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Edited Transcript of UAN earnings conference call or presentation 25-Jul-19 3:00pm GMT

Q2 2019 CVR Partners LP Earnings Call

Sugar Land Jul 30, 2019 (Thomson StreetEvents) -- Edited Transcript of CVR Partners LP earnings conference call or presentation Thursday, July 25, 2019 at 3:00:00pm 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 CVR Partners, LP Second Quarter 2019 Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Jay Finks, Vice President of Finance and Treasurer.

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

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Thank you, Dana. 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 2019 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 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 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 2019 second quarter earnings release that we filed with the SEC yesterday after the close of the market.

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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Thank you, Jay. Good morning, everyone, and thank you for joining us for today's call. The summarized financial highlights for the second quarter of 2019 included net sales of $138 million, net income of $19 million, adjusted EBITDA of $60 million, and the Board of Directors declared a second quarter distribution of $0.14 per common unit which will be paid on August 12, 2019, to unitholders of record at the close of the market on August 5, 2019.

During the second quarter of 2019, we had strong utilization at both facilities despite the challenging weather and flooding conditions. At Coffeyville, the ammonia plant operated at 97% utilization for the quarter, well above utilization for the second quarter of 2018 that was impacted by both planned and unplanned downtime. At East Dubuque, the ammonia plant operated at 98% utilization, which was also higher than the prior year period.

For the second quarter of 2019, our combined operations produced approximately 211,000 gross tons of ammonia, 316,000 tons of UAN, and 71,000 net tons of ammonia available for sale compared to production of 174,000 gross tons of ammonia, 241,000 tons of UAN and 65,000 net tons of ammonia available for sale in the prior year period. We sold approximately 340,000 tons of UAN during the second quarter of 2019 at an average price of $217 per ton. UAN pricing for the quarter increased 14% over the prior year period.

In addition, we sold approximately 110,000 tons of ammonia during the second quarter of 2019 at an average price of $456 per ton. Ammonia pricing for the quarter increased 31% over the prior year period.

Low natural gas prices combined with strong demand and constrained river movements resulted in CVR Partners' solid financial results for the quarter. UAN sales volume were up 26% year-over-year in the second quarter of 2019. Despite the persistent wet weather and flooding conditions experienced during the quarter, there was still strong demand for nitrogen due to the catch-up from the poor fall application and the late start to spring.

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. Turning to our results. For the second quarter of 2019, we reported net sales for the period of $138 million and operating income of $35 million compared to net sales of $93 million and an operating loss of less than $1 million in the second quarter of 2018. Net income for the second quarter of 2019 was $19 million or $0.17 per common unit and adjusted EBITDA was $60 million. This compares to a net loss of $16 million or $0.15 per common unit and adjusted EBITDA of $26 million for the prior year period. These improvements were driven predominantly by improved UAN and ammonia pricing and sales volumes. The increase in UAN sales volumes was primarily attributable to strong demand for nitrogen, as Mark just discussed.

Direct operating expenses for the second quarter of 2019 decreased to $46 million from $47 million in the prior year period. Excluding inventory impacts, direct operating expenses decreased by approximately $6 million year-over-year primarily related to turnaround expenses incurred in 2018 and not in 2019.

Turning to capital spending. During the second quarter of 2019, we spent $2 million on capital projects which was primarily maintenance capital. We continue to estimate total capital spending for 2019 to be approximately $20 million to $25 million, excluding turnaround spending. In the fall, we have a planned turnaround at East Dubuque, which we expect will cost approximately $7 million.

Looking at the balance sheet. As of June 30, we had approximately $69 million in cash, including approximately $2 million related to customer prepayments for the future delivery of product. Availability under the ABL facility was $48 million plus $25 million in our cash included in our borrowing base. We currently believe our total liquidity position of approximately $93 million at the end of the quarter is sufficient going forward.

Our long-term gross debt and finance lease obligations of $631 million including current portion remains unchanged. As a reminder, the majority of our gross debt position is comprised of our 9 1/4% senior notes due 2023. These notes became callable in June of this year at 104.6% of par.

Available cash for distribution of $15 million is derived from our positive adjusted EBITDA for the quarter after consideration of reserves at $15 million for debt service and $2 million for environmental and maintenance capital expenditures. In addition, we reserved $28 million for future turnaround capital and operating cash needs.

