Sisecam Resources LP
Q1 2016 Earnings Call Transcript

Published: 6 May 2016

[Operator:]

Welcome to Ciner Resources First Quarter 2016 Earnings Conference Call and Webcast. Hosting the call today from Ciner Resources is Mr. Kirk Milling, Chief Executive Officer. He is joined by Kevin Kremke, Chief Financial Officer and Scott Humphrey, Director of Finance and Treasurer. [Operator Instructions]. It is now my pleasure to turn the floor over to Scott Humphrey. You may begin.

[Scott Humphrey:]

Thank you, Jackie. Good morning this is Scott Humphrey Director of Finance and Treasurer for Ciner Resources. Thank you for joining us to discuss our first quarter 2016 earnings results. Kirk Milling, our CEO will discuss our first quarter results. Kevin Kremke, our CFO will provide additional details related to our financials. Kirk will follow that with our outlook for the remainder of 2016. 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:]

Thank you, Scott and good morning everyone. Welcome to Ciner Resources first quarter 2016 earnings call. As you've seen in our earnings release last night our results were below are expectations and Kevin and I are going to try and walk everyone through the reasons. Coming into the year we knew we would experience lower pricing primarily due to the softness in Asia and our plan was to offset a portion of the impact from those lower prices with higher volumes. As we look at the first quarter prices were pretty much as we expected but our shortfall came in the form of production volumes falling below our expectations primarily due to complications we encountered from a drop in our average ore quality. Normally, we have flexibility with our continuous miners to adjust when we encounter an area with lower ore grade but in the quarter we were developing a new panel for ventilation and could not move out until finished. The result was a 1.5% drop in our average ore grade which created processing issues for us in our surface operations. All in we produced approximately 30,000 fewer tons in the first quarter than we had planned which resulted in a $2.8 million shortfall to our EBITDA expectations in the quarter. We took corrective actions in March to improve both ore quality and utput of our deca operation. In addition we had a planned maintenance outage in April where we took the opportunity to modify some of our processing equipment that will allow us to better handle variations and ore quality going forward. These efforts we believe will allow us to increase production rates for the remainder of the year most of which we expect to realize over the second half of 2016. Both our domestic and international reported prices have been deflated by lower freight cost relative to our total revenue. In our international segment, we purposely started to scale back our volumes into Europe as the stronger dollar and higher freight rates led to lower margins compared to our other markets. From a cash flow perspective this is a net positive, however it will show up on the top line in the form of lower revenue and Kevin is going to discuss this in more detail in his section. International pricing overall came right in line with our expectations but combining the lower prices without the higher volumes led to a 14.5% decrease in adjusted EBITDA versus the first quarter of 2015. Our distributable cash flow was a slightly better story as lower EBITDA was partially offset with lower maintenance CapEx. Turning to the soda ash market as we discussed in our call last quarter we are seeing higher spot prices throughout most of the Asian region including China where reported domestic prices have risen $20 to $30 per metric ton. We think a lot of that improvement can be attributed to the environmental accident and subsequent shutdown of China's largest soda ash manufacture. You can clearly see the impact in the form of reduced Chinese exports which are down over 6% through February. This is a short term issue and we anticipate their full production is likely to be back on line for some time midyear or third quarter. While the trend is encouraging and we should see flighty higher prices over the balance of the year, I need to remind everyone that most of our soda ash is sold through fixed price contracts for a calendar year which mitigates the majority of any short term price fluctuations. In other markets, Latin America continues to be soft. We are projecting flat demand in 2016 with increased exports to Mexico being offset by declines in Brazil. So in summary while we've had a slow start to the year we feel good about the improvements we've made that will strengthen the business over the balance of the year. Now I'm going to turn the call over to our CFO, Kevin Kremke who will share our financial results in more detail.

[Kevin Kremke:]

