Sisecam Resources LP
Q2 2017 Earnings Call Transcript

Published: 8 Aug 2017

[Operator:]

Welcome to Ciner Resources Second 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, 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 open for your questions following the presentation. [Operator Instructions] It is now my pleasure to turn the floor over to Scott Humphrey. Sir, 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 2017 earnings. Kirk Milling, our CEO will discuss our second quarter results. I will then provide additional details related to our financials. And then, 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 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. I think as everyone knows, we have been methodically expanding our production capacity [indiscernible] de-bottlenecking efforts for several years now, which has yielded an additional 250,000 tons of annualized production capacity since 2013. With this, we are pushing our equipment harder than we ever have in the past. And in the second quarter, we continue to experience impacts from unplanned equipment outages that drove volumes more than 30,000 tons below our expectations coming into the quarter. Any time we experience unplanned outages, we also end up with higher maintenance expenses associated with fixing the equipment plus higher labor cost due to incurring unscheduled over time to get the units back up and running as quickly as possible. As a reminder, given our position at the low-end of the global soda ash cross curve, we are always able to sell everything we produce. As such, lower production volumes directly correlate with lower sales, and therefore lower distributable cash flow. Given we have now experienced lower-than-expected production for the first two quarters, and will be difficult to make up over the course of the year, we lowered our full year guidance for sales volume to be flat with 2016. As I mentioned last quarter, we engaged earlier this year outside resources to do an in-depth evaluation of our key operational practices and assist us in moving towards best-in-class processes that should not only lead to more consistent production, but also in more efficient use of our resources. Their evaluation has identified two significant areas that we are focused on, the combination of which we believe will add roughly 80,000 tons to our previous 12 months run rate. We believe we will see the initial benefits of higher rates beginning in Q4 this year, but we expect to see this on a full year run rate starting in 2018. The other unrelated operational impact we felt during the second quarter was in our deca hydrate processing area. Wyoming has experienced 100-year record levels of rainfall over the first five months of 2017 and that excess water created issues with being able to complete our annual deca hydrate harvest. To combat this, we try to use a common technology that is widely used in mining industries that would allow us to harvest the deca in wet conditions. While it did its job the efficiency and productivity was slower and too costly and we therefore decided to stop any further production using this method. The positive news that since early July the weather has turned in our favor in increased evaporation rates beyond what we normally expect at this time of year, which should help the timeline in our ability to harvest deca going forward. While these issues were negative impacts on both the quarter and our year-to-date performance, we remain focused on our efforts to grow our capacity up to a sustainable 3 million ton run rate over the next few years. On the positive front, we are continuing to make progress to lower our cost and maintain our position as the lowest cost operator in the Green River Basin. To date, these efforts have yielded a positive impact to our Wyoming EBITDA of over $2 million and will further improve our EBITDA per ton margin which we believe is already the best amongst our competitor group. Turning to the market, prices overall improved in both domestic and international markets. Domestic results primarily as a result of an improved customer mix but international prices ticked up mostly from higher prices in Asia. We believe these price levels should remain for the balance of the year with prices at least at two levels if not slightly higher. Lastly I'd like to congratulate Scott Humphrey and his appointment to his new role as General Resources CFO. Many of you already know Scott who has been with us since the IPO in 2013, very successfully managing our IR and Treasury functions. Scott's knowledge of our business in his previous background with successful companies such as GE will serve us well as we look to get back to a sustainable cash flow growth trajectory for General Resources. 