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Executives

Wes Harris – VP, IR

Byron Kelley – President and CEO

Frank Pici – CFO and Treasurer

Analysts

Ted Drangula – Morgan Stanley

CVR Partners LP (UAN) Q2 2012 Earnings Call August 2, 2012 9:30 AM ET

Operator

Greetings, and welcome to the CVR Partners Second Quarter 2012 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 of Investor Relations. Thank you sir. You may begin

Wes Harris

Well, thank you, Christine, and good morning everyone. We appreciate your participation on today’s call. With me today are Chief Executive Officer Byron Kelley, Chief Operating Officer Stan Riemann and Chief Financial Officer Frank Pici.

Prior to discussion of our 2012 second quarter 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 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. These disclosures related to such non-GAAP measures, including reconciliations to the most directly comparable GAAP financial measures are included in our 2012 second quarter results press release that we filed yesterday after the market closed.

So with that, I’ll turn the call over to Byron Kelley, our Chief Executive Officer. Byron?

Byron Kelley

Well, thank you, Wes, and let me add my welcome to you this morning we’re very pleased that you could join us. Before I get in the presentation, I may be want to apologize upfront a little bit for my voice, that may deteriorate only, I like a lot of people in Houston have been fighting broncos cold issue, seem like it’s an epidemic around Houston.

So I do have a lingering cough pretends to come in every now and then and so my apologies, if I have to cough a little bit and stop and drink water through appetizers, but we certainly want to cover the bases today, and I am going to give you a quick review of the second quarter and talk a little bit about our current business, Frank, will then discuss the financial results and I’ll conclude our opening remark for discussion concerning some industry trends and then our outlook. And then after that Frank, Stan, and I will all be available to answer questions that you may have this morning.

We posted another period of very solid financial results for the second quarter of 2012, including a net income of $35.1 million on net sales of $81.4 million. This is compared to 2011 second quarter with the net income of $38.2 million on net sales of $80.7 million.

2012 second quarter adjusted EBITDA, which as you recall represents net income adjusted for depreciation and amortization, interest expense and income as well as financing costs, income tax expenses and any share-based compensation that adjusted EBITDA was $44.1 million for the second quarter of this year, compared to $45 million in the prior year.

Driven by our strong financial performance in this year’s second quarter. Last week, we announced a distribution of $0.60 per common unit and this distribution will be paid on August of 14 to unitholders of record on August 7.

Let’s look more little more to our operations. From our last earnings call, you may remember that in late February, we began to see a decline in production output, and made a financial decision to take the plan out of service to implement some unscheduled maintenance work. This work was successful and we continue to make up a loss production, we think we’ll make it up before the year is over.

But with that work behind us, we’re seeing a much improved runtimes for our facilities from the first quarter into the second quarter. During the second quarter the gasifier was on-stream 99% of the time, ammonia synthesis loop which own 98% and the urea ammonium nitrate plant was on-stream 97% of the time.

In 2012, second quarter we produced 108,900 tons of ammonia of this amount, we converted 74,000 tons into 180,000 tons of UAN leaving a balance of 34,900 net tons of ammonia available for sale for the second quarter.

This compared to the second quarter of 2011, when we produced 102,300 tons of ammonia of which 74,100 tons were converted into a 179,400 tons UAN, that left us a balance for last year in the second quarter of 28,200 net tons available for ammonia sales.

During this year, second quarter, we were a net receiver of hydrogen under our feedstock and shared services agreement with CVR entities adjacent refinery.

As such we did not report hydrogen revenue sales in this quarter and this is compared to 2011 second quarter, when we elected to sell $6.1 million of hydrogen to the refinery under our keep-whole pricing arrangement. The amount of hydrogen sold during that period remember we’re again referring the second quarter of last year was equivalent to producing 9,400 tons of ammonia.

During the 2012 second quarter, we rollout an average netback price for ammonia $568 per ton as compared to $574 netback per ton in the prior year. For UAN, the average netback price for 2012 second quarter was $329 per ton, which was an approximate 10% higher and then $300 per ton netback reported in the second quarter of 2011.

We continue to make significant progress on our UAN plan expansion, this expansion will allow us to convert virtually all of our ammonia production into more highly valued UAN, this will increase our capacity to more than a 1 million tons of UAN annually, which is approximately 50% higher than current level. All is being equal with 2012, we estimate the expansion could add approximate $0.25 per unit to our cash available for distribution in 2013.

