Sisecam Resources LP
Q3 2017 Earnings Call Transcript

Published: 11 Nov 2017

[Operator:]

Welcome to Ciner Resources Third 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's my pleasure to turn the floor over to Scott Humphrey. You may now begin.

[Scott Humphrey:]

Thank you, Crystal. Good morning. This is Scott Humphrey, CFO for Ciner Resources. Thank you for joining us to discuss our third quarter 2017 earnings. Kirk Milling, our CEO, will discuss our third 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 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. Our third quarter production performance illustrated the initial stages of improvements from the operational-excellence initiatives we began earlier this year. While on a year-to-date basis, our production volume remains below 2016 levels, our sequential production was up over 5%. And from a historical perspective, this was the second-best quarter of production we've ever had. Included in the quarter, we successfully executed an annual maintenance outage, and combined with our operational-excellence initiatives, we expect to see further sequential production growth in Q4. While we are encouraged by our improved operating performance in the quarter, we still have much work to accomplish in order to unlock the true potential of our business. We think by mid-2018, the initiatives will be delivering approximately 100,000 tons per year annualized as well as some improvements in our cogs due to more efficient utilization of our resources. Most of our efforts today focus on improved equipment reliability, which translates into better utilization of our existing assets and ultimately, lower operating costs. I also want to follow up on something we talked about last quarter related to our decahydrate processing that added roughly $2 million to our fixed cost this year. As mentioned, Wyoming experienced 100-year record levels of rainfall earlier in the year, and as a result, did not allow us to harvest the normal amounts of decahydrate that is needed in order to maintain current levels of production. This issue is now mitigated, mostly thanks to improving weather conditions in Wyoming, and we expect to see no further impact from this going forward. Turning to the market. Soda ash demand has been much stronger than expected this year as we forecast overall global growth to exceed 2 million tons, which is the most robust growth profile we've seen in several years. China is leading the charge, with demand up over 8%, but it is also spilling into other Asian markets that are up over 12%, which are core markets for ANSAC. The surge in demand, combined with tight supply in China, is putting significant upward pressure on prices. To illustrate this point, domestic prices in China have increased over $80 per ton since June. Given the higher local prices and tight supply, it is clear Chinese producers are choosing to sell their available product locally, which is why we're seeing their export volumes down 24% compared to last year. The combination of higher demand and less available supply should set the stage for pricing to remain relatively strong for most Asian markets as we head into 2018. In other markets, Ciner's new facility in Kazan started up in August with their first line of production. Each line can produce 500,000 tons per year and will be phased in over the next 6 months. While there is no doubt this new production will have some impact on market prices, robust global demand should be able to absorb the production faster than first thought, and therefore, serve to mitigate the impacts created from any imbalance of supply. 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 your call and your continued interest in Ciner Resources. Today, I'll provide some additional detail on our third quarter performance and how that relates to the outlook we provided back in August. I will discuss the significant financial drivers from the quarter, including our capital spending program and some key metrics around managing our business. Before we jump into the results, I want to remind everyone how we treat freight costs in our sales figures as you're 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 cost 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. Total volume sold decreased 2.9% in the quarter versus Q3 of 2016. Year-to-date, total sales volume is now down 1.7% compared to our outlook of flat volume growth. Our 2016 comp is lower in the fourth quarter, so we expect to approach flat volume growth for the full year. Our domestic sales price increased by 1.4% in both the quarter and year-to-date, slightly above our original flat to down 3% outlook for the year. International prices increased by 6% in the quarter and 10% year-to-date, well ahead of our outlook for 3% to 5% growth. We recognized higher international pricing during the first 9 months of the year as we have increased our international sales to our Turkish affiliate, CIDT. 