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 joining us on our call and your continued interest in General Resources. Today, I'll provide some additional detail on our second quarter performance and how that relates to the outlook, we provided back in May. I will discuss the significant financial drivers from the quarter including our capital spending program and some key metrics around 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're going freight as a 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 costs in our customer base in any given quarter can gear 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, due to the negative impact production that Kirk discussed, total volumes sold decreased 3.7% in the quarter versus Q2 of 2016, year-to-date total sales volume is now down 1.1% compared to our original outlook of a range from 1% to 3%, our domestic sales price increased by 2.4% in the quarter and 1.4% year-to-date slightly above our flat to down 3% outlook for the year. International prices increased by 9.1% in the quarter and 12.1% year-to-date well ahead of our outlook for 3% to 5% growth. We recognized higher international pricing during the first half of the year as we have increased our non-ANSAC international sales through our Turkish affiliate. These sales include full in land and ocean freight costs in our results compared to ANSAC volumes which only contemplate rail freight to the U.S. port. While the mix change result in higher revenue, it also gives rise to higher freight cost, in the end we recognized a very similar return to our typical international sales despite the increase in revenue due to freight. Maintenance capital year-to-date was $5 million which is on pace for our revised range of $10 million to $12 million for the full year, expansion capital was $6.4 million year-to-date, we expect to see an increase in expansion capital spending in the second half of 2017. Our revenues for the quarter were $119.7 million up 2.6% compared to the second quarter of 2016, year-to-date revenues of $246.3 million are up 6.6% versus the first half of 2016. The favorability was largely driven by increased freight due to customer mix in both the domestic and international markets. Domestic sales of $48.1 million in the quarter were basically flat compared to Q2 of 2016 despite lower sales volume. In the first half of 2017, domestic sale was $97.2 million or 1.4% higher than the first six months of 2016. The primary driver was the change by various customers from contracting their own freight during 2016 to having general range freight this year, which hit the growth price and sales line but again has minimal impact to EBITDA. Without this freight uplift to sales prices, domestic prices would have been down slightly versus 2016 but in line with our outlook for the year. International sales increased by 4.2% to $71.6 million in the quarter due to a 9.1% increase in prices. On a year-to-date basis, international sales are up 10.3% due to a 12.1% increase in prices, as previously discussed the price increases are due to sales to an increase in non-ANSAC international sales through our Turkish affiliate. Cost of products sold in the quarter including freight increased by approximately 9% to $89 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 from the Deca Dredging project which Kirk discussed. The expense related to this project impacted us by $1.3 million in the second quarter approximately another $1 million to come in Q3. Our level of maintenance work in the quarter was also elevated as we attempted to mitigate our production issues on the surface. SG&A expenses of $5.8 million were $200,000 lower than the prior year quarter, year-to-date our SG&A expenses of $10.9 million or $900,000 lower than 2016 first half total of $11.8 million. This favorability was mostly due to lower SG&A costs for ANSAC. Cash provided by operations was $25.7 million in the first half down from $66.1 million provided in 2016, the decrease in cash from operations was primarily due to higher accounts receivable from our affiliate in Turkey which peaked at the end of June and should now unwind over the remainder of the year and next let's turn to discuss how all of that hits the bottom line on two of the key metrics we manage as an MLP, adjusted EBITDA, and distributable cash flow. In the second quarter, we delivered $25.6 million in adjusted EBITDA a 12.9% decrease versus $29.4 million in the same quarter last year, year-to-date adjusted EBITDA of $56 million is down 2.8% from $57.6 million in the first half of 2016. Our distributable cash flow was $10.8 million in the quarter and $24.2 million year-to-date compared to $13.3 million in the second quarter of 2016 and $25.8 million in the first half of 2016. The decreases were driven by lower EBITDA generation in the second quarter of this year due to lower sales volume combined with higher maintenance CapEx spend, the changing CapEx compared to 2016 is simply a timing issue as we now expect maintenance CapEx to be flat this year versus 2016. Our coverage ratio of 0.94 in the quarter resulted in a trailing fourth quarter coverage ratio of 1.07. General Resources had earnings per unit of $0.41 in the second quarter of 2017 compared to $0.52 last year as net income decreased due to lower sales volume and higher maintenance cost as discussed. We continue to maintain a very conservative balance sheet with the current leverage ratio of $0.99 times net debt to adjusted EBITDA which positions us well if we continue to seek out opportunities to use our liquidity and strong balance sheet. To provide more liquidity for our capital spending program and liquidity needs last week we closed the new five year line of credit for both Wyoming and CINR which added an extra $35 million in borrowing capacity at effectively the same rate thus our previous credit agreement. We also succeeded in changing one of our covenants the more conducive to an MLP model. I will now turn the call back over to Kirk for more specifics on an updated 2017 outlook.

