CVR Partners Q3 2023 Earnings Call Transcript

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Provided by Quartr
October 31, 2023

There are 5 speakers on the call.

Operator

Greetings and welcome to the CVR Partners LP Third Quarter 2023 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, Director of FP and A and IR.

Operator

Thank you, Mr. Roberts. You may begin.

Speaker 1

Thank you, Camilla. Good morning, everyone. We appreciate your participation in today's call. With me today are Mark Pytosh, our Chief Executive Officer Dan Newman, our Chief Financial Officer and other members of management. Prior to discussing our 2023 Q3 results, let me remind you that this conference call may contain forward looking statements That term is defined under federal securities laws.

Speaker 1

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.

Speaker 1

Dispositions related to such non GAAP measures, including reconciliation to the most directly comparable GAAP financial measures are included in our 2023 Q3 earnings release that we filed with the SEC for the period. 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 may reserve amounts for other future cash needs as determined by our General Partners 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 or finished products, capital expenditures and cash reserves deemed necessary or appropriate Directors of our general partner. With that said, I'll turn the call over to Mark Pytosh, our Chief Executive Officer.

Speaker 1

Mark?

Speaker 2

Thank you, Richard. Good morning, everyone, and thank you for joining us for today's call. To summarize financial highlights for the Q3 of 2023 include net sales of 131,000,000 Net income of $1,000,000 EBITDA of $32,000,000 and the Board of Directors declared a 3rd quarter distribution of $1.55 per common unit, which will be paid on November 20 to unitholders of record at the close of the market on November 13. Our facilities continue to run well during the Q3 of 2023 with consolidated ammonia plant utilization at 99%. Combined ammonia production for the Q3 of 2023 was 217,000 gross tons, of which 68,000 net tons were available for sale UAN production was 358,000 tons.

Speaker 2

During the quarter, we sold approximately 387,000 tons of UAN At an average price of $2.23 per ton and approximately 62,000 tons of ammonia at an average price of $3.65 per ton. Relative to the Q3 of 2022, UA and ammonia sales volumes were higher as a result of both facilities completing planned turnarounds in the Q3 of 2022. Prices for the Q3 declined from the Q3 of last year with ammonia prices falling 56% and UAN prices falling 48%. Following the reset of nitrogen fertilizer prices in July, prices steadily rose throughout the summer, driven by a combination of strong demand and reduced supply as a result of planned and unplanned outages across the industry. Looking ahead, we believe market conditions affirmed for the Q4 And we are optimistic about nitrogen fertilizer demand for 2024, which I will discuss in my closing remarks.

Speaker 2

I will now turn the call over to Dane discuss our financial results,

Speaker 3

thank you, Mark. For the Q3 of 2023, we reported net sales of 131,000,000 And operating income of $8,000,000 Net income for the quarter was $1,000,000 or $0.07 per common unit and EBITDA was 32,000,000 Relative to the Q3 of 2022, the increase in EBITDA was primarily due to higher production and sales volumes and lower operating expenses Excluding inventory impacts, direct operating expenses decreased by approximately $38,000,000 relative to the Q3 of 2022, primarily driven by a combination of lower turnaround and repair and maintenance expenses along with reduced stock based compensation expense. During the Q3 of 2023, we spent $8,000,000 on capital projects, which was primarily maintenance capital. We estimate total capital spending for 2023 to Approximately $29,000,000 to $32,000,000 of which $26,000,000 to $28,000,000 is expected to be maintenance capital. During the Q3, we amended our ABL credit facility to increase the maximum availability from $35,000,000 to $50,000,000 and extended the maturity from 20 in cash and availability under the ABL facility of $48,000,000 Within our cash balance of $89,000,000 we had $30,000,000 and had net cash needs of $16,000,000 for interest costs, maintenance CapEx and other reserves.

Speaker 3

Within that total is a release of $8,000,000 from the reserve taken in the Q2 of 2023 for expected working capital needs along with $6,000,000 of reserves for future turnarounds and planned capital projects. As a result, there was $16,000,000 of cash available for distribution and the Board of Directors of our general partner declared a distribution of $1.55 per common unit. The remainder of the working capital reserve taken in the Q2 of 2023 may be released in the future if determined by the Board. Looking ahead to the Q4 of 2023, we estimate our ammonia utilization rate to be between 90% 95%. We expect direct operating expenses, excluding inventory impacts, to be between $55,000,000 $60,000,000 and total capital spending to be between $10,000,000 $15,000,000 With that, I will turn the call back over to Mark.

