Sisecam Resources LP
Q4 2017 Earnings Call Transcript

Published: 16 Feb 2018

[Operator:]

Welcome to Ciner Resources Fourth Quarter and Full Year 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 opened for your questions following the presentation. [Operator Instructions] It is now my pleasure to turn the floor over to Scott Humphrey. You may now begin.

[Scott Humphrey:]

Thank you, Maria. Good morning. This is Scott Humphrey, CFO for Ciner Resources. Thank you for joining us to discuss our fourth quarter and full year 2017 earnings. Kirk Milling, our CEO, will discuss our fourth quarter performance. I will then provide additional details related to our financials and then Kirk will follow that with our outlook for 2018 and beyond. 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 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. As I reflect on our performance in 2017, it was a challenging year to say the least as we experienced a continued competitive price environment around the globe for most of the year and a series of unplanned operational outages from our production units earlier in the year, but I'm proud of the work accomplished by our team, which ultimately allowed us to end the year on a high note as we delivered 2.6% annual growth and adjusted EBITDA 3.2% annual growth and distributable cash flow. We also finished 2017 with a full-year coverage ratio of 1.14, demonstrating the fundamentals for our business are very sound as our coverage cushion allowed us to weather a challenging year and still comfortably maintain our quarterly distribution. The quarter represented the first true sign that we are beginning to capitalize on the operational excellence initiatives we started in the first half of 2017. We set new records for both production and sales volumes in the quarter with both hovering around 700,000 tons. While on a full-year basis, our production volume finished 1% below 2016 levels. I believe our performance in the fourth quarter is an indication we are building momentum to resume annual production growth like we delivered every year other than 2017 since our IPO. Improving our production reliability and combining it with more debottlenecking investments, we believe will get us up to our desired goal of 3 million tons of output within the next few years. Turning to the market, Soda ash demand remained strong through the end of 2017. Demand increased 7% in China during the year and ANSAC experienced similar growth in its Asian markets. The surge in demand combined with tight supply in China from environmental shutdowns put significant upward pressure on prices. Export prices out of China reached levels in Q4, which we've not seen since 2011. Robust demand in the Chinese domestic market drove down their exports by 26% through November compared to the previous year. While prices have recently begun to normalize, export prices to Asia remain above the 2017 average. The combination of higher demand and less available supply has set the stage for pricing to remain relatively strong for most Asian markets at least through early 2018. And other markets are sponsors new facility in Kazan continues to ramp up production. Our sales into Europe through our affiliated Turkish company wound down in Q4 and as such our export volumes have begun shifting more toward ANSAC markets. Now I am 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 Ciner Resources. Today I'll provide some detail around our fourth quarter and full-year performance and how those results compare to the outlook we provided throughout 2017. 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 cost 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 topline 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 volumes sold increased 0.6% in the quarter versus Q4 of 2016. Year-to-date total sales volume was down 1.1% compared to our outlook of flat volume growth. We continue to work with outside consultants to improve our maintenance processes, which should mitigate our equipment reliability issues moving forward. Clearly, we've been making progress but we still have additional changes to implement. Our domestic sales price increased by 1.2% in the quarter and 1.4% for the full year of 2017, better than our original flat to down 3% outlook for the year and in line with the range of flat to up 2%, which we provided last quarter. International prices increased by 5.9% in the quarter and 8.9% for 2017, slightly better than the updated range we provided last quarter of a 6% to 8% increase for the full year. We recognized higher international pricing during 2017, primarily due to increased sales to our Turkish affiliate 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. While this mix change results 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 spending in 2017 was $11.1 million within our expected range of $10 million to $12 million for the full year. Expansion capital spending for the full year was $10.8 million, which was below our expected range of $17 million to $20 million. We have some exciting expansion project that we plan to execute in 2018, which Kirk will discuss a little later. Our revenues for the quarter were $128.5 million up 4.4% compared to the fourth quarter of 2016. Full-year revenues of $497.3 million were up 4.7% versus 2016 driven by an increase in average sales price of 5.8%. In the fourth quarter, higher prices in Asia drove the positive comparative. The favorability in annual pricing was largely driven by increased freight due to customer mix in both the domestic and international markets Domestic sales of $47.7 million in the quarter were down 1.2% compared to Q4 of 2016 driven by a 2.4% decrease in sales volume. For the full year, domestic sales of $192.8 million were 0.1% higher than sales in 2016, despite the lower sales volume. 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 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 8% to $80.8 million in the quarter due primarily to a 5.9% increase in prices. On a full-year basis, international sales are up 7.7% due to an 8.9% increase in prices. Better pricing for the full year is mostly attributable to an increase in international sales to our Turkish affiliate CIDT. Cost of products sold in the quarter including freight decreased from $89.9 million to $88.3 million as we had less freight expense to CIDT in 2017 than we did to the combination of CIDT and our European customers in the fourth quarter of 2016. Cost of goods sold excluding freight was down sequentially on a per ton basis by over $2 per short ton in Q4 versus Q3 of 2017 and down by over $3 per ton versus Q4 of 2016. 