[Kirk Milling:]

Thanks, Scott. And as I mentioned earlier given our production is year-to-date. We have revised our outlook for sales volume to be flat with 2016. However with the efforts we have undertaken to improve the sustainability of our expansion efforts we are optimistic that this will position as well for 2018 and beyond. We also reduced our capital spending plan for the year given the higher margin environment this year as well as our operational issues in Wyoming. We revisited our capital expenditure plan to identify any discretionary items that could be delayed without impacting our cash flow performance. On the expansion side, we pushed to new ERP implementation into 2018. In closing thank you for your continued interest in general resources while it was a difficult quarter we still believe the underlying long term fundamentals for a business are positive and we are very focused on improving our operational performance so, we can get back to growing our distribution to shareholders. This concludes our prepared remarks. Maria, please open the line for questions.

[Operator:]

Thank you. [Operator Instructions] our first question comes from the line of Daniel Juster of Citi.

[Daniel Juster:]

Good morning, guys. I certainly appreciate all the color on the quarter, can you just help us think about how costs will evolve in the second half of the year and obviously talked about the elevated cost in the second quarter is any of that going to lead in to the third quarter and as you get back to a little bit more of an improved run rate production by the fourth quarter are you still going to be dealing with some additional costs or should if we go back to a cost structure that looks a little bit more like 2016.

[Kirk Milling:]

Yes, we wouldn't anticipate to be at least at the 2016 level on a per ton basis if not better. We've made some structural improvements to some of our underlying cost. Which I mentioned in my remarks had assisted us about $2 million year-to-date the only carryover that I would anticipate over the second half of the year was the roughly million dollars that Scott mentioned related to this, this Deca issue we encountered. We stopped doing that but there is a little carryover of that into Q3 but again I would expect an improvement if, if we can get our operations lined out that should help our maintenance spending in some overtime cost that we've been incurring as we just keep trying to get the units back up and running as quickly as we can.

[Daniel Juster:]

Okay, that's helpful and then on some of sort of the longer term growth plans given sort of challenges that you had in that in the first half get into $3 million tons run rate. Does that trajectory of that look any different from where you are today or it really the implementation of some of these items that sort of your outside experts can help and that will really help you get back on that trajectory that you had in the past.

[Kirk Milling:]

Yes, that's the way I would characterize Dan I mean, I think we've again as we've been pushing the plant to its limit. Things are popping up and we're realizing maybe some of our disciplines and internal processes may not be as strong as they need to be and that's where these outside resources are helping us. I think no doubt some of the projects that we worked on in the second quarter of this year that we were hoping to get some additional tons have not panned out and so, I think purely from a CapEx spend were a little bit behind but I hope to compensate for that with some of the work that these outside resources are going to help us with so, I'd say we're still on pace for the 3 million tons. Maybe six months to a year behind what we originally hoped for but definitely still on pace.

[Daniel Juster:]

Okay and then on the coverage ratio Scott, maybe you can help us think about how, how that should progress going forward I think 1.06 of the first half. I think is a lowest that I could recall you guys doing so, where's the comfort level for you and how low can that go before there's other actions that you need to take to pop that up.

[Scott Humphrey:]

Well, I mean to address your last question first about how low can it go, I think as we look out over the next let's say 18 months. We want to be comfortable that we're going to be generating enough cash to meet our distribution than we are comfortable with that. And so as far it's how low can it go for a short period of time you can be at one-to-one but that's not our intention for sure. We're going to continue to manage our business in order to provide that cushion for investors and I would say well yes the first half performance has led to a trailing four quarters of 1.07. We expect that number to be improved by the end of the year this year as we move into 2018.

[Kirk Milling:]

Yes, Dan, it's Kirk; just a further stop for I mean I think generally we're looking for that trailing to, to be north of where we're at. I think had we not had some of these unplanned issues I think the underlying fundamentals of the business are solid. We've got to get execution up on the operational performance and if we had that I think we'd probably be well over 1.1 right now which is plenty comparable considering the pricing cycle that we're in today.

[Daniel Juster:]

Okay guys. That's very helpful and Scott congratulations on your funding new role. Thanks guys.

[Scott Humphrey:]

Thanks Dan.

[Operator:]

Our next question comes from the line of Jim Sheehan of SunTrust.

[Jim Sheehan:]

Good morning. There has been a sale of the soda ash business in Wyoming recently can you talk about whether that's positive, negative or neutral for your business.

[Scott Humphrey:]

While on the positive side I would say that it's nice to have another soda ash company in the MLP and soda ash will be discussed with our investor base or at least investors that are in the MLP world. On the negative for us we were trading a bit higher than what the multiple went the - sold the business to Genesis for and so we've been trading down a little bit of late. I think for us that's maybe a little disappointing because our EBITDA margins are a bit higher than what's thrown off head so we'd expect to trade at a bit higher multiple but overall I'm optimistic we'll have a comp now another MLP so, I think that's good news.

[Jim Sheehan:]

Can you also talk about the status of pricing in China where we are with environmental closures and what do you expect the Asian prices to see over the next few months?

