CVR Partners

Greetings and welcome to the CVR Partners third 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, Richard Roberts. Senior Manager of FP&A and Investor Relations. Thank you, sir. You may begin.

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. Prior to discussing our 2020 third 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. Your caution 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 disposures related to such non-GAAP measures, including reconciliation to the most directly comparable GAAP financial measures, are included in our 2020 third 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 may reserve amounts for other future cash needs as determined by our general partners' boards. 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, 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 third quarter of 2020 included net sales of $79 million, a net loss of $19 million, and EBITDA of $15 million. We repurchased 1.4 million CVR Partners common units for $1.3 million. And there's no cash available for distribution this quarter. During the third quarter of 2020, we had strong utilization at both facilities. The Coffeeville, the ammonia plant operated at 97% utilization compared to the third quarter of 2019 at 98%. At East Dubuque, the ammonia plant operated at 99% utilization compared to 97% in the prior year period adjusted for last year's scheduled turnaround. Our combined operations produced approximately 215,000 gross tons of ammonia, of which 71,000 net tons were available for sale for the third quarter of 2020. This compares the production of 196,000 gross tons of ammonia, of which 56,000 net tons were available for sale in the prior year period. We produced 330,000 tons of UAN in the third quarter of 2020, as compared to 318,000 tons in the prior year period. During the third quarter of 2020, we sold approximately 365,000 tons of UAN at an average price of $140 per ton, and approximately 54,000 tons of ammonia at an average price of $242 per ton. Year-over-year pricing softened for UAN and ammonia, which are down 23% and 28% respectively. Natural gas pricing was lower as well, helping to offset some of the UAN and ammonia price weakness. Although prices for nitrogen fertilizers have been softer this year, recently we've seen improvements in crop prices and farm economics that make us cautiously optimistic about an uptick in fertilizer pricing from these levels. The supply and demand balance for corn is looking more favorable and market conditions are improving, 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 third quarter of 2020, we reported net sales of $79 million and an operating loss of $3 million compared to net sales of $89 million and an operating loss of $8 million in the third quarter of 2019. Net losses for the third quarter of 2020 were $19 million, or 17 cents per common unit and EBITDA was 15 million. This compares to a net loss of 23 million or 20 cents per common unit and EBITDA of 11 million for the prior year period. The year over year increase in EBITDA was driven by higher sales volume and lower operating expenses offset somewhat by lower prices for ammonia and UAN. Direct operating expenses for the third quarter of 2020 decreased to 39 million from 48 million in the prior year period. Excluding inventory and turnaround impacts, direct operating expenses decreased by approximately $3 million or 7% compared to the same period last year as we made progress on our cost reduction efforts. Turning to capital, during the third 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 $18 to $21 million, of which $13 to $15 million is expected to be maintenance capital. Turnaround expenses year-to-date were less than $1 million, and we do not currently expect any significant turnaround expenditures for the remainder of 2020. Turning to the balance sheet, at the end of September, we amended our ABL facility to extend the maturity out to September 30th of 2022, while also reducing the total commitment to $35 million and improving the borrowing base, including the elimination of cash and increasing the advance rate on certain eligible inventory receivables. As of September 30th, we had approximately $74 million of liquidity, an improvement of $21 million over June 30th, which was comprised of approximately $48 million in cash and availability under the ABL facility of approximately $25 million. Within our cash balance of $48 million, we had approximately $10 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. In assessing our cash available for distribution, we generated EBITDA of $15 million and current cash needs of $15 million for debt service and $3 million for maintenance capital expenditures. During the quarter, we repurchased just over 1.4 million common units for a total cash consideration of $1.3 million. In addition, the board of directors of our general partner established reserves of $1.5 million for the planned turnaround at Coffeyville in 2021. As a result, there was no cash available for distribution. Looking ahead to the fourth quarter of 2020, we estimate our ammonia utilization rate to be between 95% and 100%. We expect direct operating expenses to range between $37 million and $42 million, excluding inventory impacts, and total capital spending to be between $5 million and $8 million. With that, I will turn the call back over to Mark.

