CVR Partners Q1 2024 Earnings Call Transcript

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April 30, 2024

There are 5 speakers on the call.

Operator

Greetings, and welcome to the CVR Partners First Quarter 2024 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 FP and A and 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 Dane Newman, our Chief Financial Officer and other members of management. Prior to discussing our 2024 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 are cautioned that these statements may be affected by important factors set forth in our filings with 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

The disclosures related to such non GAAP measures, including a reconciliation of the most directly comparable GAAP financial measures, are included in our 2024 Q1 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 Q1 earnings call. The summarized financial highlights for the Q1 of 2024 include net sales of $128,000,000 net income of $13,000,000 EBITDA of $40,000,000 and the Board of Directors declared a 1st quarter distribution of $1.92 per common unit, which we paid on May 20 to unitholders of record at the close of the market on May 13. For the Q1 of 2024, our facilities achieved a consolidated ammonia plant utilization of 90%, which was impacted by a 14 day planned outage at our Coffeyville facility in the quarter. Combined ammonia production for the Q1 of 2024 was 193,000 gross tons, of which 60,000 net tons were available for sale and UAN production was 305,000 tons.

Speaker 2

During the quarter, we sold approximately 284,000 tons of UAN at an average price of $2.67 per ton and approximately 70,000 tons of ammonia at an average price of $5.28 per ton. Relative to the Q1 of 2023, ammonia sales volumes were higher as a result of favorable weather allowing farmers to apply ammonia earlier in the year, while UAN sales volumes were lower primarily due to lower production volumes in the quarter. Prices for the Q1 declined from the Q1 of last year with ammonia prices falling 41% and UAN prices falling 42 percent. Nitrogen fertilizer pricing for the Q1 remained fairly steady with Q4 2023 pricing and demand for ammonia was strong, driven by favorable weather conditions. Inventory levels across the system remain fairly tight, particularly for UAN, and we remain optimistic about fertilizer demand for the remainder of the spring planting season, which I will discuss further in my closing remarks.

Speaker 2

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

Speaker 3

Thank you, Mark. For the Q1 of 2024, we reported net sales of $128,000,000 operating income of $20,000,000 Net income for the quarter was $13,000,000 or $1.19 per common unit and EBITDA was 40,000,000 dollars Relative to the Q1 of 2023, the decline in EBITDA was primarily due to lower market prices for ammonia and UAN. Direct operating expenses for the Q1 of 2024 were $56,000,000 Excluding inventory impacts, direct operating expenses decreased by $6,000,000 relative to the Q1 of 2023, primarily due to lower natural gas and electricity costs. During the Q1 of 2024, we spent $5,000,000 on capital projects, which was primarily maintenance capital. We estimate total capital spending for 2024 to be approximately $46,000,000 to $49,000,000 of which $33,000,000 to $35,000,000 is expected to be maintenance capital.

Speaker 3

We anticipate a significant portion of the profit and growth capital spending plan for 2024 will be funded through cash reserves taken in 2023 2024. We ended the quarter with total liquidity of $108,000,000 which consisted of $65,000,000 in cash and availability under the ABL facility of $43,000,000 Within our cash balance of $65,000,000 we had $13,000,000 related to customer prepayments for the future delivery of product. In assessing our cash available for distribution, we generated EBITDA of $40,000,000 and had net cash needs of $20,000,000 for interest costs, maintenance CapEx and other reserves. As a result, there was $20,000,000 of cash available for distribution and the Board of Directors of our general partner declared a distribution of $1.92 per common unit. Looking ahead to the Q2 of 2024, we estimate our ammonia utilization rate to be between 95% 100%.

Speaker 3

We expect direct operating expenses excluding inventory impacts to be between $50,000,000 $55,000,000 and total capital spending to be between $15,000,000 20,000,000 dollars With that, I'll turn the call back over to Mark.

Speaker 2

Thanks, Dane. In summary, we are pleased with our first quarter results. Taking into account the planned outage in Coffeyville, we had good production from our facilities and experienced solid early demand for ammonia for spring pre plant application due to favorable weather conditions. We believe market conditions are steady and we expect to see strong demand continuing for nitrogen fertilizer for the spring 2024 planting season. In addition to the early spring movement of fertilizer in March, we have seen improved planting conditions in the Southern Plains with more moisture, which has led to higher demand for nitrogen fertilizer in Kansas, Oklahoma and Texas.

