Sisecam Resources LP
Q1 2018 Earnings Call Transcript

Published: 8 May 2018

[Operator:]

Welcome to Ciner Resources First Quarter 2018 Earnings Conference Call and Webcast. Hosting the call today from Ciner Resources is Mr. Kirk Milling, Chief Executive Officer. He is joined by Scott Humphrey, Chief Financial Officer. Today’s call is being recorded. At this time, all participants have been in a listen-only mode and the floor will be opened for your question following the presentation. [Operator Instructions] It is now my pleasure to turn the floor over to Scott Humphrey to begin.

[Scott Humphrey:]

Thank you, Laurie. Good morning, this is Scott Humphrey, CFO for Ciner Resources. Thank you for joining us to discuss our first quarter 2018 earnings. Kirk Milling, our CEO, will discuss some highlights from the quarter. I will provide additional details related to our financials and Kirk will follow that with our outlook for the rest of 2018. We will then take your questions. Before we begin, I would like to remind you that the comments included in today’s conference call constitute forward-looking statements. Actual results may differ materially from the results suggested by these comments for a number of reasons, which are discussed in more detail on the company’s SEC filings. Certain financial measures discussed during this call are considered pro forma and are therefore, non-GAAP financial measures. Reconciliations of those non-GAAP financials can be found in our earnings press release. I will now turn the call over to Kirk.

[Kirk Milling:]

Thanks, Scott, and good morning, everyone. Welcome to Ciner Resources first quarter 2018 earnings call. Overall, I think Q1 got us off to a good start in 2018 as many of the key business performance metrics that drive our DCF showed positive momentum compared to 2017. While DCF overall was down 1.5%, our volume produced was up 2.6%, international prices were up 7.9% after netting out the freight impact from our affiliates sales, and domestic volume grew by 13.9% in the quarter compared to 2017. Most of the drag on DCF was on the expense side as professional fees for the consultants we used for our operational improvement initiatives and expenses related to the start of our ERP project added an incremental $1.3 million in the quarter. These should begin to subside as the year progresses. The 2.6% improvement in production volume in the quarter was pretty much in line with expectations. We’ve lowered our full year outlook for sales volume by 1%. As you know, the second quarter is typically the lowest production volume quarter of the year, as we take our largest producing unit down for an annual maintenance outage. The outage this year was already expected to last longer than normal. However, we encountered an unexpected issue last week that will delay start of our units by roughly one week. Impact from the delay is expected to be 30,000 tons to 40,000 tons from our production plan, which equates to roughly the 1% that we’ve lowered our outlook. Turning to the market, international pricing has been better than we expected primarily due to stronger than expected supply demand fundamentals. While the demand data is a little mixed right now in China, demand around the world seems quite robust. In China domestic prices have been rising in recent weeks, the supply has been reduced due to maintenance related shutdowns. Additionally, there are some plants in China which will need to be relocated or updated after the environmental inspections last year. All of this provides a positive foundation for Asian pricing for the rest of 2018. So we have updated our international price outlook to reflect the momentum in the marketplace. On the domestic front, we were successful in regaining some market share in the United States in 2018. Since, we’ve been expanding our capacity over the last five years, we’ve allocated most of this production to move into our export markets, but at the same time we also lost some domestic share to other Wyoming competitors. Our plan is to slowly rebuild our domestic share to be in the range of our relative market capacity share. Overall we are off to a good start as domestic volumes were up 13.9% in the quarter. We expect this trend to grow even more as the year progresses, as some of the share gains took some time to transition during the quarter. As a result, we increased our domestic volume outlook for 2018 by around 35,000 tons. Now I’m going to turn the call over to Scott, who will share our financial results in more detail.

[Scott Humphrey:]

