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Edited Transcript of UAN earnings conference call or presentation 21-Feb-19 4:00pm GMT

Q4 2018 CVR Partners LP Earnings Call

Sugar Land Mar 1, 2019 (Thomson StreetEvents) -- Edited Transcript of CVR Partners LP earnings conference call or presentation Thursday, February 21, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jay Finks

CVR Refining, LP - IR Contact

* Mark A. Pytosh

CVR Partners, LP - CEO, President & Director of CVR GP LLC

* Tracy D. Jackson

CVR Partners, LP - Executive VP & CFO of CVR GP LLC

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Conference Call Participants

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* Adam L. Samuelson

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Charles Nathan Neivert

Cowen and Company, LLC, Research Division - MD and Senior Research Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the CVR Partners, LP Fourth Quarter 2018 Conference Call.

(Operator Instructions) As a reminder, this conference call is being recorded.

It is now my pleasure to introduce your host, Mr. Jay Finks, Vice President of Finance and Treasurer. Thank you, sir. You may begin.

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Jay Finks, CVR Refining, LP - IR Contact [2]

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Thank you, Michelle. Good morning, everyone. We appreciate your participation in today's call.

With me today are Mark Pytosh, our Chief Executive Officer; Tracy Jackson, our Chief Financial Officer; and other members of management.

Prior to discussing our 2018 full year and fourth 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 are cautioned that these statements may be affected by important factors set forth in our filings with the Securities and Exchange Commission and our latest earnings release. As a result, actual operation 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 measure, are included in our 2018 fourth quarter earnings release that we filed with the SEC.

With that said, I'll turn the call over to Mark Pytosh, our Chief Executive Officer.

Mark?

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Mark A. Pytosh, CVR Partners, LP - CEO, President & Director of CVR GP LLC [3]

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Thanks, Jay. And good morning, everyone, and thank you for joining us for today's call.

2018 was a successful year for CVR Partners. During the year, we were focused on safe and reliable operations, improving our market capture and maintaining financial discipline. Some of our specific accomplishments include we achieved significant year-over-year improvement in environmental, health and safety areas at both facilities. We maintained high utilization rates, excluding planned downtime at our Coffeyville facility. We completed a new rail loading rack at our Coffeyville facility and began loading UAN rail cars during the second half of 2018, providing unit train capabilities, increased access to the BN rail line and reduced distribution costs. We completed Coffeyville's planned turnaround on time and on budget. We identified and learned the process of developing a plan to construct a backup oxygen unit in Coffeyville in order to reduce the impacts of a possible third-party outages. And we consolidated back-office locations, reducing certain overhead costs and staffing.

To summarize financial highlights for 2018 full year, including net sales of $351 million, a net loss of $50 million and adjusted EBITDA of $90 million.

Looking more specifically at the 2018 fourth quarter. We reported net sales of $98 million, a net loss of $1 million, adjusted EBITDA of $33 million. And the Board of Directors declared a fourth quarter distribution of $0.12 per common union -- unit, which will be paid on March 11 to unitholders of record on March 4.

In the fourth quarter of 2018, we changed our measure of reliability to focus on production, as compared to a time-based metric. We feel this better illustrates production reliability and capture of capacity during the period. During the fourth quarter of 2018, we had strong operating performance at both facilities. At Coffeyville, the ammonia plant operated at 96% utilization for the quarter compared to 94% for the fourth quarter of 2017. At East Dubuque, the ammonia plant operated at 95% utilization compared to 88% to the prior year period.

For the fourth quarter of 2018, our combined operations produced approximately 209,000 tons of ammonia, 357,000 tons of UAN. And 59,000 tons of ammonia were available for sale compared to production of 200,000 gross tons of ammonia, 306,000 tons of UAN and 64,000 tons of ammonia that were available for sale in the prior year period. We sold approximately 364,000 tons of UAN during the fourth quarter of 2018 at an average netback price of $180 per ton, which was a 36% increase over the prior year period. In addition, we sold approximately 46,000 tons of ammonia during the fourth quarter of 2018 at an average netback price of $324 per ton, which was a 23% increase over the prior year period.