Speaker 2

Thanks, Dane. In summary, we were pleased with our 3rd quarter results. We had another quarter of strong production from our facilities and we navigated the resetting of the nitrogen fertilizer market this summer. We believe market conditions are firming and we are well positioned for the Q4 and 2024. With harvest nearly complete And weather conditions being favorable, fall ammonia application began last week, a little earlier than normal.

Speaker 2

Weather permitting over the next month, we expect a strong fall 2024. Current USDA estimates indicate 95,000,000 acres of corn were planted in the spring of 2023, A 7% increase compared to 89,000,000 acres in 2022. Planted soybean acres are estimated to be 84,000,000 In the Midwest, yield estimates were reduced to 173 bushels per acre for corn and 50 bushels per acre for soybeans. The USDA is now projecting grain inventory carryout levels to be approximately 15% for corn and 5% for soybeans, resulting in inventories near the 10 year average for corn and at the low end of the range for soybeans. Grain prices have remained steady with December corn at $4.80 Reset fertilizer prices support attractive farmer economics, which should bode well for nitrogen fertilizer demand for 2024.

Speaker 2

We believe that the length of this upward cycle demand cycle will in large part be driven by grain prices staying at elevated levels and we see fundamentals for grains remaining steady. Since July, production in nitrogen fertilizer has experienced a combination of unplanned production outages, A heavy plant turnaround schedule and natural gas availability issues in several geographies. These supply issues coupled with steady demand from customers to replenish Inventories depleted in the spring have tightened supply demand balances and have led to significant firming of prices in the market. As I mentioned on the last earnings call, customer purchasing patterns have evolved to more ratable purchasing due to higher cost over the past year from higher interest rates. We think this buying pattern matches well with our production schedule.

Speaker 2

Geopolitical risk continue to represent a wildcard for the nitrogen fertilizer industry with meaningful fertilizer production capacity residing in countries across the Middle East and North Africa. As we enter the 4th quarter, the current 4th quarter price for TTF natural gas has been a range of $12 to $18 per MMBtu, which should drive Europe back to the high end of the global nitrogen production cost curve. Natural gas prices in the U. S. Have been in the range of $3 to $3.50 per MMBtu in October, Placing the U.

Speaker 2

S. At the low end of the global cost curve. Europe has been importing some ammonia and we expect this to continue in the coming months. We do not believe that the structural natural gas market issues in Europe have been resolved and will likely remain in effect over the next 2 to 3 years. On our decarbonization efforts, we continue to make progress on the installation of a nitrous oxide abatement unit in the number one acid plant at the Coffeyville facility and expect that project to be completed by 2025.

Speaker 2

We also continue to explore various CO2 sequestration opportunities for the East Dubuque facility, which if approved could reduce its carbon footprint over the next several years. 2 of the major CO2 pipeline projects in the upper Midwest Have faced opposition and one project sponsored by Navigator and Valero has been canceled. Ultimately, we believe these hurdles will lead to a longer development schedule. We've not made commitments to any projects at this point, but we will continue to monitor their progress. We also continue to pursue the certification of production at Coffeyville as Blue Ammonia and UAN and have received customer interest in low carbon nitrogen fertilizer.

Speaker 2

We continue to evaluate brownfield development projects at both the production facilities that could be targeted capacity increases to our existing footprint. The Board elected to continue reserving capital that we expect to spend over the next 2 to 3 years to progress these The 3rd quarter continued to demonstrate the benefits of focusing on reliability and performance. In the quarter, we executed on all the critical elements of our business plan, which include safely and reliably operating our plants With a keen focus on the health and safety of our employees, contractors and communities, prudently managing cost, Being judicious with capital, but targeting select investments in reliability projects and incremental additions to production capacity, maximizing our marketing and logistics capabilities and targeting opportunities to reduce our carbon footprint. In closing, I'd like to thank our employees for their excellent execution, achieving 99% ammonia utilization and solid delivery on our marketing and logistics plans, Resulting in a distribution of $1.55 per common unit from the Q3 and over $16 declared year to date. With that, we are ready to answer questions, Camilo.

Operator

Thank you. We will now be conducting a question and answer session. Our first question comes from the line of Rob Maguire with Granite Research. Please proceed with your question.

Speaker 4

Good morning, Mark, Dan and Richard. Thank you for taking my questions.

Speaker 2

Good morning, Rob.

Speaker 4

Hey, the strike at East Dubuque, is there any color that you can provide us around the strike? Have there been strikes in the past? If so, it was a prolonged strike and is that impacting your utilization or do you anticipate that impacting your utilization in the 4th quarter?