Thank you, Kirk, and thanks, everyone, for your continued interest in Ciner Resources. Today, I’ll provide some detail around our first quarter performance, and how those results compare to the outlook we provided back in February. I will discuss the significant financial drivers from the quarter including our capital spending program, and some key metrics we used to manage our business. Before we jump into the results, I want to remind everyone how we treat freight costs in our sales figures as you are going to hear freight as the driver of pricing and revenue in our results today. Freight is typically included in our reported sales price, and we have a wide variation of freight costs by customer and region, so different mixes of freight cost in our customer base in any given quarter can obscure the reported top line revenue figure, and make comparisons quarter-over-quarter less meaningful. Let me start with a recap of our actual results versus our full year outlook. Total volume sold decreased 0.5% in the quarter compared to Q1 of 2017, versus an original range in our outlook of 1% to 3% increase which we have now reduced due to the issues during our Q2 shutdown Kirk discussed earlier. In 2017, we drew down inventory in the first quarter, so sales volume exceeded production volume last year. Domestic volume grew approximately 31,000 tons in Q1, so we have raised our outlook for the increase in domestic volume to go from a range of 80,000 tons to 125,000 tons, to a range of 125,000 tons to 150,000 tons. Our domestic sales price decreased by 1.1% in the quarter in line with our outlook of a decrease in the range of 1% to 3% for the year. Overall, international pricing was down 7.8% in the first quarter. We recognized higher international pricing during 2017 due to increased sales to our Turkish affiliate. These sales included full inland and ocean freight costs in our results compared to ANSAC volumes which only contemplate rail freight to the U.S. ports. While this mixed change results in higher revenue, it also gives rise to higher freight costs. In the end, we’ve recognized a very similar return to our typical international sales, despite the increase in revenue due to freight. International prices excluding the CIDT effect on sales last year, increased by 7.9% year-over-year. As Kirk mentioned already, we’ve revised our forecast for international pricing to increase in the range of 1% to 3%. The comp will get tougher as the year goes on as international pricing excluding CIDT increased every quarter during 2017. This is better than the original range we’ve provided last quarter a flat to down 2% pricing excluding CIDT. Maintenance capital spending in the first quarter was $2.8 million and we still expect to be within our range of $13 million to $15 million for the full year. Expansion capital spending in the first quarter was $4.8 million. Our revenues for the quarter were $121.2 million, down 4.3% compared to the first quarter of 2017. The reduced sales were almost entirely driven by the reduced freight component of our sales due to the elimination of sales to CIDT. Domestic sales of $55.3 million in the quarter were up 12.6% compared to Q1 of 2017, driven by a 13.9% increase in sales volume. The volume increase was partially offset by a 1.1% decrease in domestic prices. International sales dropped to $65.9 million in the quarter compared to $77.5 million in Q1 of 2017, due to two primary drivers. First, we had a 7.8% decrease in volumes sold, as we had zero sales to CIDT in the quarter, and we also shifted some volume to the domestic market. Second, the absence of CIDT sales caused pricing to drop 7.8% versus 2017 due to the loss of the higher freight component in our sales numbers, which we had in 2017 from CIDT. Cost of products sold in the quarter including freight decreased from $91.4 million to $86.4 million as we had no freight expense for CIDT in 2018. Cost of goods sold, excluding freight increased on a per ton basis from $76.83 per ton in Q1 of 2017 to $77.97 due to a few factors. We spent more in Q1 of 2018 on professional fees to our consultants that are helping us with both our continuous improvement and equipment reliability initiatives. These costs will begin to wind down over the next couple of quarters. We also experienced higher royalty expense based on the mix of leases we are currently mining. Finally, we experienced higher DECA costs which will continue throughout 2018. Last winter we harvested DECA from one of our ponds which is located farther from the plant and therefore more expensive. These higher costs were partially offset by lower natural gas cost per ton thanks to lower spot net gas pricing. SG&A expenses of $6.4 million were $1.3 million higher than the prior year quarter. The two primary drivers for the increase were higher SG&A fees from ANSAC, which directly correlates to the volumes we sell to ANSAC, and higher expenses from our ERP implementation project. The ERP project costs will skew more towards CapEx moving forward, but the initial training for the project was expensed in accordance with GAAP. Ciner Resources had basic earnings per unit of $0.51 in the first quarter of 2018, compared to $0.54 last year. Cash provided by operations with $37.3 million in the first quarter of 2018, compared to $10.8 million provided in the first quarter of 2017. The increase in cash from operations was primarily due to a reduction in accounts receivable from CIDT, our affiliate in Turkey in the first three months of 2018. Moreover in 2017, we were ramping up sales to Turkey during Q1, so the increase in AR was a drain on working capital. This contributed to an increase in cash provided from changes in working capital of $27.6 million in the quarter compared to Q1 of 2017. We continue to maintain a very conservative balance sheet with a current leverage ratio of 0.91 times net debt to adjusted EBITDA. We reduced our long-term debt outstanding in the first quarter by $17.5 million thanks to our working capital reduction. Next let’s turn to discuss how all this translates into two of the key metrics we manage as an MLP, adjusted EBITDA and distributable cash flow. In the first quarter we delivered $28.8 million in adjusted EBITDA, a 5.3% decrease versus $30.4 million in the same quarter of last year. Our distributable cash flow was $13.2 million in the quarter compared to $13.4 million in the first quarter of 2017, as lower cash maintenance CapEx and net cash interest expense helped to offset slightly lower EBITDA. Our coverage ratio of 1.16 in the quarter was basically flat to the 1.17 ratio in the first quarter of last year. Now I’m going to turn the call back to Kirk for some comments on our outlook for 2018 and more details surrounding our expansion CapEx initiatives.

[Kirk Milling:]

Thanks, Scott. In our earnings release last night, we updated our 2018 outlook to be more positive in a number of areas, which we’ve discussed. We’ve already talked about our improved outlook for international pricing as well as more robust volume growth in our domestic market. We also increased our outlook for expansion CapEx spending to now be in the range of $55 million to $65 million. The primary driver of the change is based on approval of an energy project I mentioned last quarter on our call. We are going to invest approximately $45 million over the next 12 months to install a new gas turbine, as well as update our energy infrastructure. This new turbine will eventually generate approximately one-third of our electricity needs, while also providing the steam needed in our surface operation. At current natural gas prices, the project initially should generate about $7 million in annual Wyoming EBITDA, and eventually rising up to about $12 million annually once fully utilized. We expect to commission the new unit in May of 2019. In closing we got off to a solid start in Q1. Production was up over last year. International pricing is shaping up to be better than we originally thought, and our continuous improvement initiatives are leading to better reliability at our facility. Factoring out the start of delay in our second quarter maintenance outage, the primary performance metrics look encouraging to stay stronger than expected over the balance of 2018. Thank you for your continued interest in Ciner Resources, this concludes our prepared remarks. Laurie, please open the line for questions.

