Q2 2021 CVR Partners LP Earnings Call
I'd now like to turn the conference over to your host Mr. Richard Roberts Senior manager of F P&A and Investor Relations for CVR partners. Thank you you may begin.
Thank you Melissa good morning, everyone. We appreciate your participation on today's call with me today are Mark <unk>, Our Chief Executive Officer, Tracy Jackson, Our Chief Financial Officer, and other members of management.
Prior to discussing our 2021 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 are cautioned that these statements may be affected by important factors set forth on 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.
Let me remind you that CVR partners completed a 1 for 10 reverse split of its common units on November 23, 2020 any per unit references made on this call are on a split adjusted basis.
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 2021 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 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.
I'll turn the call over to Mark <unk>, Our Chief Executive Officer, Mark. Thank you Richard Good morning, everyone and thank you for joining us from today's call.
Summarized financial highlights for the second quarter of 2021 included net sales of $138 million net income of 7 million EBITDA of $51 million and the board of directors declared a second quarter distribution of $1.72 per common unit, which will be paid on August 23.2021.
On to unit holders on record at the close of the market on August 13th.
During the second quarter of 2021, we operated the plant safely and reliably with consolidated ammonia plant utilization of 98%.
Demand for UAS on was strong throughout the quarter with supply impacted by a number of other nitrogen fertilizer plants that faced operating issues fall on the shutdowns related to winter storm Yuri.
Our combined operations produced approximately 217000 gross tons of ammonia.
Of which 70000 net tons were available for sale for the second quarter 2021.
This compares to production of 216000 gross tons of ammonia of which 79000 net tons were available for sale on the prior year period.
We produced 334000 tons of UA dollars in the second quarter of 2021 as compared to 321000 tons in the prior year period. During the second quarter of 2021, and we sold approximately 370000 tons of UN at an average price of $237 per ton and.
And approximately 80000 tons of ammonia on an average price of $403 per ton realm.
Relative to the second quarter of 2020, you add on sales increased while ammonia sales declined as less ammonia was required due to the strong fall 2020 ammonia application.
Year over year pricing was 44% higher for you and 21% higher for ammonia.
Nitrogen fertilizer prices have increased significantly from start of the year and that strength continued through the spring planting season and into the summer fertilizer.
Inventory levels remain tight across the U S. Due in part to Yuri related shutdowns earlier in the year and the deferred turnaround activity from 2020 that has now been completed.
The continued strength in crop prices and tight inventory levels was kept pricing firm for nitrogen fertilizers and we have a good order book already for the fall, which I will discuss further in my closing remarks, I will now turn the call over to Tracy to discuss our financial results.
Mark before I get into our results I would like to highlight that during the second quarter of 2021, we revised our reporting to include adjusted EBITDA, which excludes significant noncash items that we believe may skew our underlying results and trends.
For the second quarter of 2021, we reported net sales of 138 million and operating income was $30 million compared to net sales of $105 million on an operating loss of $26 million in the second quarter of 2020.
Net income for the second quarter of 2021 was $7 million or 66 cents per common unit and adjusted EBITDA was 51 million. This compares to a net loss of $42 million or $3.68 per common unit and adjusted EBITDA of 39 million from the prior year period, the year over year increase in adjusted EBITDA was <unk>.
And by higher Ullianna pneumonia sales prices offset slightly by higher feedstock costs and operating expenses.
Operating expenses for the second quarter of 2021 were $53 million compared to $40 million in the prior year period second quarter direct operating expenses included $4 million charge for electricity expenses allocated to us by the city of Coffeyville related to winter storm here.
Excluding this charge as well as inventory and turnaround impacts direct operating expenses increased by approximately $10 million primarily related to higher stock based compensation as a result of the increased unit price.
Turning to capital spending during the second quarter of 2021, we spent 4 million on capital projects, which was primarily maintenance capital. We estimate total capital spending for 2021 to be approximately $27 million to $31 million of which $20 million to $22 million is expected to be maintenance capital.
This excludes turnaround spending, which we expect to be approximately 8 to 10 million that make sense.
Looking at the balance sheet as of June 30th we had approximately $75 million of liquidity, which was comprised of approximately $43 million on cash and availability under the ABL facility of approximately $32 million within our cash balance of $43 million, we had approximately $2 million related to customer prepayments for the future delivery of product in <unk>.
June we completed a refinancing of a substantially of a substantial portion of our outstanding senior notes with a reduction to the coupon of over 300 basis point that will reduce our annual interest expense by over 17 million total debt outstanding at June 30 was $645 million, which was comprised of $550 million on the new 6 on an <unk> seen.
