UAN - NYSE

Greetings, and welcome to the CVR Partners Fourth Quarter 2023 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Richard Roberts, Financial Planning and Analysis 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; Dane Neumann, our Chief Financial Officer; and other members of management. Prior to discussing our 2023 fourth quarter and full year 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 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 disclosures related to such non-GAAP measures, including reconciliation of the most directly comparable GAAP financial measures are included in our 2023 fourth quarter earnings release that we filed with the SEC and Form 10-K for the period and will be discussed during the call. Let me 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 partner's 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. With that said, 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 today's call. The summary of financial highlights for the fourth quarter of 2023 included net sales of $142 million, net income of $10 million, EBITDA of $38 million, and the Board of Directors declared a fourth quarter distribution of $1.68 per common unit, which will be paid on March 11, 2024, to unit holders of record at the close of the market on March 4. For the full year 2023, we reported EBITDA of $281 million and distributions of $17.80 per common unit. Our facilities operated extremely well for the year with ammonia utilization rates of 99% and 100% at Coffeyville and East Dubuque, respectively. In 2023, we set a new annual record for UAN production volumes at Coffeyville, along with new records for monthly production volumes of both ammonia and UAN at East Dubuque. We are also proud to report continued improvement in our environmental and safety metrics in 2023 with only one environmental event for the entire year and 0 Tier 1 process safety incidents. For the fourth quarter of 2023, our consolidated ammonia plant utilization was 94%. This resulted in combined ammonia production of 205,000 gross tons, of which 75,000 net tons were available for sale. Combined UAN production was 306,000 tons. During the quarter, we sold approximately 320,000 tons of UAN at an average price of $241 per ton and approximately 98,000 tons of ammonia at average price of $461 per ton. Relative to the fourth quarter of 2022, UAN and ammonia sales volumes were higher, primarily due to strong demand for nitrogen fertilizers in the fall, driven by favorable weather conditions and lower fertilizer pricing relative to the past 2 years. Fourth quarter prices for UAN and ammonia declined approximately 47% and 52%, respectively, relative to the prior year period. Following the reset of nitrogen fertilizer prices in December 2023, we saw an increase in pricing in the fall, particularly for ammonia, driven by strong demand for application after the harvest. While grain market conditions have softened recently, at current fertilizer price levels, we believe farmer economics remain attractive, and we expect to see continued strong demand for the upcoming spring planting season, which I will discuss further in my closing remarks. I will now turn the call over to Dane to discuss our financial results.

Thank you, Mark. Turning to our results for the full year 2023, we reported net sales of $681 million and operating income of $201 million. Net income for the year was $172 million or $16.31 per common unit and EBITDA was $281 million. For the fourth quarter of 2023, we reported net sales of $142 million and operating income of $17 million. Net income for the fourth quarter was $10 million or $0.94 per common unit and EBITDA was $38 million. Relative to the fourth quarter of 2022, EBITDA declined primarily due to lower UAN and ammonia sales prices, somewhat offset by higher sales volumes and lower natural gas prices. Direct operating expenses for the fourth quarter of 2023 were $63 million. Excluding inventory and turnaround impacts, direct operating expenses declined by approximately $5 million from the fourth quarter of 2022, primarily related to lower electricity and natural gas costs, offset somewhat by increased repair and maintenance expenses. Capital spending for the fourth quarter was $11 million, which was primarily maintenance capital, and full year 2023 capital spending was $29 million. We estimate 2024 maintenance capital spending to be $32 million to $35 million and growth capital spending to be $12 million to $13 million. We expect a significant portion of the 2024 growth capital spending will be funded from cash the Board elected to start reserving for these projects in 2023. We ended the quarter with total liquidity of $84 million which consisted of $45 million in cash and availability under the ABL facility of $39 million. Within our cash balance of $45 million, we had approximately $3 million related to customer prepayments for the future delivery of product. In assessing our cash available for distribution, we generated EBITDA of $38 million and had net cash needs of approximately $20 million for interest costs, maintenance CapEx and other reserves. As a result, there was $18 million of cash available for distribution and the Board of Directors of our general partner declared a distribution of $1.68 per common unit. Looking ahead to the first quarter of 2024, we estimate our ammonia utilization rate to be between 86% and 91%, which will be impacted by some planned downtime at Coffeyville in the quarter. We expect direct operating expenses to be $52 million to $57 million, excluding inventory impacts, and total capital spending to be between $9 million and $13 million. With that, I will turn the call back over to Mark.

