CVR Partners

Greetings and welcome to the CDR Partners LP first quarter 2020 conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during this conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Jay Sinks, Vice President of Finance and Treasurer. Thank you. You may begin.

Thank you, Michelle. 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. Prior to discussing our 2020 first quarter results, let me remind you that we are a variable distribution MLP. We will review our previous 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 distribution, if any, will vary from quarter to quarter due to several factors, including, but not limited to, operating performance, fluctuations in prices received for finished goods, capital expenditures, and cash reserves deemed necessary or appropriate by the Board of Directors of a General Partner. Let me also 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. Without limiting the foregoing, the words outlooks, believes, anticipates, plans, expects, and similar expressions are intended to identify forward-looking statements. Your caution that these statements may be affected by important factors set forth in our findings 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 2020 Thank you, Jay.

Good morning, everyone, and thank you for joining us for today's call. The summarized financial highlights for the first quarter of 2020 included net sales of $75 million, a net loss of $21 million, EBITDA of $11 million, and there's no cash available for distribution this quarter. During the first quarter of 2020, we experienced third-party outages at the Coffeyville facility that led to approximately 10 days of unplanned downtime. During the downtime at Coffeyville, we proactively completed maintenance work at the facility that allows us to move its planned turnaround from the fall of 2020 to the summer of 2021. Aside from these third-party issues, Coffeyville operated as expected in the quarter. The ammonia plant operated at 86% utilization. below the first quarter of 2019 at 96%. The unplanned downtime from the third party outages impacted Coffee Bell's utilization rate by approximately 9%. We had strong utilization at the East Dubuque facility following the completion of its planned turnaround last fall. At East Dubuque, the ammonia plant operated at 101% utilization compared to utilization of 69% in the prior year period. As a reminder, The fall of 2018 was severely impacted by wet weather which caused additional ammonia inventory at East Dubuque to be carried into the first quarter of 2019. We managed our storage capacity levels by reducing ammonia utilization during that period last year. Our combined operations produced approximately 201,000 gross tons of ammonia and 78,000 net tons of ammonia available for sale for the first quarter of 2020. This compares to production of 179,000 gross tons of ammonia and 41,000 net tons of ammonia available for sale in the prior year period. We produced 317,000 tons of UAN in the first quarter of 2020 compared to 335,000 tons of UAN last year. We sold approximately 284,000 tons of UAN during the first quarter of 2020 at an average price of $166 per ton. In addition, we sold approximately 54,000 tons of ammonia during the first quarter of 2020 at an average price of $264 per ton. Year-over-year pricing remained soft for UAN and ammonia, which were down 25% and 28% respectively. UAN pricing continued to be impacted by additional imports into the U.S. from Russia and Trinidad as a result of the EU tariffs. The ammonia market also remained well-supplied, with customers having carried over inventories after the for fall application season, which put pressure on pricing. Natural gas pricing was lower as well, helping to offset some of the ULA price weakness. In the first quarter, we saw normal activity from our customer base as they prepared for the spring planting season. So far, spring application has been robust, and we continue to expect a healthy increase of planted corn acreage compared to last year, which I will discuss further in my closing remarks. I will now turn the call over to Tracy to discuss our financial results.

Thank you, Mark. Turning to our results for the first quarter of 2020, we reported net sales of $75 million and an operating loss of $5 million compared to net sales of $92 million and operating income of $9 million in the first quarter of 2019. Net losses for the first quarter of 2020 were $21 million or $0.18 per common unit and EBITDA was $11 million. This compares to a net loss of $6 million or $0.05 per common unit and EBITDA of $26 million for the prior year period. The year-over-year decline in EBITDA was driven predominantly by lower prices for ammonia and UAN. Direct operating expenses for the first quarter of 2020 were $35 million, in line with the prior year period. Excluding inventory impacts, direct operating expenses were $39 million, also consistent with the prior year period. Turning to capital spending, during the first quarter of 2020, we spent $6 million on capital projects, which was primarily maintenance capital. We estimate total capital spending for 2020 to be approximately $19 to $23 million, of which $14 to $16 million is expected to be maintenance capital. Turnaround expenses for the full year are expected to be less than $1 million. Looking at the balance sheet, as of March 31st, we had approximately $83 million of liquidity, which was comprised of $58 million in cash, availability under the ADL facility of $50 million, less $25 million of cash included in our borrowing base. Within our cash balance of $58 million, we had approximately $37 million related to customer prepayments for the future delivery of products. Our long-term gross debt and finance lease obligations of $647 million, including the current portion, remains unchanged. In assessing our cash available for distribution, we generated EBITDA of $11 million and had total cash needs of $15 million for debt service and $4 million for maintenance capital expenditures. In addition, we released $3 million of cash reserves from prior quarters for maintenance, turnaround, and other operating needs. As a result, there was no cash available for distribution. Looking ahead, we estimate our ammonia utilization rate for the second quarter of 2020 to be between 95% and 100%. We expect direct operating expenses to be approximately $35 to $40 million, excluding inventory impact, and total capital spending to be between $6 and $10 million. With that, I'm going to call back over to Mark.

