CVR Partners Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 30, 2024

There are 5 speakers on the call.

Operator

Greetings, and welcome to the CVR Partners Second 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.

Speaker 2

Good morning, everyone. We appreciate your participation in today's call. With me today are Mark Mitosh, our Chief Executive Officer Dane Newman, our Chief Financial Officer and other members of management. Prior to discussing our 2024 Q2 results, let me remind you that this conference call may contain forward looking statements as that term is defined under federal securities laws. For this purpose, any statements made during this call that are not statements of historical facts may be deemed to be forward looking statements.

Speaker 2

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. The disclosures related to such non GAAP measures, including reconciliation to the most directly comparable GAAP financial measures, are included in our 2024 Second Quarter Earnings Release that we filed with the SEC for the period.

Speaker 2

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. Mark?

Speaker 3

Thank you, Richard. Good morning, everyone, and thank you for joining our Q2 earnings call. The summarized financial highlights the Q2 of 2024 include net sales of $133,000,000 net income of $26,000,000 EBITDA of $54,000,000 dollars and the Board of Directors declared a 2nd quarter distribution of $1.90 per common unit, which will be paid on August 2019 to unitholders of record at the close of the market on August 12. Our facilities ran well during the Q2 of 2024 with consolidated ammonia plant utilization of 102%. Combined ammonia production for the Q2 of 2024 was 221,000 gross tons, of which 69,000 net tons were available for sale and UAN production was 337,000 tons.

Speaker 3

During the quarter, we sold approximately 330,000 tons of UAN at an average price of $2.68 per ton and approximately 43,000 tons of ammonia at an average price of $5.20 per ton. Relative to the Q2 of 2023, UAN sales volumes were in line and ammonia sales volumes were lower as a result of volume shifting into the Q1 as favorable weather allowed farmers to apply ammonia earlier this year. Prices for the Q2 declined from the Q2 of last year with ammonia prices falling 26% and UAN prices falling 15%. Nitrogen fertilizer pricing for the 2nd quarter remained fairly steady with Q1 2024 pricing and we saw strong demand for ammonia and UAN for the spring planting season. We also saw better than expected fill and ammonia fall prepay ordering in July and we have a good order book on for the fall, which I will discuss further in my closing remarks.

Speaker 3

I will now turn the call over to Dane to

Speaker 4

discuss our financial results. Thank you, Mark. For the Q2 of 2024, we reported net sales of $133,000,000 and operating income of 34,000,000 dollars Net income for the quarter was $26,000,000 or $2.48 per common unit and EBITDA was $54,000,000 Relative to the Q2 of 2023, the decline in EBITDA was primarily due to lower market prices for ammonia and UAN. Direct operating expenses for the Q2 of 2024 were $47,000,000 Excluding inventory impacts, direct operating expenses decreased by approximately $1,000,000 relative to the Q2 of 2023, primarily due to lower natural gas and electricity costs. During the Q2 of 2024, we spent $5,000,000 on capital projects, which was primarily maintenance capital.

Speaker 4

We estimate total capital spending for 2024 to be approximately $40,000,000 to $43,000,000 of which $29,000,000 to $31,000,000 is expected to be maintenance capital. 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 6 quarters. We ended the quarter with total liquidity of $98,000,000 which consisted of $48,000,000 in cash and availability under the ABL facility of $50,000,000 Within our cash balance of $48,000,000 we had $1,000,000 related to customer prepayments for the future delivery of product. In Assessing our cash available for distribution, we generated EBITDA of $54,000,000 and had net cash needs of $34,000,000 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 $1.90 per common unit.

Speaker 4

Looking ahead to the Q3 of 2024, we estimate our ammonia utilization rate to be between 95% 100%. We expect direct operating expenses excluding inventory impacts to be between $53,000,000 $58,000,000 and total capital spending to be between $10,000,000 $15,000,000 With that, I'll turn the call back over to Mark. Thanks, Dane.

Speaker 3

In summary, we were pleased with our 2nd quarter results. We had another quarter of strong production from our facilities achieving 102 percent consolidated ammonia utilization. We saw strong demand for ammonia in UAN in the spring and we're well positioned to meet the needs of our customers throughout the planting sidedress season. Spring planting season went well and demand for nitrogen was strong despite difficult weather causing the planting process to be paused a couple of times. The USDA estimates 91,500,000 acres of corn and 86,100,000 acres of soybeans were planted in the spring of 2024, a 3% decrease for corn and a 3% increase for soybeans compared to 2023.