Thanks, Dane. In summary, we're pleased with our fourth quarter results. We had another good quarter of production from our facilities and experienced solid demand for ammonia for fall application, one of the strongest periods we've seen in recent years. We believe market conditions are steady, and we expect to see strong demand for nitrogen fertilizer for the spring 2024 planting season. Overall, grain market conditions have softened. Since our last call, this grain production estimates from the 2023 planting season have risen. Current USDA estimates indicate 91 million acres of corn will be planted in the spring of 2024, a 4% decrease compared to 95 million acres in 2023. Planted soybean acres are estimated to be $88 million in 2024, up 5% from 2023 levels of $4 million. Yield estimates for corn are increasing from 177 to 181 bushels per acre, and soybean yield estimates are increasing from 51 to 52 bushels per acre. The USDA is now projecting grain inventory carryout levels to be approximately 17% corn and 10% for soybeans, resulting in inventories near the 10-year averages. Grain prices are a little lower than last quarter with May corn at $4.30 per bushel and soybeans at nearly $11.90 per bushel. These grain prices, coupled with current fertilizer prices support attractive farmer economics, which should bode well for nitrogen fertilizer demand for spring 2024. 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 grains remaining steady. As I mentioned on the last several earnings calls, customer purchasing patterns have evolved to become more ratable due to higher inventory carrying costs from higher interest rates. We experienced this new buying pattern after the fall ammonia application, and we've seen more regular ratable buying of nitrogen fertilizer which is matching well with our production schedule. Geopolitical risk continue to represent a wildcard for the nitrogen fertilizer industry with meaningful fertilizer production capacity residing in countries across the Middle East, North Africa and Russia. We are closely monitoring developments in the Middle East that could impact energy and fertilizer markets, and we expect 2024 will be another period of higher than historical volatility in the business. Natural gas prices in Europe have fallen since our last earnings call to $7 to $9 per MMBtu due to lower industrial demand and a warmer-than-expected winter, while the cost to produce nitrogen fertilizer in Europe is currently lower than in 2023, it is still at the high end of the global cost curve. In the U.S., natural gas prices have remained low in the range of $1.50 to $3 per MMBtu since December of 2023, placing the U.S. at the low end of the global cost curve. Europe continues to import a portion of its ammonia needs, and we expect that to continue in the coming months. We do not believe that the structural natural gas market issues in Europe have been resolved and will likely remain in effect over the next 2 to 3 years. At our Coffeyville facility, we've been conducting engineering studies on the potential to utilize natural gas as an alternative feedstock to pet coke. We believe that by making certain modifications to the plant, we can utilize either feedstock to produce nitrogen fertilizer. If this project is approved by the Board and successfully implemented, it could give us the ability to choose the optimal feedstock mix and be the only nitrogen fertilizer plant in the U.S. with that flexibility. We also continue to evaluate brownfield development projects at both the production facilities that can be attractive targeted capacity increases to our existing footprint. The Board elected to continue reserving capital that we expect to spend over the next 2 to 3 years, and we'll be focused on improving reliability and redundancy at the 2 plants that can provide better production rates and lower downtime in the future. A union strike began at our East Dubuque facility in October and is ongoing. Since the strike began, we have operated the plant in a safe and reliable manner with utilization of 94% in ammonia production for the fourth quarter with the only significant downtime in the quarter occurring in early October before the strike began. We had record monthly production in December and shipped near record volumes of ammonia in November for the fall application. While it's hard to predict the future, we believe we can continue to operate the plant safely and reliably at high utilization rates. We sincerely appreciate the hard work of our people at East Dubuque and supporting facilities to keep the plant running and meeting the needs of our customers. The fourth quarter continued to demonstrate the benefits of focusing on reliability and performance. In the quarter, we executed on all of the critical elements of our business plan which includes 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, maximizing our marketing and our logistics capabilities and targeting opportunities to reduce our carbon footprint. In closing, I would like to thank our employees for their excellent execution, achieving 94% ammonia utilization for the quarter and 100% for the year. Solid operating performance and delivery on our marketing and logistics plans resulted in a distribution of $1.68 per common unit for the fourth quarter and $17.80 per unit declared for 2023. With that, we're ready to take any questions.

[Operator Instructions] Our first question comes from the line of Brian DiRubbio with Baird.

I guess my question is going to be around the comments you made around Coffeyville and potentially turning into a dual -- fuel dual input plant. I guess, what's the timing of that decision? Any thoughts on cost? And how would that impact the agreement that you have with your sister company in terms of buying the pet coke that they produce on site?

