CVR Partners Q1 2023 Earnings Call Transcript

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May 2, 2023

There are 5 speakers on the call.

Operator

Greetings and welcome to the CVR Partners LP First 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, Vice President of SB and A and Investor Relations.

Operator

Thank you, Richard. You may begin.

Speaker 1

Thank you, Paul. Good morning, everyone. We appreciate your participation in today's call. With me today are Mark Pytosh, our Chief Executive Officer Dave Newman, our Chief Financial Officer and other members of management. Prior to discussing our 2023 Q1 results, let me remind you that this conference call may contain forward looking statements as 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 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 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

Disclosures related to such non GAAP measures, including reconciliation to the most directly comparable GAAP financial measures are included in our 2023 Q1 earnings release that we filed with the SEC for the period. Let me also remind you that we are a variable distribution NLP. We will review our previously established reserves, current cash usage, evaluate future anticipated cash needs and 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 for finished products, capital expenditures and cash reserves deemed necessary or appropriate by

Speaker 2

the Board of Directors of

Speaker 1

our general partner. With that said, I'll turn the call over to Mark Pytosh, our Chief Executive Officer. Mark?

Speaker 3

Thank you, Richard. Good morning, everybody, and thanks for joining our call today. The summarized financial highlights for the Q1 of 2023 including net sales of $226,000,000 net income of $102,000,000 EBITDA of $124,000,000 and the Board of Directors declared a 1st quarter distribution of $10.43 per common unit, which will be paid on May 22 to Achieving record production levels in the quarter. Consolidated ammonia plant utilization was 105%. This resulted in combined ammonia production of 224,000 gross tons, of which 62,000 net tons were available for sale and UAN production of 366,000 tons.

Speaker 3

During the quarter, we sold approximately 359,000 tons of UAN at an average price of $4.57 per ton and approximately 42,000 tons of ammonia at an average price of $8.88 per Done. Relative to the Q1 of 2022, UAN and ammonia sales volumes were higher as a result of improved operations following the completion of the planned turnarounds of both facilities in the Q3 of 2022. Prices for the Q1 declined from the Q1 of last year with ammonia prices falling 16% and UAN prices falling 8%. Although Q1 benchmark prices for corn belt ammonia and UAN declined by approximately 30% from the 4th quarter, Our realized price for UAN increased quarter over quarter and our realized ammonia price was down less than 10% as we sold more than half of our first quarter production in the Q4 of 2022 before prices began to decline. Looking ahead, we continue to expect healthy demand for fertilizer in the spring planting season due to strong grain prices and farmer economics, which I will discuss I will now turn the call over to Dane to discuss our financial results.

Speaker 2

Thank you, Mark. For the Q1 of 2023, we've reported net sales of $226,000,000 and operating income of $109,000,000 Net income for the quarter was $102,000,000 or $9.64 per common unit and EBITDA was $124,000,000 Relative to the Q1 of 2022, The slight increase in EBITDA was primarily due to higher production and sales volumes and lower operating and SG and A expenses offsetting the decline in prices. Direct operating expenses for the Q1 of 2023 were $58,000,000 Excluding inventory impacts, direct operating expenses Decreased by approximately $1,000,000 relative to the Q1 of 2022, primarily driven by lower personnel costs related to stock based compensation, partially offset by higher electricity and natural gas costs and increased repair and maintenance expenses in the current period. During the Q1 of 2023, we spent $4,000,000 on capital projects, which is primarily maintenance capital. We estimate total capital spending for 2023 to Approximately $32,000,000 to $35,000,000 of which $29,000,000 to $31,000,000 is expected to be maintenance capital.

Speaker 2

We ended the quarter with total liquidity of $156,000,000 which consisted of $121,000,000 in cash and availability under the ABL facility of 35,000,000 Within our cash balance of $121,000,000 we had approximately $39,000,000 related to customer prepayments for the future delivery of product. In assessing our cash available for distribution, we generated EBITDA of $124,000,000 and received net cash proceeds of $18,000,000 from the closing of the 45Q Transaction in January. The Board elected to begin reserving cash for future turnarounds of $3,000,000 in addition to reserves of $16,000,000 for planned capital Projects that Mark will discuss further in his closing remarks. We currently anticipate future quarterly reserves for these projects, subject to further approvals. We also had net cash needs of $13,000,000 for interest costs, maintenance CapEx and other reserves.

Speaker 2

As a result, there was $110,000,000 of cash available for distribution and the Board of Directors of our general partner declared a distribution of $10.43 per common unit. Looking ahead to the Q2 of 2023, We estimate our ammonia utilization rate to be between 95% 100%. We expect direct operating expenses, excluding inventory impacts to be between $50,000,000 $55,000,000 and total capital spending to be between $7,000,000 $12,000,000 With that, I will turn the call back over to Mark.