Speaker 2

Overall grain market conditions have been volatile, but comparable to 4th quarter levels as the USDA is forecasting 90,000,000 acres of corn will be planted in spring of 2024, a 5% decrease compared to 95,000,000 acres in 2023. Plated soybean acres are estimated to be 86 point $5,000,000 in 20 24, up 3% from 2023 levels of $84,000,000 Yield estimates for corn are increasing from 177 to 181 bushels per acre and soybean yield estimates are increasing from 51 to 52 bushels per acre. The USDA is now projecting grain inventory carryout levels to be approximately 17% for corn and 10% for soybeans, resulting in inventories near the 10 year averages. Grain prices are comparable to last quarter prices with July corn at 4.50 per bushel and soybeans at nearly $11.90 per bushel. These grain prices coupled with current fertilizer prices support attractive farmer economics, which should bode well for nitrogen fertilizer demand for the remainder of spring 2024.

Speaker 2

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 steady. Geopolitical risk remain high and represent a wildcard for the nitrogen fertilizer industry with meaningful fertilizer production capacity residing in countries across the Middle East, North Africa and Russia. We're closely monitoring developments in the Middle East that could impact energy and fertilizer markets and we expect the remainder of 2024 will be another period of higher than historical volatility in the business. Natural gas prices in Europe have remained flat since our last earnings call in the $7 to $9 per MMBtu range due to lower industrial demand and a warmer than expected winter. While 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.

Speaker 2

S. With natural gas prices at below $2 per MMBtu since December of 2023. 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 years. At our Coffeyville facility, we are working on detailed engineering studies on the potential to utilize natural gas as an alternative feedstock to pet coke and expect to have them completed later this year. If this project is approved by the board and successfully implemented, could 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. We also continue to evaluate brownfield development projects at both of the production facilities that could be attractive 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 and we'll be focused on improving reliability and redundancy at the two plants that could provide better production rates and lower downtime in the future. We expect to begin spending capital on these projects in the second half of 2024.

Speaker 2

The union strike that began at our East Dubuque facility in October ended in late February and hourly workers began returning to operate the plant in early March. We wanted to thank our East Dubuque supervisory team and personnel from other CVR facilities for their excellent efforts in keeping the facility operating safely and reliably for 139 days during the strike. On March 18, CVR Energy, our parent company filed an 8 ks stating that among other things, it was evaluating potential strategic transactions, including potential options with respect to CVR Partners. At this time, there's nothing for us to report about CVR Energy's plans, if any. The Q1 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 include safely and reliably operating our plants with a keen focus on the health and safety of our employees, contractors and communities, prudently managing costs, being judicious with capital, maximizing our marketing and logistics capabilities and targeting opportunities to reduce our carbon footprint. In closing, I would like to thank our employees for the excellent execution, achieving 90% ammonia utilization for the quarter, while safely completing the 14 day outage at Coffeyville. Solid operating performance and delivery on our marketing and logistics plans resulted in distribution of $1.92 per common unit for the Q1. With that, we are ready to answer any questions, Christine.

Operator

Thank you. We will now be conducting a question and answer session.

Speaker 4

So over the last few quarters, purchases have extended out a couple of months or at least a few months. Can you just talk about if that dynamic has changed at all?

Speaker 2

No. Actually, I think we've kind of settled into that pattern now. And the customers are kind of I would I think I described in previous calls ratable buying, but it's more ratable. And if you look at our Dane gave some numbers on our prepaid orders, the dollar amount has been a lot lower, not just because of price, but the volume of prepay is lower, but the cash purchasing in season is higher. And so it's more ratable buying, which fits our production schedule quite well and kind of stretches out the buying activity.

Speaker 2

Like in a quarter, it would be over the whole quarter as opposed to purchasing 1 out of the 3 months.

Speaker 4

I appreciate that. And then I wonder if you could just expand a little from your opening comments about the alternative feedstock potential at Coffeyville, more in terms of what cost and timing might be? And then separately, the brownfield expansions, if you could talk about maybe cost and timing there as well?

Speaker 2

Sure. So on the feedstock optionality, we one, we've I think we've proven to ourselves technically that it can be done. So there's no technical hurdles there. It's more of the mechanical and operational issues about how we operate the plant. So we're comfortable technically that we can make that happen.