In relation to that expansion at this point, all of our contracts have been awarded the major towers have been erected, the cooling tower is complete and the motor control centers have been set and the main compressor is also been set and the drilling is (inaudible) completion.

I’m very pleased with the scope and the pace of the work it’s been done today. The progress that our team has made indicates that we will complete the project by the start of 2013, which is earlier than we previously discussed – we previously discussed a start up sometime in the first quarter, right now we’re pretty confident that we will start up first of the year and getting the full 12 months of the utilization out of expansion for 2013.

We continue to expect the total cost for the project will come in under budget between $5 million and $10 million under the budget this puts the total expected investment between $125 million and $130 million and that includes approximately $5 million for capitalized interest.

We are also essentially complete with our $2 million project to construct the storage and distribution type facility in Phillipsburg. We are currently unloading railcars into the tanks and we’re targeting truck delivery shipments out of those tanks, the ability to start shipping out of those tanks later this month based on the economics really drives when we will pull that out. But we do expect to start shipping out of these tanks probably sometime later this month.

At this point, I’m going to turn the presentation over to Frank Pici, our Chief Financial Officer. And then I’ll come back and have some additional comments later. Frank?

Frank Pici

Thanks, Byron, and good morning, everyone. We’re pleased to report another quarter of solid financial results.

As Byron mentioned, second quarter 2012 net sales were $81.4 million compared to $80.7 million in 2011 and increases for the result of higher average plant gate prices and sales of volumes for UAN. Partially offset by lower hydrogen sales by CVR Energy – refinery and decrease sales volumes.

Cost of products sold for 2012 second quarter was $10.7 million compared to $9.7 million in the second quarter of 2011. Contributing to the net increase was higher freight and distribution cost, which were partially offset by reduced pet coke volumes.

As we’ve discussed in the past, we typically purchased over 70% of our pet coke from CVR Energy adjacent refinery. Remaining 30% of our pet coke requirements are purchased from the third-party supplier under a fixed price contract to begin in March of this year and runs through the end of 2013.

During the second quarter, our average cost of consumed pet coke, including third-party purchases for shipping and handling was $31 per ton, compared to $30 per ton for the second quarter of 2011.

Direct operating expenses are excluding depreciation and amortization, was $22.5 million for the second quarter, which was essentially flat with the prior year.

Selling, general, and administrative expenses were $7 million for the second quarter, as compared to $4.7 million in the second quarter of 2011. The increase was driven primarily by higher share-based compensation expense of $1.6 million and an increase in net personnel related expense reimbursements to our general partner.

Depreciation and amortization for the second quarter was $5.2 million, compared to $4.6 million in the prior year period. The increase was associated with an adjustment in remaining useful lives of certain assets to be retired during its turnaround scheduled for this year’s fourth quarter.

Turning for a minute to capital expenditures, during the second quarter, we spent $16.9 million on capital projects, including a $0.5 million for maintenance CapEx. For the full year 2012, we currently expect to invest a $100 million to $110 million in capital projects excluding capitalized interest.

This amount includes $70 million to $75 million for the UAN expansion, $10 million to $12 million for maintenance CapEx, and $20 million to $25 million for other growth projects. I would note that all of our capital, planned capital spending will be fully financed by cash on our balance sheet.

On our first quarter earnings call in May, we discussed that in addition to the typical adjustments for deferred revenue and maintenance capital, we were reducing our first quarter available cash for distribution by $7.5 million reserve for accrued property taxes to be paid in the second quarter, and catalyst purchased during the first quarter for used during the turnaround later this year.

Including in our earnings releases a reconciliation of cash flows from operations to available cash for distribution. As part of the reconciliation, you’ll see that we increase the second quarter available cash for distribution by $6.7 million to reflect the payment of those property taxes reserve for the end of the first quarter.

The remaining balance of $800,000 of – at the end of the first quarter is for the pre-purchase catalyst, for the turnaround. We expect that this amount will be added to our fourth quarter cash available for distribution.

As we look to the balance of this year and into 2013, we remain in a very strong financial position with substantial flexibility. As of June 30, we had cash liquidity of $221 million, which is comprised of $196 million in cash and cash equivalents and $25 million available under our revolving credit facility.

I would also note that we continue to carry a modest level of debt at $125 million.

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

Byron Kelley

Thank you, Frank. Since we last had a review at our earnings call in May, the industry have seen a dramatic swing in forward corn prices, from a low or less than $5 per bushel to more than $8 per bushel currently for December deliveries. This increase has been primarily driven by growing negative outlook for this year’s corn crop, due to the severe drought in the majority of the mid-west and other key growing regions.

