Sisecam Resources LP
Q2 2018 Earnings Call Transcript

Published: 7 Aug 2018

[Operator:]

Welcome to Ciner Resources Second 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 placed in a listen-only mode and the floor will be opened for your questions following the presentation. [Operator Instructions] It is now my pleasure to turn the floor over to Scott Humphrey. You may begin.

[Scott Humphrey:]

Thank you, Maria. Good morning. This is Scott Humphrey, CFO for Ciner Resources. Thank you for joining us to discuss our second quarter 2018 earnings. Kirk Milling, our CEO will discuss some highlights from the quarter, I will then 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 second quarter 2018 earnings call. On last quarter’s call, I mentioned that we had just encountered an issue with the critical piece of equipment during our regularly scheduled outage in May. At the time we communicated a 30,000 to 40,000 ton reduction in our Q2 volumes as the repair would extend our outage by roughly 10 days. Unfortunately, we encountered additional issues as we work through that to get our production back online. Our production volume dropped 10% or approximately 60,000 short tons compared to the second quarter of 2017. We have since repaired the equipment and have been running well. However, since we are operating in the sold-out environment, we don’t believe the production losses from the second quarter can be made up and therefore we have lowered our full year outlook for total sales volume. Aside from the issues we encountered during May, our production during the remaining 5 months of 2018 was 33,000 tons higher than the same 5 months during 2017. As a result, we are gaining more confidence that the operational excellence initiatives that we undertook in 2017 are in fact improving the site’s reliability to sustainably produce additional volume in future years. Our results show that we delivered an 80% increase in distributable cash flow in the quarter primarily driven from the settlement of our royalty rate litigation, a dispute which dated back to early 2016. We recognized approximately $25.9 million in net benefit to EBITDA in the quarter from our settlement with Rock Springs Royalty Company. Turning to the market, international pricing has continued to improve primarily due to stronger than expected supply demand fundamentals. While the demand data remains mixed in China, demand around the world seems quite robust. In China, domestic prices rose during the second quarter due to more environmental shutdowns as well as reduced operating rates during business summit in Shanghai. Thanks to all the positive developments we have updated our international price outlook again to reflect the momentum in the marketplace. Now, I am going to turn the call over to Scott who will share financial results in more detail.

[Scott Humphrey:]

