Nov 1, 2017
Executives
Jay Finks - VP of Finance Mark Pytosh - CEO Susan Ball - CFO Jack Lipinski - Executive Chairman
Analysts
Adam Samuelson - Goldman Sachs Lin Shen - HITE Owen Douglas - Robert W. Baird John Gibbons - Credit Suisse
Operator
Greetings and welcome to the CVR Partners LP Third Quarter 2017 Conference Call. At this time, all participants are in a listen-only mode.
A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Mr. Jay Finks, Vice President of Finance.
Thank you, you may begin.
Jay Finks
Thank you, Michelle, good morning everyone. We appreciate your participation in today's call.
With me today are Jack Lipinski, our Executive Chairman; Mark Pytosh, our Chief Executive Officer and Susan Ball, our Chief Financial Officer. Prior to discussing our 2017 third 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. Without limiting the foregoing, the words outlook, believes, anticipates, plans, expects, and similar expressions are intended to identify forward-looking statements.
You're cautioned that these statements may be affected by important factors set forth in our filings with the Securities and Exchange Commission 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 to the most directly comparable GAAP financial measures are included in our 2017 third quarter earnings release that we filed with the SEC this morning, prior to open of the market. With that said, I'll turn the call over to Mark Pytosh, our Chief Executive Officer, Mark?
Mark Pytosh
Thank you, Jay. Good morning everybody and thanks for joining our call this morning.
To summarize financial highlights for the 2017 third quarter included net sales of $69.4 million, adjusted EBITDA of $5 million and a net loss of $31.6 million. Third quarter results were impacted by a scheduled 14-day turnaround of the East Dubuque facility.
After the turnaround, we had eight days of unplanned downtime to deal with exchange and repairs. In the fourth quarter, we also experienced some additional downtime of approximately 12 days to complete some piping repairs on the reformer.
Due to the $2.5 million cost of the turnaround and the lost production distribute the total impact on third quarter EBITDA was approximately $7 million. Remember that the third quarter is always our seasonally weakest quarter of the year for volume and product pricing.
The on-stream rates were at Coffeyville, the gasifier ran at 96.3%, the ammonia unit operated at 93.5%, and the UAN plant ran at 93.9%. While the East Dubuque the ammonia unit ran at 76.3% and the UAN units operated at 77.1%.
For the third quarter, our combined operations produced approximately 181,000 tons of ammonia. We converted the majority of the produced ammonia into approximately 307,000 tons of UAN.
This left approximately 46,000 tons of ammonia available for sale. We sold a combined total of approximately 299,000 tons of UAN during the 2017 third quarter at a product price at gate of $138 per ton versus $154 per ton in the 2016 third quarter.
For ammonia, we sold a combined total of approximately 65,000 tons during the 2017 third quarter at a product pricing gate of $214 per ton as compared to $345 per ton in the 2016 third quarter. Heavy spring rainfall, particularly in the upper Midwest resulted in difficult application conditions for ammonia.
These conditions coupled with a floor ramp up of new ammonia upgrading capacity caused inventory levels to be higher at the end of June and as compared to the second quarter of 2016. This left the market with excess tonnage going into the seasonally slower summer period and cost prices to fall further than fundamentals what have suggested.
We expect the summer was a low point pricing and we’ve already seen prices were significantly in the past two months. We believe ammonia inventory for the industry will be at normal levels by the end of the year.
On the second quarter earnings call, we announced that the company held back distributable cash flow of $12.9 million in the second quarter, which when combined with our results in the third quarter allowed us to be close to breakeven from a distributable cash flow in the third quarter. We will continue to remain diligent and managing the business for cash until we see clear recovery of the cycle.
In my closing remarks, I will discuss the industry conditions and outlook for the remainder of the year. But before that, Susan will discuss our detailed financial results.
Susan?
Susan Ball
Thank you Mark and good morning. Looking specifically at the 2017 third quarter, our net sales for the period were $69.4 million as compared to $78.5 million in the same prior year period.
The decrease was primarily attributable to the lower UAN and ammonia sales prices partially offset by higher ammonia sales volumes. The decrease in cost of materials and other for the 2017 third quarter to $19.4 million as compared to $19.9 million in the prior year period was primarily attributable to lower regulatory railcar repairs and maintenance partially offset by an increase in hydrogen purchases from CBR Refining.
