Q1 2022 CVR Partners LP Earnings Call
Yeah.
Greetings and welcome to the CVR partners first quarter 2022 conference call.
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A brief question and answer session will follow the formal presentation.
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It is now my pleasure to introduce your host Richard Roberts, Vice President financial planning and analysis and Investor Relations. Thank you Sir you may begin.
Thank you Christine and good morning, everyone. We appreciate your participation in today's call with me today are Mark <unk>, Our Chief Executive Officer, Dave Newman, Our Chief Financial Officer, and other members of management.
Prior to discussing our 2022 first 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 maybe 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.
Let me remind you that CVR partners completed a one for 10 reverse split of its common units on November 23, 2020 any per unit references made on this call on a split adjusted basis.
Call also includes various non-GAAP financial measures.
Those were related to such non-GAAP measures, including reconciliation to the most directly comparable GAAP financial measures are included in our 2022 first quarter earnings release that we filed with the SEC for the period.
Let me also remind you that we are a variable distribution MLP, who 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, if necessary or appropriate by the board of directors of our general partner.
That said I will turn the call over to Mark <unk>, Our Chief Executive Officer Mark. Thank.
Thank you Richard Good morning, everyone and thank you for joining us for today's call the.
The summarized financial highlights for the first quarter 2022 include net sales of $223 million net income of 94 million EBITDA of $123 million.
We repurchased approximately 112000 CVR partners common units for $12 4 million.
And the board of directors declared a first quarter distribution of $2 26 per common unit, which will be paid on may 23rd to unit holders of record at the close of the market on may 13th.
During the first quarter of 2022, we operated the plant safely with consolidated ammonia plant utilization of 88% we experienced.
Approximately three days of downtime at Coffeyville due to an outage at the third party air separation facility and approximately two days of downtime due to a power outage and.
At East Dubuque, we experienced approximately 11 days of downtime during the quarter due to a number of different outages.
As I mentioned on our last earnings call a major part of the plan for the upcoming turnaround at East Dubuque should address the issues that resulted in the downtime over the last two quarters.
In addition, during the upcoming Coffeyville turnaround the operator that a third party air separation facilities planning to complete some work that should significantly improve the reliability of that asset or.
Our combined operations produced approximately 187000 gross tons of ammonia of which 52000 net tons were available for sale for the first quarter 2022.
This compares to production of 188000 gross tons of ammonia of which 70000 net tons were available for sale in the prior year period, we produced 317000 tons of UA and in the first quarter 2022, as compared to 272000 tons in.
In the prior year period.
During the first quarter of 2022, we sold approximately 322000 tons of UA and at an average price of $496 per ton.
And approximately 40000 tons of ammonia at an average price of $1055 per ton.
Relative to the first quarter of 2021 UAS in ammonia sales volumes were higher driven in part by higher production from Coffeyville, where the plant ran at an improved utilization rate during the short turnaround work we completed.
In the fourth quarter.
Year over year pricing for the quarter was 212% higher for UAS and 252% higher for ammonia.
Our first quarter results are reflective of the price increases for nitrogen fertilizers that we witness in the fall with the energy Crunch that began in Europe and Asia.
Fertilizer inventory levels remained tight across the U S and globally. The ongoing conflict in Ukraine has caused another wave of supply concerns across the fertilizer and grain markets.
We have a good order book for the second quarter and are feeling more optimistic about pricing dynamics for the second half of 2022 and into 2023, which I will discuss further in my closing remarks, I will now turn the call over to Dave to discuss our financial results. Thank you Mark.
For the first quarter of 2022, we reported net sales of 223 million and operating income of $104 million compared to net sales of $61 million and an operating loss of $14 million in the first quarter of 2021.
Net income for the first quarter of 2022 was $94 million 78 per common unit and EBITDA was $123 million.
This compares to a net loss of $25 million or $2 37 per common unit and EBITDA of $5 million from the prior year period.
There were no adjustments to EBITDA in either period the.
The year over year increase in EBITDA was driven by higher U N in ammonia sales volumes and prices offset slightly by higher feedstock costs and operating expenses.
Direct operating expenses for the first quarter of 2000 $20 million to $60 million compared to $37 million in the prior year period.
<unk> inventory and turnaround impacts direct operating expenses increased by approximately $17 million, primarily related to higher electricity and natural gas costs and higher share based compensation as a result of the increased unit price.