We are a variable distribution MLP. We will review our previously established reserves, 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.

With that, I will turn the call back over 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. Weather impacted the business in the second quarter in 2 ways. Planting conditions were late and were never dry enough to effectively plant either the corn or soybean crops. And two, the severe flooding in Kansas and Oklahoma curtailed UAN rail shipments for 18 days between mid-May and mid-June. Despite these conditions, there was still strong demand for nitrogen due to the catch-up from the poor fall application and late start to spring.

The late planting season extended well into July for the Sidedress and Topdress seasons, and fertilizer consumption has brought customer inventories to a very low level at the end of the planting season. The late planting season also delayed the start of the summer fill season for UAN, which we expect will begin in the next couple of weeks.

There's been a lot of speculation about the number of planted corn and soybean acres versus preventative plant acres. At the end of June, the USDA issued a confusing planning intentions report that estimated nearly 92 million acres of corn were planted in the spring but only 82 million acres of soybeans. From our point of view, looking at demand for nitrogen fertilizer at our plants, we believe that the planted corn acres are significantly overstated and farmers either waited longer to plant soybeans or preventatively planted a portion of their acreage.

For those acres that were planted, excess moisture should negatively impact yield per acre. Corn yields were estimated by the USDA to be down 10 bushels to 166 bushels per acre for this planting season versus last year. We have seen yield estimates for corn as well as 160 bushels per acre.

With fertilizer inventories for distributors and retailers lower than normal in the short term, the reduced corn production from this planting season bodes well for 2020. Corn prices have rallied about $0.75 a bushel since April and are at the highest absolute prices in several years. We expect fertilizer demand to be strong in the third quarter and expect demand to further increase when customers begin focusing on the spring 2020 planting season, where we currently expect planted acres to be significantly higher than 2019.

As Tracy mentioned, we are planning a 28-day $7 million turnaround at our East Dubuque facility starting in September and are focused on a significant upgrade of our natural gas reformer and various other reliability and repair projects.

Over the next several turnarounds at both of our plans, we will be targeting projects that are intended to improve our reliability and debottleneck the plants in incremental ways to gain added production for our low capital investment. Our plants have been strong performers in the past several years but we know we can do better in the future.

Finally, I want to reiterate that the partnership will continue to focus on maximizing free cash flow by safely operating our plants reliably and at high utilization rates, prudently managing our cost, being judicious with our capital and maximizing our marketing and logistics activities.

In closing, I would like to thank all of our employees for their contributions in the second quarter to help us navigate challenging weather conditions and being well prepared to capitalize on this past spring season.

With that, we're ready to answer any questions. Dana?

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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 Mark, I guess, first, I'd be interested in getting a little bit more color on the market outlook thus far in July and how it frames the second half. I mean I believe, at least in the trade press, that there was summer fill price from you guys that got listed late last week. But any sense or color you can provide on how much of the 3Q volume might still be summer -- at spring pricing or near spring pricing relative to what would be a notable step-down for 3Q as always happens at this time of the year?

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

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Sure. So what I would say there, Adam, is that we -- and I'm not going to get quantitative on that measurement, there's been a decent period in July where we've still been selling in-season product. And so we had a late season, and then the embargo for the -- all the rail facilities in Oklahoma were equally embargoed during sort of mid-May to mid-June for a big chunk of that time. So the product left later and then people had to catch up on the refill there. So went further into July than normal, maybe 2 or 3 weeks. And we did sell some product down at East Dubuque, but that was an isolated sale, and we still have tons to sell at East Dubuque.

The sort of the main fill season I expect to come in the next couple of weeks. So we'll get some blending of sort of late spring pricing. And as you know, typically, the spring pricing starts to fall in June. So it won't be exactly where the second quarter pricing was, but the season at that point went longer. The most important thing about the late season was that it sort of drew down all the inventory in the dealer, distributor network, which bodes well for the demand of -- to refill the tank. So we were expecting a very healthy demand coming out in the -- here in the third quarter because the tanks are largely empty at this stage.

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

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Yes. And any similar commentary or thoughts on the ammonia market where, obviously, you don't have the late season demand, but you've also had a pretty sharp correction of prices at the Gulf as we go out of season? Just kind of how to frame that market a little bit.