Direct operating expenses for the 2017 third quarter increased to $40.3 million from $32.5 million in the prior year period. This increase was primarily due to the turnaround of East Dubuque as well as the increased [inventoriable] costs being expensed due to overall higher sold in the 2017 third quarter.
Selling general and administrative expenses for the 2017 third quarter was $6.1 million as compared to 7.3 million for the third quarter of 2016. The 1.2 million decrease is primarily due to decreases and expenses associated with the East Dubuque merger.
Finally, we recorded a net loss of $31.6 million or $0.28 per common unit in the 2017 third quarter. This is compared to a net loss of $13.4 million or $0.12 per common unit for the third quarter of 2016.
Now turning to our capital spending, in the 2017 third quarter we spend $2.8 million on capital projects which increased 2.7 million for maintenance capital and the remainder for growth capital projects. For the 2017 full year, we expect combined spending for maintenance CapEx at our two facilities will be approximately $50 million.
We think the balance sheet as of September 30th we had approximately $70 million of cash and cash equivalents and approximately 647 million of total debt. Finally, on our website you will find a brief presentation in the third [inflex] of financial information including adjusted EPS of 12 months from September 30, 2017 of $76.4 million.
With that, I’ll turn the call back over to you Mark.
Mark Pytosh
Thanks Susan. This year's corn– harvest is approximately 55% complete as compared to 75% on average for the same period for the previous five years.
The USDA is estimated a yield of 171 bushels per harvest today of corn for 2017. This is a little than last year but still a good result given all of the weather conditions for 2017 season.
On our last earnings call, in late July we discussed that the fill season for underway. During the UAN fill season, product prices were lower than last year’s fill.
One factor was US domestic market prices were lower than international prices because buyers were factoring in the new US production capacity. Because of these well absolute prices, customers are more aggressive with their purchases in 2017 compared to 2016.
Even with the new production at the [indiscernible] facility, customers were proactive with their purchasing. This was a change in behavior from what we have seen over the past year where customers were waiting longer the purchase product thinking there would be new production coming online.
Since the UAN fill season, in late July globally urea prices have increased slightly over a $100 per ton with firm demand from all regions of the world at these higher prices. Higher prices have led to more exports of US product to Latin America and Europe which is from the US market.
Urea prices of around 250 to $270 per ton are up from lows of 160 to $170 per ton in July but still approximately $30 per ton below global prices. These urea prices are also about 40 to $50 per ton higher than at this time last year.
These durably higher urea prices have led ammonia and UAN prices higher to more closely matched product prices on a nitrogen equivalent basis. As a result, product prices for tons sold in the fourth quarter and for the first half of 2018 delivery are expected to be significantly higher than the pricing from this summer and higher than pricing in the first half of 2017.
We don’t expect to see the full impact of those higher prices until the first quarter of 2018. While we are pleased to see the signs of improvement in the market, management will remain focused on the issue that we can control including the plants at higher on-stream rates, prudently managing costs, being judicious with capital, maximizing our marketing logistics activities.
We are well positioned with our production, marketing, logistics for this market, but remain conservative in our approach to manage for cash and total recovery takes hold. Before I turn to Q&A, I’m going to turn the call over to our Executive Chairman, Jack Lipinski.
Jack Lipinski
Thank you, Mark, thank you everyone. Listen, I don’t normally join these calls because I leave them in Mark’s capable hand.
You may have seen the announcement this morning that after 12.5 years I am retiring as the CEO, CVR Energy and with that I will be retiring as the Executive Chairman of CVR Partners. I appreciate all your help and support and interest in our company over the years.
It’s been a long time since we took [a hard look]. I like Mark believe that better days are ahead of us, the market is turning.
But I just wanted to spend a moment saying thank you and wishing Mark and the rest of Mark's employees very best. I did this on your shoulders over the years, they are great people and this is a great company.
So, Mark if you want to take back over.
Mark Pytosh
Alright. Well, thanks Jack and thanks for your guidance all these years.
With that, I think we now turn it over to Q&A. Michelle?
Operator
[Operator Instruction] Our first question comes from the line of Adam Samuelson with Goldman Sachs. Please proceed with your question.
Adam Samuelson
Yes, thanks. Good morning everyone.
And Jack, you will be missed. Congratulations on the retirement.
Jack Lipinski
Thank you.