Turning to capital spending during the first quarter of 2022, we spent 6 million on capital projects, which was primarily maintenance capital. We estimate total capital spending for 2022 to be approximately 38% to $42 million of which 36% to $39 million is expected to be maintenance capital. This.
This excludes turnaround spending, which we expect will be approximately 26% to $31 million expense.
Looking at the balance sheet as of March 31, we had approximately $172 million of liquidity, which was comprised of approximately $137 million in cash and availability under the ABL facility of $35 million.
Within our cash balance of $137 million, we had approximately $80 million related to customer prepayments for the future delivery of product.
As we mentioned on our last earnings call in February we redeemed a final $65 million of the 2023, nine and a quarter notes outstanding completing our plan of reducing outstanding debt by $95 million.
Between the refinancing of the senior notes completed in June of 2021, and the $95 million reduction in debt outstanding we have reduced our annual debt service costs by approximately 26 million per year, a reduction of over 40%.
In assessing our cash available for distribution, we generated EBITDA of $123 million and had net cash needs of $22 million for interest cost maintenance capex and other reserves.
Of the $101 million or $9 57 per common unit remaining we have cash needs of $65 million for the repayment of the remaining 2023 senior notes and $12 million for the repurchase of 112000 common units.
As a result, there was $24 million of cash available for distribution and the board of directors of our general partner declared a distribution of $2 26 per common unit.
Looking ahead to the second quarter of 2022, we estimate our ammonia utilization rate to be between 92 and 97%.
We expect direct operating expenses to range between 55, and $60 million, excluding inventory and turnaround impacts and total capital spending to be between 12 and $17 million.
With that I will turn the call back over to Mark.
Thanks Dane Russia.
Russia is attack of Ukraine had a major impact on global agriculture markets immediately in February exports of grains, and fertilizers came to a virtual standstill in the black Sea as ports were closed this impacted Ukrainian and Russian exports of wheat, and corn and Russian exports of nitrogen fertilizers.
Particularly ammonia and urea.
Formal and informal sanctions placed on exports products and individuals closely associated with Russian leadership by Western countries is dramatically reduced russias ability to export nitrogen phosphates or potash. Additionally, the natural gas shortages present in Europe . Since September 2021 are now likely to persist.
Through the rest of 2022 due to limits on availability of Russian natural gas exports.
The shortages of natural gas in Europe continue to cause a curtailment of nitrogen fertilizer production and with limited Russian exports supply conditions have been very tied into the spring 2022 planting season.
For ammonia production in natural gas cost alone is currently $200 per short ton in Europe .
Given the drawdown on available nitrogen fertilizer inventories, we don't expect supply conditions to improve materially until 2023.
Longer term given Europes stated shift away from using Russian natural gas to imported LNG baseline nitrogen fertilizer production costs will likely rise for European producers and favor U S production, where gas costs should be lower.
While input costs have risen substantially in the past 18 months, so a grain prices with corn at $8 soybeans in 2016, 50, and we'd at $10 50 farm economics remain attractive.
However for spring planting we have heard from wholesalers retailers or co ops that availability of inputs is as much a concern this price.
Consistent with this feedback the USDA spring 2022 planting intentions report from last month estimated planted corn acres will be $89 5 million down four 1% from $93 4 million in 2021, and soybean acres are estimated at $91 million up four 3% from $87.
2 million acres in 2021.
Factoring these lower planted corn acres and higher soybean acres inventory carryout levels are likely to be below 10% for both corn and soybeans keeping them at the lower end of the 10 year range.
Inventory levels for corner, we may be drawn further than these estimates due to potential grain exports shortages from Ukraine and Russia.
Overall grain market conditions currently bode well for nitrogen fertilizer in 2023 due to the likely need for additional corn and wheat planted acres.
Spring application and got off to a late start to the cold and wet weather, we are seeing strong demand at our plants and expect that demand to continue through the end of the second quarter and into the summer.
While planted acres are expected to be down the supply of fertilizer is tight and the markets appear to be well supported at these price levels.
Net backs in the first quarter were higher by over $750 per ton for ammonia and over $330 per ton for <unk> and relative to the first quarter of 2021, reflecting the escalation in market prices that started in the fourth quarter.