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've continued to make progress mitigating our unplanned downtime issues from the first half of 2017. For the full year, cost of goods sold excluding freight was slightly better than our 2016 performance on a per ton basis, mostly due to lower DECA cost and fringe benefits. DECA costs were improved year-over-year as we harvested the 2017 DECA from Pond 1 the closest thin proximity to the plant. Fringe benefits provided an uplift mostly due to changes that we implemented in our retiree medical plan to bring benefits in line with market benchmarks. These cost reductions offset higher maintenance materials and contract maintenance costs incurred due to the unplanned downtime we experienced in 2017. We also spent more in 2017 in professional fees as we brought in outside consultant to help with our equipment reliability initiatives. SG&A expenses of $5.8 million were $700,000 higher than prior year quarter. In 2017 our SG&A expenses of $22.4 million are approximately $900,000 lower than the full year 2016 total of $23.3 million. This favorability was due to lower SG&A costs for ANSAC. Cash provided by operations was $79.3 million in 2017 down from $128.3 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 full-year increase in working capital of $37.8 million. This increase in working capital improved substantially in Q4 as we collected $30 million from CIDT in the quarter. We continue to sell tons to CIDT through early November but have not sold any tons in the path to them in the past three months. We do not expect to sell any tons to CIDT in 2018. Next let's turn to discuss how all this hits the bottom line on two of the key metrics we manage as an MLP adjusted EBITDA and distributable cash flow. In the fourth quarter we delivered $34.9 million in adjusted EBITDA, a 21.6% increase versus $28.7 million in the same quarter of last year. Full-year adjusted EBITDA of $120.1 million was 2.6% higher than the $117.1 million we delivered in 2016. Our distributable cash flow was $14.6 million in the quarter and $52 million for the full year, compared to $11 million in the fourth quarter of 2016 and $50.4 million in 2016. We were able to achieve a 3.2% increase in DCF for the year despite managing through some operational issues during 2017. Our coverage ratio of 1.28 in the quarter resulted in a 2017 full-year coverage ratio of 1.14. Ciner Resources had basic earnings per unit $0.67 in the fourth quarter of 2017 compared to $0.49 last year. In 2017, Ciner Resources delivered basic earnings per unit of $2.08, which was the same as 2016. 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 as we continue to seek out opportunities to use our liquidity and strong balance sheet. 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. As mentioned in our earnings release outlook for 2018, we are expecting soda ash volumes sold to increase 1% to 3%. This is being achieved as we've improved our asset maintenance strategies and are expecting a 1.5% improvement in onstream time, combined with a 3% improvement in our unit utilization. Most of the process improvements were implemented in late 2017, but we will see the results continue to build as we move through 2018. We also made a conscious decision to gain some share in the domestic market. As a result, our Outlook for 2018 calls for an additional 8220 5000 tons in the domestic market. As a result, our outlook for 2018 calls for an additional 80,000 to 125,000 tons in the domestic market. While this shift will drive down our average domestic price modestly by 1% to 3%, as a reminder, domestic prices overall are higher than international prices. So, the mix shift should have an overall net positive impact to our cash flow in 2018. Turning to international markets, as previously mentioned, our 2018 outlook is not currently projecting any further sales to our Turkish affiliate and therefore, our weighted average international price will be lower year-on-year, due to the exclusion of ocean-related freight on that volume. Stripping the freight gross-up issue out, which we communicated extensively on last year, international prices are expected to be flat to down 2%. The market is starting the year quite a bit stronger than these levels and if this pricing holds, there will be upside to the outlook. However, as I'm sure many have read in IHS and other publications, domestic prices have recently begun to soften somewhat in China. So, we're going to have to monitor how and if that will begin to affect our other markets throughout the Asian region as the year progresses. Moving on to CapEx, we are projecting maintenance of business expenditures in the range of $13 million to $15 million and expansion-related expenditures in the range of $30 million to $35 million. As we look ahead to 2018 and beyond, we have several key initiatives that are underway that we hope will begin to put us on a path to grow our distributor cash flow in the coming years. I'd like to walk through each of them now. Number one, investments to organically grow our existing site capacity up to 3 million tons to continuous improvement initiatives to lower our operating expenses over the next three years and three, begin to leverage our sponsor's capability to build a global soda ash brand. First, I'd like to start with the organic growth. As a reminder, we've been investing to the bottleneck or plant for several years now. This has grown our overall production capacity by roughly 300,000 tons over that period. Going forward, we will continue to invest $15 million to $20 million per year in debottlenecking projects in order to build a sustainable capacity level of 3 million tons per year. These investments will mostly improve the utilization of our dissolving calcination infiltration section along with infrastructure upgrades to handle the additional capacity. Our second initiative is related to investing in building a culture of continuous improvement that we think will ultimately drive our cost down over the next three years. In 2018, we plan to start down this path by working on two key projects. The first is investing in a new ERP system that will provide the foundation for us to begin leveraging technology for enhanced decision-making with the ability to adopt industry-best practices and maximize Ciner's operational performance. The second is to change our energy cost through an investment in power generation. This could significantly alter our energy consumption pattern while at the same time reducing our cost. The project looks very promising and we hope to have our evaluation completed by the end of Q2. Some more to come on this as we move forward. As such, we've not included anything related to this project in our 2018 outlook for capital expenditures. And our third key initiative is beginning to leverage the Ciner Group's capabilities and build a global soda ash brand. As a reminder the General group acquired General Resources during Q4 of 2015. Combining Wyoming's output along with the two producing locations in Turkey, the Ciner Group globally now produces more than 6.5 million tons, making it the world's largest producer of low-cost natural soda ash. Our sponsors platform includes unique low-cost technology, logistics assets, including ports and bolt chips and world-class cost competitive production assets to geographically located to serve most key markets around the world. We started these efforts in late 2016 by supplying product from Wyoming to our affiliate in Turkey in order to serve key global customers located in Europe as the new Turkish production ramped up throughout 2017. Starting in 2018, our sponsor had entered into an agreement for a new port on the eastern seaboard in the U.S. to import soda ash for supply to select customers on the East Coast. For General Resources, we will now have inventory to ship from not only Wyoming, but also a new location on the East Coast that ultimately will improve security of supply to our customers in the region. We believe this will help Ciner Resources offer a unique value proposition to our customers and ultimately improve the cash flow and profitability of our domestic business. As these strategies illustrate, we are focused on positioning our business to continue to grow. All of these initiatives should have a positive impact on distributable cash flow and if successful will allow us to get back on a similar growth trajectory to where we've been. In closing, thank you for your continued interest in Ciner Resources. 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 Jim Sheehan of SunTrust.