Adam Samuelson
I guess my first question on marketing and price realizations. Mark, can you comment a little bit on your own price realizations versus the industry benchmarks and how you think that might be evolving today and into the future with the new U.S.
capacity from Wever and Port Neal and [indiscernible] and your own mix of production between Coffeyville and East Dubuque, UAN and ammonia in particular I would have thought we’ve had a larger mix of East Dubuque tons that would pull that realization output, any thoughts there?
Mark Pytosh
Yeah. Let’s start, there much of pieces from that.
The milestone with the ammonia because the mix in ammonia was different this quarter and if you recall from the second quarter that we had our UAN plant down in June in Coffeyville. And so, we ended up with a lot more ammonia inventory Coffeyville than we would normally at June 30 and we really don’t have that kind of ammonia seeds in the summer in the Southern planes.
So, we ended up, the pricing was cheaper around the Coffeyville market and so the mix shift to Coffeyville that was an unusual; that was kind of a one-time event. So that’s why the pricing was lower.
I would say we definitely price within the market in the Southern planes, but the percentage of our sale tons were greater in the Southern planes than they are normally. As you know, we largely upgrade most of our ammonia to UAN at Coffeyville, but we had that outage in June and so we had a bunch of tonnage that we sold at where prices were low.
The Southern plains was unique this year in that season, the planting season wasn’t very good and there were issues with the Magellan pipeline and the unit expansion was late. So, when you combine all those factors, there was a lot of ammonia in the Southern planes and that forced prices lower and there is really not a great Ag market.
So, the spread there was just proportionately difficult. I think your other, I think what you’re asking on the other question is will we continue to have the Northern planes premium at East Dubuque in that that marketplace relative to Coffeyville and I think the answer is yes.
There is still a good spread between the two plants. It was down a little bit this year and as customers adjusted to the new Wever plant that were a lot of buying out of the Wever facility.
But as that plants kind of settling into the market we expect the spread to be -- may not be quite as wide as it used to but we expect it to be a decent spread and that’s really driven by transportation economics between no Coffeeville and all the way up East Dubuque. So, we think that spread will hold.
I think things have calmed down quite a bit and we’re seeing a spread during as we’re selling tons into the first half of ’18 kind of revert closer back to normal levels.
Adam Samuelson
Okay. That’s helpful.
And then maybe along those lines, any color on how much of your 4Q tonnage and even first quarter and maybe a little bit of the -- how much has been forward sold and maybe forward sold at Summerville prices versus prices more in line with where they are today.
Mark Pytosh
Well you know in the fill, we’ve take a lot of work, they take a lot of the second half of the year. So that will carry in to the fourth quarter for those fill prices and add a little bit into next year but most of it will be priced on where market conditions are now.
The difference this year and last year is one, in the month of October their producers were still selling UAN at prices at or below the fill price which is that actually the current market is well above the fill price. So, a very different market dynamic and we weren’t really taking any orders in October for the first half of the spring, the fall for '17 and this year we are seeing demand for the first half of ’18, we’re seeing earlier demand for the first half of the year that we did last year.
I would say that the market feels much more constructive this year than it did in the fall of ’16.
Adam Samuelson
Okay. And at East Dubuque, I think the [indiscernible] has or is in the process of starting up, any comments on the volume that you’d be sending over the fence there and any range on the economics of those tons?
Mark Pytosh
I am not going to comment on how much volume there will be a nice customer that plant is up and running and its ramping up and its start to full rate. I believe I think by the end of this quarter it will be at full rate.
We had the ribbon cutting about a month ago and it will be a nice new customer for us and the economics will be comparable to what our economics are and the rest of the plant that’s the way out for our contract works with them, and we the same kind of the rate with them at Coffeeville, where sell them periodically, sell them ammonia. So, they will be up and running and I think its complementary plant, complementary product to UAN so we would expect you maybe see some potential opportunities that work together to target some customers there.
Adam Samuelson
I think your direct operating expenses this quarter stepped up versus the prior quarters and I think in your prepared remarks you alluded to more inventory among your costs running through P&L but any ROI on that direct operating expense number and I was thinking about that going forward?
Susan Ball
No, it really was associated with the costs that normally would be inventoried with volumes going down more tons sold, so we had to increase direct, that was probably more unique to this quarter given East Dubuque's turnaround during the quarter as well as idle time and more costs being expensed.
Operator
Our next question comes from line of Lin Shen with HITE. Please proceed with your question.
Lin Shen
So, Mark, I guess I have two questions. I just want to follow up there question about your price realization versus benchmark price.