Ammonia sales volumes were down significantly year-over-year in the fourth quarter of 2018 due to a combination of excess moisture and cold weather. Current estimates from NPK Fertilizer Advisory Service indicate that the U.S. Corn Belt fall ammonia application season was down from early-season expectations by 50% for the U.S. Corn Belt and 40% for the northern plains surrounding East Dubuque. While our 2018 fourth quarter results were negatively impacted by the weather, we were able to retain these unshipped fall contracts and inventory, which were resold for second quarter 2019 shipment. In this December, we reduced East Dubuque's ammonia production rate to help manage our inventory levels.

I will now turn the call over to Tracy to discuss our financial results.

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Tracy D. Jackson, CVR Partners, LP - Executive VP & CFO of CVR GP LLC [4]

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Thank you, Mark.

Before I cover our results, I'd like to outline that, during the fourth quarter of 2018, we revised our internal and external use of non-GAAP measures to eliminate any adjustments to EBITDA for business interruption insurance recoveries. As Mark mentioned, we also changed our measure of reliability from onstream rate, which is a time-based metric, to utilization, which was a production based metric.

Turning to our results for the full year 2018.

We reported operating income of $6 million, a net loss of $50 million or $0.44 per common unit and adjusted EBITDA of $90 million. This is compared to operating losses of $10 million, a net loss of $73 million or $0.64 per common unit and adjusted EBITDA of $63 million (sic) [$67 million] for the full year of 2017. The approximate 50% increase year-over-year in adjusted EBITDA was primarily due to the improved netback pricing of 17% and 14% for ammonia and UAN, respectively.

For the fourth quarter of 2018, we reported net sales for the period of $98 million, operating income of $8 million, a net loss of $1 million or $0.01 per common unit and adjusted EBITDA of $33 million. This is compared to net sales of $78 million, operating losses of $11 million, a net loss of $27 million or $0.24 per common unit and adjusted EBITDA of $8 million for the prior year period. These improvements were also driven predominantly by improved netback pricing as well as an increase in UAN sales volumes of 20%, partially offset by 45% lower ammonia sales volumes. The decrease in ammonia sales volumes was primarily attributable to weather issues in the Corn Belt, as Mark just discussed.

In the fourth quarter of 2018, we recovered approximately $6 million from a 2017 business interruption insurance claim.

Direct operating expenses for the fourth quarter of 2018 decreased to $38 million from $42 million in the prior year period. Excluding inventory impacts, direct operating expenses increased by approximately $1 million year-over-year primarily due to natural gas costs.

Turning to capital spending. During the fourth quarter of 2018, we spent $4 million on capital projects, which was primarily maintenance capital. For the full year 2018, we spent approximately $20 million, of which $16 million was for maintenance capital at our 2 facilities. This compares to our spending plan for the year of $21 million of total capital and $18 million of maintenance, with a slight difference due to timing. We estimate total capital spending for 2019 to be approximately $20 million to $25 million.

Looking at the balance sheet. As of December 31, we had approximately $62 million in cash, including $24 million related to customer prepayments for the future delivery of product; and full availability under the ABL facility of $50 million. We currently believe that our total liquidity position of approximately $87 million at the end of year is sufficient going forward.

Our long-term gross debt of $647 million, including current portion, remains unchanged.

Available cash for distribution of $14.1 million or $0.12 per unit is derived from our positive adjusted EBITDA for the quarter after consideration of reserves of $15 million for debt service and $4 million for environmental and maintenance capital expenditures. We are a variable distribution MLP. We will review our previously established reserves, evaluate future cash -- anticipated cash needs and may reserve amounts for other future needs as determined by the 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 [just] received for finished products, maintenance capital expenditures and cash reserves deemed necessary or appropriate by the Board of Directors of our general partner.

