CVR Partners, LP
Q1 2021 Earnings Call Transcript

Published: 4 May 2021

[Operator:]

Greetings and welcome to the CVR Partners First Quarter 2021 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, Senior Manager of Financial Planning and Analysis and Investor Relations. Thank you, sir, you may begin.

[Richard Roberts:]

Thank you, Christine. Good morning everyone. We appreciate your participation in today's call. With me today are Mark Pytosh, our Chief Executive Officer; Tracy Jackson, our Chief Financial Officer; and other members of management.

[Mark Pytosh:]

Thank you, Richard and good morning everyone and thank you for joining us for today's call. The summarized financial highlights for the first quarter of 2021 included net sales of $61 million, a net loss of $25 million, and EBITDA of $5 million. We repurchased 24,000 CVR Partners common units for $0.5 million and there is no cash available for distribution this quarter. During the first quarter of 2021, we experienced some unplanned downtime at Coffeyville due to an outage of the third-party air separation unit in January. The ammonia plant at Coffeyville operated at 87% utilization for the first quarter of 2021 compared to 86% in the first quarter of 2020 that was also impacted by downtime too due to third-party outages.

[Tracy Jackson:]

Thank you, Mark. Turning to our results for the first quarter of 2021, we reported net sales of $61 million and an operating loss of $14 million, compared to net sales of $75 million and an operating loss of $5 million in the first quarter of 2020. Net losses for the first quarter of 2021 were $25 million or $2.37 per common unit and EBITDA was $5 million. This compares to a net loss of $21 million or $1.83 per common unit and EBITDA of $11 million for the prior year period. The year-over-year decrease in EBITDA was driven by lower sales volumes of UAN and ammonia and lower UAN sales prices. Direct operating expenses for the first quarter of 2021 were $37 million, compared to $35 million in the prior year period. Excluding inventory and turnaround impacts, direct operating expenses increased by approximately $5 million, primarily related to higher stock-based compensation as a result of the increased unit price and elevated natural gas and electricity costs as a result of winter storm Uri.

[Mark Pytosh:]

Thanks, Tracy. Since our last earnings call, the strengthen in crop prices and farmer economics have continued into the spring planting season. For the 2021 planting season, the USDA currently estimates planted corn acres to be 91 million, and soybean acres to be 87 million, which we believe are conservative. Crop yield estimates are currently 172 bushels per acre for corn and 50 bushels per acre for soybeans.

[Operator:]

Thank you. We will now be conducting a question-and-answer session. Thank you. Our first question comes from the line of William Stein, a private investor. Please proceed with your question.

[Unidentified Analyst:]

Thank you for taking my questions. First I wanted to talk about pricing. I understand notwithstanding your comments about the positive inflection that happened in April that you don't normally guide this, I'm not asking you to do that. But if you were a securities analyst and outsider looking into your company, how would you go about trying to better understand what the likely price that the company would achieve in the market in the current and future quarters? Is spot ever even a consideration? Is it always forward pricing? What exchanges should we look at? Any color on that would be helpful. And then I have a broader follow-up question.

[Mark Pytosh:]

Sure. So the way to think about it is there is kind of three seasons. The spring pre-planting and sidedress, topdress. Then we have the summer fill season and then the fall application. And in many cases for either the spring and the fall application it's -- there is a lot of forward sales into that. But during the spring and the fall there is a lot of spot sales in and around those forward sales. So -- but in the first quarter and the third quarter probably less so because there is not any application. So there is not any immediate demand if there is a need. So it's more of a forward sales but -- and that's what the first quarter was. It's -- first quarters typically has a lot of forward sales and those are conducted usually in November and December because it's really stocking. I call pre-stocking for spring application. But in terms of pricing there are a lot of factors that go into pricing. Its supply/demand balances obviously in fertilizer. And we -- this year is an interesting year, because on the supply side we had a complete industry outage for between one and two weeks in February, because virtually all the plants were shut down, because natural gas, when it's skyrocketed, it didn't make sense to produce. So either you did, as we did, and you took a plant down and sold your contracted gas at very high prices, or if you were not under contract, you'd had to shut your plant down, because it didn't make economic sense to produce product. And so, the supply side coming into the spring actually was reduced fairly significantly due to the outages at the plants and that was industry-wide. So the supply side's in very good shape. On the demand side, demand is really the biggest driver of demands farm level economics. And we -- since last July, we've seen a sea change in farm economics in the United States. Grain prices are at close to 10-year highs. And as you look forward into the summer and the fall and we get -- that's the -- what we call the new crop year, corn prices, which are the big driver for nitrogen, are at very high levels. So the new crop price in July is at $7. Last July, the price was at $3.25. So the economics for the farmer would incentivize that farmer to use nitrogen to maximize corn production, because of the revenue base. Fertilizer overall is about 15% of the cost to a farm and nitrogen is about 8%. So it's not a big number. And with corn prices at $7 there's going to -- there is a lot of demand for nitrogen for corn. And so, as we look into the second half of this year, we see this -- the trend started in January continuing because of the grain prices. And tangentially, soybean -- high soybean prices also are positive, not because they directly consume a lot of nitrogen, but if you go back to farm level economics, if a farmer is getting paid a lot for soybeans, that's more money they have in their pocket to buy inputs for next year. So this is probably the biggest sea change we've seen in -- since maybe seven or eight or 10 years ago. Grain prices have gotten to a level that have changed the fundamental economics for farming in the United States.