Your notes due in 2028 and $95 million of the 9 on a quarter senior notes due in 2023 as we have discussed previously we intend to take advantage of the improvements in the nitrogen fertilizer Margaret market and potential 45 to <unk> 45, Q tax credit income to repay the remaining 2023 senior notes outstanding over the next 2 years.
In assessing our cash available for distribution, we generated EBITDA of $51 million had current cash needs of $15 million for debt service and $3 million for financing fees and $3 million from maintenance capital expenditures, we added back the 4 million noncash electricity charged from the city of Coffeyville, while we actually well while the actual cost Navy pay.
Over the next 10 years, we're currently evaluating our legal rights with respect to this surcharge.
In addition, the board of directors of our general partner established reserves of $15 million to recapture prior negative cash available and 1 million from the planned turnaround at Coffeyville in the fall of 2021 as a result, there was $18 million in cash available for distribution in the board of directors of our general partner declared a distribution of $1.72 per common unit.
Looking ahead to the third quarter of 2021, we estimate our total on ammonia utilization rate to be greater than 95%. We expect direct operating expenses to range between 38% and $43 million, excluding inventory impacts and total capital spending to be between 9 and $12 million with that I will turn the call back over to Mark.
Thanks, Tracy weather conditions from spring fertilizer application and planting we're good in 2021.
The USDA currently estimate planted corn acres from $93 million and soybean acres were $88 million for corn soybeans temperatures and moisture levels for the next month will be critical to driving harvest yields.
Drought condition can remain in parts of the northern plains, but the hard on the Midwest has been getting timeline range. So the corn crop looks okay overall.
Assuming the usda's planted acres and crop you on estimates hold.
<unk> 2021 inventory carryout of 7.6% for corn and 3% per soybeans continues to be at the low end of the 10 year range, while corn and soybean prices remain near 10 year highs.
Spring ammonia application went well and when combined with a fall 2020 application. It was the largest combined application since we purchased used Dubuque in 2016.
Demand for <unk> was strong and consistent through the quarter and continued into July for side dress on top dress our inventory levels were very low at the end of the quarter. So we were well positioned coming into the summer.
On the supply side of the market due to concerns for employee and contractor safety and restrictions from COVID-19 protocols, many north American nitrogen fertilizer producers delayed major plant turnaround scheduled for 2020 into 2021 many.
Many of these turnarounds that were delayed have on will be starting in the third quarter. So we expect industry production levels should be lower in the second half of this year compared to 2020.
Additionally, during winter storm, Yuri most north American nitrogen fertilizer production facilities ceased operations from 1 to 2 weeks due to shortages of natural gas or excessively high prices.
Any of the plants from their taken down during Yuri have had subsequent operating issues that resulted in additional outages and lower production the.
The impact of these 2 factors tied on nitrogen fertilizer inventory levels at the end of the planning season compared to the past several years.
Since our last earnings call all nitrogen fertilizer prices have remained firm as compared to the past 5 years, we did not see the normal seasonal decline in nitrogen fertilizer prices into the summer sale.
Sales for summer ammonia fill fall prepay and UAS fill were completed in late June and July at price levels comparable to spring spot pricing.
We have a solid order book for both Ual on UA on going into the fall, but have more product to sell from our fourth quarter shipments.
And our sales effort, we factored in our planned fall turnaround for the Coffeyville plant that is expected to start in early fourth quarter.
We continue to evaluate structuring alternatives for the pursuit of $45.2 tax credits for the carbon capture and sequestration through enhanced oil recovery activities that are ongoing at the Coffeyville plant as part of these efforts. We continue to monitor several pieces of proposed legislation moving through Congress that could provide additional flexibility and incentives for companies to.
Pursue carbon capture and sequestration.
At our East Dubuque facility, we are evaluating the progress on a couple of Cotwo sequestration projects and I went Illinois that might create a sequestration opportunity from the plant. While those projects are on early stages considerable effort is being made to bring those projects from the drawing board to reality some of the proposed legislative.
<unk> could aid the development of these projects.
As Tracy mentioned, we were pleased to complete the refinancing of our debt structure in June that will reduce our annual interest expense by more than $17 million. We also intend to reduce our debt outstanding by $95 million over the next couple of years. This reduction on that call should allow us to invest more on the business or make additional distributions to our unit holders.
With greatly improved nitrogen fertilizer market conditions in the debt refinancing. We currently believe that we can both pay distributions and repay debt from our operating free cash flow.
