Q1 2023 CVR Partners LP Earnings Call
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Greetings and welcome to the CVR Partners LP first quarter 2023 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.
I started here on your telephone keypad.
As a reminder, this conference is being recorded it is now and then.
My pleasure to introduce your host Richard Roberts, Vice President of S. DNA in Investor Relations. Thank you Richard you may begin.
Thank you Paul Good morning, everyone. We appreciate your participation in today's call with me today are Mark <unk>, Our Chief Executive Officer, Dan Newman, Our Chief Financial Officer, and other members of management.
Prior to discussing our 2023 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 may be affected by important factors set forth in our filings with 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 reconciliations to the most directly comparable GAAP financial measures are included in our 2023 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. 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.
But that said I'll turn the call over to Mark <unk>, Our Chief Executive Officer, Mark. Thank you Richard Good morning, everybody and thanks for joining our call today.
The summarized financial highlights for the first quarter of 2023 include net sales of 226 million net income of 102 million EBITDA of $124 million and the board of directors declared a first quarter distribution of $10 43 per common unit, which will be paid on may 22.
Unit holders of record at the close of the market on May 15th.
Our facilities ran well during the first quarter of 2023 with the combined plants achieving record production levels in the quarter.
Consolidated ammonia plant utilization was 105%.
This resulted in combined ammonia production of 224000 gross tons of which 62000 net tons were available for sale.
Uhm production of 366000 tons.
During the quarter, we sold approximately 359000 tons of UAS at an average price of $457 per ton and approximately 42000 tons of ammonia at an average price of $888 per ton.
Relative to the first quarter of 2022 UAS in ammonia sales volumes were higher as a result of improved operations. Following the completion of the planned turnarounds at both facilities in the third quarter of 2022.
Prices for the first quarter declined from the first quarter of last year with the ammonia prices falling, 16% and UA and prices falling 8%.
Although first quarter benchmark prices for corn belt ammonia and UAE declined by approximately 30% from the fourth quarter, our realized price for UAS increased quarter over quarter, and our realized ammonia price was down less than 10% as we sold more than half of our first quarter production in the fourth quarter of 2022 before prices.
Began to decline.
Looking ahead, we continue to expect healthy demand for fertilizer in the spring planting season due to strong grain prices and farmer economics, which I will discuss further in my closing remarks, I will now turn the call over to Dave to discuss our financial results.
Mark for.
For the first quarter of 2023, we reported net sales of 226 million and operating income of $109 million net.
Net income for the quarter was $102 million or $9 64 per common unit and EBITDA was $124 million realm.
Relative to the first quarter of 2022, the slight increase in EBITDA was primarily due to higher production and sales volumes and lower operating and SG&A expenses offsetting the decline in prices.
Direct operating expenses for the first quarter of 2023 or $58 million, excluding inventory impacts direct operating expenses decreased by approximately $1 million relative to the first quarter of 2022, primarily driven by lower personnel costs related to stock based compensation, partially offset by higher electricity and natural gas costs at <unk>.
<unk> repair and maintenance expenses in the current period.
During the first quarter of 2023, we spent 4 million on capital projects, which was primarily maintenance capital.
We estimate total capital spending for 2023 to be approximately $32 million to $35 million of which $29 million to $31 million is expected to be maintenance capital.
We ended the quarter with total liquidity of $156 million, which consisted of $121 million in cash and availability under the ABL facility of $35 million.
Within our cash balance of $121 million, we had approximately $39 million related to customer prepayments for the future delivery of product.
In assessing our cash available for distribution, we generated EBITDA of $124 million and received net cash proceeds of $18 million from the closing of the 45 Q transaction in January .
The board elected to begin reserving cash for future turnarounds of $3 million. In addition to reserves of $16 million for planned capital projects that Mark will discuss further in his closing remarks.
We currently anticipate future quarterly reserves for these projects subject to further approval.
We also had net cash needs of $13 million for interest cost maintenance Capex and other reserves.
As a result, there was $110 million of cash available for distribution and the board of directors of our general partner declared a distribution of $10 43 per common unit.
Looking ahead to the second quarter of 2023, we estimate our ammonia utilization rate to be between 95 and 100%.
We expect direct operating expenses, excluding inventory impacts to be between $50 and 55 million and total capital spending to be between seven and $12 million.
That I will turn the call back over to Mark Thanks, Dave.
Summary, we were very pleased with our first quarter results driven by record production from our facilities with the combined ammonia utilization rate of 105% we.