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. ports. While this mix 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. Maintenance capital year-to-date was $6.8 million, and we still expect to spend within our expected range of $10 million to $12 million for the full year. Expansion capital was $7.7 million year-to-date. We expect to see an increase in expansion capital spending in the fourth quarter of 2017. Our revenues for the quarter were $122.5 million, up 1.2% compared to the third quarter of 2016. Year-to-date revenues of $368.8 million are up 4.7% versus the first 9 months of 2016, driven by an increase in average sales price of 6.6%. The favorability in pricing was largely driven by increased freight due to customer mix in both the domestic and international markets. Domestic sales of $47.9 million in the quarter were down 1% compared to Q3 of 2016, driven by lower sales volume. In the first 9 months of 2017, domestic sales of $145.1 million were 0.6% higher than the first 9 months of 2016 despite lower sales volume. The primary driver was the change by various customers from contracting their own freight during 2016 to having Ciner arrange freight this year, which hit the gross price and sales line, but again, has minimal impact to EBITDA. Without this uplift to sales prices, domestic prices would have been down versus 2016. International sales increased by 2.8% to $74.6 million in the quarter due to a 6% increase in prices. On a year-to-date basis, international sales are up 7.7% due to a 10% increase in prices. The price increases are mostly due to an increase in non-ANSAC international sales to our Turkish affiliate, CIDT. Turning to cost. Cost of products sold in the quarter including freight increased by approximately 4.6% to $88 million due to increased freight costs from sales to our affiliate in Turkey. Cost of goods sold excluding freight was down on a per ton basis by over $3 per short ton in Q3 versus Q2 of 2017. We are seeing this improvement in sequential cost performance due to both our cost-reduction initiatives beginning to provide benefits and our increased production throughput, as we have begun to mitigate our unplanned downtime issues from the first half of the year. SG&A expenses of $5.7 million were $600,000 lower than the prior year quarter. Year-to-date, our SG&A expenses of $16.6 million are $1.5 million lower than the year-to-date period of 2016 total of $18.1 million. This favorability was due to a combination of lower SG&A costs for ANSAC and increased employee time allocations to Ciner efforts outside of the public company. Cash provided by operations was $45.2 million in the first 9 months of 2017, down from $103.9 million provided in 2016. The decrease in cash from operations was primarily due to higher accounts receivable from CIDT, our affiliate in Turkey, which drove a year-to-date increase in working capital of $54.8 million. We expect that the majority of this receivable balance will unwind by year-end. Next, let's turn to discuss how all that hits the bottom line on 2 of the key metrics we manage as an MLP, adjusted EBITDA and distributable cash flow. In the third quarter, we delivered $29.2 million in adjusted EBITDA, a 4.9% decrease versus $30.7 million in the same quarter last year. Year-to-date adjusted EBITDA of $85.3 million is down 3.4% from $88.3 million in 2016. Our distributable cash flow was $13.1 million in the quarter and $37.5 million year-to-date compared to $13.5 million in the third quarter of 2016 and $39.4 million in the first 9 months of 2016. The decrease in DCF year-to-date was driven by lower EBITDA generation due to lower sales volumes combined with higher maintenance CapEx spend. The change in CapEx compared to 2016 is simply a timing issue as we expect maintenance CapEx to be flat this year versus 2016 levels. Our coverage ratio of 1.15 in the quarter resulted in a trailing four quarter coverage ratio of 1.06. Ciner Resources had earnings per unit of $0.46 in the third quarter of 2017 compared to $0.56 last year. We wrote off $1.6 million of assets in Q3 as a result of our energy sourcing initiative. The balance of the reduction in EPU was due to lower profitability primarily from lower sales volume. We continue to maintain a very conservative balance sheet with the current leverage ratio of 1.07 times net debt to adjusted EBITDA, which positions us well as we continue to seek out opportunities to use our liquidity and strong balance sheet. In August, we retired one of our two industrial revenue bonds as it reached maturity. We increased our borrowing under our revolving credit facility to repay this $8.6 million bond. Now I'm going to turn the call back to Kirk for some comments on our outlook for the fourth quarter.