We are especially pleased to have to be paying a distribution of $1.72 per unit, our first of the fourth quarter of 2019.
Well fertilizer market conditions are strong we're not changing our focus on maximizing cash flow generation by safely and reliably operating our plants with a keen focus on the health and safety of our employees contractors and communities.
Prudently managing costs being judicious with capital, but targeting select investments in reliability projects and incremental additions to production capacity.
Maximizing our marketing and logistics capabilities and targeting opportunities to reduce our carbon footprint.
Closing I would like to thank our employees for their excellent execution during the second quarter and their continued commitment to being healthy and safe in everything we do.
With that we're ready for the Q&A session Melissa.
Thank you if you'd like to ask a question. Please press star 1 on your telephone keypad.
<unk> tone will indicate your line is in the question Kim you.
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 Keith on.
Our first question comes from the line of Richard Kus with Jefferies. Please proceed with your question.
Hey, guys. Thanks for taking my questions. This morning.
First 1 from me is I was a little bit surprised on the price realization that you guys were able to get in Q2, what percentage of your order book or what percent of I guess the volumes that you sold during the quarter, we are actually pre sold.
Lower pricing levels with Q1.
Hum.
Uh huh.
I don't have the exact percentage is in front of me, but we typically we typically sell a fair amount of our product both products.
Forward to anywhere from call it 1% to 6 months so the spring.
There was a large component of the spring that was priced in call. It February March.
Prices were rising.
At the end of the second quarter. The ammonia, we typically in the spring we price a big pop.
Part of that in the December timeframe for prepay, so customers purchases on a prepaid basis in December so that that had a big pricing element from a few months ago.
That's typical we typically and again would sell 1% to 6 months in advance. So it's more reflect I would call the second quarter price and reflective of our.
A combination of the first and second quarter market price.
And whatever way you would define that but thats the second quarter was kind of a combination.
I see and then your comments imply that you should see a pretty big step up in pricing net more towards what you really saw from a market standpoint. In Q2 is as we look to Q3 is there a is there a much pre sold volume then at lower pricing in Q3 or should we be looking for that step up in price.
Yes, we yes in that case.
By the time, we were pricing third quarter of this year.
On the market had moved to the spot they call it the spot pricing so.
We didn't sell any product from June and July so it's kind of reflective.
Current spot yeah. Okay. That's good to hear and then from a demand standpoint, obviously things remain robust how should we think about the your.
Your shipment levels as you look to Q3 acknowledging that it's a seasonally slower quarter, but how do you expect those shipment levels to trend relative to last year given the environment.
So typically in the third quarter ammonia shipments are lower.
Because we are waiting for fall applications. So they tend to be lower in the third quarter, but UAS and it's pretty consistent so I would expect.
High degree of shipments in UAS and.
But even in ammonia. This we've sold some some product for the third quarter. So we should see decent shipments of ammonia obviously, the big movement will be in probably the November timeframe for the fall application, but we should see good ammonia movement, but I'd call. It typical UAS movement, which should be pretty good.
Got it understood and then lastly from me on the cost side I know last quarter on the direct operating costs you guys had talked $35 million to $40 million. You came in at 53 could you maybe go through what the difference was there 1 more time I know you had mentioned a few special items there.
Well.
They are the 2 biggies are.
We have the.
This electricity charge so during winter storm year a 1.
On a few plants on operated.
We did receive surcharge from.
Our electricity provider they are proposing that to be paid over.
A 10 year period.
We're challenging that and the assumptions behind it but.
But we took a charge for the net present value of the whole thing in the quarter.
So that was $4 million and then we had a larger stock based comp. So our SG&A number was high because of the increase from the stock price. So those are the 2 bigger numbers there.
That would sort of outside the normal what I call operating environment.
Got it I really appreciate that thanks for the time.
Thank you. Our next question comes from the line of Brian <unk> with Baird. Please proceed with your question.
Good morning.
And you said in your commentary that you're looking to bolt.
<unk>.
And reduce debt, particularly the non quarters.
How are you going to balance that.
Over the next couple of years, obviously, you took advances this quarter the distribution to shareholders, but how you balance things.
Moving to pay the distribution on the amount versus <unk>.
Repaying the balance of the non.
And of course.
Again, it'll come down to a more decision about what.
How much they want to allocate to debt repayment on how much would.
It would be available for distributions, but I think that the.
On the theory that we're operating under is I would consider kind of a steady pace of repayment.
