CVR Partners

Greetings and welcome to the CVR Partners LP second 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 the 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. Richard Roberts, Investor Relations Manager. Thank you, sir. 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 second quarter 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. You were cautioned that these statements may be affected by important factors set forth in our filings for 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. Disclosures related to such non-GAAP measures including reconciliation to the most directly comparable GAAP financial measures are included in our 2020 second quarter earnings release that we filed with the SEC yesterday after the close of the market. 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 their 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?

Thank you, Richard. Good morning, everyone, and thank you for joining us for today's call. The summarized financial highlights for the second quarter of 2020 included net sales of $105 million, a net loss of $42 million, EBITDA of negative $2 million, which included a non-cash goodwill impairment of $41 million. We repurchased approximately 890,000 CVR Partners common units for approximately $1 million, and there's no cash available for distribution this quarter. During the second quarter of 2020, we had strong utilization at both facilities. At Coffeyville, the ammonia plant operated at 98% utilization above the second quarter of 2019 at 97%. At East Dubuque, the ammonia plant operated at 101% utilization compared to 98% in the prior year period. Our combined operations produced approximately 216,000 gross tons of ammonia of which 79,000 net tons were available for sale for the second quarter of 2020. This compares to the production of 211,000 gross tons of ammonia of which 71,000 net tons were available for sale in the prior year period. We produced 321,000 tons of UAN in the second quarter of 2020 as compared to 316,000 tons in the prior year period. We sold approximately 337,000 tons of UAN during the second quarter of 2020 at an average price of $165 per ton. In addition, we sold approximately 111,000 tons of ammonia during the second quarter of 2020 at an average price of $332 per ton. Year-over-year pricing softened for UAN and ammonia, which were down 24% and 27% respectively. Natural gas pricing was lower as well, helping to offset some of the UAN and ammonia price weakness. For the first time in several years, we saw normal weather conditions for spring fertilizer application, resulting in approximately 92 million acres of corn planted, an increase of over 2 million acres versus last year. Nitrogen fertilizer prices have remained soft, however, as producers take advantage of the low natural gas price environment and continue running at high utilization. We have a good order book for the coming months following the summer fill and fall prepay for UAN and ammonia. 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 second quarter of 2020, we reported net sales of $105 million and an operating loss of $26 million compared to net sales of $138 million and operating income of $35 million in the second quarter of 2019. As a result of the decline in ammonia and UAM prices and overall challenging business environment, We recorded a non-cash goodwill impairment of $41 million in our second quarter 2020 results. Including this non-cash charge, net losses for the second quarter of 2020 were $42 million or $0.37 per common unit and EBITDA was negative $2 million. This compares to net income of $19 million or $0.17 per common unit and EBITDA of $60 million for the prior year period. The year-over-year decline was driven by the goodwill impairment and lower prices for ammonia and UAN. Direct operating expenses for the second quarter of 2020 decreased to $40 million from $46 million in the prior year period. Excluding inventory impacts, direct operating expenses decreased by approximately $3 million compared to the same period last year as we phased in our cost reduction efforts, primarily due to lower utilities and labor expenses. Turning to capital spending, during the second quarter of 2020, we spent $3 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 June 30th, we had approximately $53 million in liquidity, which is comprised of approximately $33 million in cash, availability under the ABL facility of approximately $46 million, less $25 million in cash included in our borrowing base. Within our cash balance of $33 million, we had approximately $1 million related to customer prepayments for the future delivery of product. Total debt on the balance sheet remains at $647 million, which is comprised of $645 million of senior notes due in 2023 and $2 million of senior notes due in April of 2021. The $2 million of senior notes due next year have been reclassified as a current liability on the balance sheet. In assessing our cash available for distribution, we generated EBITDA of negative 2 million, which includes the 41 million non-cash goodwill impairment. We had current cash needs of 15 million for debt service and 2 million for maintenance capital expenditures. In addition, during the quarter, we repurchased approximately 890,000 common units for total cash consideration of approximately 1 million and recaptured 5.9 million of cash used for operating losses in the first quarter. The Board of Directors of our General Partner established reserves of $14.5 million for the planned turnaround at Coffeyville in 2021, repayment of the senior notes due April 2021, and for future operating needs of the business. As a result, there was no cash available for distribution. Looking ahead, we estimate our ammonia utilization rate for the third quarter of 2020 to be between 95% and 100%. We expect direct operating expenses to be approximately $37 to $42 million, excluding inventory impacts, and total capital spending to be between $3 and $6 million. With that, I turn the call back over to Mark.