We also executed well on our marketing plan from last fall, where we forward sold a significant portion of our first quarter production.
In advance of softening prices spring pre plant season is off to a good start when we saw activity levels pick up in the southern Plains in late March in the corn belt in April overall activity levels seem consistent with the USDA estimates in spring 2023 planted corn acres of $92 million compared to $88.
6 million acres in 2022, an increase of 4%.
<unk> soybean acres are estimated to be flat with 2022 levels at $87 5 million acres.
Inventory carryout levels continue to be estimated at approximately 9% for corn and 5% for soybeans, keeping inventories at or below the low end of the 10 year range.
As a result grain prices have remained strong with corn at $5 85 per bushel and soybeans at $2014 30 per bushel. These.
These strong grain prices are continuing to generate attractive farmer, economics, which should bode well for nitrogen fertilizer demand from the planning season, we believe that the length of this upward demand cycle will in large part be driven by grain prices staying at elevated levels and we see fundamentals for grain remaining strong.
As we discussed on the fourth quarter earnings call warmer than expected weather in Europe , and the U S. Starting in December has led to increased natural gas inventories and lower prices in the U S and Europe as a result spot prices for all nitrogen fertilizer products have fallen from the high levels in the fall.
With sustained lower natural gas prices in Europe in the first quarter, we have seen some of the offline European nitrogen production capacity come back online.
Recent estimates indicate European nitrogen production operating at around 80% of capacity up from 60% in the fall 2022.
Natural gas market dynamics are driven nitrogen fertilizer prices to largely be set by the marginal price of European natural gas for production input cost plus logistical cost while prices of nitrogen fertilizer in the us have fallen since the winter natural gas prices have also fallen into the area of $2 20 per <unk>.
Btu setting U S nitrogen fertilizer production costs at the low end of the global cost curve.
While the extreme pressure on natural gas inventories have subsided for now we do not believe that the structural market issues in Europe have been resolved and should remain in effect over the next two to three years.
We believe there are slightly more upside than downside to European natural gas prices from here.
On our de Carbonization efforts, we have been studying the potential installation of nitrous oxide abatement unit and our number one asset plant at the Coffeyville facility.
They have set aside a capital reserve this quarter from the expected cost of the installation we.
We expect the project to be completed by 2025 and it should further reduce our carbon footprint at the Coffeyville facility, which we believe already has one of the lowest carbon footprints of any nitrogen fertilizer plant in the U S.
We have reserved $5 million of the 45 to proceeds we received in January to fund. This additional de Carbonization project in essence, leveraging our previous de Carbonization proceeds to fund the next step.
We also continue to explore various cotwo sequestration opportunities for our east Dubuque facility.
If approved could reduce its carbon footprint over the next several years, we already have installed nitrous oxide abatement units in both of these dubuque's nitric acid plants, and we recover a portion of our two stream to make food grade cotwo.
We are proud of our efforts to reduce the carbon footprint at the Coffeyville facility and we're focused on opportunities to further reduce the carbon footprint at east Dubuque.
Over the past year, we've been evaluating brownfield development projects at both of our production facilities that could be attractive targeted capacity increase increases to our existing footprint. As a result of this review we've identified several projects that even without a full expansion project could improve the facilities for reliability and production levels.
Our board approved an initial reserves this quarter expected to be spent over the next two to three years to progress these potential projects.
We are also exploring a potential project at the Coffeyville facility.
<unk> tended to improve pet coke handling and storage.
This project if approved would address the key environmental issue at the facilities from reduced truck loading and unloading and better storage containment. The board also approved additional reserves for this project this quarter and we anticipate future quarterly reserves as we further develop these projects.
The first quarter, demonstrating the benefits of focusing on reliability and performance in the quarter. We executed on all the critical elements of our business plan, which include safely and reliably operating our plants with a keen focus on the health and safety of our employees contractors and communities prudently managing cost.
It's 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.
To thank our employees for their excellent execution, achieving record plant production and solid delivery on our marketing and logistics plans, resulting in a distribution of $10 43 per common unit in the first quarter.
That we are ready to take questions Paul.
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Yes.
Thank you. Our first question is from Rob Mcguire with Granite Research. Please proceed with your question.
Good morning, Mark Dana Richard Congratulations on a well executed quarter.
Thank you good morning, Rob.
Would you give us an idea of how much of your second quarter volumes are pre sold and how much are setup to be sold in the spot.
I really don't want to get into the <unk>.