So a few questions in there. I think that our goal is to make a decision this year to present to the Board, and we think that the capital costs there we don't have the final engineering, so I don't have the final number, but it's not a sort of significant investment for us. It would be a good investment for us, but it doesn't require a big reconfiguration of the plant, particularly the gasification complex. So it's something that we could easily fund. It could be out of the reserves that we've been using for building capacity at the plant. The way that we've sourced pet coke, we source from a group of refineries in the Mid-Continent. The Coffeyville refinery is a big component of that. And the cost of feedstock from the Coffeyville refinery is cheaper than the others because we don't have transportation to bring it from these other locations. And so our intention would likely be to keep the Coffeyville contract intact as it exists today, but consider removing one or more of the third-party providers, which are more costly end of our feedstock. But -- and so we would -- what we're contemplating is a dual feed system, which would be natural gas and pet coke. But depending on what we do with the design, we may be able to go back 100% coke -- pet coke or 100% natural gas, depending on what the market is offering, but that would give us optionality that we do not have today. And so we're very excited about it. And we do intend to make a decision this year on that.

Got it. And then I know very early stages, but let's say for argument sake, you just get the green light from the Board, is that a project that you see in place by I guess, work in '25 done by '26? Or would that take a little bit more time?

I would think that we could do that project in the '25 time frame. I think our goal there -- or I think our goal there would be to make a decision on pet coke sourcing for the '26 year on there because typically, we sign 1-year contracts for sourcing the pet coke. So we'd be looking at making a decision based on how to source the pet coke for the '26 calendar year.

Got it. So best case scenario, this is a '26 event in terms of impacting the P&L?

Yes. I think currently, unless we speed it up, I think that would be the logical and the pet coke cycle is on an annual basis. And so as an aside, pet coke costs have come down and our pet coke costs will be down this year from last year. So the peak of the market seems to have subsided in pet coke and it's coming down. But we like the optionality of being able to pick pet coke or natural gas or really a combination of those two.

I agree on that approach. I remember giving you guys grief a couple of years ago when you thought about going oil, not gas at Coffeyville, but I think this makes all the sense overall.

Our next question comes from the line of Rob McGuire with Granite Research.

Just a few questions here. Can you talk about inventories in the channel? Do you have any color on that from your perspective?

Yes. And that's -- I think it's kind of what I was saying in my remarks about ratable buying. Inventory levels are lower than historical. And that -- so that's what I call ratable because typically what -- the pattern that we saw -- we've seen in recent years is that after fall, ammonia application customers would be buying in size for spring, what we call spring prepay and also winter fill. Well, they're not buying as much in a lump sum in December. But we've seen buying in January and February. Historically, we haven't really seen much buying in January and February for the ammonia run in the spring. And so the inventory levels are definitely lower in the system. And we never -- they never replenished after the end of last season. They were buying for, I'd call it, immediate needs. So in ammonia, they bought for fall application. In UAN, they've been buying more ratably over time and not filling up inventories as quickly as they had historically. And we -- from talking to the customer base, a lot of it isn't -- customers don't want to carry as their cost of capital is 8%. They don't want to carry product for 8 months or 6 months, buying it in the fall and applying it in April or May. So -- but it matches -- what I said in my comments, it matches really well because we're kind of selling every month, whereas historically, we sold in episodes and when the customers are ready. So it actually matches very well with our production schedule.

And then Coffeyville's ammonia utilization. Can you just give us some color on that step down?

Yes. We've had some issues with our ammonia converter, which is what Dane said in his remarks to you on the guidance for the utilization for the first quarter of the plant. We're doing work on a catalyst change there. And so that work is going to get done -- bridged mostly in February, a little bit in March, and that's why the ammonia rates dipped back down. And so we wanted to get in there and change out that catalyst. So that's going on right now, and we expect it to get back to full production rates as soon as we come out of that project.

And then lastly, do you have any thoughts on OCI's announced sale of Iowa Fertilizer Company valuation and so forth?

I would say it hits on a couple of points for us that we definitely believe in. We think that the value of existing production assets is worth more than maybe the market thinks. Because of the cost to construct, if you look at all the new blue ammonia projects that are contemplated in the Gulf and even the brownfield expansions that have been getting done here recently that the cost -- the cost escalation in the last 3 years for new capacity is enormous. And -- and therefore, the plants that are already up and running have more value -- in my mind, have more value than they did 3 years ago. And there are -- I think there's really good synergy there. But I think that when you look at the purchase price relative to our assets, it certainly makes us feel like there's real value in the 2 plants that we have, particularly the plants that are located in the Midwest.

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.

Well, thanks, everybody, for joining today, and we’ll look forward to reviewing our first quarter results in a couple of months. Thank you.