With that, I will turn the call back to Mark.

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Mark A. Pytosh, CVR Partners, LP - CEO, President & Director of CVR GP LLC [5]

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Thanks, Tracy.

We had a confluence of weather factors that made normal farming conditions difficult during the fourth quarter of 2018. There was a lot of moisture in late summer or early fall, which delayed the harvest of corn and soybeans. After the harvest was completed, temperatures fell rapidly, limiting nitrogen application in many areas across the Corn Belt, and farmers were just not able to do field work or apply normal levels of ammonia in preparation for the 2019 planting season. As a result, nitrogen fertilizer producer sales were down, and demand was shifted from the fall to the spring. Due to the decreased fall demand, most of our customers' fall orders were canceled and then reordered for the spring. As such, we had a significant order book for spring of ammonia.

Inventory levels for both customers and competitors have been higher than normal and have led market pricing to soften in the short term because demand for product is lower while we wait for spring application to begin. In addition to our large ammonia spring order book, we sold most of the 2019 first quarter UAN production volumes during the fourth quarter. We now are in a comfortable UAN inventory position as we wait for spring season to start. However, the challenge for spring will be logistics of moving a lot of nitrogen during a tight application window. Most of the industry estimates are for planted corn acres of 92 million to 94 million compared to 89 million last year. Therefore, farmers will be required to catch up on the lower fall ammonia application plus 3 million to 5 million incremental planted corn acres. It is uncertain whether it will be a long-enough ammonia application window to replenish the lost tons or if there will be incremental demand for UAN urea to achieve the target levels of nitrogen for planting. In either case, we expect that inventory levels will quickly be reduced if and when spring weather emerges, which should lead to customer repurchasing to meet in-season demand.

CVR is well positioned to meet the needs of our customers with improved logistics, and we're preparing to facilitate our customers' needs when the season begins.

We are pleased to see the evidence of the market recovery for nitrogen fertilizer in the second half of 2018 and to be able to provide a distribution to our unitholders for the fourth quarter. While we are pleased to see the early stages of this recovery, we will continue to focus on maximizing free cash flow by safely operating our plants reliably and on high utilization rates, prudently managing our costs, being judicious with our capital and maximizing our marketing and logistics activities.

In closing, I wanted to thank all of our employees for their contributions for making 2018 a successful year for CVR Partners.

With that, we are ready to answer any questions. Michelle?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Adam Samuelson with Goldman Sachs.

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Adam L. Samuelson, Goldman Sachs Group Inc., Research Division - Equity Analyst [2]

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So I guess, Mark, I'd love to dig a little bit more into the market commentary on pricing and specifically around kind of how the UAN market has progressed. Obviously, summer fill pricing was considerably lower than where fourth quarter spot pricing was, then markets have come off some since then. And I'm just trying to make a -- get a better sense of how much of 4Q was summer fill pricing versus the higher spot levels in 4Q and kind of the impact of the market softening that you've seen more recently. I'm just trying to triangulate between those as I think about how the first half for you guys is shaping up from what's in your book.

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Mark A. Pytosh, CVR Partners, LP - CEO, President & Director of CVR GP LLC [3]

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Sure. So fourth quarter, the fourth quarter price that we have and we show in our results was really a -- taking the 2 plants, their fill numbers, for the most part. There was some spot pricing in there, but it was largely the fill price. But we worked off on most of our fill book or if not all of it in the second half of '18. And so the first quarter pricing will be reflective of what the spot market was largely in the fourth quarter. So we sold some and -- we sold some this year, but we sold a larger percentage of our book for the first quarter in October, November, December.