We have sold much of our <unk> volumes at this point and netback prices are expected to be higher than in the second quarter compared to first quarter generally reflecting an escalation in prices from the first quarter.
The issues that caused the downtime in the first quarter expected to be addressed in the turnarounds planned for both plants and the summer.
Both turnarounds are scheduled for the third quarter and we are focused on improving reliability for the long term.
In 2023, we don't currently plan any turnaround activity at either plant.
We continue to progress on monetizing the 40 <unk> tax credits for the Coffeyville facility, we're working through detailed due diligence and structuring and currently expect to complete a transaction in the coming months.
As Dan mentioned, we completed our targeted debt paydown by retiring the remaining $65 million of the 2023 senior notes in February .
Our total debt now stands at $550 million and with an interest rate of six 8%, we are comfortable with our debt level and interest costs through a full market cycle.
We also completed the repurchase of 112000 units for $12 $4 million and when combined with the <unk> to $2 26 declared distribution, we returned $3 <unk> per unit to our unit holders this quarter.
We are also evaluating some brownfield development projects at both plants that could be could be targeted capacity increases to our existing footprint.
If approved these projects would take several years to complete but we may believe there'll be some attractive opportunities within our plant footprint.
We are currently contemplating any greenfield development projects.
While fertilizer market conditions are strong we're maintaining 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.
<unk> communities prudently managing cost 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.
In closing I'd like to thank our employees for their excellent execution during the first quarter and their continued commitment to being healthy and safe in everything we do.
With that we're ready to answer any questions Christine.
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 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 Richard <unk> with Jefferies. Please proceed with your question Hey.
Hey, guys congrats on a good quarter and thanks for answering my questions. So.
Firstly for me as you look at Q2.
I guess, you mentioned that the spring planting season got started a little bit later this year can you talk maybe about how you expect volumes to trend. This year just in terms of ammonia and and you and as you look at the second quarter and the spring planting season.
Yes, Richard it's Mark.
It's a little bit early to call that because it's there we're still I'd say in the.
Planting for eight and so I'm not ready to call volumes, what I would tell you typically.
In a spring wear.
Less ammonia was applied.
That generally has to be made up with.
Urea in UAE and so.
If it does in fact, if we don't get as much ammonia applied.
Ben.
We would see a pickup in demand a little bit later for urea and <unk>.
So the.
The simple fact is that you need to have a certain amount of nitrogen on the on the ground and to meet yield targets. So if it's if it's unmatched by ammonia then it'll it'll get picked up in urea in you and I think this year, we'll probably see incrementally more demand in urea and <unk> versus <unk>.
Got it Okay. That's helpful. And then you mentioned Q2 is substantially booked out have you guys started booking into Q3 yet.
We have just we are in I would say price discussions on Q3.
So it's pretty early there again with the spring that's got to play out we got to get the crop in the ground, but we have had some price discovery with customers for the third quarter, So, but we havent sold Mike.
A lot of volume yet, but we have a sense for what people are thinking about.
Got it okay.
And then maybe lastly for me just in terms of all of the cash that you guys are generating and are likely to generate for the remainder of this year.
You talked about maybe some targeted capex some unit repurchases and dividends, obviously things of that nature now that you've reached your gross debt target.
Are you thinking about any potential inorganic opportunities in terms of M&A or is that not really something that youre thinking about at this point.
Yes, I would say all of the options are on the table.
And one of the challenges in this environment.
M&A is.
What.
What expectations are for the buyer and the seller and I would.
As we've seen prices escalate that generally the psychology goes with it so asset prices are up substantially and I would just tell you that we're very returns focused so we will we're not going to chase assets to to deploy the capital its got to make a full cycle return for us.
So I would say that we're going to continue to look and look for opportunities, but the bid ask spreads pretty wide at this stage understood. Okay. I appreciate it congratulations.
Thanks.
As a reminder, if you would like to ask a question press star one on your telephone keypad.
Our next question comes from the line of William Stein, a private Investor. Please proceed with your question.
Great. Thanks.
Thanks for taking my questions and congratulations on the good results.
First I'd like to ask about the 45 tax credits I understand this is still in process, but can you sensitize us. So we can maybe have proper expectations around.
The magnitude and timing of cash flows from these is it's going to be an ongoing source of cash for.
For the company and thus for unit holders or is this going to be more of a one time event.