Speaker 2

And I don't have we're not finished with all the detailed engineering. So I don't have the capital plan. It won't be I would not call it a material capital investment for us to get that done. We have most of the infrastructure in place. It would really be about building infrastructure to get gas from the pipeline to the facility.

Speaker 2

And again, that's not a huge capital number. So, we're I think where we're going from here is we're confirming out the detailed engineering plans, the infrastructure, and then we would ask permission from the Board to proceed forward and we should be in position to do that later this year. And the one thing I would add to that Rob is what we're excited about is right now natural gas is more favorable than PECO, but there have been plenty of years where it was reversed. And if we had another geopolitical event and a big spike in natural gas prices, we could switch back or switch to full pet coke. So we really like the optionality that it will give us depending on really any market if gas is more favorable, we'll favor gas or if pet coke is more favorable, we'll favor pet coke.

Speaker 2

So we're excited about giving ourselves that optionality to tap into the lowest cost feedstock in the marketplace.

Speaker 4

Thank you for that color. And then with regards to the brownfield expansions, timing and cost, would that be separate for the Yes.

Speaker 2

So we have several projects. Again, in and of them each one is not I would not consider it very material. But we have a select number of projects we've been reserving for that we will start to implement in the second half of this year. We've completed a lot of work, the engineering work and the execution plans. And so we'll start those projects in the second half.

Speaker 2

And it's really around reliability and redundancy. We're not intending to add new units to the plant. We're simply trying to tap into, I would either call it unused capacity or reduce issues that cause downtime, which effectively would raise the production capacity at each of the two facilities. So we're really looking to take advantage of increasing capacity without writing a large check to do that at this point.

Speaker 4

Got it. And then could you kind of give us a little further breakdown of the $10,700,000 of current reserves for investing activities in quarter. Were there any specific projects or plans behind that? And it kind of ties into my last two questions.

Speaker 3

Yes, Rob. I'll take that one. So the reserves we're putting in place are just really ratable reserves. So we started in 2023 through 2024 and we subject to Board approval would continue to make those reserves and it's really associated with the spend around these projects as we anticipate them to come up over the next few years. I think reserves were heavier in 2023.

Speaker 3

We've kind of settled into a ratable basis. Yes. So we're we

Speaker 2

have a turnaround, So we have a turnaround plan for Coffeyville in the fall of 2025 and East Dubuque in the fall '26. So we're already reserving dollars for those turnarounds so that when we execute them, we're not drawing from current cash when we execute those turnarounds.

Speaker 4

Okay. Thank you. I appreciate that. And then lastly, freight revenue was $6,200,000 in the quarter and that was down from $10,900,000 year over year and $10,300,000 in the 4th quarter. So could you just talk about the fluctuation of that item beyond volumes?

Speaker 2

Sure. That's generally going to follow the UAN shipping number. So you'll see UAN volume was down in the quarter and that's a rail most of that freight revenue is rail and we just didn't ship as much UAN. So I would expect here in the Q2 if we ship what we produce that number will grow from 1st to 2nd quarter. But most of our product at East Dubuque moves by truck and Coffeyville mostly moves by rail.

Speaker 2

The other thing about Coffeyville in the Q1, I mentioned that the Southern Plains was stronger and we actually saw more truck movement out of Coffeyville. I think truck movement in Coffeyville was our best quarter we've ever had. So that would have lowered their freight revenue as well because we moved more by truck than by rail, more than normal. So there's nothing unusual in that. We just didn't ship as much rail this quarter.

Speaker 2

Do you

Speaker 4

think that strength in the Southern Plains continues into the Q2?

Speaker 2

I think so. I tried to stay away from being a professional weather forecaster, but we've had a you probably saw there were a series of storms that rolled through Texas, Oklahoma, Kansas this weekend. And unfortunately, there was tornadoes and a lot of damage. But there also was a lot of rain. And while that will slow down some of the planting activity, that rain was hoped for.

Speaker 2

And so that should lead to a good follow on topdress, side dress season in Texas and Oklahoma and Kansas. So with this year, we've had the most moisture in that part of the country than we've had in 5 years. And so the activity levels have been we've seen really good demand more significantly more than the last few years. And we expect that to continue with the storms that have come through here in the last week and we expect it to continue, I think, most of this week.

Speaker 4

Thank you. That's it for my questions.

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

Well, again, thank you for joining the Q1 call and we look forward to reviewing our Q2 results this summer. Thank you very much.

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
CVR Partners Q1 2024
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