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Adam L. Samuelson, Goldman Sachs Group Inc., Research Division - Equity Analyst [4]

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All right. And so that would mean that there should be a base step up from where you were on summer fill then. So okay, that's very helpful. And then just the rail loading at Coffeyville, the ability to do unit trains. Can you talk about kind of the opportunities that, that provides to actually improve the netbacks there? Just what -- just help me think through kind of the opportunities for additional market reach into some higher-netback markets.

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Mark A. Pytosh, CVR Partners, LP - CEO, President & Director of CVR GP LLC [5]

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Sure. So let's step back. The rail loading rack there, Coffeyville is largely a rail shipping facility. It's one of the few facilities out there that has equal access to both the UP and the BN. Plants generally are either UP or BN. We are UP and BN. So that's -- what the loading rack did was it opened up a whole set of geographic points that we weren't able to serve economically in the past. So in the market now which is largely domestically served, we have a very large geographic footprint in -- from the Coffeyville facility. And that facility, given where we put the rack and how that feeds into the BN system, some of the bigger co-op customers and retail distributors like to buy unit train quantities at various points in the marketplace, not everywhere. That doesn't go everywhere. Just there are certain parts that are big consumers of nitrogen that want to buy unit train rather than buying individual cars. And so what we've been able to do is that opens up certain geographic points on the market for us to ship large quantities to one point for a big customer that wants it all delivered at the same time. So that's -- that will allow us to move product, in season, to position, especially now if you look at what's coming in the spring. People are going to want large volumes delivered to a point, and so being able to deliver a unit train makes us competitive with our -- with the other producers.

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Adam L. Samuelson, Goldman Sachs Group Inc., Research Division - Equity Analyst [6]

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That's helpful. And then just a couple of kind of modeling finance ones. The -- I did -- did you give, provide a CapEx outlook for 2019? And I'm sorry if I missed it.

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Mark A. Pytosh, CVR Partners, LP - CEO, President & Director of CVR GP LLC [7]

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So it'll be pretty comparable to this year, probably around the $20 million level.

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Tracy D. Jackson, CVR Partners, LP - Executive VP & CFO of CVR GP LLC [8]

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I provided $20 million to $25 million.

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Adam L. Samuelson, Goldman Sachs Group Inc., Research Division - Equity Analyst [9]

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Okay. And does that include a little bit of growth? I think you were -- there -- is there some growth in there?

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Mark A. Pytosh, CVR Partners, LP - CEO, President & Director of CVR GP LLC [10]

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Yes, there is a little bit of growth in there, not any major projects, some targeted smaller projects, but it's largely maintenance.

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Adam L. Samuelson, Goldman Sachs Group Inc., Research Division - Equity Analyst [11]

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Okay. And then just finally -- or the bonds. Is there any -- I believe they're callable in the second quarter. Is...

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Tracy D. Jackson, CVR Partners, LP - Executive VP & CFO of CVR GP LLC [12]

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They are callable in June of -- and we will continue to monitor the market and pricing structure and what duration is available as well as closely monitor the fed and what actions they take this year.

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Adam L. Samuelson, Goldman Sachs Group Inc., Research Division - Equity Analyst [13]

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Okay. And I mean, if things would stand today, then do you think that could be a -- is that an opportunity to call? Is -- or do you think the credit markets will be amenable to -- or open it up to potentially get some cost reduction on the bonds...

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Tracy D. Jackson, CVR Partners, LP - Executive VP & CFO of CVR GP LLC [14]

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It's certainly possible.

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Adam L. Samuelson, Goldman Sachs Group Inc., Research Division - Equity Analyst [15]

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Secure your finance.

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Tracy D. Jackson, CVR Partners, LP - Executive VP & CFO of CVR GP LLC [16]

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Yes. It's certainly possible that, that would occur.

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Operator [17]

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Our next question comes from the line of Charles Neivert with Cowen and Company.

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Charles Nathan Neivert, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [18]

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A few questions. One, looking at gas pricing. I mean you guys did say there were some impacts in the fourth quarter from natural gas pricing. Does it look like, 1Q will be down in any significant manner? Or was it just relatively short burst and really you're not going to see a big decrease quarter-over-quarter?