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

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Yes. It's -- yes, I would say it's a little bit of the 2 markets because the Northern Plains is very different than the Southern Plains, which is still much better than the Gulf or Tampa price. I would say depending on where your plant was, you may not have had the best spring. We had a very fortunate spring at East Dubuque. We had a lot of need, pent-up need there because it didn't get put down on the fall. So the spring was very good at East Dubuque and we had pretty healthy demand profile looking into the fall. But I expect the market to pick up there because if the plant and acres are correct, there's going to be desire, if weather conditions hold together, to have a strong ammonia run in the fall. But there's been more, I'd say, carryover in the Southern Plains than the Northern Plains. The Northern Plains, there's more ammonia that was able to get on to the ground. But in the Southern Plains, the weather just wasn't going to allow it because of all the rain.

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

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Okay. No, that's very helpful. And then a couple -- just on the debt refinancing. I note the bonds did become callable in June. Just any color you could provide on that, how you've looked at the market opportunity to refinance there?

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Tracy D. Jackson, CVR Partners, LP - Executive VP & CFO of CVR GP LLC [7]

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So we've been evaluating the market, the rates that are available to us and we'll look to see what the Fed does next week and continue the discussion with our Board around the call premium versus the rates available and make a decision in the future.

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Adam L. Samuelson, Goldman Sachs Group Inc., Research Division - Equity Analyst [8]

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Okay. And then, I guess, the last one from me, just making sure I understand the reserves taken for CapEx and the turnarounds in 2Q relative to the distribution. Should we think about that as a conscious effort to maybe in [sugar production] days, certainly in 3Q, and you have the turnaround to aid distribution? But is it intended to kind of level out or more straight-line the distribution, assuming market conditions and production hold?

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Mark A. Pytosh, CVR Partners, LP - CEO, President & Director of CVR GP LLC [9]

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Well, what I would say there, Adam, is that we -- this year, we have a pretty aggressive spending plan in the second half and the CapEx kind of drifted backwards into the second half, partly around spending around the turnaround. And so we generated more cash in the second quarter and the Board decided that it would -- since we have the cash on hand and we had this big spend on the horizon, that we would -- we'd go ahead and reserve a portion of our free cash flow to pay for that spending. So that's really where the reserve came from.

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Adam L. Samuelson, Goldman Sachs Group Inc., Research Division - Equity Analyst [10]

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Right. But just discuss for the maintenance capital for the rest of the year and the turnaround cost for 3Q. So just we're thinking about whatever EBITDA proves to be in the second half and how that filters into distributable cash flow, you already have the turnaround expense and most of the maintenance capital already reserved for, correct?

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Mark A. Pytosh, CVR Partners, LP - CEO, President & Director of CVR GP LLC [11]

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Yes, again. Yes, we had a big quarter, a lot of free cash flow and the Board decided that it would be prudent to go ahead and set aside that big spending dollars now and sort of see what happens in the second half. So we're in a good position going into the second half and the turnaround in that CapEx are reserved, so we're in good shape right now.

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Operator [12]

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(Operator Instructions) Our next question comes from the line of Charles Neivert with Cowen.

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Charles Nathan Neivert, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [13]

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Just quick question. You had -- was your gas cost in 2Q lower than 1Q? And should we look for lower still in 3Q at this point?

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Mark A. Pytosh, CVR Partners, LP - CEO, President & Director of CVR GP LLC [14]

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A little early to call the 3Q. So my prognostication skills aren't the greatest in there. So...

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Charles Nathan Neivert, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [15]

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Well, looking at the strip then, does it look -- is it low -- it's going to be -- does it look like it's going to be lower?

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Mark A. Pytosh, CVR Partners, LP - CEO, President & Director of CVR GP LLC [16]

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Low, yes. The third quarter gas price strip today would be lower than the second quarter, which was lower than the first quarter. So -- and the forward strip looks reasonably low for today's prices, look low through the end of next year.

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Charles Nathan Neivert, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [17]

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Okay. Okay. Is there any reason to start thinking about whether you would buy some of your gas forward? I mean Coffeyville, obviously, not an issue, but is there any reason to do it for East Dubuque at this point or not?