To put this in better perspective, more than half of the country was under moderate to extreme drought conditions in June, which represented the largest area of contiguous United States affected by such dryness in almost 60 years. Nearly 1,300 counties across 29 states have been declared federal disaster areas.

Unfortunately, drought has only gotten worse since those June numbers are released. Current unexpected conditions are, will have a substantial negative impact on the final crop for this year. As a result, we do expect to see very low year ending corn inventory levels, which we believe will necessitate a substantial planning of corn acreage in the coming years to rebuild inventories. On July 11, the USDA lowered its initial corn yield estimate for this year from 166 bushels per acre with a carryout of 1.9 bushels to 146 bushels per acre with a carryout of 1.2 billion bushels.

With the Canadian drought condition, we expect the USDA will lower their estimates again next week. We would note that Pro Exporters most current forecast assumes a yield of 132 bushels per acre with a carryout this year of 571 million bushels. This could result in a stocks-to-use ratio of around 5% or less, which would represent the lowest level since 1988.

Looking specifically in our business in mid-June the sales season got underway in full force and within two days, we have placed orders for essentially all of our remaining UAN production for 2012.

While I am not discussed our forward netback pricing for competitive reasons, we would note that we typically see the industry does, typically see prices come down a bit for deliveries in summer and fall months, this year was no exception however, having said that we are very pleased with the UAN prices that we’ve seen for the current season for field, and very pleased with the resulting increase and visibility, we now have for 2012 year outlooks.

For ammonia, we’ve been taking fall pre-pay orders and are also pleased with overall pricing, similarly UAN we now have significant visibility for remainder of 2012. At this point, we placed orders for almost all of our targeting third quarter ammonia deliveries in majority of 2012 fourth quarter production as well.

I would remind everyone that we do have a turnarounds laid in for the fourth quarter, and certainly is expected to be down for approximately 16 days to 18 days. We estimate the combination of foregone revenue during that work as well as incremental. Expenses for the turnaround will approximate $0.25 per common unit, turnaround as you remember first every two years and so we will not be looking at a turnaround next year.

In terms of – excuse me distributable cash flow guidance for 2012, given our solid results today and our substantial visibility, we have for the remainder of the year, we are reaffirming our full year guidance range of $1.65 to $1.85 per common unit. I would note this guidance does include the negative impact of approximately $0.25 per common units for the Q4 turnaround.

As we look to 2013, while we are currently not in a position to provide formal guidance there are number of factors support what is expected to be another excellent year for the partnership in all of our unitholders. First and foremost, we look forward to benefiting from our expanded UAN operations for the entire year.

In addition, as I mentioned earlier, we do not – we’ll not have a turnaround in 2013. Therefore all outs being equal, cash available to distribution in 2013 could approximate $0.50 per unit higher than we’ve seen in 2012.

Looking at the $1.75 midpoint of this year, distributable cash flow per guidance this indicates the potential for an almost 30% increase in cash available for distribution in 2013 and again all things being equal and when you say that you’re simply talking about we do see prices equivalent to this year or better.

We also expect the benefit from a continued positive fertilizer pricing environment moving into next year’s spring corn planting. As I discussed earlier the challenging crop conditions are indicating a very low year-end stocks-to-use ratios. Therefore we expect to see in personal aspect we will see a $92 million plus acres planted in next year to support the growing, both the growing demand for corn as well as rebuilding inventory for the years to come.

In general, I think you’re going to see several years of really strong planning to rebuild these lower inventories if we’re going to come out of this year with, adding to this some strengthening in the world economy down the road and I think did you have the making for strong demand for nitrogen based fertilizers for quite a while.

As we’ve discussed in the past, we are focused on a number of initiatives to grow our business. Supporting these average is a strong balance sheet that provides significant flexibility to capitalize quickly on opportunities as they present themselves.

To top the near-term opportunity list is as I mentioned our UAN expansion it comes online in 2013, addition of our RSI storage facilities in Phillipsburg this year and we expect to add other key locations in the future of additional comment. As well both of these will be increasing our cash flows as we seek to optimize the price, we will receive for our products. Expanding on sales mix and other higher margin products like we’re doing with diesel emission, fluid or DEF is another way that we’re increasing the amount of cash available for distribution. But then finally, we are continually looking for any acquisition opportunities that could come into the market and we’ll be aggressively pursuing any of those opportunities that are available.