Thanks, Tracy. Thank you. In the first quarter, we saw normal customer activity levels as customers were preparing for the spring planting season. During March, as a result of COVID-19, we took measures at our facilities to have non-essential employees work remotely and adjusted staffing schedules and locations to maximize social distancing. We also modified our loadout process to protect our employees, contract workers, and drivers while allowing the execution of the typical compressed application schedule. Even with these added measures, we were able to ship record levels of ammonia in April from both of our plants. While the fall ammonia application season was below expectations due to wet weather, spring ammonia application has been robust throughout the Midwest. Looking to the spring, the USDA estimated in its most recent planting intentions report that the U.S. farmers would plant 97 million acres of corn. This survey was taken in early March, and our opinion did not take into account the significant decline in ethanol and corn prices in the weeks after the survey and before the spring planting season. We still estimate planted corn acres to be between 92 and 95 million acres, which would be a healthy increase compared to last year. We think it is too early to predict the timing and strength of recovery and demand for gasoline and ethanol, which will be driven by the pace of reopening of the U.S. economy and by ethanol exports. Ethanol accounts for approximately one-third of domestic demand for corn. Despite these impacts from COVID-19, spring planting is following a normal pattern, and we expect to see large product movements in the second quarter. During the quarter, we continue to see UAN price at a discount to urea on a per pound of nitrogen basis. The dynamics we discussed on our last call regarding the impact of EU tariffs on product from Russia and Trinidad continue to impact the market. However, as we enter April, urea price has strengthened, and led to increasing prices for UAN. Although UAN is still valued at a discount to urea, we believe on the margin that UAN will be favored versus urea for the remainder of the spring for top dress and side dress nitrogen application. Continuing to offset some of the pricing issues has been lower natural gas costs. Natural gas prices used in production were significantly lower in the first quarter of 2020, averaging $2.42 per MMVTU as compared to $3.83 per MMVTU in the first quarter of 2019. Pricing for the remainder of 2020 looks attractive, where the forward strip is averaging $2.56 per MMVTU. Outages caused by the third-party air separation plant Coffeyville resulted in downtime of 10 days from December to March. During this downtime, we took the opportunity to clean, repair, or replace and inspect vessels and piping, replace catalysts and certify equipment. As a result, we determined that the maintenance work that had been done supports our decision to push back Coffeyville's planned turnaround from the fall of 2020 to the summer of 2021. In addition, we are moving the East Dubuque turnaround plan for the fall of 2021 to the second half of 2022. With the weakness across the stock market from the COVID-19 pandemic, our unit price has fallen below $1 and we have received a continued listing notice from the New York Stock Exchange. We have until January 1st of 2021 to regain compliance. We will consider the appropriate actions to take, if necessary, as we get closer to that date. Given the performance of the units recently, we feel they are significantly undervalued and the Board has authorized a unit repurchase program of up to $10 million. The authorization does not obligate the partnership to acquire any common units and may be canceled or terminated by our General Partners Board of Directors at any time. I want to reiterate that the partnership will continue to focus on maximizing free cash flow by safely operating our plants reliably and at high utilization rates while focusing on the health and safety of our employees, prudently managing our costs, being judicious with our capital but selectively investing in reliability projects and incremental additions to production capacity and maximizing our marketing and logistics activities. In closing, I would like to thank all of our employees for their focus on being healthy and safe, flexible and committed to helping the company execute at a high level at a critical time of the year for our customers. We all look forward to gradually returning to more normalized conditions. With that, we're ready to take any questions, Michelle.

Thank you. We will now be conducting the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for your questions. Our first question comes from the line of Adam Samuelson with Goldman Sachs. Please proceed with your question.

Yes, thank you. Good morning, everyone. I hope everyone's safe. Thank you. You too. Thank you. So just thinking about the market and understanding kind of an outlook for a strong spring, but given some of the dynamics, facing the market in the second half of the year and potential for lower corn acreage next year if corn holds where it is and ethanol demand is what it is. Can you give me your view of the UAN cost curve and where you sit on it?

Well, first of all, Adam, let me address the market because we're, I would say, in the pretty early days of kind of experiencing the recovery aspect of it. Obviously we have the benefit of our parent companies in the refining business and so we have the ability to kind of watch the dynamics of where gasoline is headed and gasoline demand in particular and ethanol and gasoline demand fell about 50% starting in March and most of the estimates that have been And so, you know, everyone's concerned. We share that concern about where gasoline demand is going to be and, you know, the draw on ethanol. But I think it's pretty early to make that call on the first week of May. And I think it's pretty early to make that call on the first week of May. but there's some encouraging signs about the gasoline demand. So just to put that out there. On the cost curve, globally, pretty much all the producers globally have seen benefit in the last 12 months from low natural gas prices. You know, LNG prices have gone down offshore. We've seen, obviously, you can see in our numbers and the other producers in North America how low natural gas has been. What I would tell you there, again, early days, we don't really know yet, but it appears that some of what's been driving that down may be taken out of the marketplace. The biggest driver probably globally has been associated natural gas from oil drilling, and obviously activity there has fallen dramatically in the last month, and the associated gas component will be falling there, and if you look further out on the natural gas curve, I would say conditions appear to be changing the other way. It's not going up dramatically, but I think the benefit globally of what low prices have meant probably is that bottomed. The benefit we have being in the U.S. is we'll probably, you know, I would expect the U.S. to sustain the lowest natural gas prices in the world. So I would expect U.S. producers, when you combine natural gas plus lower transportation costs that we will be by far the lowest cost producers in the world as it relates to delivering fertilizer in the Midwest and the US. So I think we will be we retain in fact probably get more of a spread in our competitiveness in 2021 as compared to what it's been like later in 2019 and 2020. So I expect it to improve actually.

Thank you. We have reached the end of our question and answer session. I'd like to turn the call back over to management for any closing remarks.

Just want to again thank all our employees for courageous efforts this quarter and the work they've done to support, to be healthy and safe and to support the company and I wish everybody on the call to be careful and be safe and look forward to talking to you in the summer and hopefully in brighter conditions. Thank you very much for participating today.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.