So I'll keep it generalized because I don't I don't want to basically put the deal out there but.
If there is going to be two buckets, there's going to be.
An upfront payment.
The structure and then there'll be ongoing payments, so there'll be there'll be sort of two cash streams that come out of the $45. Two credits a onetime payment and then ongoing payments for the life of the project.
We're sort of finalizing that as we're getting there and but we will see two sort of cash streams coming out of 45 two.
Great.
Next your inventory is nearly at an all time low I think normally in Q1, you build inventory in this quarter, you built ammonia, but you're actually consumed inventory of U a N.
Is that because of the production problems that you cited at east Dubuque or was there something else going on and do you feel youre going to be able to meet demand and drain additional inventory during Q2, where our inventory levels to low to predict that.
So there were two different issues going on there.
We did have production issues, so we had lower inventory coming in but we.
We had such a big fall ammonia that we already were low coming into that January one.
So inventory and this has been going on for a year I mean, we.
We've had low inventory even seasonally.
Gary hit last February .
And this is what when I refer to tight industry conditions.
Pretty similar for others.
All the producers have been carrying tight inventories.
And we did have ammonia available for spring, but.
Most of that will be consumed in.
Spring planting pre.
Pre plant and.
And so we were able to make enough to support our customers.
Coffeyville, if you'll recall back in the fall we did expansion in the urea plant and actually we're consuming a lot of the ammonia because we're producing at a higher level.
Producing UA and at higher levels. So we're not.
We're not having as much ammonia available for sale, but we have more UAS for sale. So that's a good that's a good problem to have and.
The performance of the plant exceeded our expectations, when we put that equipment and in the fall.
Okay, and then one maybe.
Well, it's a longer term question if youll indulge me in Q1, you posted earnings per share and free cash flow per share that my analysis right. These were greater for just the quarter than they were for the entire year of 2013. The last time your stock was trading at over $300.
It's clear that part of that improvement is related to having more capacity. Following the acquisition in 2016, and maybe other things as well, but clearly a big part of this because of.
Better pricing.
Pricing of course, the result of the balance between supply and demand.
<unk> talked a little bit about what might happen.
With supply in the very near term, but I'm, hoping you can just indulge me for a minute and talk about sort of near medium and long term anticipated changes in supply and demand factors. Thanks, so much.
Yeah.
So there's always there's always two parts of the cycle for what we do one is on the production side and.
Partly related to performance of the facilities part of it is related to input cost.
This is a very different cycle than we experienced back in that call. It 2011 to 15 timeframe.
We have a severe energy shortage in certain markets and it doesn't look like that.
Issues can be solved in months, it's more like years.
And so we require either natural gas or coal to produce nitrogen fertilizers.
And that those markets are dislocated and look like it's going to take some time to to fix that.
And so the input costs generally are much higher than they were in the last cycle. So global prices have risen and it doesn't look like there's going to be I'd say, a recovery or a reduction a major reduction in energy pricing in the near term I think it's going to take a while.
In Europe as I said in my my points for Europe is going through a transition from taking pipeline deliver natural gas from Russia to taking a lot of LNG.
And the cost of that is kind of at a much different price point.
Durable cycle.
So that the energy side is.
Very difficult and then with the Russia, Ukraine. In addition to availability of Russian fertilizers.
The grain market doesn't look we're going to draw a lot of.
Inventory out of grains and are.
Our business is only as good as farm economics drive it.
And grain grain.
Grain prices are very high and look like again. This is going to take time measured in years to fix the grain market back to being normal I think it will take two to three years. It takes two to three planting cycles to recover from the loss of.
The grain inventory that's occurring.
With the Russia, Ukraine situation, we were already pretty tight going in before that happened. So I think that the supply demand dynamics are very different.
And they are every cycle, but this one is both a combination of the energy issue globally as well as our grain issue globally, we have a food security issue in an energy security issue globally, and I think it's going to take two to three years for that.
Reach a new equilibrium and so I don't see the dynamics in our marketplace changing greatly here for the next.
Year or two I think it's going to be pretty similar to what it is today.
Sounds pretty supportive of prices for even the medium term.
Thanks for taking my questions.
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.
Yeah.
So again I want to thank everybody for your interest in CVR partners and our employees and we.
Wish everybody.
<unk>.
Say today, and we look forward to reviewing our second quarter earnings.
In the summer 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.