I think you mentioned that there are some change of customer behavior given they are seeing new production online, so they are seeing new supply in their area. So, can you talk about that what do you think maybe some long-term change for the spread for East Dubuque the spread can achieve?
Mark Pytosh
Sure. So, I'll start with the back end of your question first.
We still believe that there will be a decent spread between the pricing and East Dubuque versus Coffeyville because of the transportation economics and again what I would say is that it compressed a little bit this year to, as the market was shifting the trade goals were shifting with the Wever plant that used to be product that would come up the river, end of the terminals and then be distributed out now that product is being made in Iowa. And so just to accommodate that shift, the market I say was a little narrower this year.
But again, looking out in the ’18 where we’re starting to sell products at both plants, I see kind of the normal spread between Coffeyville and East Dubuque and in my opinion now that the capacity has got into the marketplace, we’re going to see that settle into a decent spread between the two plants because of the transportation differential. And so, I think I have lost my -- I am trying to follow the first half of your question.
Lin Shen
So, I guess maybe from…
Mark Pytosh
About customer pattern, customer buying patterns. What I kind of said in my comments I'll give a little more color there, in the last year with the new capacity coming in, last year, we had Port Neal and [indiscernible] is up and running and then we have Wever and people waiting for the [indiscernible] expansion for coke.
The customers had been buying a little bit less and waiting and buying more ratably, what we have been saying now as almost coming back to the way it was 1.5 year ago where they are buying at the tons of the year and advance and they are acting the way they used to, not saying it’s going to completely go back but they behavior is getting back to what we were accustomed to. And so, I will say the market and what's telling us is that the market kind of settled in gradually to this new capacity and the buying that’s been this historical pattern.
I think we’re very reverting back closer to what it was historically and just holding back and waiting for what we perceive as opportunity. So, we’ve seen the customers beginning to change their patterns as the markets kind of settle down here in the last few months.
Lin Shen
Great. Last question, can you remind me, do you have all your natural gas hedged for the rest of the year and how much is hedged books in 2018.
Mark Pytosh
So last year we hedged during the winter months and for a big chunk of our consumption and we’ve done the same for the winter crossing between’17 and ’18. So, we’ve done another significant hedged gas for the winter.
The biggest risk period for us as a company is a gas hike in the winter and so we’ve typically taken that off the table when there were good market conditions and we’ve already done that for this winter coming up.
Lin Shen
What was the average price, are you disclosing?
Mark Pytosh
We don’t disclose that.
Operator
[Operator Instructions]. Our next question comes from the line of Owen Douglas with Robert W.
Baird. Please proceed with your question.
Owen Douglas
Hi good morning guys. Just trying to better understand this, you mentioned about the customer buying behavior already starting to recognize that there is not too much additional capacity coming online.
In your experience, based on prior cycles, what’s the typical lag you'd say between when that capacity comes online and you start to see a return to the economics of producing nitrogen.
Mark Pytosh
Sure. I don’t know if there is a precedent for how these markets played out and it was unique to the US -- this is in particular concentrated in the US a lot of capacity came on.
So, we’ve had a big spike in really the last 18 months or so and what I would say is that starting about 18 months ago our customer buying pattern changed and customers were buying in smaller chunks on more of a ratable fashion, and were buying less than hey had historically at different times of the year. They were buying the acreage plants, and the consumption has been higher but the way they bought was a little bit different.
What we’re seeing -- as we got into the fall looking out into the spring of ’18 we’re seeing reversion back to the pre-capacity expansion approach and so the customers are starting to buying more like they did historically. So, it feels like the market has adjusted to the capacity, let’s say its wholly there yet, but the buying pattern is sort of back to where it was and I think that I feel like hat the price spread between the US and international markets will compress in the coming months.
There is still even with the higher prices, they’re still a spread between the US price and the global price and that should compress back to that are not being in differential. So that in the coming months that’s probably the last step of this process.
Owen Douglas
Okay. So, do you think this is really going to be a sort of a first half of 2018 and just as you think about the weak quarters in the years, just recognize the seasonality in your business, do you think that changes the dynamic in terms of the seasonal profitability of your business?
Mark Pytosh
I don’t think so. I think ’18 will be a very normal seasonal pattern for us.
This third quarter, the prices were extremely low this quarter for all the reasons we talked about already, but as I look out into ’18, I think what we see there is we’re not declaring victory there, but some real recovery appears to be shaping up for at least for the first half of ’18.
