Sisecam Resources LP
Q1 2017 Earnings Call Transcript

Published: 9 May 2017

[Operator:]

Welcome to Ciner Resources First Quarter 2017 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, Director of Finance and Treasurer. Today’s call is being recorded. At this time all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. [Operator Instructions] And it is now my pleasure to turn the floor over to Scott Humphrey. You may begin.

[Scott Humphrey:]

Thank you, Hope. Good morning, this is Scott Humphrey, Director of Finance and Treasurer for Ciner Resources. Thank you for joining us to discuss our first quarter 2017 earnings results. Kirk Milling, our CEO will discuss our first quarter results. I will then provide additional details related to our financials. Kirk will follow that with our outlook for the remainder of 2017. We will then take your question. 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 in 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 these 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 2017 earnings call. Well, we showed some modest improvement in distributable cash flow year-over-year, we believe the amount of improvement was below the capabilities our business can and should deliver. The investments we’ve made over the last few years are showing we can produce an expected annualized soda ash rate 2.8 million tons per year. However, we have been challenged to maintain that level of capacity over extended runs. As we saw in Q4, we continue to experience lower on-stream performance in our surface operations, due to a variety of unplanned production issues. And due impart to our efforts to continue pushing our units at their maximum capacity levels. As a result of this in March, we engaged outside resources to do an in-depth evaluation of our operational practices and assist us in moving toward best-in-class processes that should not only lead to more consistent production capability, but a more efficient use of our resources. Making systematic changes like this will take time to effectively permeate throughout our culture, but we are optimistic, we will be able to realize some additional cash flow as the year progresses that can build further upon our performance in the first quarter. Moving to the market, Chinese export prices peaked in February at the highest level since all the way back to mid-2012. Since then, they’ve begun to normalize to around $230 to $240 per ton but this still represents pricing levels well above what we experienced in 2016. In addition, an announcement recently made by the Chinese soda ash association called for a 10% reduction in production level from 60 days from mid-April through mid-June as well as calls for lower inventory and capacity across the industry. At the same time, apparent demand for soda ash in China is up 14% and their exports are down 37% as both flat and containable ash market demand has gotten off to a strong start to the year. We believe all of this should set a positive back drop for further price escalation as the year progresses. Moving onto other markets, where contracts were negotiated back in the fourth quarter of 2016, realized prices were pretty much in line with our expectations, as previously communicated, aggressive price actions from uncompetitive European synthetic producers put downward pressure on prices in both North and South America. These markets are now stabilized and pricing will remain at level similar to what we experienced in Q1 for the balance of the year. Now, I’m going to turn the call over to Scott Humphrey who will share more financial results in more detail.

[Scott Humphrey:]

Thank you, Kirk. And thanks everyone for joining us on our call and your continued interest in Ciner Resources. Today I’ll provide some additional detail on our first quarter performance and how that relates to the outlook we provided in February. I will discuss the significant financial drivers from the quarter including our capital spending program and some key metrics around our strong financial positioning and disciplined approach to managing our business and balance sheet. Before we jump into the results, I wanted to remind everyone how we treat freight costs in our sales figures, as you are going to hear freight as a driver of pricing and revenue in our results today. Freight is typically included in our reported sales prices and we have a wide variation of freight costs by customer and region. So, different mixes of freight costs 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. Despite the negative impacts to production that Kirk discussed. Total volume sold increased 1.6% versus 2016 compared to our outlook of a range from 1% to 3%. Our domestic sales price increased by 0.6% in the quarter, at the high end of our flat to down 3% outlook. International prices increased by approximately 15% in the quarter, well ahead of our previous outlook. So we’ve updated our guidance to a 3% to 5% increase for the year. We will continue to achieve results above our outlooks through the first half of the year, as we sell tons to our affiliate in Turkey. These sales recognized full inland and ocean freight costs in our results compared to ANSAC volumes, which only include rail freight to the U.S. port. While, this mix change result in higher revenue, it also gives rise to higher freight costs. In the end, this mix shift produces a minimal impact to EBITDA. Maintenance capital for the quarter was $2.7 million, which is on pace for our range of $12 million to $15 million for the full year. Expansion capital was $1.7 million in the quarter. We will begin to see more expansion capital next quarter as we still plan to end the year in a range of $23 million to $28 million. Our revenues for the quarter were $126.6 million, up 10.7% compared to the first quarter of 2016. The favorability was largely driven by increased freight due to customer mix in both the domestic and international market. Domestic sales of $49.1 million were up 2.5% compared to 2016. The primary driver with the change by various customers from contracting their own freight during 2016 to having Ciner range to freight this year, which hit the gross price and sales line, but again has minimal impact to EBITDA. Without this freight uplift sales prices, domestic prices would have been down slightly versus 2016 but in line with our outlook for the year. International sales increased by 16.5% to $77.5 million due to a 14.9% increase in prices, as I previously discussed and a 1.5% increase in volume sold. Cost of products sold in the quarter including freight increased by approximately 14% to $91.4 million, primarily due to increased freight costs from sales to our affiliate in Turkey. We also saw an increase in costs associated with maintenance materials and contract maintenance work, as we attempted to mitigate our production issues on the surface. Offsetting some of these unfavorable items, we experienced lower deca cost in the first quarter compared to 2016 as our cost of harvesting the deca, which will be used this year with favorable for the prior year. SG&A expenses of $5.1 million or $700,000 lower than the prior year quarter. This favorability was mostly due to lower SG&A cost for ANSAC. Cash provided by operations was $10.8 million in the first quarter down from $36.8 million provided in 2016. This resulted from higher accounts receivable from our affiliate in Turkey, which will persist into the second half of the year. Next let’s turn to discuss how all of this hits the bottom line on two of the key metrics we manage as an MLP, adjusted EBITDA and distributable cash flow. In the first quarter, we delivered $30.4 million in adjusted EBITDA, a 7.8% increase versus $28.2 million in the same quarter last year. Increased sales volume and lower variable costs were the primary drivers for this favorability. Our DCF was $13.4 million in the quarter, an increase of $0.9 million from the prior year quarter, higher EBITDA drove the improvement in the first quarter. Our coverage ratio of 1.17 for the quarter resulted in a trailing fourth quarter coverage ratio of 1.11. Ciner Resources had earnings per unit of $0.54 in the first quarter of 2017, compared to $0.51 last year, as net income improved due to the higher sales volume and lower variable costs. We continue to maintain a very conservative balance sheet with the current leverage ratio of 0.82 time net debt to EBITDA, which positions us well as we continue to seek out opportunities to use our liquidity and strong balance sheet. I will now turn the call back over to Kirk for more specifics on our 2017 outlook.