Thank you, Kirk and thanks everyone joining us on the call today. Today I will update you on our first quarter performance versus outlook, a few of the key financial highlights from the quarter including our capital spending program and notwithstanding the operational issues Kirk discussed. Some key metrics around our strong financial positioning and disciplined approach to managing our business. Let me start with a recap of our actual results versus our 2016 outlook provided last quarter. Generally speaking we're still on track for the full year albeit with a couple of anomalies during the quarter. Total volume sold increased 1.1% which was short of the low point of our outlook of 2% to 4% growth due to our production short fall. Our domestic volume increase by 5.7% close to the high end of our range of 4% to 6%. And Kirk mentioned we're successful in securing additional volume in the domestic market this year, international prices decreased by 6.5% roughly in line with our full year expectation of the 3% to 6% decrease and again we believe right in line for full year. Maintenance capital for the quarter was right at $1 million below the run rate to hit our range of 11 million to 13 million, this is consistent with prior years where capital spend is not pro rata per quarter and looking forward we are on track and expansion capital was $4.4 million right in line with the run rate to hit our range of 15 million to 18 million for the full year. Before we jump into revenues I want to remind everyone on how we treat freight in our sales figures. Freight is typically included in our sales prices and we have a wide variation in freight cost by customer and region, so different mixes of freight cost and our customer base can obscure the reported top line revenue figure. Further we have seen a recent trend with some of our larger customers arranging their own freight instead of using our services which removes that component from both the revenue and freight expense lines. It has no impact to our bottom line but makes the revenues and cost both look lower. Our revenues for the quarter were 114.4 million down 5% compared to the first quarter of 2015. The quarter over quarter unfavorable variance was largely driven by the anticipated 6% decrease in prices I mentioned earlier. Domestic sales of 47.9 million were down from 48.6 million in 2015, a 1.4% decrease in the quarter. This was driven by lower pricing due to the freight matter I already mentioned and thus had no impact to EBITDA. International sales decreased by 7.4% to 66.5 million due in part to the expected lower international pricing I mentioned but also from selling lower cost of freight tons, pushing international pricing down 6.5%. This price decrease is driven by shifting volume from Europe to ANSAC where we have an $80 to $90 per ton freight cost differential. We sold approximately 25,000 tons less to Europe in Q1 of '16 than we did in 2015. This change had a major impact on our reported international pricing in the first quarter. The net impact of the decrease in gross price and equal offset in freight expense so no net impact to EBITDA. Cost the product sold in the quarter including freight decreased from $88 million in the first quarter of 2015 to $86.4 million this year again due primarily to lower freight cost from the mix shift out of Europe. We also realized the benefit from lower natural gas prices this year but our cost per Mmbtu down 6.6% quarter over quarter. These benefits were partially offset by 13.2% increase in our royalty expense due to the higher rates. The federal rate reverted from 4% back to 6% beginning in October of 2015 and our other significant lessor also raised a royalty rate from 7% to 8% which is in dispute and more details can be found in our 10K. SG&A expenses of $5.8 million were approximately $900,000 higher than the prior year quarter driven partially by some onetime cost in Q1 but also from investing more in our IT infrastructure to improve efficiency. Cash provided by operations was $36.8 million in the first quarter of 2016 up 6.1% compared to the 34.7 million provided in the first three months of 2015 driven mostly by our continued efforts to reduce working capital. Ciner Resources had earnings per unit of $0.51 for the first quarter as net income decreased as discussed. Turning now briefly to review adjusted EBITDA. We delivered $28.2 million in adjusted EBITDA in Q1 of '16 versus 33 million in the same quarter last year. As we expected and discussed last quarter lower international pricing was the primary driver behind the drop in both adjusted EBITDA and net income. Normalizing for the $2.9 million shortfall due to the production issues that Kirk discussed and accounting for approximately $1 million and increased royalty expense we would have been right in line with 2015. I also want to touch on our capital spending program and distributable cash flow. We spent $5.4 million on CapEx in the first quarter of 2016 compared to 5 million in the first quarter of 2015. As I mentioned earlier the bulk of the spend went to expansion projects in Q1 as we continue to be bottleneck our facility to add to our production capacity. In addition to adjusted EBITDA the other key non-GAAP measure using the evaluating our performance as an MLP is distributable cash flow. Our DCF was $12.5 million in the quarter and 8.1% decrease compared to prior year quarter. Lower maintenance CapEx spending helped to offset lower EBITDA in the first quarter. Our coverage ratio of 1.11 for the quarter resulted in a trailing four quarter coverage ratio of 1.23 which is exactly in-line with our stated objective of staying between 1.20 and 1.25. We continue to maintain a very conservative balance sheet with the current leverage ratio of 0.62 times net debt to EBITDA. We utilize our operating cash flow in the first quarter to pay down $6.5 million on our revolving credit line. So we currently have $96.2 million in remaining debt capacity and almost $23 million of cash on our balance sheet. This positions us well as we continue to seek out opportunities to use our liquidity and strong balance sheet for acquisitions which would be a accretive to our unitholders. I will now turn the call back over to Kirk for some more specifics on our 2016 outlook.

[Kirk Milling:]

Thanks, Kevin. So as we look ahead to the rest of 2016 we just completed a major maintenance outage and as usual we will also take a smaller outage in the third quarter. Our plans remain to grow sales volume in the range of 2% to 4% in 2016. As our results demonstrate we have continued to recapture domestic market share and expect our volume to grow closer to the high end of our 4% to 6% range in 2016. Due to our success in recapturing share we are now forecasting flat to a slight decline in our average domestic pricing for soda ash excluding the freight changes which Kevin mentioned earlier. Moving to the international market, we still expect pricing overall to be down 3% to 6% as supply issues in China should lead to slightly higher pricing in Asia over the balance of the year. So while we had our challenges in the quarter most of it was execution related which we believe can be overcome as we see the benefits of the changes made in March and April. This is why we were comfortable leaving our 2016 outlook unchanged. In closing I want to thank everyone for their interest in Ciner Resources, this concludes our prepared remarks. Maria, please open the line for questions.

