Lexicon Pharmaceuticals Q3 2024 Earnings Call Transcript

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October 29, 2024

There are 5 speakers on the call.

Operator

Greetings, and welcome to the CVR Partners Third Quarter 20 24 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 of Financial Planning and Analysis Investor Relations.

Operator

Thank you, sir. You may begin.

Speaker 1

Thank you, Christine. 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 2024 Q3 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 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, public events or otherwise, except to the extent required by law. This call also includes various non GAAP financial measures.

Speaker 1

The disclosures related to such non GAAP measures, including reconciliation to the most directly comparable GAAP financial measures are included in our 2024 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 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 the Board of 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 Q3 call. To summarize financial highlights for the Q3 of 2024 include net sales of 125 $1,000,000 net income of $4,000,000 EBITDA of $36,000,000 and the Board of Directors declared a 3rd quarter distribution of $1.19 per common unit, which will be paid on November 18 unitholders of record at

Speaker 1

the close of the market on November 8.

Speaker 2

Our facilities ran well during the Q3 of 2024 with consolidated ammonia plant utilization of 97%. Combined ammonia production for the Q3 of 2024 was 212,000 gross tons, of which 61,000 net tons were available for sale and UAN production was 321,000 tons. During the quarter, we sold approximately 336,000 tons of UAN at an average price of $2.29 per ton and approximately 62,000 tons of ammonia at an average price of $3.99 per ton. Relative to the Q3 of 2023, ammonia sales volumes were in line and UAN sales volumes were lower as a result of some unplanned downtime at the upgrading units at both facilities. Prices for the Q3 increased from the Q3 last year with ammonia prices increasing 9% and UAN prices increasing 3%.

Speaker 2

After the peaks in nitrogen fertilizer pricing we saw over the past few years, we believe we're currently in a more of a mid cycle type of environment and we were encouraged to see ammonia and UAN prices for the Q3 increasing relative to the Q3 of last year. Demand for summer UAN fill and ammonia fall prepay were strong and customer inventory levels have been low ahead of fall. As a result, we have seen prices continue to increase for both ammonia and UAN since summer, which I will discuss further in my closing remarks. I will now turn the call over to Dane to discuss our financial results.

Speaker 3

Thank you, Mark. For the Q3 of 2024, we've reported net sales of $125,000,000 and operating income of $11,000,000 Net income for the quarter was $4,000,000 or $0.36 per common unit and EBITDA was $36,000,000 Relative to the Q3 of 2023, the increase in EBITDA was primarily due to a combination of higher market prices for ammonia and UAN and lower feedstock and operating expenses. Direct operating expenses for the Q3 of 2024 were $56,000,000 Excluding inventory impacts, direct operating expenses decreased by approximately $3,000,000 relative to the Q3 of 2023, primarily due to lower natural gas and electricity costs. During the Q3 of 2024, we spent $10,000,000 on capital projects, which was primarily maintenance capital. We estimate total capital spending for 2024 to be approximately $39,000,000 to $42,000,000 of which $31,000,000 to $33,000,000 is expected to be maintenance capital.

Speaker 3

We anticipate a significant portion of the profit and growth capital spending planned for 2024 will be funded through cash reserves taken over the past 7 quarters. We ended the quarter with total liquidity of $150,000,000 which consisted of $111,000,000 in cash and availability under the ABL facility of $39,000,000 Within our cash balance of $111,000,000 we had $31,000,000 related to customer prepayments for the future delivery of product. In assessing our cash available for distribution, we generated EBITDA of $36,000,000 and had net cash needs of $23,000,000 for interest costs, maintenance CapEx and other reserves. As a result, there was $13,000,000 of cash available for distribution and the Board of Directors of our general partner declared a distribution of $1.19 per common unit. Looking ahead to the Q4 of 2024, we estimate our ammonia utilization rate to be between 92% 97% with some potential downtime with the 3rd party air separation unit at Coffeyville expected in the quarter.

Speaker 3

Expect direct operating expenses excluding inventory impacts to be between $60,000,000 $70,000,000 and total capital spending to be between $19,000,000 $23,000,000 With that, I will turn the call back over to Mark.

Speaker 2

Thanks Dane. In summary, we had another good quarter operationally with ammonia utilization of 97% and we were pleased to see pricing for the Q3 of 2024 come in higher for both ammonia and UAN compared to the Q3 of 2023. Saw strong demand for our products over the summer, which combined with plant disruptions and natural gas issues in certain global markets has led to fertilizer prices increasing from the levels we saw in early summer. Harvest is nearing completion and ahead of schedule and corn yields are expected to be the highest in history. The USDA is estimating yields of almost 184 bushels per acre on 91,000,000 planted acres of corn and inventory carryout levels of approximately 13%.