Thanks, Tracy. The weather conditions for spring fertilizer application and planting were largely normal in 2020, except in the northern plains. Our employees and customers took measures to address health and safety concerns with COVID-19, but were able to operate normally and deliver under the tight timeframes for planting. We shipped record levels of ammonia in April from the East Dubuque facility and maintained consistent UAN shipments from both plants throughout the quarter. We also shipped our first unit train from Coffeyville in May and have sold additional unit trains to ship in the fall. At the end of June, the USDA updated some planting intentions report to lower the estimated planted corn acres for US farmers from 97 million acres to 92 million. This is consistent with our estimates from the first quarter call and with the demand we experienced from customers during the spring. The next important data point will be summer growing conditions. So far, the temperatures this summer have been hotter than normal, causing some debate around the plausibility of the USDA's estimated yield per acre of 178.5 bushels of corn. With the lower planted corn acres, inventory carryout will be higher than last year, but much lower than the market was expecting three months ago. Unfortunately, corn prices remain at the lower end of the range this year because of demand concerns. Demand for gasoline and ethanol has improved since our last call, but it's looking like more of an elongated recovery than a V-shaped recovery. Between the yields experienced in the corn harvest and the continued recovery in gasoline and ethanol demand, which accounts for approximately one-third of domestic corn demand, we expect the corn markets to continue to be volatile in the coming months. However, the reduction in planted corn acreage has provided some cushion against the downside in 2021. In late June and early July, the summer UA infill was completed, and we have good volume in our order book for the coming months. Customers also bought ammonia for the summer fill and fall prepay during June and July. We are seeing higher prices from various market sources for fourth quarter 2020 and first quarter 2021, so we think that the summer fill should represent the bottom in nitrogen Thank you for joining us today. Since we have no turnarounds planned for the second half of 2020, our current goal is to run at full capacity for the balance of the year. As Tracy mentioned, we repurchased approximately 890,000 units in the month of June. Given the performance of the units in 2020, we continue to feel they are significantly undervalued. 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. We will prudently manage our costs and be judicious with our capital, but selectively invest in reliability projects and incremental additions to production capacity and maximize our marketing and logistics activities. In closing, I'd like to thank our employees for their commitment to being healthy, safe, flexible, and helping the company execute at a high level while managing the impact of COVID-19. We all look forward to returning to more normalized conditions. With that, we're ready to take questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to move 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.

Hi, everybody. This is actually Jordan for Adam. Can you guys hear me all right?

Yeah, we can. Good morning.

Yeah. Good morning. So the first question, I have three questions, and the first one is really quick. Could you provide some more details on the employment and what that was for exactly?

I didn't. Can you repeat the question? I didn't understand it.

Could you just provide some more color on the details of the impairment and what was actually being impaired?

Sure. We had $41 million of goodwill recorded on our books from the farmland acquisition. Because we normally do our valuation assessment towards the end of the year, but with the significant decline in prices towards the end of the quarter, we felt like we had a triggering event that required us to to accelerate our evaluation into the second quarter. That was completed by an external firm and indicated that an impairment was necessary. It's only related to goodwill.

Okay, perfect. And then two more questions. The first one, if you could provide some color on UAN inventories exiting the spring and into the summer field program and how it differs from the past several years.

Sure. What I would say in our system, our inventories were quite low coming through at the end of June. There was a good pre-plant and then the side dress and top dress were good. And I think generally the feeling was that the inventory levels were normal to, I think in a good shape, maybe lower than normal just because of the season. We felt good going into the summer on UAN in terms of inventory level.

Okay. And then my final question would be if you have any thoughts on financing plans into the next couple years and how you're evaluating potentially refinancing opportunities on your debt as the call premium has come down a bit.

It has come down. We continue to monitor the high yield markets and look for opportunities to see if we can bring that rate in a little bit and decrease our interest burden. And as you know, the interest markets, the high yield market in particular has been pretty volatile, although improving the last couple of weeks. So we'll just keep monitoring for an opportunistic window.

That'll do it for me. Thank you.

Thank you. 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.

I just want to thank everybody for being on the call today, and we look forward to speaking to you after the third quarter is completed in October. Thank you.

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.