Analytics of that but like we did in the first quarter.
Have pre sold.
I'd say, a good chunk of the second quarter.
Particularly in the ammonia side, which is typical for this for the industry, we sold back back in the fourth quarter.
A good percentage of our ammonia pre plant.
And we will forward selling into the second quarter during the first quarter. So we also pre salt.
Decent percentage in the second quarter.
Okay.
Thank you and then can you discuss running at 105% utilization coming out of your turnaround is that normal or is there something unusual that occurred and then how much longer do you anticipate that run rate to continue.
We talked about it a lot last year.
We struggled with some of the performance issues last year with the plants. We identified what we thought were reliability challenges for US we thought we would address those in the turnaround.
And.
We were very pleased to see the run rates that we had.
I wont promise, 105% for the forward quarters, but we feel like we've addressed.
Some of the reliability issues.
Our target is to operate at 95% to 100%.
Nameplate.
And.
We're already thinking ahead to the next reliability sets of reliability projects, which are identified in my comments.
We think reliability is everything in on the production side of this business and we.
We have paid for the effort that we put in and were basically preparing for the next round of that for the next two to three years. So.
I hope that we can run at high rates, we have in the past at various points in time.
And again, we spent we had big turnarounds last year long stretches of outages and we dealt with issues that we thought but we have other opportunities we think at the plant to improve.
And so I'm, hoping that we will continue on we typically run better after the turnaround once the plants are in lined out.
But again, our focus has been has been for the last several years, but we will continue to be if anything.
More focused on reliability.
Well done and then.
Are you talked about European natural gas and.
And some of the production returning over in Europe , and that has led to lower nitrogen prices.
Have you seen any other notable influences behind the continued drop in nitrogen prices.
I would say that probably the one area that we have seen.
In terms of.
I think causing some of the softness as maybe some of the industrial demand for ammonia overseas has been lighter.
And that's created lengths on the ammonia side.
If you look at the going back to European natural gas. If you look at the forward curve for the fourth quarter as we get into the next winter.
Prices are much higher there and.
We think that window may open like a dead last fall for export from the U S to Europe again in the summer and the fall.
Because we think that the economics for European production are going to be challenged next winter.
And what what most of the European producers are saying is that they will only restart.
They have economics that hold together for a year and if you look at the gas curve I think you'd be challenge to assume that youre going to be able to make it a year, where you're going to be cost competitive. So we do think that there is.
There are opportunities for export out of the Gulf.
To Europe for ammonia for either for upgrade production in Europe , starting maybe this summer or fall so.
The good news for us in the U S is that our cost to produce at the lowest we're right at the low end of the cost curve in the world and so there at these prices are still very good margin for us and.
With where natural gas has come way down from where it was but it's still on the pricing in the marketplace are still much higher than it's been historically in the nitrogen from the last five years or seven years.
I appreciate it and then last question. If you can just give me your thoughts on.
Urea is obviously bounced back here, yes, there are logistical issues out there, perhaps you could say that if there are other reasons behind that and do you anticipate.
Any type of price movement for <unk> and ammonia due to.
Logistical issues or finishing out the season and trying to get product out to the farmer.
Yes, I think that.
We're look we're seeing a pretty good.
Pre plant.
Think that side dress and top dress season are going to be really strong.
For nitrogen and I think that.
Our customers and even down to the farm level had been more reluctant there purchasing more just in time.
It's hard to imagine just in time purchasing in this industry given the logistical challenges, which the flooding in the Mississippi shows you. It's not a good bad to battle on reliable logistics and I think that part of it is for urea is part of it is a demand issue part of it and there are logistics.
We think that the upper Midwest is going to be challenged and logistically, which favors.
Producers that have production capacity in the north.
And so we expect demand to be strong in the northern plains because.
There won't be the ability to get product off the river, we think in time to meet side dress and top dress. So I think it's a confluence of factors there and.
This industry has a history of when you try to purchase just in time.
A lot of times you end up sure.
Purchase enough and there is not you can't you can't quickly.
Relieve market pressure in the spring when it's needed in the timing of it is critical and so you need the fertilizer at the right time in the right location.
So it needs a lot of preplanning and this year I think people trying to play it a little bit too cute with.
The customers did with when they purchased.
Thank you so much.
Thank you there are no further questions at this time I would like to hand, the floor back over to management for any closing comments.
Alright, well. Thank you very much for participating on the call today, and we look forward to reviewing our second quarter results.
And later in July Thank you very much.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.