[Scott Humphrey:]

Hey Jim. This is Scott. The environmental inspection that lead to a lot of sort of temporary shutdown for maintenance have been ongoing over the summer I think they're going to conclude here this month and in August. It has led to kind of tight supply in China and prices kicked up in June and then again in July in the domestic market in China so, the and at the same time you also have a very low ammonium chloride credit which is dropped from in the 80s to about 59 a ton currently. So there's, there is a lot of things sort of working for keeping prices where they're add or even pushing them up a little as we go through the rest of the year.

[Kirk Milling:]

Hey Jim just a little more color to give you a sense so in Q2 I think in Asia we realized roughly about $5 call it a ton higher pricing and kind of our assumption going forward is we should be at least at that level that's not slightly higher over the balance of the year.

[Jim Sheehan:]

Great and finally can you talk about any prospects for royalty relief in Washington?

[Scott Humphrey:]

Is there anything - being passed in Washington right now, I mean we've remained very optimistic, I mean, a lot of effort, a lot of work has been done. There is a lot of bipartisan support on the royalty side right now. I mean, given what's going on in Washington, I have no idea what ultimate chances are. I would say if Congress can get moving with passing some legislation, I think there is a decent chance that we will be able to get this pass through along with something else, but how quickly that's going to happen is tough to say.

[Jim Sheehan:]

One more; can you talk about your M&A pipeline? And does your focus on operational improvement change your timetable for considering acquisitions?

[Kirk Milling:]

Definitely, it does not change your timetable. I mean, obviously we've got a lot of focus right now on (NYSE

[Jim Sheehan:]

Thank you very much.

[Kirk Milling:]

Yes. Thanks, Jim.

[Operator:]

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

[Roger Spitz:]

Thanks very much. Good morning.

[Kirk Milling:]

Good morning.

[Roger Spitz:]

Can you elaborate a little more on what international, particularly Asian soda ash prices are? What are you seeing in the market right now, what they are doing? I recognize your own prices -- international price should move around because you are shifting yourselves from ANSAC to your affiliate, but just think about what the Asian industry prices are doing?

[Kirk Milling:]

Yes. So I think Scott touched a little on this earlier. I mean, here recently they moved up about $10. We experienced in Q2 about $5 higher in Asia. Asia is really the only market around the world that loose much because Latin-America, North America, Europe, kind of rest of the world, they generally operate on annual contracts. So it's really Asia that's either spot or quarterly and tends to be a little more volatile. So, generally speaking, due to some of the environmental tests that have been going on and closures that have happened in China, China has somewhat tightened, so you have seen pricing rise even a little bit more in Q3. We haven't put that into our kind of planning and projection, we've assumed that prices would remain roughly at Q2 levels for the balance of the year.

[Roger Spitz:]

And have you seen any impact on pricing? It sounds like not yet from your Turkish affiliates, new capacity startups that new capacity…

[Kirk Milling:]

Well, we saw some impact I would say coming into 2017. I think as the market started to realize this new capacity was coming online, some of the producers went out and tried to front-run that capacity and tie-up volume over a period of time, and they lowered -- they offered some better pricing. And so, we felt that in some of our realized prices in 2017. I would say, as the year has progressed, we haven't really felt any impact yet, but the new plant [indiscernible] slated to start coming online this quarter and into Q4. And so, I would anticipate that there likely would be some impact as we head towards 2018.

[Roger Spitz:]

On the contractual prices, that you negotiate later this year for 2018, got it.

[Kirk Milling:]

Correct, correct.

[Roger Spitz:]

Do you have any primary view of what impact that might have, and perhaps you do, but don't want to say, I understand that too.

[Kirk Milling:]

Yes, I mean it's a bit early. I think on the positive front there has actually been some price increases announced on the domestic market. So I would view that in a positive light, but I think it's a bit too early to know, we've not really engaged much in a way of discussions and negotiations. We are actually also going to get a little bit of help in some of our freights area for our international markets because ANSAC had hedged some contracts, ocean contracts, as well as some fuel hedges. And some of those are unwinding as we speak, and they've been out of the money. So while it may not offset any kind of overall pricing impact, it will get provide a buffer to us as we look towards 2018.

[Roger Spitz:]

Thank you very much for your time.

[Kirk Milling:]

You bet.

[Operator:]

Ladies and gentlemen, that was our final question. At this time, this concludes today's Ciner Resources second quarter 2017 earnings conference call. You may disconnect your lines, and have a nice day.