[Operator:]

[Operator Instructions]. Our first question comes from the line of [indiscernible] of SunTrust Robinson Humphrey.

[Unidentified Analyst:]

So in terms of the outage that you mentioned in China, have you started to see prices in Asia come in a little bit as a result of the expectation that that plant is back online or where do you see pricing now in the spot markets in Asia.

[Kirk Milling:]

Yes it is still significantly higher than where we started the year, but I just started to report that spot prices have come off a few dollars as I think more of that production has come back online but still significantly higher than where we were before.

[Unidentified Analyst:]

And could you talk about your long term production plans. I know you've got some debottlenecking work that you’ve done and you previously said you expected to expand capacity through 2020, could you just talk about your maximum capacity would be without making additional investments?

[Kirk Milling:]

Yes well right now we're going to be -- we expect to finish this year I think somewhere between 2.7 and 2.75 and our plans right now we believe will allow us to get up near 3 million tons sometime in the 2019 to 2020 period.

[Unidentified Analyst:]

And could you talk about your M&A pipeline. What are you seeing in terms of possible acquisitions and what is the timeline -- what are your goals to executing on acquisition this year?

[Kirk Milling:]

I mean obviously without getting into specifics we're got several opportunities that we're evaluating both in soda ash and out and when those are going to hit you never can exactly predict that but I would say that we’re optimistic that we've got some good opportunities in our pipeline.

[Operator:]

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

[Daniel Jester:]

With regard to your maintenance outage in the second quarter, can you size that relative to the outrage in the second quarter of last year. I guess I'm just trying to get a sense if sequentially you're going to see volumes improve in the second quarter versus the first quarter?

[Kirk Milling:]

Our outage timeline and impact will be very similar to what it was in the second quarter of last year. On a sequential basis volume wise I think it'll be pretty flat with where we were in Q1.

[Daniel Jester:]

Okay and then kind go into the coverage ratio in 2014 and in 2015 sequentially from first quarter, second quarter your coverage ratio declined. And so now that we have this 1.1 starting point at the first quarter of 2016 do you still think that a decline in the coverage ratio in the second quarter is that seasonality expected to hold or because of the issues that you had in the first quarter that maybe seasonality is going to be a bit different in '16 versus the past couple of years.

[Kirk Milling:]

I mean I think our full year coverage ratio for '16 will be down compared to where it was in '15, I think we've shared before that our objective is to maintain a coverage ratio somewhere in the 1.2 to 1.25 range, I think that's appropriate given the one product line that we have today and so that's what we intend try and keep it.

[Daniel Jester:]

Okay. And then just in terms of your comments about the market, you know you pulled back from Europe, I think it sounds like mainly because of exchange rate maybe can you just go kind of the region by region talk about demand, you said that Latin America is a little bit weak but maybe just dive into your key region and what you're seeing in terms of the demand side.

[Kirk Milling:]

Yes, I mean it's not terribly strong really anywhere right now. I mean if you see what's coming out of China, China is actually reporting apparent demand down around 4%. I mean it's not a lot of data points thus far but it appears down I think, the U.S. market is fairly strong mostly on the construction side so we've seen some good demand coming on the flat glass sector. Europe, not much to report in Europe. I mean yes as I said earlier the primary driver there, I mean Europe historically has always been on the bottom of our margin range for the markets that we serve but when the dollar started strengthening and freight cost have been rising I mean we really kind of gotten pinched and comparatively speaking the gap has just continued to widen and it got to be to a point where it just didn't make sense anymore. So we're probably going to do about half the volume this year into Europe than we did last year and so overall as Kevin pointed out, you're going to see an impact on the top line but from a margin standpoint that's a good upgrade for us.

[Daniel Jester:]

Okay. And so as you pull out of Europe. Is there any way to generalize where that volume is going for you instead?

[Kirk Milling:]

I mean we’re going to have some incremental production this year and we got some incremental tons from that mix shift, the way I would think about it Dan is most of those tons are likely going to be moving into ANSAC regions. So Asia and Latin America and ANSAC has picked up some share in Latin America this year as well as Asia because I think not only from coming from [indiscernible] but also from some of the other competitors here I think you'll see an increase in exports coming out of the U.S. this year. Some of it from us.

[Operator:]

Thank you. ladies and gentlemen. This concludes the Q&A session today. And we thank you for joining today's call and wish you a great rest of your day.

[Kirk Milling:]

Great. Thank you.