[Kirk Milling:]

Thanks, Scott. While we've improved the outlook for pricing in both international and domestic markets segments, a good portion of this is due to the customer mix of higher sales to CITD and other customers who have higher freight cost, but also, to a lesser extent, improving prices throughout Asia. As Scott discussed, without the uplift from freight, our prices would have been slightly lowered thus far in 2017 compared to last year. In spite of being at the low end of the price cycle for soda ash, we improved our quarterly coverage ratio to 1.15, and our year-to-date coverage ratio was up to 1.10. We expect our full year to be comfortably over 1.1, which again, I think shows that the fundamentals for our business are very sound as our coverage cushion allows us to weather through what's been a challenging year and still be able to comfortably maintain our quarterly distribution. Our team remains laser-focused on executing our initiatives that will further drive down COGS, and when combined with higher sales levels, will set the foundation in order to get back to growing our distribution. How quickly that happens somewhat depends on how soon the market absorbs the new incremental capacity coming online in 2018. But regardless, strength in the Asian markets, combined with our initiatives underway in 2017, should help mitigate the impact we may experience from softer prices in other regions of the world. In closing, thanks for your continued interest in Ciner Resources. This concludes our prepared remarks. Crystal, please open the line for questions.

[Operator:]

[Operator Instructions] And your first question comes from the line of Daniel Jester with Citi.

[Daniel Jester:]

Hey. Good morning, everyonne.

[Kirk Milling:]

Good morning, Dan.

[Daniel Jester:]

Thanks for all the color about the pricing and freight and how that’s impacted, I'm just wondering, as I look at your full year international price guidance, it seems like the fourth quarter might see a little bit less year-over-year growth in international prices relative to what you've seen so far this year. So between the freight issue and the strength from the Asian market which, you talked about in your prepared remarks as well, can you just kind of help us frame all of the different moving pieces going into the fourth quarter for pricing?

[Kirk Milling:]

Yes. Sure, Dan. Thanks. On a net basis, as I mentioned, prices in Asia are strong. So on a net basis, overall in our international markets we're actually expecting some improvement in Q4 compared to what we've seen on a year-to-date basis. On a growth basis, it will be down slightly in Q4, and that's primarily the result of the fact that we're not selling near as much to our affiliate, CIDT, as we did in the first half of the year. So on our last quarterly call we expected those sales to wind down in Q3. We actually had more sales than originally anticipated, we had a few more in October. But as of now, those have wound down, and we don't anticipate any further sales for the balance of the year. And so therefore, on a gross basis, this gets to what Scott was talking about the sales that we make to ANSAC are on a lower gross basis because it's only freight to the port as opposed to including all the ocean freight to destination. But net-net, cut out all the noise and just get it down to a net basis, I would anticipate international pricing to be better in Q4 than what we've experienced year-to-date.

[Daniel Jester:]

Okay. That's very helpful. And then if I look to 2018, this past year, you've just addressed sort of some of the mix issues between selling between your Turkish affiliates and ANSAC. For 2018, should the mix go back toward a more historical mix or much more ANSAC sales or will that depend on market conditions, because I think you've made $70 million or so year-to-date through your Turkish affiliate?

[Kirk Milling:]

Yes. At this point, we would anticipate the sales to revert back to normal and most of the sales that we've made to CIDT to flow back to ANSAC. We did it this year as they were in the process of starting up production. But as we head into 2018, now that Kazan is up and running and the excess production at Eddie [ph] is running will flow those sales back to ANSAC in 2018.

[Daniel Jester:]

Okay. And then just one last one for me. I think you mentioned this also briefly in your prepared remarks, but as you think about some of the contract negotiations for the annual contracts into 2018, can you walk us through some of the moving pieces. Obviously, there's new supply in the market, but just wanted to get your first sense as to how those are evolving? Thanks very much.

[Kirk Milling:]

Sure, Dan. I think we'll have a lot more color on this next quarter. I think it's still a bit early. The one positive and why I have some optimism, it's just the tightness in Asia is quite a bit stronger than what we had anticipated. And I would say now that we're here at the end of the year, negotiating a lot of contracts for 2018, very tight supply, I think will set the stage for some good negotiating on contracts for 2018. But I can't get into too much at this stage because a lot of this - there's still a lot of moving pieces and I think it's still a bit early, but we'll have a lot of more color on it in the next quarter.

[Operator:]

This concludes today's Ciner Resources Third Quarter 2017 Earnings Conference Call. You may now disconnect your lines at this time, and have a nice day.