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Mark A. Pytosh, CVR Partners, LP - CEO, President & Director of CVR GP LLC [18]

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We -- we're always evaluating it and I think our -- what we'd like to do, if the opportunity presents itself, is to take a portion of that winter gas price. So I'm hoping we'll be able to put something in place there as we go. So we look at it all the time. So I'm hoping we'll put something in there. It's pretty attractive right now.

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Charles Nathan Neivert, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [19]

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I guess then when you look at the cadence of sales over the course of the next 2 quarters, is there any reason to think that 3Q might be a little on the lighter side because of the late planting, late harvest that will likely occur because of that? Or that that might be offset by the fact you have all those prevent planting that's basically going to get pulled out early to get -- and any opportunity to get fertilizer down on it is going to be taken? How do you sort of play those against each other?

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Mark A. Pytosh, CVR Partners, LP - CEO, President & Director of CVR GP LLC [20]

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Well, the third quarter is always a light quarter because we don't put a lot of ammonia on the ground in the third quarter. So relative to the second quarter -- the second and the fourth are big quarters for ammonia application. So the third will always be lower than the second just because ammonia doesn't move that much. And then the fourth will be where we'll see that activity really pick up. So volumes are always going to be lighter.

We'll be -- as you know, Charlie, we ship pretty ratably out of Coffeyville, UAN. So we'll have, all else being equal in the plants running, we'll have a normal shipping schedule there. And then East Dubuque, we'll be shipping UAN, but the big move in ammonia won't be until the fourth quarter.

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Charles Nathan Neivert, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [21]

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Okay. And there's no -- right now, expectations are for good demand because of the likely increase in corn acres?

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Mark A. Pytosh, CVR Partners, LP - CEO, President & Director of CVR GP LLC [22]

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Yes. I think that what I -- we saw each other at the Southwest conference. I think most customers are saying they really would like to see good weather in the fall to be able to have a strong ammonia application in preparation for the filling of the big acreage number in the spring.

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Charles Nathan Neivert, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [23]

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Okay. And last question is it -- I mean I assume it's reasonable forgetting the pricing you received, but looking at the volume that you did in Q2, that had a lot of that carryover that we discussed after the first quarter that didn't get down during 1Q or didn't get out. So you carried it through into 2Q. You managed to basically rid of it all. So I think is it reasonable to assume that 3Q volumes, at least from a sales perspective and even maybe in the entire second half, might be a little bit lighter? But definitely in 3Q, I guess, you just don't have the inventory to work through.

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Mark A. Pytosh, CVR Partners, LP - CEO, President & Director of CVR GP LLC [24]

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Well, what I would tell is that, again, UAN moves, got to say, more ratably. So I don't think there'll be any big changes there. We did lose a little bit of ammonia application in the first because of the weather and they've got taken up in the second. But I think the second half will be normal. A lot of UAN movement in the third and then UAN and ammonia in the fourth. So I don't expect anything unusual. The planting cycle didn't really change any of what I'd consider the normal pattern of purchasing. And rather than the fill season, it's a little bit later than normal in terms of that picking up and buying in the second half.

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Charles Nathan Neivert, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [25]

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Okay. I got one other thing. You guys took advantage of the fact that a lot of product couldn't make it upriver because of the river issues and the hike, the currents and the high water and all. Is that something that's still affecting the deliveries? Or is that now completely by the boards and things are, for lack of a better word, back to normal?

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Mark A. Pytosh, CVR Partners, LP - CEO, President & Director of CVR GP LLC [26]

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I'd say the Mississippi -- the -- when you look at rivers in the country, the Mississippi is upstream normal. But there are other rivers that are not normal in the Southern plains that are affecting it, but that's not really affecting us per se. But the Mississippi is back to normal.

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Charles Nathan Neivert, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [27]

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Okay. So things can get up to East Dubuque and be competitive again as opposed to in the second quarter when they -- basically they couldn't be?

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Mark A. Pytosh, CVR Partners, LP - CEO, President & Director of CVR GP LLC [28]

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Yes, that's correct.

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Operator [29]

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Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to management for closing remarks.

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Mark A. Pytosh, CVR Partners, LP - CEO, President & Director of CVR GP LLC [30]

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Well, again, we want to thank everybody for joining our call today. And we look forward to speaking to you on the third quarter call. Thank you very much.

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Operator [31]

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This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.