[Pete:]

Good morning, This is Pete on for Jim. We've seen some reports that 2018 domestic contracts has settled at a rollover, but you're guiding to lower prices. So what scenario would push you towards the lower end of that minus 1% to 3% range? Is that just a function of how much domestic volume you are at?

[Kirk Milling:]

The prices overall, I would say were pretty close to a rollover, maybe slightly down, but generally it's more of a mix issue. So, as we gain some share at what I would call the larger, a global accounts, those tend to be more on the lower end of the price curve in the domestic market. So, it brings our average down, but generally speaking, I would say it's fair to say that domestic prices overall were pretty much at a rollover level.

[Pete:]

Okay. Great. And if I back out domestic volumes from your guidance, I am coming up with international volumes down around 2% to 3% for the year compared to an increase of 2% this past quarter. So, in terms of timing, how is that playing out in the current quarter versus your expectations throughout the rest of the year?

[Kirk Milling:]

Well, the only reason it's going to be off lightly has more to do again with this mix shift. So, we're probably going to pick up if we hit our 1% to 3% that's somewhere on the, call it 50,000 to 80,000-ton range. And as I said, we picked up a fair bit more domestic volume. So, it's really more of a mix issue. So, all in all, net-net, international volume maybe slightly off, but I don't think a whole lot.

[Pete:]

Okay. And then just one more, do you expect there could be any further delays with the start-up of the Kazan plants in Turkey and what do you expect the timing of the production ramp to be there?

[Kirk Milling:]

Yeah, I believe they’ve recently started up the fourth line and hope to have the last line started up sometime over the next few months

[Pete:]

Okay. Great. Thank you.

[Operator:]

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

[Daniel Jester:]

Good morning guys. You did touch about this a bit in your prepared remarks, but I was wondering if you could just comment on the price volatility we've seen in China? And how you think that flows through to the rest of the market? It seems like, particularly this past winter you've seen price swings of $75 a ton or more just a few month period which is very volatile for soda ash pricing. So, can you just walk us through what you're seeing there and how that can affect the next couple of quarters?