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Mark A. Pytosh, CVR Partners, LP - CEO, President & Director of CVR GP LLC [19]

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It was -- we had a spike. The market had a spike in gas and coming into the winter. It's kind of moderated, so I would say it's kind of moderate in the first quarter, not too high, not too low. If you look out into the spring -- and obviously it's coming down a lot if it holds in there, so I think there'll be some opportunity as we get into the warmer weather, but that spike was not confirmed. It backed off after December, so the first quarter has kind of moderated from that fourth quarter number.

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Charles Nathan Neivert, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [20]

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Okay. And if I look at -- I mean you guys obviously don't sell a lot into like NOLA per se. And pricing, I assume, is a little bit better, but have you guys seen movement in pricing in the regions you tend to sell to similar to what was -- has been going in NOLA, not obviously the same level but similar? Or has it been less volatile sort of tying into a tighter range? I mean your experience, not just the market's.

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Mark A. Pytosh, CVR Partners, LP - CEO, President & Director of CVR GP LLC [21]

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Well, I -- what I would tell you is the old-school measurement off NOLA plus transportation, I think, is probably not the best comparable measure because there's not as much activity through NOLA and not as much liquidity. And generally a lot of the customers are pricing within a producer point to their point. So that's -- it's a very different pricing structure. The product has not been moving. It's not -- NOLA in the first quarter was not a liquid market because there's not a lot of movement of product. Between the weather and the system being full from the fall or at least with certain products, the barges -- that's been much more volatile because barges that come in but don't have a place to go have to generally be liquidated. And you're liquidating into a non-liquid market. It isn't liquid there, but that -- it's just not been a liquid -- and so the interior markets are more stable, but they -- it's not that they're disconnected, but they don't have the volatility. If you go to the Corn Belt, you don't see these bigger swings that you saw in NOLA here in the first...

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Charles Nathan Neivert, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [22]

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Yes. So these big declines in NOLA -- and I know you guys don't deal with much urea, but in -- NOLA, urea and other products are not being reflected in the places that you guys are generally selling into. And like you said, it's because of thin-market, trader-to-trader type of trades and things of that nature. So that's not what you're seeing.

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Mark A. Pytosh, CVR Partners, LP - CEO, President & Director of CVR GP LLC [23]

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Charles, the spot market is softer than it was at the beginning of the year, but it's not a deep market because there's not as much transaction -- generally it's not -- and this year in particular, again because of the weaker fall, there is not as much of a burning need to buy in January because you're not applying until March or April, and so the buying activity is lower. The interior has been less volatile, but it's down too versus where it was like in the fourth quarter.

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Charles Nathan Neivert, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [24]

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Okay. Typically, when do you guys see this most significant movement of product? I mean, is it March? Is it April? I mean, again based on where you guys do most of your work, when do you start really seeing the tons move, assuming weather isn't crazy in one direction or the other? Or where would you bracket it? Sort of early-season to a late movement, where would those tend to range?

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Mark A. Pytosh, CVR Partners, LP - CEO, President & Director of CVR GP LLC [25]

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Well, I think I said on previous calls I'm not the best weather forecaster around...

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Charles Nathan Neivert, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [26]

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Well, we'll take weather out. Let's just say, if you get an early season, when does it typically -- when would it start? And if it's late start, when would it be? Sort of what's the range of timing that I should look for these things to start happening?