Thanks, Kirk and thanks everyone for joining us on the call and for your continued interest in China in Ciner Resources. Today, I will provide some detail around our second quarter performance and how those results compare to the outlook we provided back in February. I will discuss some significant financial drivers from the quarter including our capital spending program and from the key metrics we utilized to evaluate our business. Let me start with a recap of our actual results versus our full year outlook. Total volumes sold decreased 10.2% in the quarter compared to Q2 of 2017 and 5.3% on a year-to-date basis versus our revised outlook of down 1% to 3% in 2018. Production volume was down in the quarter due to the issues Kirk discussed earlier which have now been fixed. Domestic volume grew approximately 55,000 short tons in Q2 and approximately 87,000 short tons year-to-date, so we are on target to hit our range of 125,000 tons to 150,000 tons. Our domestic sales price decreased by 0.2% in the quarter and 0.6% year-to-date, in line with our outlook of a decrease in the range of 1% to 3% for the year. Overall, international pricing was down 3.7% in the second quarter. We have recognized higher international pricing during 2017 due to increased sales to CIDT. These sales included full in-land and ocean freight costs in our results compared to ANSAC volumes which only contemplate rail freight to the U.S. port. International prices excluding the CIDT effect on sales in 2017 increased by 5.5% in the quarter and 6.7% year-over-year. As Kirk mentioned already we have revised our forecast for international pricing to increase in the range of 2% to 4%. The comparison 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 provided in February of flat to down 2% pricing excluding CIDT. Maintenance capital spending was $2.1 million and $4.9 million year-to-date. We still expect to be within our revised range of $15 million to $17 million for the full year. We have some larger projects scheduled in the second half of the year including the start of one project which we originally planned to commence in 2019. Expansion capital spending was $10.7 million in the second quarter and $15.4 million year-to-date. We expect to hit our outlook for a range of $55 million to $65 million as we kicked off our electricity generation project in the second quarter. Our ERP implementation project remains on budget and on schedule for 1/1/19 go-live date. Our revenues for the quarter were $109.9 million, down 8.2% compared to the second quarter of 2017. The reduced sales were almost entirely driven by the sales volume reduction caused by our production issues. Revenues in the first half of 2018 were $231.1 million, down 6.2% compared to $246.3 million over the first half of 2017. The two main drivers for the reduction year-over-year were the reduced freight components of our sales due to the elimination of sales to CIDT and the production issues we experienced in the second quarter. Domestic sales of $60.3 million in the quarter were up 25.4% compared to Q2 of 2017 driven by a 25.6% increase in sales volume. In the first half of 2018 domestic sales of $115.6 million were up 18.9% compared to $97.2 million in the first half of 2017. International sales dropped to $49.6 million in the quarter compared to $71.6 million in Q2 of 2017 due primarily to a 28.1% decrease in volumes sold related to our production issues. In the first half international sales were down 22.5% from $149.1 million in 2017 to $115.5 million in 2018. The decrease was due to a 17.8% drop in volumes sold from the mix shift away from CIDT in 2017 to more domestic volume in 2018 as well as the absence of CIDT sales in 2018, which reduces pricing from the loss of the higher freight component in our sales numbers which we experienced last year. Cost of products sold in the quarter, including freight decreased slightly from $89 million to $88.7 million. Year-to-date cost of products sold decreased from $180.4 million to $175.1 million as we have had no freight expense to CIDT during 2018. SG&A expenses of $6.4 million or $0.6 million higher than the prior year quarter primarily driven by higher expenses from our ERP implementation project. Year-to-date SG&A expenses increased from $10.9 million to $12.8 million. The two primary drivers for the increase year-over-year 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 $0.83 in the second quarter of 2018 compared to $0.41 last year. On a year-to-date basis earnings per unit was $1.34 in 2018 compared to $0.95 in the first half of 2017. The primary driver for the increase was the $27.5 million litigation settlement with Rock Springs Royalty Company related to royalty expenses. Net of additional expenses related to the settlement just added $25.9 million to net income in the second quarter. Cash provided by operations was $57.2 million in the first half of 2018 compared to $25.7 million generated in the first half of 2017. The increase in cash from operations was primarily due to a reduction in accounts receivable from CIDT in the first 6 months of 2018. In 2017, we were ramping up sales to Turkey during the first half of the year, 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 $42.2 million in the first half of 2018 compared to the first 6 months of last year. The $27.5 million litigation settlement was paid in early July, so that will show up in cash flow in the third quarter. We continue to maintain a very conservative balance sheet with a current leverage ratio of 0.92x net debt to adjusted EBITDA. 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 second quarter, we delivered $42.9 million in adjusted EBITDA including the $25.9 million net litigation settlement. Year-to-date adjusted EBITDA of $71.7 million is a 28% increase versus $56.0 million in the first half of last year. Our distributable cash flow was $19.6 million in the quarter compared to $10.8 million in the second quarter of 2017 as our net income increased due to the royalty litigation settlement. On a year-to-date basis, our distributable cash flow attributable to Ciner Resources was $32.7 million compared to $24.2 million in the first half of 2017. Our coverage ratio of 1.7 in the quarter compares favorably to the 0.94 ratio in the second quarter of 2017. Now, I am going to turn the call back to Kirk for some comments on our outlook for the balance of 2018.

[Kirk Milling:]

Thanks, Scott. We have raised our outlook for maintenance capital in 2018. Following the settlement of our royalty litigation, we intend to start construction on a new change-house project during the third quarter. This project has in development for several years and the influx of cash from the royalty settlement has allowed us to move up the timetable and start the work in 2018. This project will upgrade and replace old infrastructure for our workforce that dates back to when the plant was built in 1962. On the expansion CapEx side, we approved a new chemical calcination project during the quarter that should elevate our production levels by roughly 100,000 tons. We anticipate startup during the second half of 2019. In addition, our energy cost reduction project is well underway and on schedule. As previously communicated, at current natural gas prices, this project initially should generate about $7 million in annual Wyoming EBITDA eventually rising to about $12 million annually once fully utilized. We expect to commission the new unit in May of 2019. As I think about our prospects for the balance of 2018, pricing continues to be a tailwind for our results. I am optimistic that our efforts over the last year to overhaul and improve our reliability processes will be bring improved production results over the second half of the year. The combination of the strong price environment along with improved production levels should set the stage for improvements in our DCF over the balance of 2018. Thanks for your continued interest in Ciner Resources. This concludes our prepared remarks. And Maria, please open the line for questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Jim Sheehan of SunTrust.

