to be purchased to meet this year’s spring demand. As I mentioned in my opening remarks we have seen a global softening of nitrogen fertilizer prices. This is primarily due to well documented economic slowdowns in China and Brazil, weather issues in various parts of the world, a less than normal level of fall application of nitrogen in the U.S. and large imports of urea into the domestic market. As a result farmers have been slower to purchase fertilizer, dealers and distributors in advance of spring application as compared to prior years. However, over the last couple of weeks we saw prices stabilize and then rise with an acceleration of customer orders for wheat top dressing in preparation for spring corn application.

As we look to the second half of 2016 we will not have a solid view of pricing levels until we get closer to the fill season, which typically begins in June or July. At that time the industry will take into consideration how much corn was planted this spring, how well the crop has done since planting, projected yields for the fall harvest, and global inventory considerations.

Despite these weaker market conditions it is important to keep in mind that the fundamentals for the U.S. nitrogen fertilizer industry remains strong, we expect the U.S. to remain a net importer of nitrogen, even after taking into consideration the additional products supply coming online over the next year. As such we expect domestic prices will continue to be influenced by the cost of tons imported into the U.S.

In this current environment we will continue to focus on running our business efficiently and maximizing production at our Coffeyville plant, and once the merger closes at East Dubuque. In addition some of our commodity related input costs have declined, which should help offset the impact of expected lower product pricing as compared to 2015. We also believe that the current environment may continue to present opportunities for expanding our business to a further industry consolidation. As I said in the past, CVR partners will be thoughtful and patient in pursuing opportunities and we remain focused on acquisitions that are accretive to distributable cash flow. With that we are ready to answer any questions you have. Kevin?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. Our first question today is coming from Adam Samuelson from Goldman Sachs. Please proceed with your question.

Adam Samuelson

Thanks, good morning everyone. I guess first I’d like to hear your thoughts on where your customer levels are today -- customers are today in terms of their spring buying activity and how much do you think they’ve actually held back from committing to tons and as a corollary to that understand how far long you are in pricing in your first quarter and first half volumes given some pretty sharp falls in pricing in the last couple of months?

Mark A. Pytosh

Sure Adam, good morning. So I’d say that in January the purchase levels were pretty far behind previous years. They were with the falling prices customers were cautious and so we didn’t see a great deal of buying in January. And quite frankly we weren't that interested as a seller. But in the last two weeks I would say that we largely caught up to how much cuttage we would expect to have sold forward this time of the year. So, we are getting pretty closer to normal but I think that there is going to be probably stronger demand into the spring application than we have seen in prior years because of the short fall back in ammonia run in the fall. The ammonia run was light because of the weather in the Midwest.

Adam Samuelson

And along those lines are you starting to see demand for winter weed in the southern plains and people actually putting -– back into the ground at this point with application worker, are we still a few weeks within that?

Mark A. Pytosh

We have already -- the weed runs have already started in Texas and I think a little bit in Oklahoma, but Texas for sure and it’s been a pretty good weed run so far. So that’s already begun and people are ordering in to be prepared for the corn application. So I would describe the last two or three weeks as normal like we’ve gotten back to normal and people are getting positioned for spring. So I would say we are pretty close to normal. You had asked also about pricing, the pricing was very soft in January. There wasn’t really a lot of tonnage attached to those prices. It was -- I am not sure how I would describe the pricing environment then because tonnage wasn’t moving, customers weren't buying tons. And UAN very little changed hands in the month of January. And so it got a little bit detached from the urea price and I’d say again it has kind of gotten back to normal here in the last couple of weeks. It’s softer than it was back in the third and the fourth quarter but it is better than where the market indicated in January. If that’s of any value.

Adam Samuelson

It is. I guess I am trying just to reconcile because these listed UAN prices that I would see are still around 170 NOLA and you have seen a rally in the urea price in the last two weeks or so and last couple of days frankly without any, I mean observable move yet, based on the trade clash on the UAN price and I would just be interested to get your thoughts there?

Mark A. Pytosh

Yes, I would say it is sort of been again a developing environment in the last couple of weeks. It's firmed up. I don’t really want to comment on kind of where the things are I would say that the NOLA prices has tended to be pretty conservative at least the last two or three months in terms of where things are.

Adam Samuelson

Great, it’s very helpful. I appreciate the color.

Operator

Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to management for any further or closing comments.

Mark A. Pytosh

Well, I want to thank everyone for participating today. And we look forward to talking to you shortly on our first quarter results. Thank you very much.

Operator

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.

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