[Kirk Milling:]

Yeah. So, as you saw in our outlook, we projected prices to be down slightly. We're obviously going to start the year with prices up because of what's going on in China. And even though you've begun to see things soften a bit you know, they're softening from a very high level. As I said in my prepared remarks a level we haven't seen since 2011. So, I'm optimistic that if this holds and if the market in China and GDP remain strong like we saw in 2017 that these price levels can maintain themselves throughout the balance of the year. But you know that's obviously a big question and as we said we have seen things start to slip. So, we're just going to have to monitor it, but I do think we'll see prices at least start the year considerably higher than what you saw compared to 2017.

[Scott Humphrey:]

Okay. Dan, I wanted to just expand on that a little bit, I think as you look back to 2017, we saw prices in China moving up but a $100 plus a ton. But Asia export prices did not follow, you know maybe we saw a $25 to $30 increase at the same time as we saw $100 increases in China. As prices start to normalize in China, of course that's going to have some effect on the international export market, but we're not seeing these dollar-for-dollar moves on the way down either. So, it's a bit muted compared to the volatility that you're seeing in the domestic market in China.

[Kirk Milling:]

So unconsciously you know a lot of the contracts in Asia, not all of them but some of them are in annualized contracts and so it buffers you from all that volatility. There's obviously a decent portion of smart business, but it's not all of the portfolio.

[Daniel Jester:]

Okay. And then I think you know over the past year or two there's been a lot of focus on supply growth that's coming in Turkey and now we're seeing that hit the market. If you look out over the next few years say, 2019 to 2020. What is your expectation of other supply growth whether it be China or in other parts of the world. Is there anything else on the horizon that that we should be watching out for in terms of new capacity additions?

[Scott Humphrey:]

No, I mean I think you're going to continue to see, obviously demand is strong. So, a lot of people I think are looking at the de-bottlenecking and ways to improve efficiency and utilization of existing facilities. But in terms of anything near what we're seeing from design of a substantial Greenfield side of that that kind of capacity, we don't forecast anything like that. Now obviously you're going to continue to see puts and takes in China because their demand is growing so much. So, they're going to need to potentially build some capacity just to keep up with the increase in consumption, but outside of that there's nothing on the horizon that I see of any significance. And so, I think once the market absorbs the new production in Turkey, I think we should start to see some uplift in prices around the world.

[Daniel Jester:]

And then I was interested in your comment about your sponsor importing soda ash to the east coast of the United States. I'm just wondering to be able to comment, is it more cost effective to service your customers by shipping soda ash over the ocean than it is by freight? And ultimately over the long term, how does that affect your own mix? Will you be shipping more to Asia or Latin America? Just kind of walk us through that scenario?

[Kirk Milling:]

Well the approach that we took was to pick up some share some of that share will be supplied from volume from our new port and some of the share will be supplied by Wyoming, but we’re not offsetting any of the existing general resources volume in the domestic market. So, this is purely a new incremental growth on this product. And then answer to your beginning part of your question about freight, I think yes particularly along that eastern seaboard there are opportunities for logistics savings compared to shipping direct from Wyoming.

[Daniel Jester:]

Okay. And then with the energy products project that you talked about, I guess, I'm surprised that you're interested in doing your own tower, given how cheap natural gas is. So, you can just maybe talk a little bit more about why that's something that you’re investigating right now?

[Kirk Milling:]

Well that's what we'd be doing. We just basically be creating it on our own, but putting it in a gas turbine, putting into cogen plant. So that's what we've been looking at. It looks really promising. I mean our electricity costs have gone up fairly significantly over the last five to six years to a point where it’s our largest energy dollar now. And so, as I said it looks quite promising but we haven't finalized exactly what it's going to - how big it's going to be and what it's going to look like. So, I think we'll have more details to share on that over the coming months. But it could be a fairly significant cost saving opportunity, given where gas prices are today.

[Daniel Jester:]

Okay. And then just one last one for Scott, I notice on the income statement, interest expense was down pretty significantly relative to the trend that we've seen over the past year plus, but total debt on the balance sheet is up sequentially. So, can you help us think about what goes on there? Thanks.