In conclusion, we’re pleased with our results for the first half of 2012, we certainly look forward to the remainder of this year in addition support of our solid industry fundamentals, we are poised – expected to be a very successful 2013, highlight about the substantial growth over 2012.

As always, we appreciate the continued support of our unitholders and as we continue to build an even stronger CVR Partners for the future. So with that, we will open the floor for questions and operator I’ll turn it back to you.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Thank you. Our first question comes from the line of Vincent Andrews with Morgan Stanley. Please proceed with your question.

Ted Drangula – Morgan Stanley

Hi, this is Ted Drangula in for Vincent. I had a question on how you see the volume playing out for the rest of the year, is it similar sort of pattern as to the second half of 2011. And then, I guess the follow-on to that, will the mix likely be similar and have you essentially, it sounds like you have essentially priced everything for the rest of the year and firmed up the entire order book. Can you give us an idea of how that pricing is, is there any indexing on that or was it just contract in certain point of time or you can’t give away all that, but present ideas of the methodology behind the prices for the rest of the year?

Byron Kelley

Okay Ted, I will try to go through that, if I miss answering, I think you had several question. If I missed any of it, come back and remind me. And first up, in terms of this year versus last year, I think in terms of sales for this year, it’s pretty similar except that we’re probably little ahead of booking full capacity.

We have reserved some ammonia capacity that we think will be, that the fourth quarter is going to be very strong quarter for ammonia. So reserve some of that, the UAN were pretty well booked, but the big difference as you saw last year, we’re though how quick people were buying for the spring and as we got into the fourth quarter, we saw a lot of the distributors are holding back on buying product at that time.

It’s too early to know what are that’s going to be the duplicated again. Our sets of distributors are probably going to be more aggressive in this market on refilling that product. I think as part of that will also play into, now that we’re seeing that, where stock-to-use ratio is kind of going to come out that most of distributors are going to be expecting a pretty strong year next year.

And we’ll probably feel their product little earlier, but we’ve – we are actually quite pleased with where we are for this year on putting our product in the market and also quite pleased with some of the things that we’re seeing out there as we head into people buying for spring deliveries next year as well.

Let see you – in terms of pricing, no, we don’t do any index pricing. Every day, we do is individually negotiate it and it’s really based on the timing of deliveries based on our rate of the market and where we think the market is going to go and really one-on-one negotiation with the customers, it’s always a give and take negotiations in that regard. Was there another questions in there perhaps I missed it?

Ted Drangula – Morgan Stanley

No, you got that. I guess there is one just follow-up. Even though, it sounds like you -pickup soon, now correctly you have pretty much sold everything for the rest of the year is, even considering that, have you noticed in your contacts in the marketplace be – I guess the sentiment of dealers of your customers in the phase of this rapidly big deteriorating crop outlook, I mean I guess how do you think processes season will be in the fall where people looking, or willing for some customers looking their lands, because there are customer and farmers are in some cases having issues and how do you see demand, I guess?

Frank Pici

No, I mean, I think the couple of things to keep in mind about this drought, it is perhaps different from some of the historical droughts as most of the farmers are carried between 75% and 85% of the insurance.

And so ensure that they are going to be somewhat financial impacted by the drought in a question. But they are going to have pretty good recoveries, some of what they are going to be selling, it’s going to be at higher prices and perhaps they thought.

So I have – the sentiment, we are receiving is that, we’re not seeing at this point any pullback from either the dealers or the farmers. The dealers are actually, we think from what the discussions we’re having or getting a little anxious about actually firming up some of their stuff with the spring, and we see that is supporting some what we think will be some pretty good prices next year.

Ted Drangula – Morgan Stanley

Great.

Byron Kelley

We are not actually seeing a pullback in the market.

Ted Drangula – Morgan Stanley

Thank you.

Operator

(Operator Instructions) Mr. Kelley, it appears we have no further questions at this time. I would now like to turn the floor back over to you for further comments.

Byron Kelley

Well, thank you very much. Again let me thank all of you for attending this morning. As I’ve said, we are very pleased with the quarter. We are actually very excited about how our year has been moving this year so far, both from financial performance as well as progress we are making on our expansion.

And all this leads us with the fundamentals that we see in the business as well as success of this year, very excited about next year. And so we appreciate your attendance and as always, if you have any other questions, needing the clarification, we are always available to take your calls as well.

So with that operator, I think we will conclude the meeting.

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.

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