Speaker 2

Yes, Rob. The strike started about 2 weeks ago with the local union there. And based on that, we're fully manned and we expect to run safely and reliably on a continuous basis 20 fourseven.

Speaker 4

Yes. I noticed that your targeted East Dubuque ammonia utilization for the Q4 is 85% to 90%. And in the past quarter, you across the board, you put up I think 99%. Is that is the 4th quarter in line with the last quarter or is that a little lower and Are there other issues there that could be impacting utilization? Yes.

Speaker 2

It's not it's unrelated to the strike. We had a mechanical issue right at the end of the third quarter And that carried into October that we completed a repair a few weeks ago and so that's why we lowered our forecast for the utilization. It's not Related to the strike.

Speaker 4

Okay. I appreciate that. Thank you. And then last quarter, you talked about how customers were only advanced purchasing by, say, 2 to 3 months versus the normal 4 to 6 months. Did that by say 2 to 3 months versus the normal 4 to 6 months.

Speaker 4

Did that buying pattern persist throughout all of the Q3? And is it currently occurring in the Q4 as well?

Speaker 2

Yes, it's been it's really been pretty consistently, we're buying 2 to 3 months at a time. I would tell you that we do expect the prepay season to be normal, which is typically towards the end of the calendar year. There would be prepaid purchasing for the spring, particularly for ammonia application. So we do expect that to be consistent with past practice. But I would say generally, the customers are more ratably buying.

Speaker 2

They're not carrying as much inventory for lengthy periods of time.

Speaker 4

Is that due to what do you think is causing that?

Speaker 2

Cost of basically cost of money is probably double digits for the retailer or a farmer. And so to carry fertilizer, if you bought in July, carried it till April. If you have a 10% or 12% cost of money, that's a pretty expensive carry For 9 months, so that's I would say that that's the biggest driver.

Speaker 4

Got it. And can you give us an idea of how much Q4 production has been sold so far? And You mentioned spring sales. Have any spring sales begun at this point?

Speaker 2

So first on the Q4, we're Largely sold through the Q4 at this point. I don't want to say exactly where we are, but we're in good hands for the Q4. And we have

Speaker 4

All righty. And then I won't hold you to this, but do you have an opinion, Mark, on where ammonia and UAM pricing will end up in the Q4 relative to the Q3?

Speaker 2

We don't give that kind of information, so I don't want to put it out there. If you listen to the first part My comments, we've had a nice lift in both ammonia and UAN since July. We set in marketplace and that we do see that carrying into 2024. And so there's been a significant increase. If you look at the publications, you can kind of see where Fertilizer prices are today and that's kind of where the market is.

Speaker 2

And again, that's the pricing that carried late into Later in the Q4 and into the 2024 season.

Speaker 4

That's fair. Thank you. And just lastly, You've built up a healthy reserves for maintenance CapEx. Can you discuss what's led to that buildup and will it continue?

Speaker 2

Yes. So we have several projects that we're pursuing and We're continuing to do work and we're reserving for these are combination of reliability and expansion projects. And we'll continue to reserve, as you could see probably from earlier this year till now, we've kind of lowered that quarterly carry On that or the amount we're reserving, but it will all depend on kind of the outcome of those projects. So if we conclusion that we're not going to move forward with 1 or more of the projects and we will either stop reserving or we'll Probably let that reserve loose. But right now, we have several promising projects that we're reserving for Specifically that we think are going to make sense for the plants longer term.

Speaker 4

Okay. I appreciate that. I know I said last question, but I got one other. Just any thoughts on Russian imports of UAN and how that's impacting the market here in the States?

Speaker 2

If you go all the way back last year to the beginning, we had a disruption of The flow of Russian UAN here, but that only lasted until the summer of 2022 and we've largely the markets Sort of normalized since the summer of 2022. We haven't seen any changes in the marketplace there for Russian UAN. It's been sort of steady and consistent. And it was only really disrupted in the 1st 6 months of the war that broke out in the Ukraine, But it's kind of reverted back to normal, I'd say, at this point. It's been that way for over like a year almost 1.5 years now.

Speaker 4

Well, I appreciate the answers. Thank you so much.

Speaker 2

Thank you, Rob.

Operator

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

Speaker 2

Well, again, I want to thank everyone for joining the call this morning, and we look forward to reviewing our Q4 results in February. Thank you very much.

Operator

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

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Earnings Conference Call
CVR Partners Q3 2023
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