[Scott Humphrey:]

Certainly. So, the interest expense line that you're referring to is on a net basis and typically we have very little interest income. However, we structured our contracts with CIBT knowing that not only were we going to have that freight uplift on our revenue line, but that are payment terms would be extended beyond what we normally would have from ANSAC. So, to compensate for that working capital build, and knowing that we would have to increase debt, as you mentioned that you can see on the balance sheet we structured a contract with them where they would pay us to compensate us for the interest expense on that extra debt. And so net-net we're actually getting a little bit of interest Kerry on that. And so, it's actually reducing our interest expense on a net basis. But effectively all that extra debt that we're carrying the interest expense is being covered by our parent because they wanted us to be no worse off from helping them with their supply ramp up than we would have been if we just kind of done status quo shipments to ANSAC.

[Daniel Jester:]

And so, because you're not doing any more of the sales in 2018 situation extensors revert back to prior things?

[Kirk Milling:]

It should be closer to normal. Yes once, we once we see the receivable paid off this year obviously we'll use that cash to pay down our debt back to normal levels and then everything should look like it has in the past.

[Daniel Jester:]

Okay. Thanks so much.

[Operator:]

Our next question comes from the line of Peter Butler of [STCSI Research].

[Unidentified Analyst:]

Hey. Good morning. Have there been any significant changes in the economics of your large European competitors and how do you see them managing their losing capacity?

[Kirk Milling:]

Well we haven't - obviously the new capacity in Turkey is going to be the lowest cost supplier I think to those markets. And so, I would imagine they're moving maybe a disproportionate share into the European market. But as of right now we've not seen any announcements of closures. Not to say, I mean I would expect overtime when Ciner's first plant started up in [indiscernible] in 2009. While it didn't happen right away. Over the course of several years, you did start to see some of the higher cost plants in Europe begin to rationalize. I would expect you may see something similar to that. However, the only caveat I would say is that, demand globally has been so robust that I think it's serving to suck up a lot of this capacity that's coming on stream. So, it may have less of an impact this go around, just due to how strong the overall market is.

[Unidentified Analyst:]

How significant are non-economic reasons to keep the plants running. For instance, you know in some cases of course a lot of money when you try to shut down and plant.

[Scott Humphrey:]

Sure Peter, this is Scott. I think most of the plants that Kirk was referring to are located in Western Europe and so you've got a high degree of social costs related to the shutdown as well as environmental issues. And so yes, there are other considerations for them and I think that's why as Kirk mentioned, the first time around it took them a couple of years to make those tough decisions. I think you'll see something similar this time around as well.

[Unidentified Analyst:]

Okay. Well, thanks for your help.

[Operator:]

[Operator Instruction] Our next question comes from the line of Michael Greenfield of Industrial Minerals.

[Michael Greenfield:]

Good morning, gentlemen. Just to pick up on the last points as well about potentially being obviously help to soda bringing more capacity to the market and not leaving with the European producers with more - with a surplus supply. And that seems to have no effect on prices. So, I don't know if you gentlemen had any comment on that and how that may have influenced prices moving forward?

[Kirk Milling:]

Sure. I think if you're following some recent market data and I just report, I mean the market globally is very tight, despite Kazan coming online. And so, we're not in this hugely oversupplied global marketplace right now. And so, those European producers are finding places to place tons. And thus, the pressure is off a little bit for now.

[Michael Greenfield:]

Okay. And could you elaborate on where they have found export destinations for that surplus product, where you might speculate that they have?

[Kirk Milling:]

Sure. Obviously the most logical big market you have is the east coast of Latin America. So easy for them to ship tons there and that's a market where there's no local supply. So Latin America has few import just about everything that it consumes. And so, I think that’s being a primary outlet for them.

[Michael Greenfield:]

And also, another question on the new port the talked about on the east port of the U.S. I think it was. I know that there's been a new facility open in Liverpool and that was financed by new port industries. So, I wanted to get a few more specifics on obviously location of that logistics facility of port in the U.S. and who's financing that? And yeah just on those two issues essentially.

[Kirk Milling:]

So, there's not been a public announcement on the port yet as it's currently under construction, so we're not going to make a formal announcement until it's ready. And the entity that is the counterparty on the port is an affiliate company of the Ciner group. So, it's not the local US entity.

[Michael Greenfield:]

Okay. Are they financing it or are you financing as a Ciner group or is it some mix between that?

[Kirk Milling:]

We'll discuss that more when we're prepared to make the public announcement on it.

[Michael Greenfield:]

Okay. Perfect. All right. Thank you, gentlemen.

[Kirk Milling:]

Thank you.

[Operator:]

[Operator Instruction] I'm showing no further questions at this time. I'll turn the floor back over to management for any additional or closing remarks.

[Kirk Milling:]

Thanks Maria. That pretty much concludes everything we have. Thanks again for your interest in Ciner Resources. You can close the line now Maria. Thanks.

[Operator:]

Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect and have a wonderful day.