[Unidentified Analyst:]

That's very helpful and it sort of segues into the second question I have, which is very big picture. You're probably aware there’s a lot of investors, I suppose, are writing these articles on Seeking Alpha and such and perhaps trying to forecast exactly what's going to happen quarter-to-quarter. I just want to ask you to maybe take a very big step back from sort of the week-to-week month-to-month sort of changes and exact calculations and what's going on in the business and instead compare the business today relative to what it looked like, let's say, nine or 10 years ago when we last saw corn at this level and we last saw fertilizer at this level. If memory serves, on a split adjusted basis, distributions were about $20 a year and the stock was between $200 and $300. I'm not asking you to say, yes, that's exactly what's going to happen this time around. I wouldn't expect you be able to forecast that, but I'm hoping you can frame up for investors what the difference in the business is today relative to, let's say, nine, 10 years ago, last time you saw those farm economics as you described them looking the way they are today. I think your business is much bigger today, because you've done an acquisition and maybe what offsets that is a higher level of debt, but are there other things that we should think that maybe this cycle looks totally different and profitability will be much worse or lower, or how can you maybe frame that comparison for us? Thank you.

[Mark Pytosh:]

Sure. So, as a company, we obviously are different, because we've added East Dubuque. What I would say is, if you step back and set aside our company for a minute but the cycle, this business is cyclical. And farming, ag is a cyclical business. We've been through a very difficult period of time and -- but, the market has reemerged. And our business is really fundamentally driven by farm level economics. And the most important thing is just the durability of the recovery and the reasons. And that to me, I think, there is some different factors driving the demand for corn and where we are. And I'm not saying that we're changing the overall cycle of the industry, but I think that this has legs to it this recovery, because the need for corn and actually for soybeans is a little different than before. We're blending more for renewable fuels. That seems -- that was the driver from -- if you went from 2005 to 2012 that drove the corn market. When ethanol came in and started being blended, that drove the first leg of this. Now we're in the second leg, where there is a big push towards sustainability and renewable fuels. And soybeans, is now part of that too, because of the biodiesel work. And so farming, which used to be only for food, is now -- also has another leg on it, which is for fuels blending. And so, I think, it's a little different market than before. I would just say that in this recovery the opportunity for us as a company is we took on debt to buy East Dubuque, and we've been patiently waiting for the financial markets and this industry to recover before we reset our cost of debt. And so things have kind of come in a good direction there and we intend in over the coming months to make that happen. But we -- by being patient and waiting for that, the company is going to benefit. So when we refinance effectively the purchase of East Dubuque, which was five years ago, we're going to -- we kind of reset the capital structure and the cost. And we're going to -- we've been, I think pretty clearly stating that we'd like to also reduce the overall debt level on the company and that resetting will put us in a stronger position as we move ahead past the refinancing. So, I'd say this is kind of finalizing the repositioning of the company post-East Dubuque, and -- in an industry that I think has got a lot of momentum. And the key for us isn't quarter-to-quarter, it's durability of recovery. We want farm economics to last for years, not for quarters. So, as I stated in my comments, this next stretch which is I'm already looking into the fall and the spring, really with grain prices doing what they're doing, I think gives us great confidence in where we are in this cycle. We're at the very early stages, but the key to any business is the health of the customer and the willingness to buy your product and our customer is as healthy as they've been in a decade.

[Unidentified Analyst:]

Thank you.

[Operator:]

Our next question comes from the line of Brian DiRubbio with Baird. Please proceed with your question.

[Brian DiRubbio:]

Good morning. Maybe a couple of questions for you. Starting out, am I reading this right that the gain that you received from selling the natural gas back, when you shut down East Dubuque, was about $4.6 million?

[Mark Pytosh:]

That's correct.

[Brian DiRubbio:]

Okay. So can you help us understand as you talked about the unplanned outages and some of the other challenges you had in the quarter, what was the totality of those expenses that you were impacted by?

[Mark Pytosh:]

We don't want to quantify something at that level. What I would tell you is that the gain that we had at East Dubuque was largely offset by a combination of loss production that we had less tons to sell. And if you looked at our volumes that we sold it was lower -- decently lower than last year. And the other is that we took the opportunity, while the plant was down to accelerate maintenance activities. So between those two, it was not the windfall in the quarter that it might appear to be. We largely offset that with lower product sales and cost pulling forward maintenance costs that we would have done later in the year. So that's sort of what happened in the quarter.