[Kirk Milling:]

Thanks, Scott. As we discussed last quarter 2017 represents the start of our efforts to leverage synergies throughout Ciner’s global soda ash network. You see it throughout our Q1 results from our sales to our Turkish affiliate. While on the surface, these sales don’t represent a huge EBITDA impact in the short-term. They are providing important strategic benefits we hope to realize as part of Ciner groups global soda ash platform. We will continue to explore further market synergies as the year progresses that we think and drive improvements in our DCF. In addition, we’ve begin technical exchanges with our counterparts in Turkey that can further build upon the operational initiatives we discussed earlier to drive both production and cost improvements going forward. As for our outlook, we increased our forecast for international pricing from flat to up 3% to a new range of a 3% to 5% increase. This was mostly attributable to the change in our sales mix due to additional volume moving to our Turkish affiliate. We expect this to continue through this summer. In addition, Asia prices are set to rise further in the near-term and therefore we think will be above our original expectations for the year. The rest of our 2017 outlook remains intact from last quarter. In closing, I want to say thank you to everyone for their interest in Ciner Resources. This concludes our prepared remarks. Hope, please open the line for questions.

[Operator:]

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

[Jim Sheehan:]

Good morning.

[Kirk Milling:]

Good morning, Jim.

[Scott Humphrey:]

Good morning.

[Jim Sheehan:]

Could you give us more detail on what you’re seeing in China, why do you think pricing is moving higher there? Is there a higher level of environmental enforcement that’s causing rationalization? Anything else here – any other color on the Chinese market would be appreciated? Thanks.

[Scott Humphrey:]

Yes, hi Jim. This is Scott. Yes, the Chinese government is about to embark on a very similar environmental check program to what happened in 2016. They have looked at soda ash facilities in 15 provinces last year. And they’re doing an additional 15 provinces this year, which account for about 46% of the total volume of soda ash in China. So we expect there to be a similar shortage of production or lower production as we saw last year.

[Kirk Milling:]

The other – just one further comment on that Jim too. So we started to see prices rising in Q4 that carried into February of this year. And so as we negotiate prices on a quarterly basis we’re lagging just a little bit on those increases. So we therefore prices were still a fair bit higher as we started negotiating for Q2. So Q2 prices generally in Asia rose somewhere in the $5 to $10 a ton range from where they were in Q1.

[Jim Sheehan:]

Okay. And then on your coverage ratio bounce back pretty nicely in this quarter, can you talk about how you think about the distribution going forward and any prospects for raising it.

[Kirk Milling:]

Well, I mean a lot of it’s really dependent upon how we do on production and we’re forecasting and increasing production, if we can deliver on that I think it will set the stage for some improvement year-over-year. I think the market dynamics are there, I think we got some good tailwind on cost. We just got to execute really on the operation side.

[Jim Sheehan:]

Okay. And can you give us an indication of what your M&A pipeline looks like right now.

[Kirk Milling:]

We don’t really have anything to comment Jim on M&A. As we said in the past, we continued to evaluate some opportunities but there’s nothing to discuss right now.

[Jim Sheehan:]

Do you think that Tronox’s decision to divest its business, offers any opportunities for you in your market?

[Kirk Milling:]

I mean we’ll just have to see how that plays out and who ultimately is the successful winner there? But I wouldn’t anticipate a whole lot of change.

[Jim Sheehan:]

Thank you.

[Kirk Milling:]

Thanks Jim.

[Operator:]

Your next question comes from the line of Roger Spitz of Bank of America.

[Roger Spitz:]

Thank you, good morning. Firstly can you – if you’re able to review the timing that you’re Turkish affiliate’s capacity additions.

[Kirk Milling:]

Sure. So the initial expansion at Beypazarı is coming online in Q2. And then the new Greenfield sites in Kazan is expected to come online later this year sometime in Q3, Q4 time period.

[Roger Spitz:]

Okay. And in terms of Tronox and their sales process, I don’t know if you willing to comment. But do you think any of the current producers in Green River would be able to acquire that business from a regulatory standpoint.

[Kirk Milling:]

Yes. I really have no comment on that. I mean there’s five total producers in the U.S. market today. But whether or not that would move through, I really can’t comment on that.

[Roger Spitz:]

Understand. Thank you very much.

[Kirk Milling:]

Thank you.

[Scott Humphrey:]

Thanks.

[Operator:]

There are no further questions. This concludes today’s Ciner Resources first quarter call and webcast. You may disconnect your lines at this time. And have a wonderful day.