Speaker 3

Yield estimates from the USDA are 181 bushels per acre for corn and 52 bushels per acre for soybeans in 2024. Based on these planting and yield estimates, the USDA is projecting inventory carryout levels for 2025, approximately 14% for corn and 10% for soybeans, resulting in inventories near the 10 year averages. Grain prices have softened some recently in part due concerns over global demand and potential large U. S. Crop production.

Speaker 3

December corn prices are approximately $4.10 per bushel and November soybeans are approximately $10.35 per bushel. In July, we completed both summer UAN fill and fall prepay ammonia ordering customers. And despite the recent softening in grain prices, we saw strong demand for both products at pricing that was above 2023 fill season pricing better than most were expecting. We currently have a solid order book heading into the fall and UAN pricing has risen from our achieved fill prices. 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.

Speaker 3

We 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 been steady since our last earnings call trending in the $10 to $11 per MMBtu range for the fall and $1 or 2 higher for the winter. The inventory fill rate, which typically increases significantly in the summer, has been lower this year, reducing the potential for reaching storage limits for winter. Natural gas prices in the U. S.

Speaker 3

Have been hovering at $2 to $3 per MMBtu through the Q2 and into the Q3 with demand strong but production returning from the shut ins in the spring. 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 market issues and that will likely remain in effect over the next couple of years. At our Coffeyville facility, we're progressing on detailed engineering studies on the potential to utilize natural gas as an alternative feedstock to 3rd party pet coke, which we expect to have those studies completed later this year.

Speaker 3

If this project is approved by the board and successfully implemented, it could give us the ability to choose the optimal feedstock mix and be the only nitrogen fertilizer plant in the U.

Speaker 4

S. With that flexibility.

Speaker 3

We also began implementing certain debottlenecking projects at both plants that are expected to improve reliability and production rates. The Board elected to continue to reserve in capital in the Q2 that we expect to spend over the next 2 to 3 years as we focus on improving reliability and redundancy of the 2 plants and 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 the reserves taken over the last 6 quarters. Quarters. 2nd quarter continued to demonstrate 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 includes safely and reliably operating our plants with a keen focus on the health and safety of our employees, contractors and communities, prudently managing the cost, 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 their excellent execution achieving 102% ammonia utilization and solid delivery on our marketing logistics plans, resulting in a distribution of $1.90 per common unit for the 2nd quarter. With that, we're ready to take any questions. Christine?

Operator

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

Speaker 1

Good morning, Mark, Dane and Richard. Thank you for taking my question. Good morning, Rob. So just to begin with, you touched on the natural gas feedstock versus coke capabilities at Coffeyville. Can you remind us, what do you anticipate the total cost of this project to be?

Speaker 1

And then I think you mentioned it a few minutes ago, but just could you go back through the timeline when you think it might be complete?

Speaker 3

So we haven't yet finished all the detailed engineering. So I'm not in a position to quantify what that's going to cost. I think what I said on previous calls that we don't expect it to be a I'd call it a material large material capital item. There'll be some spending there. And we have accounted for that in the reserves that we been taking the last 6 quarters.

Speaker 3

The plan is to get those studies done by the end of this calendar year, get board approval. If the numbers pencil out, which we feel very comfortable, they will. And we would execute the installation of what's required there in during the first half of twenty twenty six I mean, 2025, I'm sorry, 2025. I'm skipping a year. And so the equipment should be in place later next year to make some decisions on the 2026 slate feedstock slate.

Speaker 1

Thank you for that color. And then I know Dane talked about your CapEx or maybe I heard that wrong. Can you give us an idea? So reserves this quarter for investing were at $25,200,000 Can you just talk about that increase and what level of increase we should see or level we should see in the second half of this year?

Speaker 4

Yes. I'll grab that one, Rob. So with our capital profile, the spending that's occurred thus far this year, it's been slower to ramp up. And as you can see in our guidance and full year numbers as well as the Q3, we do expect that to increase. The increase in the reserve for investing was primarily associated with that timing of the capital expenditures ensuring that we weren't crossing the reserves and having adequate capital available to spend as we get into the 3rd Q4.

Speaker 4

What won't guide on future expectations though?