[Brian DiRubbio:]

Okay. That makes sense. And I guess as we think about the forward sales that you made in November, December, are you fully satisfied with those sales? Whereas as we'll see in the second quarter is the -- those sales will be out of the P&L and we'll see now sales at the more representative current spot rates?

[Mark Pytosh:]

Yes. That's correct. So we cleared all that out in the first quarter and the second quarter for a product that we were selling during the first quarter into the second quarter and spot loans.

[Brian DiRubbio:]

Great. Then final one for me just on pet coke costs. Obviously, not much of a difference year-over-year, but sequential came up really, really high. I guess, two questions part of that. How much did you source from Coffeyville? And what are you seeing in terms of pricing for pet coke at this point?

[Mark Pytosh:]

I would tell you that the Coffeyville quarter-to-quarter was down. They obviously -- the refinery was impacted by the winter storm. And so the production rate was lower and they also were running lighter crudes, so we did source less. Our third-party pet coke has been pretty steady, but that we bring in easily by barge and then truck it to the plant. So that's been pretty steady and we've been able to access pet coke when we needed it. But we also draw from other refineries in the Kansas, Oklahoma market and they all too were affected by the weather storm. So, overall, we have to source more, I would say, off of the river versus typically drawing from our nearby refineries. And that kind of will normalize in the second quarter, because they're all back up and running. In fact the refineries are starting to raise rates back closer to where they were in 2019 rather than 2020, which is they were running 70% to 80% utilization. Now they're more closer to 85% to 90%.

[Brian DiRubbio:]

Perfect. Appreciate the color. Thank you.

[Operator:]

Our next question comes from the line of Roger Spitz with Bank of America. Please proceed with your question.

[Roger Spitz:]

Thanks very much. Good morning. So, just returning on prices, so, seasonally generally speaking you've said for Q1 prices we should base those price levels based on the November, December forward pricing, if I heard that correctly. Could we go on for Q2, Q3, Q4? How should we think about pricing for each one of those, is like Q2, it sounds like it should be closer to the prevailing spot? Thank you.

[Mark Pytosh:]

Yes. So yes so Q2 is going to be much more closer to prevailing spot. There is a mix and the season peaks in May and then it gradually declines through the end of June. But we're -- the second quarter will look a lot -- probably if you've been following the complications that have pricing out there. In the second quarter, we were selling much more into that market. That started sort of February March for April, May. So we were selling into that at much higher prices in the first quarter. And we haven't gotten into the second half. It's too early. We're just trying to get through the planting season and then Sidedress and Topdress. Clearly, I think our view is that the second half is going to look a lot different than the second half of 2020, much higher when it settles. And so, we expect a very different outlook for the second half compared to second half of 2020 which was a very low period -- on lower periods in this past cycle.

[Roger Spitz:]

Got it. But I mean historically -- seasonally in Q3 and then historically in Q4 do those -- because you talked about some of those being forward sales how should we think about historically? How should we think about Q3 prices? Is that also somewhat prevailing spot in Q4? Maybe we look back to some prior time because that's more forward sales?

[Mark Pytosh:]

Yes. I would say that for UAN -- I'm going to use UAN because that's...

[Roger Spitz:]

Yes.

[Mark Pytosh:]

UAN is -- we don't sell urea. That's why I'm not quoting urea. But follow they follow each other. The UAN reset will typically be in July. And again the price typically -- if you took the peak spring price and looked at July, it was lower. It is decently lower. And so we would expect a similar relationship. I just don't think it will fall as far this year, as it has the last few years because of all the dynamics with crop pricing and the supply-demand outlook for the producers. So I expect that we're likely to end this spring season with pretty low to manageable inventory levels fertilizers. So going into the summer, it should be a pretty comfortable summer fill discussion with customers because I think the supply demand dynamics will be good and the underlying farm economics are going to be good. We're already starting to hear farmers expressing interest on buying inputs in the second half earlier than normal because they're going to have money in their pocket this year when they sell this year's crop and they typically buy inputs to help manage their tax situations. So they have that cost embedded in there. So I think conditions are going to be quite solid in the second half. And I think the supply side is in good shape and the demand side is in good shape. So feel good about the go forward.

[Roger Spitz:]

Happy to hear it. One other thing, you gave the turnaround expenses of $8 million to $10 million. Last call I think you said those would be spent in the fall which I take to be more or less Q3 or maybe into Q4. But it sounds like in your answer before that you use an opportunity to do some maintenance perhaps, while the plants were down because of winter storm Uri. When should we model in the $8 million to $10 million of that turnaround expense for this year?

[Mark Pytosh:]

Well the maintenance that we did was on the East Dubuque plant which is not going to be in turnaround this year. The $8 million to $10 million will be for the Coffeyville plant. And I would put that in the fourth quarter. Our current schedule is a fourth quarter turnaround.

[Roger Spitz:]

Thank you very much.

[Operator:]

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.

[Mark Pytosh:]

Again wanted to thank everybody for their interest in CVR Partners and joining the call and we look forward to speaking with you next quarter for the 2Q results. 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.