The way to think about it and so do a decent debt paydown, but we do expect given where pricing is that there would be still a significant amount of free cash flow available for distribution, even after and those payments are made.
Okay and the plan is still within the next 2 years to extinguish that lasts.
The piece.
That's correct.
Before I missed.
Before.
On the hopefully.
Yeah.
This is actually on.
Yeah, that's the section.
Yes.
Second section 45, 2 tax credits so.
Where do you stand in terms of being able to monetize the ones that you have today.
I know you were looking at several different structures any updates on that.
And where COVID-19 continuing depressed.
We are progressing on on the structure.
Were there some I would say some new information on the IRS, which clarified some issues with.
With respect to the carbon capture equipment, which effects on our structure and.
So.
We're sort of on the view that when we have got a BOE wrapped around this wheel will be will lay it out there, but we're making progress it's moving around.
As an example on the infrastructure ledger.
Legislation in the.
On the big 1 that comes behind that Theres, some various proposals on carbon capture which combination of increasing the length of the time the claim credits.
This is a credit so all of that's going to factor in to completing our wrapping up on the structure, which is what are the credits worth and how long can lay claim on because that effects.
The value of our of our asset in effect. So we're working through that we're on.
Plan is to keep moving along and see how the legislation falls out.
I think it's generally very favorable for us.
But.
Who knows with with the activities in D C. What will come out of the.
On the various pieces of legislation, but theres clearly I think design.
Desire to provide more incentives for carbon capture and in different forms. So we're going on we're going to hopefully take advantage of that.
I think the only thing I would add that is tying those 2 things together. So the plan is to kind of ratably pay down that stub amount before maturity and the early 2023, but once we are able to monetize the 45 key credits.
We'll likely take out the remainder of the balance whatever it is at that time and take advantage of the interest savings that's available to us.
Okay.
That's helpful. And then just looking at the sales on reductions data schedule that you provided.
There was.
Fair amount almost 16% drop in the use of natural gas in terms of volume and the cost of materials and other.
So.
27, 11 versus $32.16000, MMP to use any reason why you had that large dropped there wasn't really any drop in production.
Page 7 of the press release I'm.
I'm looking at the press release, Yeah, I'm not sure off the top on my head that we can explain that we all want to get back to you on that but it wasn't an effect of the.
Change in production, because where our production was right in line with last year. So yes, no I mean east Dubuque get magically more efficient.
Versus last year.
No it didn't get more efficient I think it's I think it's probably inventory build of ammonia at east Dubuque, but we will have Richard check it and you guys can connect on protocol.
Great that's great I appreciate the partners.
Thank you, ladies and gentlemen, as a reminder, if you'd like to join the question queue. Please press star 1 on your telephone keypad. Our next question comes from the line of William Stein Private Investor. Please go ahead Sir.
Great. Thanks, so much for taking my question.
Some have been answered already.
But Mike I want to address a comment you made about cyclicality in pricing I think you just noted.
Net.
Some point relatively recently transitioned to selling at prices that are closer to spot.
Yeah.
Prices that you realized during Q2 were pretty far away from that if we plug in spot pricing.
To the volumes that you delivered.
In Q2. It appears you might have had something on the order of 6 or $7 per share.
Share in.
Cash available for distribution, but as you highlighted on on this call and in the press release today.
We're in a very strong part of the cycle right now as investors should we anticipate that the current pricing environment.
Rolls over at some point relatively quickly it goes back down to things how things have been for the last I don't know 7 to 8 years or so or is there any reason to be a bit more optimistic that the current pricing environment can persist for some time because it seems to me that if I can.
It's relatively realistic that you could do much higher distributions something on the order of 20 Bucks a year.
And I think given your stock price of about 60 Bucks that.
Addressing this would be of great interest to investors. Thank you.
Okay. So there are several questions in there so I'll start let's start at the top.
We I.
I think I've said on a number of past calls we typically are a seller.
Our market is based on when our customers are wanting to buy product. So.
That that changes periodically year to year because of.
On a variety of factors seasonality.
Whether pricing things like that so we tend we tend to sell product when the customers are buying because thats when there is liquidity so.
This past year customers bought earlier going into the spring. So that's why when you look at the second quarter, it's kind of a blending on our first quarter on second quarter.
We have to participate in the market when the customers are buying so we cant just sell everything on spot pricing.
And I expect that we're going to move all of our.
Inventory our production through the system.
So, but the difference between the second quarter on the third quarter was.
We have sold forward the third into the third quarter, but the pricing was set.