Speaker 3

Yes, we didn't I'd say that for the growth capital reserves, we didn't change the quantum. It was really generation. We expected to spend more capital in the second quarter, but that's shifted to 3rd and 4th. So we're just kind of matching up with that. But our reserves for growth capital have been consistent and same numbers in this quarter versus the last several quarters.

Speaker 1

I appreciate that. Okay. Then switching gears on that. Can you give us an idea of how much your ammonia is sold outside

Speaker 3

I I would say that we typically I would say we sell probably 30% to 40% of our total into the industrial markets. There's kind of, I call it a wide range of markets. Ammonia is a feedstock for a lot of different chemical production for in the I call it nongrowcrop ag supply chain. So I'd say it's kind of a broad mix of usages predominantly feedstock based. And it tends the ag part of it tends to be very heavy, ag sales or tends to be in ammonia tends to be very heavy in the second and the fourth quarter for spring pre plant and fall effectively fall pre plant for the following spring.

Speaker 3

So those are the big ag periods and then it's much more of an industrial sale in between. So the 1st and third quarters have more as a percentage. This is percentages, not volume, have more percentage sales because they're more consistent through the year of industrial. And so hopefully that gives you an idea of the curve. But so you can see in our numbers that this year is unusual because the weather was so good in the Q1.

Speaker 3

We sold a bunch of ag ammonia in March, which we typically don't sell that nearly the quantum that we did this year. Which we typically don't sell that nearly the quantum that we did this year. But typically, we sell a lot of our ag in the second and the fourth quarter.

Speaker 1

That's helpful. Thank you. And do you sell any of that ammonia into the industrial market on contract or is it all spot?

Speaker 3

No, there's several contracts there. So there's I would say a big I'd say a good chunk of that is under contract, not spot. And it's more ratable. It's a ratable sale during the year because we're matching up with their the buyers' production. So they're generally all takers on a ratable basis during the course of the year.

Speaker 1

Appreciate that color. And you Mark, you've been doing this for a while. Can you just tell us your view of the price of corn, how that impacts fertilizer sales?

Speaker 3

I mean clearly, it's like within I'd use this as any business. The health of your customer is and their ability to spend is critical. And so our customers are farmers And the higher the grain price, the better. $4 north of $4 in corn is outside of the last couple of years is usually pretty good. We got used to like seeing corn numbers at $7 or $8 that's extraordinary.

Speaker 3

But $4 in the $4 area where we are now is a good the economics are good for farmers. And the price of fertilizer from the peaks, when it was $7 or $8 the price of fertilizer was very high. So if you look at the P and L from a farm perspective, it's not quite as good as it was a couple of years ago, but at over $4 corn with fertilizer prices kind of settling into what I call mid cycle pricing, pretty attractive economics for a farmer these days. And so that we always that's one of our critical measures is farm health, farm economics. And we're in a, I'd say, a pretty good sweet spot right now.

Speaker 1

That $4 number I've been hearing for, it just seems like years now. Is there a point where the inflation just causes you to bump that up to by 10% or something along those lines? Or I mean, you talked about farmer economics a moment ago, so it's profitable. But is inflation playing a role in bumping that number up over time?

Speaker 3

I think it's some factor in it too. And factor in fertilizer price, I think most commodity oriented manufacturing same fundamentally inflations will raise costs for everybody. So if you go back to pre COVID, our cost to produce is a little bit higher, inflation based driven by inflation and farmer economics are the price I think the price of corn is going to stay a little higher. And so yes, I think inflation is embedded. It's embedded in our cost structure.

Speaker 3

It's embedded in the farmer cost structure. So I think some of those historical measures probably aren't as good. But when the corn got down to $3 that's a tougher that's really tough economics for the farmer. But at these levels, even with the inflationary costs that are embedded in there, it's still pretty attractive because our cost of what we sell for have adjusted too. So all in there, their economics are pretty solid here.

Speaker 1

Thank you for answering my questions. That's all for me.

Speaker 3

All right. Thank you, Rob. Thanks, Rob.

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 3

All right. Well, thank you everybody. We appreciate you being on the call today and we look forward to reviewing our Q3 results in about 3 months. So look forward to speaking to everybody again. Thank you.

Speaker 3

Thank you for your time.

Operator

Ladies and gentlemen, this does conclude today's tele

Powered by Quartr
Earnings Conference Call
CVR Partners Q2 2024
00:00 / 00:00