Thanks, Tracy. Since our last earnings call, there has been a marked improvement in crop prices and farm economics. USDA estimates for planted corn acres were lowered in September to 91 million acres from the initial estimate of 97 million. During the summer, there were drought conditions in parts of the Midwest and the unusual derecho storm that struck Iowa and other parts of the Midwest damaged over 10 million acres of corn. On the demand side, ethanol blending remains at lower levels than last year due to lower gasoline consumption, but this has largely been offset by an increase in other domestic and Chinese demand for corn. Eventually, as a vaccine or therapeutics are developed for COVID-19, we expect to see an uptick in gasoline consumption and ethanol blending, and in turn, an increase in corn demand for that usage. Soybean demand from China has been far greater than expected as well. As a result of drought conditions and derecho storm, the USDA is currently forecasting lower expected yields in harvested acres, and therefore much lower expected corn inventory levels. All of these factors have led to a rally in crop prices. Since the July low prices, corn has rallied from $3.08 per bushel to over $3.95 per bushel, and soybeans have rallied from $8.70 per bushel to over $10.50 per bushel. Weather conditions have also been favorable in September and October. and the harvest is largely complete, leaving the fields ready for ammonia application. We expect solid demand for ammonia this fall and have already seen the ammonia run begin in the upper Midwest. We consider healthy farm economics to be one of the most important factors for fertilizer demand in the coming years and market conditions have improved substantially in that regard. While urea prices have exhibited strength since July, especially with multiple India tenders, Ammonia and UAN prices have been largely flat for the past three months. As we enter the fall ammonia application, we can see growing interest in these two inputs relative to urea. We think the markets may gravitate towards the traditional pricing relationships among ammonia, urea, and UAN, where today ammonia and UAN are favorable on a price per pound of nitrogen. Since the last earnings call, natural gas prices have risen over a dollar per MMBTU and the curve shows natural gas prices rising further for the rest of the year and into the winter. Higher natural gas prices will lower the incremental incentive for producers to run at full capacity. I also want to highlight a press release we issued on October 5th about CBR's efforts to reduce its carbon footprint. Recently our Coffeyville facility certified its first carbon offset credits for reducing nitrous oxide emissions in one of our acid plants. Previously we installed similar units in both of our acid plants at East Dubuque. and have been on average abating the vast majority of our nitrous oxide emissions over the past five years. Coupling these efforts with our ongoing process for carbon sequestration through enhanced oil recovery at our Coffeyville facility, we are now able to reduce our carbon dioxide equivalent emissions by over one million metric tons per year between the two plants. With the reduced carbon footprint at Coffeyville, we could seek to certify our ammonia production as blue and we believe that as part of the energy transition, new customers going forward will be seeking blue ammonia as a potential energy source that has produced a low carbon footprint. Finally, on our first quarter earnings call, we discussed the continued listing notice that we received from the New York Stock Exchange in April as a result of our average closing unit price falling below $1. We have until January 1st of 2021 to regain compliance. As such, the Board of Directors of our General Partner has authorized a one-for-ten reverse split of our common units, effective after the close of the market on November 23rd. Unit holders will receive one unit for every 10 units owned at the close of business on November 23rd, with fractions rounded to the nearest whole unit. We continue to believe our units are undervalued. However, we consider the reverse split a necessary step towards regaining compliance with the New York Stock Exchange listing standards. 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, brutally 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 want to thank our employees for their commitment to being healthy, safe, and flexible and helping the company execute at a high level during the third quarter while managing the impact of COVID-19. We're all looking 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 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would 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 poll for questions. Thank you. Our first question comes from the line of Adam Samuelson with Goldman Sachs. Please proceed with your question.

Yes, thanks. Good morning, everyone. Good morning, Adam. Hi. So I guess, Mark, first I wanted to just give you this. I just want to know if that included some of the spring pricing tonnage.

I would say not really much effect from spring pricing. The fill occurred earlier this year. So we came into the third quarter basically with the fill book. So the third quarter pricing is really the fill pricing, particularly for UAN. But even ammonia, the summer fill was done early this year. So the third quarter does not have any of the spring pricing in it. You know, it's a rounding error.

Okay. And so in that context, I mean, is that typically kind of when you guys enter the summer, Phil, you tend to do it for the whole second half? Or have you given yourself more kind of open space as you move kind of into the later parts of this year and early next to potentially capture a rising market? I'm just trying to think about kind of the scope for earnings leverages. should be poised for a nitrogen bounce here at some point.

Yeah, we haven't really been selling the whole second half, and we always have the ability to, I would say, move tons around from a delivery timing perspective. So we can capture pricing opportunities. And so we typically would sell into the fourth quarter and wait and see for the market to lift. In the last couple of years, it didn't really lift. until we got closer to the end of the year and into the first quarter. So that's been the pattern the last couple years. Historically, if you go back further, there was the fill price and then there was a lift by September, October. It's been a little slower to lift these last couple years in the September, October, and then in December, January, typically the price increased around that time. So We have opportunities to take orders, and we can jump in and take advantage of market opportunities. And we're kind of waiting to see. I think with the fall ammonia application, we'll have a better idea of where demand's going to be in pricing. But we feel a lot more optimistic about kind of where things are headed than we did, say, on the last earnings call. Conditions have improved, I'd say, significantly in terms of farm-level economics. and I don't really know any business that does well if their customers aren't healthy financially and doing well and that's the big change since the last call.

Okay. And then the final one for me, just looking at the capital structure of the business, I mean, you've got about 80 million, you've got about 20 million, 80 million of fixed charges between the interest on the bonds and kind of the sustaining kind of capital run rate. that's kind of the EBITDA kind of level you've got to clear before you're generating any cash. Do you think that the business has the wherewithal to weather through this or how are you evaluating or thinking about different kind of capitalization opportunities at some point? You're going to have to deal with those bonds when they come due or before then, but I'm just trying to think about kind of different options as you evaluate them.

Well, I'll just tell you that we haven't, you know, even in the Sort of 2017, we used a little bit of cash, but we typically haven't been using any cash. So I'm very comfortable with our structure. And quite frankly, we're not in a rush to refinance until the market is at a good price for us. But I think from a cash flow perspective, either this year or next year, we feel very comfortable with our cash position, cash flow position. and it's really about being opportunistic with the refinancing of that piece of paper so I don't see any dramatic changes in our cap structure or anything like that. We're not nervous about anything. We feel very comfortable with where we are. We weathered I think the worst part of this storm was really the I'd say the tail end of the first quarter end of the second quarter when you know it was very unclear what the demand profile and I'd say we've recovered you know Thank you, Adam.

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.

I just want to thank everybody for being on the call today and hope that you're safe and healthy and we look forward to talking to you in February for our fourth quarter call. Thank you very much.

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.