[Unidentified Analyst:]

Good morning. This is Pete on for Jim. Are there any other factors aside from the repairs in May that have impacted your volume outlook relative to what you provided last quarter?

[Kirk Milling:]

No. Solely, we pulled it down only because of the impact from the maintenance issues we encountered slightly before the outage during the outage and then as we began to ramp production backup coming out of it. So since that time, we have we run pretty strong and pretty much in line with the guidance that we have given previously.

[Unidentified Analyst:]

Okay, great. And then by how much did domestic freight costs change year-over-year on a per ton basis and do you expect free cost per ton to increase in the second half of the year?

[Kirk Milling:]

Do not expect any change in freight costs second half versus first half. I think all-in year-over-year freight is up 3% to 4%.

[Unidentified Analyst:]

Alright. Thank you.

[Kirk Milling:]

Yes.

[Operator:]

Our next question comes from the line of Daniel Jester of Citi.

[Daniel Jester:]

Hi, good morning guys.

[Kirk Milling:]

Good morning Dan.

[Scott Humphrey:]

Good morning, Dan.

[Daniel Jester:]

So, you talked about in your prepared remarks about some of the fundamental improvement in soda ash supply demand, so I was wondering maybe you could just talk about some of the key regions on the supply side, what are you seeing from Turkey and where is the Kazan project today in terms of ramping and then maybe dive a little bit deeper into your outlook for China supply in the second half?

[Kirk Milling:]

Sure. I mean, if you look at China so far this year, production is down about 4%, which equates to about 400,000 tons on a year-to-date basis. I mean, generally for the first half of the year, we have seen prices rising. There has been some short-term movements downward here and there, but all-in in Asia, prices have been up Q2 over Q1. We expect them to be up again in Q3 over Q2, so not expecting a whole lot of change in the supply demand fundamentals at least in Asia, I mean, overall kind of inventories are very tight. We think that sets the stage for further improvements in pricing. As we look towards our negotiations in 2019. I think for the rest of the world if you want to call it, I think supply remains very tight. I think the good news is we had very robust demand growth last year and starting this year. So, all of the incremental production coming from Turkey seems to have been absorbed in the marketplace with very little impact. And then I think your last question was how was the ramp up of Turkey, I know that they are running at least four of their five lines and I think set to bring the fifth line sometime here over the second half of the year.

[Daniel Jester:]

And then just maybe a little longer term, there have been a couple of obviously the Turkish projects have been very large and chunky, but outside of that, if you go to 2019 and 2020 do you anticipate any other large projects coming online?

[Kirk Milling:]

There is nothing significant. I mean, I just actually in their most recent report they have put out something talking about plants that were at risk for closure in China. And they listed over 12 million tons that were at risk either for environmental reasons located in populated areas that they want to relocate and like less than 2 million tons that was slated at least for new projects. So I think all-in the dynamics look better for tighter supply as we go forward. But no other significant large scale projects that to report on.

[Daniel Jester:]

Okay. And then in light of I think how you deem more upbeat fundamentals on supply demand, stronger pricing and some growth projects that you are working on, how do you view the distribution in light of that and what will give you confidence to start raising that again?

[Kirk Milling:]

Yes. I mean obviously we talk. We are in a very good cash position now coming off the settlement. The fundamentals look very good. I think we were hesitant coming off a tough operating quarter. We feel good about the actions we have taken over the last 12 months to 18 months to improve reliability which ultimately will affect volume produced. But – and I think if we start to hit those going forward, clearly I think looking at the distribution again and beginning to raise the distribution is definitely in the foreseeable future, but it was just a tough call I think coming off the tough operating quarter in Q2.

[Daniel Jester:]

Okay. And then just one last one filling off for that tough operating quarter, so if you back out the benefits from the settlement, it seems like year-over-year EBITDA was down each $9 million, is there anything else going on there, is that all just volume?

[Kirk Milling:]

No, so it’s a combination of volume and cost, so a few things that are moving in the cost bucket. There is a correlation to when we struggle with reliability we are also going to add labor costs in the form of over time, maintenance cost, contractors, maintenance supplies, etcetera, so all of it sort of builds up together. We have also had higher than normal medical claims and then there are consultants that we had engaged. We have also seen some expenses for those, but those are really winding down now, so I do see some improvements on the cost side that we should see the benefit of over the second half.

[Daniel Jester:]

Okay. Thanks very much.

[Operator:]

Thank you. Ladies and gentlemen, this does conclude today’s conference call. You may now disconnect. And have a wonderful day.