Q2 2023 CVR Partners LP Earnings Call

Greetings and welcome to the CVR Partners L. P second 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 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, Vice President of P&A and I are thank you. Mr. Roberts you may begin.

Thank you Camilla 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 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, maybe deemed the 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 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 disposal related to such non-GAAP measures, including reconciliation to the most directly comparable GAAP financial measures are included in our 2023 second quarter earnings release that we filed with the SEC for the period.

I also remind you that we are a variable distribution MLP.

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.

That said 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 for today's call.

<unk> financial highlights for the second quarter of 2023 include net sales of $183 million.

Net income of $60 million EBITDA of $87 million and.

And the board of directors declared a second quarter distribution of $4 14 per common unit.

It will be paid on August 20, <unk> to unit holders of record at the close of the market on August 14th.

Our facilities ran well during the second quarter of 2023, and despite five days of downtime due to outages at a third party air separation plants at Coffeyville.

We achieved consolidated ammonia plant utilization of 100%.

We also achieved new records for monthly ammonia production of daily ammonia shipments at east Dubuque in the quarter.

Combine them on your production for the second quarter of 2023 was 219000 gross tons of which 70000 net tons were available for sale and UAS production was 339000 cars.

During the quarter, we sold approximately 329000 tons of UA and at an average price of $316 per ton.

79000 tons of ammonia at an average price of $707 per ton.

Relative to the second quarter of 2022 U a N 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 second quarter declined from the second quarter of last year with ammonia prices falling 40%.

And prices falling 43%.

While nitrogen fertilizer prices continued to decline through the second quarter, we sold more than 40% of our second quarter volumes in the first quarter at higher prices.

Looking ahead, we believe we have seen the recent bottom and nitrogen fertilizer prices and expect to see prices increasing into the fall due to strong game grain prices and farmer economics, which I will discuss further in my closing remarks, I will now turn the call over to Dan to discuss our financial results. Thank you Mark.

For the second quarter of 2023, we reported net sales of 183 million and operating income of $67 million.

Net income for the quarter was $60 million or $5.66 per common unit and EBITDA was $87 million relative to the.

The second quarter of 2022, the decline in EBITDA was primarily due to lower prices for you a N a pneumonia offset somewhat by higher production and sales volumes.

Direct operating expenses for the second quarter of 2023 or $56 million.

Excluding inventory impacts direct operating expenses decreased by approximately $6 million relative to the second quarter of 2022, primarily driven by lower natural gas and electricity costs offset somewhat by higher stock based compensation expense.

During the second quarter of 2023, we spent 6 million on capital projects, which was primarily maintenance capital.

We estimate total capital spending for 2023 to be approximately 33 to 35 million of which $31 million to $32 million is expected to be maintenance capital.

We ended the quarter with total liquidity of 104 million, which consisted of $69 million in cash and availability under the ABL facility of $35 million.

Within our cash balance of 69 million, we had less than $1 million related to customer prepayments for the future delivery of product.

In assessing our cash available for distribution, we generated EBITDA of $87 million and had net cash needs a $43 million for interest cost maintenance capex and other reserves.

Within that total is a cash reserve of $20 million for expected working capital needs that could be released in the future if appropriate.

$8 million of reserves for future turnarounds and planned capital projects.

As a result, there was $44 million of cash available for distribution and the board of directors of our general partner declared a distribution of $4 14 per common unit.

Looking ahead to the third 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 14 and $16 million.

Now I'll turn the call back over to Mark Thanks.

In summary, we were very pleased with our second quarter results. We had another quarter of strong production from our facilities along with great execution from our marketing and logistics team, where we sold forward a significant portion of our second quarter production volumes in the first quarter.

The spring planting season went well with favorable weather and strong demand for nitrogen.

Demand was strong overall, we did not think that the level of demand was consistent with the USDA estimates of 94 million planted corn acres in the spring of 2023, which is a 6% increase compared to 80 $988 6 million acres in 2022.

The USDA estimated planted soybean acres to be 83 million, which is down 5% from the 2022 level of $87 million and grain inventory carryout levels, our estimate to be approximately 15% for corn and 6% for soybeans.

Resulting in corn inventories near the 10 year average and at the low end of the range for soybeans.

Given the significant drought conditions in the Midwest, We think there's a rest of the Usda's. Most recent yield estimates for both corn and soybeans.

Grain prices remained strong with December corn at $5.15 per bushel and November soybeans at $13 30 per bushel.

Strong grain prices, coupled with lower fertilizer prices support attractive farmer economics.

Which should bode well for nitrogen fertilizer demand from the fall application season.

We believe that the length of this upward demand cycle were in large part be driven by grain prices staying at elevated levels and we see fundamentals for grain remaining strong.

We think that spring nitrogen demand was lower than the amount implied by an estimated 94 million planted corn acres in the U S. As we think the additional acres of corn were infringe areas, where yields are lower we also believe demand was impacted by a large drawdown in inventories at the dealer level and lower than normal application rates per plant.

Acre.

Customers have shared with us that their inventory levels weren't the lowest they have seen in recent years and will need to be replenished in the coming months with the increase in carrying cost over the past year, we see customer purchasing behavior shifting to a more ratable pattern rather than purchasing larger volumes further into the future.

We think this matches well with our production pattern.

As we discussed in the first quarter earnings call sustained lower natural gas prices in Europe in the first half of 2023 and lowered the production cost produce nitrogen fertilizers in Europe the.

The global market has been factoring in these natural gas costs and prices for ammonia urea and UAE are.