Operator
Our next question comes from the line of John Gibbons with Credit Suisse. Please proceed with your question.
John Gibbons
Just a quick question follow-up on sort of where we are corn harvest Mark you mentioned I think you said 50% versus sort of historically 75% I guess all else equal that would be sort of negative for fall application. And there were also some fall application issues last year about the same year just to hold it whether.
Can you just talk about how this application is sort of shaping up compared to last year?
Mark Pytosh
There is a couple of things there I am talking to customers here in the last week or two. One, I didn’t quote the soybean that’s pretty far along.
So, there is going to be a bunch -- so the application I think will be [here] the first piece of this also you need temperature to be below 50 degrees. So, we’re getting into that zone after the corn belt, but the soybeans are out in the field.
So, I think the first leg of the application is going to be the rotations from soybean to corn. And so, I think there will be pretty good application rolling out here probably in the next week or so starting and that will cover the soybean fields and by then the corn harvest will be much further along and we should be able to roll from the farmers who are going to plant corn on top of their beans from this past year that will be the first leg and then we can roll the corn I think call it another week or 10 days out from there.
So, ammonia is so cheap right now that I expect the application to be good. Ammonia has had a huge discount than urea, so I do expect a big application season because the economics are very advantageous.
So, I think it will be a good application. We still have the way of mixture whether it is okay they don’t get you much rain, but I think it’s going to be a good fall application this year.
John Gibbons
Got it. Thank you, very helpful.
And just a follow-up sort of on the previously asked question and in your comments around strong selling prices of the Q4 and then first half of ’18. I guess can you give any color just around on what percentage of volumes you guys are selling in ’18 and a little bit just around your preference of -- and with Wever and others coming on basically what your other sell now in the first half of ’18 at current prices or are you bullish on prices that you would potentially hold back some volumes try to sell into higher prices in the first half, how are you guys sort of thinking about that?
Mark Pytosh
If you look historically we done it, now we call it ratable. We're not trading champ, we’re not going to trying to protect where the market will be in April.
So, we sold tonnage of both plants in the first half all the way through the second quarter next year at very good prices. It's not a huge percentage of our volume at this point but the customers have been -- we just -- today is November, forgot today is November 1, but we weren’t getting those orders for the first half of ’17 last year and this year we’re getting them and again the customers are dipping their toe in the water and it tells you that they think that the market is going to be at least today they think the market is going to be [warmer] so they’re buying earlier and we’re not going to try to sell all our volume here in the next month.
But we will ratably at good prices will take some down and we’ll start building the book for the spring. But I guess the message that we’re trying to convey today is that the customers, this isn’t argued, our customers have a more constructive view of the marketplace and are coming to us to buy tonnage in the first half but they think last year they were not.
John Gibbons
Got it, very helpful. And last one can you just expand a little bit on the just operational downtime in East Dubuque in Q4 sort of what went down and you expect there to be all the issues to resolved in those 12 days of down time you know historically you guys have operated at pretty high rates and any color on that would be great.
Mark Pytosh
Yeah, this is the age-old conundrum of the way these plants operate. They are built around full out and one of the issues you have sometimes is when you cycle the plant so we took the plant down in July and we’ve done a lot of repairs and we’ve cleaned the plant and its brand spanking new.
The plant sometimes is temperamental when it comes back up and we’ve had a couple of issues that resulted and I think our goal now is to knock these issues off and let the plant runs for an extended period of time, we've had a great run for I mean like six quarters and we took the plant out for turnaround suddenly you know we had a couple of issues which are frustrating but you know our hope is that this is the last one and we just let this plant run to allow for a long time before we take it down for turnaround. But its mystifying sometimes when they come back up and they’re temperamental and they cool off and they’ve been running for a long period and then they don’t act the way you think even though you’ve repaired everything and it's all shiny brand new and pretty.
So, this was frustrating for us after six quarters of 95 to 100% off stream. So hopefully this is behind us now.
Operator
Thank you. There are now further questions at this time, I would like to turn the call back over to management for any closing remarks.
Mark Pytosh
Again, thanks everybody. just one last shot out to Jack Lipinski and we appreciate all his help over the years and we look forward to talking to you on the fourth quarter results coming in spring.
Thank you.
Operator
Thank you. This concludes today’s teleconference, you may disconnect your lines at this time.
Thank you for your participation and have a wonderful day.