Speaker 3

Thanks, Dane. In summary, we were very pleased with our Q1 results, driven by record production from our facilities with a combined ammonia utilization rate of 105 We also executed well on our marketing plan from last fall, where we forward sold a significant portion of our Q1 production in advance of softening prices. Spring pre plant season is off to a good start, where we saw activity levels pick up In the Southern Plains in late March in the Corn Belt in April, overall activity levels seem consistent with the USDA estimates of spring 2023 planted corn acres of 92,000,000 compared to 88,600,000 acres in 2022, an increase of 4%. Planted soybean acres are estimated to be flat with 20 22 levels at 87,500,000 acres. Inventory carryout levels continue to be estimated at approximately 9% for corn and 5% for soybeans, keeping inventories at or below the low end of the 10 year range.

Speaker 3

As a result, grain prices have remained strong with corn at $5.85 per bushel and soybeans at 14.30 per bushel. These strong grain prices are continuing to generate attractive farmer economics, which should bode well for nitrogen fertilizer demand for the planting season. We believe that the length of this upward demand cycle will in large part be driven by grain prices staying at elevated levels and we see fundamentals for grains remaining strong. As we discussed on the Q4 earnings call, warmer than expected weather in Europe and the U. S.

Speaker 3

Starting in December has led to increased natural gas inventories and lower prices in the U. S. And Europe. As a result, spot prices for all nitrogen fertilizer products have fallen from the high levels in the fall. With sustained lower natural gas prices in Europe in the Q1, we have seen some of the offline European nitrogen production capacity come back online.

Speaker 3

Recent estimates indicate European nitrogen production operating at around 80% of capacity, up from 60% in the fall of 2022. Natural gas market dynamics have driven nitrogen fertilizer prices to largely be set by the marginal price of European natural gas for While prices of nitrogen fertilizer in the U. S. Have fallen since the winter, Natural gas prices have also fallen into the area of $2.20 per MMBtu, setting U. S.

Speaker 3

Nitrogen fertilizer production costs at the low end of the global cost curve. While the extreme pressure on natural gas inventories has subsided for now, we do not believe that the structural market issues in Europe have been resolved and should remain in effect over the next 2 to 3 years. We believe there is likely more upside than downside to European natural gas prices from here. On our decarbonization efforts, we've been studying the potential installation of a nitrous oxide abatement unit in our number one acid plant at the Coffeyville facility and have set aside a capital reserve this quarter from the expected cost of the installation. We expect the project to be completed by 2025 and it should further reduce our carbon footprint at the Coffeyville facility, which we believe already has one of the lowest carbon footprints of any nitrogen fertilizer plant in the U.

Speaker 3

S. We reserved $5,000,000 of the 45Q proceeds we received in January to fund This additional decarbonization project, in essence, leveraging our previous decarbonization proceeds to fund the next step. We also continue to explore various CO2 sequestration opportunities for our East Dubuque facility, which if approved could reduce its and we recover a portion of our CO2 stream to make food grade CO2. We are proud of our efforts to reduce the carbon footprint at the Coffeyville facility and we're focused on targeted capacity increases to our existing footprint. As a result of this review, we've identified several projects that even without a full expansion project could improve the facility's reliability and production levels.

Speaker 3

Our Board Approved initial reserves this quarter are expected to be spent over the next 2 to 3 years to progress these potential projects. We are also exploring a potential project at the Coffeyville facility intended to improve pet coke handling and storage. This project, if approved, would address a key environmental issue at the facility through reduced truck loading and unloading and better storage containment. The Board also approved initial reserves for this project this quarter and we anticipate future quarterly reserves as we further develop these projects. The Q1 demonstrated the benefits of focusing on reliability and performance.

Speaker 3

In the quarter, we executed on all of 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 prudently managing costs, being judicious with capital, but targeting select investments in reliability projects and additional 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 record plant production and solid delivery on our marketing and logistics plants, resulting in a distribution of $10.43 per common unit in the Q1. With that, we're ready to take questions. Paul?

Operator

Thank you. We will now be conducting a question and answer session. The confirmation tone will indicate your line is in the question Thank you. Our first question is from Rob Maguire with Granite Research. Please proceed with your question.

Speaker 4

Good morning, Mark, Dane and Richard. Congratulations on a well executed quarter.

Speaker 3

Thank you. Good morning, Rob.