[Operator:]

[Operator Instructions] Your first question comes from line of Jim Sheehan of SunTrust.

[Jim Sheehan:]

Good morning.

[Kirk Milling:]

Good morning, Jim.

[Jim Sheehan:]

Could you talk about whether your first quarter domestic volumes were above your expectations entering the year?

[Kirk Milling:]

Actually, they would be slightly below in Q1. As I mentioned in my prepared remarks, we had a little bit of transition time as some of the new locations we were shifting began to ramp up. I don’t think it’s significantly different, but I would anticipate the volumes to rise slightly as the year progresses.

[Jim Sheehan:]

And now what’s the status of the new soda ash facility, the Kazan facility in Turkey? When do you expect this to be running at full capacity? And it sounds like you’re pretty confident that this capacity is not impacting international pricing at least so far. What gives you that confidence?

[Kirk Milling:]

I mean, I think the best thing I can say is that demand around the world, Jim, has been very strong. I think it started last year and it’s continued into this year. There’s a little bit of mixed message coming out of China right now, we only have two months worth of data which shows that demand being slightly down, but in the marketplace it just feels very, very snug right now. So I think essentially what happened is even though, we had new capacity coming online in Turkey there’s been enough demand growth around the world to absorb it. And then following up on the first part of your question, as far as the ramp up of production, we believe that they’ve been ramping up probably somewhere in 1.5 million ton and 2 million ton per year range, and then the balance of that should ramp up over the second half of the year.

[Jim Sheehan:]

Great. And in China, there’s a turnaround season going on. What do you expect to happen through June? As a result of those turnarounds, do you think supply demand is even getting tighter there? And where do you see inventory levels in China?

[Kirk Milling:]

Yes, supply demand has definitely been getting tighter. I mean, I think just the most recent data to come out of IHS has showed pricing rising here in recent weeks as the supply tightness has occurred. So I think that’s a good sign that some of these maintenance outages have reduced inventories which is putting some pressure on prices.

[Jim Sheehan:]

Thank you.

[Kirk Milling:]

Thanks, Jim.

[Operator:]

[Operator Instructions] Your next question comes from line of Daniel Jester of Citi.

[Daniel Jester:]

Hi, good morning, everyone.

[Kirk Milling:]

Good morning, Dan.

[Scott Humphrey:]

Good morning, Dan.

[Daniel Jester:]

So I wanted to ask you a bit about what you’re seeing in cost for ocean freight and also for rail freight. And I know some of the companies that you’ve talked to this quarter, been talking about some inflation in both of those environments. Can you just talk a bit about what you’re seeing?

[Kirk Milling:]

Yes. I mean, our rail freight on the international side is on long-term contracts. So it has some escalation and definitely our rail freight rates have been increasing particularly to the Gulf in Mexico. On the domestic front, those typically have some sort of inflationary area of 3% to 5% per year. I don’t think that’s overly abnormal from what we’ve experienced in the past though. And then on the ocean side, I think will be slightly lower overall, and that’s primarily just because of some fuel hedges and some longer term time charters that ANSAC had that are beginning to roll off, that are giving us a little bit of uplift on the ocean side.

[Daniel Jester:]

Okay. And then as I think about, you’re sort of more positive stance on supply demand, more positive stance on the international pricing front. Can you just help us think about how that ties to distributions? And as the year progresses, how are you thinking about your coverage ratio and your ability to start lifting your distribution again?

[Kirk Milling:]

Yes, I mean, we’re obviously optimistic, I mean, some of it’s going to depend on continued success with ramping up production. But for sure all the baseline fundamentals look much better today than they did three months or six months ago when we were concerned about pricing pressure that we were going to get due to new capacity ramping up. So when it’ll start? I don’t want to place a date on that, but I would say the fundamentals improving the way they are, hopefully should put us back on a path to growing our distributions in the future.

[Daniel Jester:]

And then just one last quickly, for funding this growth CapEx, do you plan to use cash on hand or will you use any debt for that? Thank you.

[Scott Humphrey:]

Yes, Dan, this is Scott, I’m going to take that one. So initially we’re going to just use the availability on our revolver. We’re pretty under-levered and have plenty of availability right now. I would say, next year when we commission that gas turbine, will certainly take some time at that point to look at whether we want to term out some of that debt, but yes, we’ll be using debt, not cash on hand.

[Daniel Jester:]

Great, thank you very much.

[Kirk Milling:]

Thanks, Dan.

[Operator:]

[Operator Instructions] At this time there are no further questions. Thank you for participating in Ciner Resources first quarter 2018 earnings conference call and webcast. You may now disconnect your lines and have a wonderful day.