We expect that European gas prices will stay low end of the fall and then reset as we enter the winter the current fourth quarter price for T. T. As has been in a range of 15 to $20 per M Btu, which should drive Europe back to the high end of the global nitrogen production cost curve.

On the other hand natural gas prices in the U S had been in the range of $2 to $3 per M. N V to you since the spring place in the U S. At the low end of the global cost curve, we do not believe that the structural natural gas market issues in Europe had been resolved and should remain in effect over the next two to three years.

In July we completed both the summer UA unfurl in fault prepay ammonia ordering from customers with the reset in prices I discussed we saw strong demand for both products and had a good order book heading into the fall.

On our de Carbonization efforts, we are moving forward on the installation of a nitrous oxide abatement unit and the number one asset plan at the Coffeyville facility and expect the project to be completed by 2025. We also continue to explore various C. O two sequestration opportunities for the east Dubuque facility, which if approved could reduce its karl.

Footprint over the next several years several developers are working on large scale multi customer sequestration projects in the Midwest and we are evaluating the opportunity to join one of these development projects.

We are also pursuing the certification and the production of Coffeyville as blue ammonia in UAE and and have received customer interest in low carbon nitrogen fertilizer.

We continue to evaluate brownfield development projects at both of the production facilities that could be attractive targeted capacity increases to our existing footprint.

The board elected to continue reserving capital that we expect to spend over the next two to three years to progress these potential projects.

With the exception of the air separation plant outage at Coffeyville in the second quarter continued to demonstrate the benefits of focusing on reliability and performance.

In the quarter, we execute them all of 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 being judicious with capital, but targeting select investments in reliability projects and incremental additions.

As to production capacity.

Maximizing our marketing and logistics capabilities that targeting opportunities to reduce our carbon footprint.

In closing I would like to thank our employees for their excellent execution, achieving 100 per cent ammonia utilization and solid delivery on our marketing and logistics plans, resulting in a distribution of $4.14 per common unit for the second quarter.

With that we're ready to open up for Q&A.

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 wanting to keep that your line is in the question queue.

You May press star two if he 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 and our first question is from Rob Maguire with Granite Research. Please proceed with your question.

Good morning, Mark Dane and Richard Congratulations on your strong operational performance.

Thanks, Ralph good morning.

The market in your opinion, what are the leading drivers behind the hydrogen prices stabilizing over the last month.

I think there were a confluence of factors I think there were a number of our mother were planned turnarounds globally.

There were operating difficulties.

And we've seen in certain parts of the world that natural gas has been shifted from a nitrogen production too.

Our power generation, so there's a shortage of gas in certain markets and I would just say that fundamentally if you looked at no cost to produce with natural gas prices, where the market was I think that there was in the low inventories I think that really push demand and so.

So we were probably disproportionately low from an inventory perspective.

And that that kind of snapped back the other way to you know I'd say reach maybe back to equilibrium.

We've seen a large increase in pricing in the last month.

And I think it's all been really demand driven theres been consistent demand even as prices have been rising.

And I think that's because the market was fundamentally lead them through their inventories.

Through the spring.

Got it and then.

So is your summer fill program for ammonia in U a N over at this point.

Yes. It is.

And can you give us an idea of the fourth quarter production that you pre sold at summer fill prices as it is that volume in line with historic averages.

The volume was lower than historic out or in terms of selling forward. We sold in a you know.

The market was buying in shorter increments I said that in my comments.

People are buying and they used to buy in sort of call. It four to six months increments in the summer fill that's more like two to three months now so I would say the buying patterns shifted in and.

As I said I think the biggest factor there is cost cost of money cost to carry inventory.

And and said you know the customers don't want to carry inventory as long and so they are buying in shorter periods and so we didn't sell as long as we typically do in the summer fill.

And which was which has been helpful. Because prices have risen since then.

So the farmer is still a little stuck in just in time mode.

I would say that what happened was when the market reset.

That also reset all the way to the farm level and so the retail price for nitrogen is a lot lower than it was even in the spring and so we're seeing that we're seeing the by going all the way through to the farmer level.

And so we've seen good take up not just from the customer base, but also the farm the reset in pricing makes it very attractive for farmers to step in there. So it's been a I'd say all the way through the supply chain good demand down to the farmer level.

Got it and then shifting gears.

Should we expect pet coke prices to remain around the $75 ton level for the second half of the year.

Yeah, but where were longer term contracts for longer term contracts for most of that.

Yeah for the longer term being through the end of the year and I I would expect with natural gas being this wild adult that next year should reset lower.

For the you know for that contract.

So our contracts a series of contracts.

Got it.

And then can you kind of give us an idea of where youre seeing fall prices for you in right now versus a relative to low as you saw in the summer.

Right now the current pricing is about up about 20% from the summer fill.

So would that be for fall pricing that youre charging right now or would you guess.

That'd be sort of I'd call. It October October November pricing versus July .

Third quarter pricing.

Got it okay I appreciate that.

Those are all my questions. Thank you very much all right Rob. Thank you.

Thank you there are no further questions at this time I would like to turn the floor back over to management for closing comments.

Again want to thank everybody for participating in the call today, and we look forward to sharing with you our.

Third quarter results in late October early November thanks, again for participating.

Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.

[music].

Uh huh.

Uh huh.

[music].

Mhm.

[music].

Uh huh.

[music].

Hum.

[music].

Okay.

Mhm.

[music].

Okay.

Yeah.

[music].

Yeah.