Basically late June and July which was effectively the market pricing was spot springs from pricing. So that pricing was much better looking into the third quarter based on where spot pricing was at that time. So.
So that's I just want to be clear the market provides liquidity to us multiple times during the year and we tried to participate when its available and so we sell.
Didn't call it ratable, but we sell it when liquidity is offered so it's we can't we can't.
I don't think I can lay out on and it's different every year. So it will be.
Hard to tell you that there is an exact pattern that holds.
But.
Let's go to the market though.
I would tell you is.
On the underpinnings of our business are very solid right now and it starts really at the farm level.
Grain prices are high.
Higher than they've been in the last really basically the last 6 or 7 years, maybe back to 10 years going back 10 years and Thats because demand has been good for grain and supply has been.
<unk>.
Think rushing to keep up with that but but weather is always a factor in controlling it and grain prices going into the end of this season, and then to the fall or carry on inventory is going to be.
1 the low points from the last 10 years, so inventory levels are look good.
If you look forward on the grain pricing for December grain prices look very good through the end of this calendar year, which sets up very well for the spring of 'twenty 2.
So the demand side it looks really good.
And that in grain prices look good which means farmers are making money.
And Thats any business is a critical part of the business as if your customers, making money our customers, making money and really the prospects look very solid there on the supply side.
We've had I described on my in my comments, but we've had a confluence of factors where demand picked up.
And supply has been.
There has been if there have been issues with production and part of it was the winter storm and part of it was the turnaround schedule and I described the turnaround schedule here on the U S. But also globally a lot of productions catching up on turnaround. So the inventory levels for this time of year are.
Just appear to be at the lowest they've been in a number of years. Because production also has had limits and it's going to take us from time to catch up to that so I think that the supply demand balance looks quite good going into 'twenty 2.
And I think I think our prospects look really good.
We don't give forward forecast, so I'm not going to comment on the distribution levels and things like that but.
We.
Our goal is to be.
Balanced in our thought process and pay down some debt.
And provide distributions on top of that and we feel very good about.
Our prospects there so.
That's a rambling answer to your question, but.
Did I answer all your questions.
I think so mark I appreciate it.
I Wonder if you have any comment on your expectation for this stronger part of the cycle I think what you just said as you know.
You would anticipate it to remain strong in 2022.
Any sort of change in the volatility of the cycle beyond that or is it just too far out to tell thanks. So much.
No.
We are a cyclical business so I'm knock on a per ton of like the cycles are.
Arent going to come back they always do.
I would just say a couple of things that are interesting for our business from the go forward number 1.
On the growing consumption of grains and renewable fuels.
<unk> is a factor that could have a bearing on.
It could have a bearing on the.
On the go forward. This is on the farm side.
Theres more soybeans being consumed in making renewable diesel and there are some prospects for corn participating in either renewable diesel or in <unk>.
Additional ethanol blending.
So grain demand.
There could be I would say more of a secular change based on the growing use of renewable fuels.
The other is.
The production of Blue or green ammonia that would be used in other sectors outside of agriculture like in power.
Or transportation.
We don't we don't right now we don't have that that would be a new market for ammonia and that would take away. Some of the production that would be used for AG.
So that's the I think most companies we are.
We've been looking at.
Being able to produce below ammonia at both of our plants right now and we think we can certify coffeyville is a blow ammonia plant.
Then if we take the appropriate steps do the same at east Dubuque, but that would be a new market and it would not be an agricultural market and that 1 that would mean that the agricultural mark has to compete with a new source of demand.
The other factor at least over the next few years is.
On the.
This anti dumping case that CF has filed with the department of Commerce on ITC.
And.
If you go back to some of our conference calls from 19 to 20, we're talking about the entry of product from Russia on Trinidad into the U S.
We believe that the subsidized product based on the price of natural gas.
And was.
Was dumped here on the U S, particularly after the the EU put tariffs on UA and so if in fact that they ultimately.
Do provide or put a duty on UA on that also could could be more of a multi year change to our business. So.
There's some really interesting.
I would say factors that could or could lengthen the cycle could affect our business in a more structural way and.
And I would say that we're optimistic about it but a lot of wireless has to play out in front of us going forward.
Thank you.
Thank you, ladies and gentlemen that concludes our time for questions and answers I'll now turn the floor back to management for any final comments.
Alright, well.
Appreciate everyone's time today, and we look forward to talking to you on our third quarter results coming up thank you very much.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.
Yeah.
Okay.
Yeah.