Speaker 4

Would you give us an idea of how much of your second quarter volumes are pre sold and how much are set up to be sold in the spot? I really don't want

Speaker 3

to get into the analytics of that, but like we did in the Q1, we have Pre sold, I'd say, a good chunk of the 2nd quarter, particularly in the ammonia side, which is typical For the industry, we sold that back in the Q4, a good percentage of our ammonia pre plant, And we were forward selling into the Q2 during the Q1. So we also pre sold a decent percentage in the second quarter.

Speaker 4

Thank you. And then can you discuss running at 105% utilization coming out of your Turnaround, is that normal or is there something unusual that occurred? And then how much longer do you anticipate that run rate to continue?

Speaker 3

We talked about it a lot last year. We struggled with some of the performance issues last year with the plants. We had identified What we thought were reliability challenges for us, we thought we had addressed those in the turnaround. And We were very pleased to see the run rates that we had. I won't promise 105% For the forward quarters, but we feel like we've addressed some of the reliability issues and we Our target is to operate at 95% to 100% of nameplate.

Speaker 3

And as we're already thinking ahead to the next reliability sets of reliability projects, which I identified in my comments, We think reliability is everything on the production side of this business and We got paid for the effort that we put in and we're basically preparing for the next round of that for the next 2 to 3 years. So, I hope that we can run at high rates. We have in the past at various points in time. And again, We spent we had big turnarounds last year, along stretches of outages and we dealt with Issues that we thought, but we have other opportunities we think at the plant to improve. And so I'm hoping that we'll continue on.

Speaker 3

We typically run better after the turnaround once the plants are lined out. But again, our focus has been for the last several years, but we'll continue to be, if anything, more focused on reliability.

Speaker 4

Well done. And then Arum, you talked about European natural gas and some of the production returning over in Europe and that's led to lower nitrogen prices. Have you seen any other notable influences behind the continued drop in nitrogen prices?

Speaker 3

I would say that probably the one area that we have seen In terms of, I think, causing some of the softness is maybe some of the industrial demand for ammonia overseas has been lighter. And that's created length in the ammonia side. If you look at the going back to European natural gas, if you look at the forward curve for the Q4, as

Speaker 4

As we get into the next

Speaker 3

winter, prices are much higher there. And we think that a window may open like it did last fall For export from the U. S. To Europe again in the summer and the fall, because we think Economics for European production are going to be challenged next winter. And what most of the European producers are saying is that they will restart if they think they have economics that hold together for a year.

Speaker 3

And if you look at the gas curve, I think you'd be Challenge to assume that you're going to be able to make it a year where you're going to be cost competitive. So we do think There are opportunities for export out of the Gulf to Europe for ammonia for either for upgrade Production in Europe starting maybe this summer or fall. So the good news for us in the U. S. Is that our cost to produce We're right at the low end of the cost curve in the world.

Speaker 3

And so there at these prices, there's still very good margin for us. And With where natural gas has come way down from where it was, but it's still the pricing in the marketplace is still much higher than it's been Historically in the nitrogen for the last 5 years or 7 years.

Speaker 4

I appreciate it. And then last question, if you can just give me your thoughts on Urea has obviously bounced back here and there are logistical issues out there. Perhaps you could cite if there are other reasons behind that. And do you anticipate Any type of price movement for UAN and ammonia due to logistical issues or finishing out the season and trying to get product out to the farmer?

Speaker 3

Yes. I think that we're seeing a pretty good the pre plant and we think that Dry dress and top dress season are going to be really strong for nitrogen. And I think that Our customers and even down to the farm level have been more reluctant. They're purchasing more Just in time purchasing in this industry given the logistical challenges, which the flooding in the Mississippi shows you it's not a good bet to bet on Reliable logistics. And I think that part of it is for urea as part of it's a demand issue, part of it is our logistics.

Speaker 3

We think that the Upper Midwest is going to be challenged logistically, which favors producers that have Production capacity in the North and so we expect demand to be strong in the Northern Plains Because there won't be the ability to get product up the river, we think in time to meet side dress and top dress. So I think it's a Confluence of factors there and this industry has a history of when you try to purchase just in time, A lot of times you end up short, you don't purchase enough and there's not you can't quickly relieve market pressure in the spring when And the timing of it is critical. And so you need the fertilizer at the right time in the right location. And so it needs a lot of pre planning. And this year, I think people tried to play it a little bit too cute with the customers did with when they purchased.

Speaker 4

Thank you so much.

Operator

Thank you. There are no further questions at this time. I'd like to hand the floor back over to management for any closing comments.

Speaker 3

All right. Well, thank you very much for participating in Call today, and we look forward to reviewing our Q2 results in later in July. Thank you very much.

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CVR Partners Q1 2023
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