Speaker 2

Soybean yields are estimated to be at 53 bushels per acre on 87,000,000 acres planted with inventory carryout levels also estimated around 13%. Corn prices have been weaker with the expectation of the large U. S. Crop and December corn prices are currently at $4.15 per bushel, roughly in line with prices from July. With the early harvest, we believe conditions will be favorable for fall ammonia application and prices for 4th quarter are up approximately $50 per ton for ammonia and $10 per ton for UAN compared to the Q4 of 2023.

Speaker 2

Geopolitical risk continue to represent a wildcard for the nitrogen fertilizer industry given the significant fertilizer production capacity residing in countries across the Middle East, North Africa and Russia. Continue to monitor developments in the Middle East that could impact energy and fertilizer markets, and we expect the remainder of 2024 2025 will likely be periods of higher than historical volatility in the business. Natural gas prices in Europe have increased $1 to $2 since our last earnings call, trending around $13 per MMBtu for the Q4, while U. S. Prices remain in the $2 to $3 per MMBtu range.

Speaker 2

Although the cost to produce nitrogen fertilizer in Europe has remained lower than in 2023, it is still at the high end of the global cost curve, particularly compared to the U. S. We continue to believe Europe faces structural natural gas issues that will likely remain in effect over the next 2 years. At our Coffeyville facility, we're progressing on detailed engineering studies on the potential to utilize natural gas as an alternative feedstock to third party pet coke, and we expect to have these studies completed later this year. If this project is approved by the board and successfully implemented, it give us the ability to choose the optimal feedstock mix and be the only nitrogen fertilizer plant in the U.

Speaker 2

S. With that flexibility. As a reminder, if this project were implemented, we would likely continue to utilize the pet coke supplied by the adjacent Coffeyville refinery, while the remainder of the feedstock can be flexed between natural gas and pet coke depending on prevailing prices. With crude oil prices down, we have seen a softening of pet coke prices in the U. S.

Speaker 2

And expect to see our pet coke costs decline in 2025. We also began implementing certain debottlenecking projects at both plants that are expected to improve reliability and production rates. The Board elected to continue reserving capital in the Q3 that we expect to spend over the next 2 to 3 years as we focus on improving reliability and redundancy at the 2 plants in efforts to provide better production rates and lower downtime in the future. We began spending capital on these projects in the Q3 of 2024 with funds coming from reserves taken over the last 7 quarters. The Q3 continued to demonstrate the benefits of focusing on reliability and performance.

Speaker 2

In the quarter, we executed on all of the critical elements of our business plan, which includes 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, 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 97% ammonia utilization and solid delivery on our marketing and logistics plans, resulting in a distribution of $1.19 per common unit for the Q3. With that, we're ready to take questions. Christine?

Operator

Thank you. Thank you. Our first question comes from the line of Brian D'Arrivio with Baird. Please proceed with your question.

Speaker 4

Good morning, gentlemen. A couple of questions for me. First off, just with the river valvables on the Mississippi, and normally low again, is that having a positive impact on corbel prices for UAN and ammonia?

Speaker 2

We haven't seen any major impacts on either of those. A lot of the ammonia is positioned already and there's a lot of ammonia that moves into the corn belt from pipeline and same on UAN, a lot of it what's needed in corn belt moved by rail. So it hasn't had a big impact on the marketplace. We're watching it closely more for grain movements. So as harvest is nearing completion, the ability to move grain could be impacted.

Speaker 2

And so we're following that closely to see how high storage gets and the ability to move grain from the Midwest to the Gulf.

Speaker 4

Got it. That's helpful. Thank you. And just with the Coffeyville natural gas project, I know you said you're going to complete some of the front end engineering studies this quarter. But any rough guesstimates on how much that would cost and how the company would look to fund that investment?

Speaker 2

I'll start with the second question first. We've been setting aside reserves for growth capital and that capital would be taken out of the reserve if it's approved. And we roughly think it's about a $10,000,000 project. That's what we think now. But we've already that would be part of the reserve that we've set aside for growth projects for the plant.

Speaker 4

Got it. And I doubt you're going to be able to answer this, but earlier this year there was a 13D filing on your sister company CVR Energy potentially about a large owner evaluating options for CVR Partners. Any developments there that you're able to discuss or comment on?

Speaker 2

We don't really have anything to report on that, the 8 ks that was filed. And so nothing new, no new news this quarter to report on that.

Speaker 4

Appreciate all the color. Thank you so much.

Speaker 2

Thanks, Brian.

Operator

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

Speaker 2

Again, thanks everyone for joining our call today and we look forward to reviewing our 4th quarter results in February. So thanks and have a good day.

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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Earnings Conference Call
Lexicon Pharmaceuticals Q3 2024
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