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Mark A. Pytosh, CVR Partners, LP - CEO, President & Director of CVR GP LLC [27]

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Typically, in a typical season without excess moisture or excess cold, we would start seeing product movement February in Texas. And then it moves. If you just looked at the map and you said, okay, February is all the way south, then you go up into Oklahoma, Kansas kind of February, March. And then you keep climbing north; and then you get into April for Nebraska, Iowa, Illinois. So it just -- as the weather -- the weather warm creeps north, you just -- our market's fall, but normally we would see -- it's been a little bit cold to slow start to the spring. So February hasn't been moving as much, but we're seeing some movement in Kansas and in bits and pieces here or so. It's a little bit of a late start, and that's why I was talking about logistics. Because there is an enormous amount of product that needs to get on the ground. And we're just normal -- normal would be Texas, and then go north from there all the way to April.

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Charles Nathan Neivert, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [28]

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Do you see customers still sort of holding back on purchasing, trying to time things out a little bit better, where you could end up with an even bigger squeeze than we're talking about now? Because it's not just a late start but people sort of trying to hold off and do things as late as possible. Assuming we're going to see the same amount of nitrogen down, any way you look at it, but are people trying to look like they're trying to jam it into the back end of this thing?

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Mark A. Pytosh, CVR Partners, LP - CEO, President & Director of CVR GP LLC [29]

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There's always that -- it's the psychology of it all. It's -- it typically reacts too far on both sides of the curve. And so now because of the inventory in the system, they're kind of holding back, and so it tends to react more negatively. It's not very liquid. And then when you get to the other side, it tends to overreact on the upside because everyone runs to the entrance, to the door at the same time. And so that's -- and you have to back up logistics. If you can't -- we're not choppering in tons to locations. We're railing them or trucking them. And so there's an -- or barge in the case of the players over on the river. That's not a 1-week move. You really need to back up 30 days lead time to get that product to market. And so that's my comment again about logistics is we're going to have a lot of tonnage that wants to go to the ground, and those windows are measured in a week or 2 or 3. And so that's a lot of tonnage to go into a 2- or 3-week window.

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Charles Nathan Neivert, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [30]

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Yes. I'm just trying to get a sense of, judge and -- how many people are dragging their feet and how many people are sort of, for lack of a better -- or sort of in line with the right -- with their timing. Last question, that you guys said that you -- now if I got this right, you took back product that you were going to deliver 4Q because of weather, because it didn't go on the ground. And I assume you just gave back deposits, and now you've resold it into what looks like second quarter. Were you better off or worse off because of that? If you had sold it and if it had gone out in 4Q, do you get better pricing, the same pricing, worse pricing?

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Mark A. Pytosh, CVR Partners, LP - CEO, President & Director of CVR GP LLC [31]

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Well, I'm not going to try to quantify all that because there's too many moving parts to get to. I'd say the easy answer -- what I would tell you is that the spring pricing was better than the fall pricing, so -- however, we still -- we didn't -- we weren't able to put tonnage on the ground. We would have liked to have had both the spring pricing and a lot of volume move in both periods. Now that's kind of the perfect scenario. We do have a very good spring book on, so we were able to work with the customers to move it from the fall to the spring, but we would have loved to have sold a little more tonnage in the fall just to have kept that money too. So it's not a free lunch here. It's going to cost -- it cost us something in the fourth quarter, that we won't get all of it back, but the spring pricing was better than the fall.

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Charles Nathan Neivert, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [32]

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Okay, well, that's fine. I think that covers me for now. It's good that you've -- now you're starting to pay that -- make that payout now. So I think -- and given the way things are moving in 1Q, 2Q this year, it looks like that is something that should continue. So that's good. I think that's it for me.

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Operator [33]

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Thank you. We have reached the end of our question-and-answer session. I would like to turn the call back over to Mr. Finks for any closing remarks.

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Mark A. Pytosh, CVR Partners, LP - CEO, President & Director of CVR GP LLC [34]

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Again this is Mark. I would like to thank you all for your interest in CVR Partners. Additionally, I would like to thank all of our employees for their hard work and commitment towards safe, reliable and environmentally responsible operations.

We look forward to reviewing our first quarter 2019 results during our next earnings call.

Thank you.

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Operator [35]

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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.