Sisecam Resources LP
Q4 2013 Earnings Call Transcript

Published: 14 Feb 2014

[Operator:]

Welcome to OCI Resources Fourth Quarter 2013 Earnings Conference Call and Webcast. Hosting the call today from OCI Resources is Mr. Kirk Milling, Chief Executive Officer. He is joined by Charles Kim, Chief Financial Officer, Mike Hohn, General Manager, Soda Ash and Scott Humphrey, Director of Investor Relations. 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. You may begin.

[Scott Humphrey:]

Thank you, Laurie. Good morning. This is Scott Humphrey, the Director of Investor Relations for OCI Resources. Thank you for joining us to discuss OCIR’s fourth quarter 2013 earnings results. Kirk Milling our CEO will discuss our fourth quarter results. Charles Kim our CFO will provide additional details related to our fourth quarter and full year 2013 financials. Kirk will follow that with our outlook for 2014. 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 these non-GAAP financials can be found in our earnings press release. I’ll now turn the call over to Kirk.

[Kirk Milling:]

Thank you, Scott. Good morning everyone. Welcome to the fourth quarter 2013 earnings call for OCI Resources. Today we’re going to provide an overview of our fourth quarter performance and discuss our initial outlook for 2014. If we roll back to November as many of you will recall we discuss that we anticipate our fourth quarter revenue was going to be up about 10% and as you see our fourth quarter revenue up was 11.4% sequentially compared to the third quarter and even 2% compared to fourth quarter of 2012. The drivers to these results were international volume was up almost 15%, 14.6% and international pricing improved by 4.8% sequentially over the third quarter 2013. On a full year basis our volumes were up 1.5% but revenues decreased 4.4% compared to 2012 due to the lower international pricing, again very similar trend that we’ve seen throughout the year. We ended our first year as a public company with pro forma earnings per unit of $1.94 in the fourth quarter was our best quarter of 2013 as we generated earnings per unit of $0.62 per unit. In January we declared our first ever quarterly distribution of $0.50 per unit for the fourth quarter plus the $0.07 for the post IPO period which was in September. So in general I feel like our results played out as we expected with raising volumes from increased production rates and Asia pricing continue to rebound from the trough that we experienced earlier in 2013. All-in-all I think these were good results and or given us some momentum as we head into 2014. So with that I’m going to turn it over to Charles who will now review our financial results in more detail.

[Charles Kim:]

Thank you, Kirk. Our revenues for the quarter were $117.6 million up 2% compared to the first quarter of 2012. The international sales increased by 5.7% to $69.9 million in the quarter compared to $66.1 million in the 2012 quarter. The increase in revenue was due to a 3.5% increase in average sales price against 2012 primarily from higher (indiscernible) pricing and also due to a 2.2% increase in volume of tons sold. Domestic sales increased by 3% to $47.7 million for the three months ended December 31, 2013 compared to $49.2 million in the fourth quarter of 2012, primarily as a result of 5.6% decrease in sales volume in the domestic market. The drop in volume was partially offset by a 2.6% increase in average sales price in the fourth quarter of 2013. Revenues for the full year of 2013 were $442.1 million down 4.4% compared to 2012. This variance was driven by international prices which were 9.7% lower in 2013 against 2012. Cost of goods sold increased by 1.7% in the fourth quarter of 2013 to $87.4 million compared to $85.9 million in 2012. The increase was primarily caused by a year-over-year increase in energy cost. Year-to-date 2013 our cost of goods sold increased 5.3% to $349 million compared to $331.5 million in 2012, again due to an increase in energy cost. Our (associates) had earnings per unit of $0.62 in the fourth quarter and $1.94 year-to-date. We spend $6.3 million on CapEx in the fourth quarter bringing our total spend for the year to $17 million. Our expansion CapEx range for 2014 will be between $24 million and $30 million. While maintenance CapEx will be in the range of $12 million to $15 million. I’ll now turn the call back over to Kirk for our 2014 outlook.

[Kirk Milling:]

Thanks, Charles. So as we look ahead to 2014, we are continuing to see soda ash market conditions improve. January results indicated further upward price improvement in Asia, although we remain somewhat cautious on predicting how much further pricing is going to move given the expected capacity increases coming on line in China that could create some short term supply demand imbalance. Nevertheless we still expect international prices to increase in the 3% to 5% range year-on-year. Our focus right now was on execution of our operational plan to increase our production volumes by as much as 4% in 2014. We will experience some volatility in earnings quarter-to-quarter as we’re dealing with higher than expected natural gas prices at the moment and we will have an extended maintenance outage in May that will push volumes down in the second quarter. We are confident in our ability to deliver the $0.50 per unit in quarterly distributions to our unitholders this year and will assess opportunities for raising the distributions later in the year. In closing I’d like to thank everyone for their interest in OCI Resources. This concludes our prepared remarks. Laurie, please open the line for questions.

[Operator:]

The floor is now opened for questions. (Operator Instructions) Your first question comes from the line of P.J. Juvekar of Citi.

[P.J. Juvekar:]

Hey good morning.

[Kirk Milling:]

Good morning.

[P.J. Juvekar:]

So, can you talk a little bit about the impact of natural gas and electricity especially given how gas is going up or what is the impact in the first quarter?

[Kirk Milling:]

Yes. So if you look at it right now we consumed between $8 million and $9 million BTUs per year. So a $1 let’s say increase in gas prices is call it an $8 million impact, $0.50 $4 million call it. So last year we’re in the sub $4 range on gas prices and as you see in Q1 I mean if we were to take this strip today I think we’d be in that 430 to 470 kind of range. So I mean I think we’ve got to kind of wait and see how things play out for the rest of the year but that gives you an order of magnitude I think on the impact to us.

[P.J. Juvekar:]

Thank you. You mentioned some capacity expansions in China maybe you can give us more color on that? And also there are some soda ash expansion announcements in the U.S. made by competitors. So I was just wondering when you look at the two, how do you see supply demand playing out in 2014? Thank you.

[Kirk Milling:]

Sure. Yes. So, on the Chinese front I mean there is a fair bit of capacity that was slated to come online last year that started slowly began to push and is now talking about coming online in say first quarter of 2014. There is more capacity that was projected last year to come online in 2014 I think it kind of remains to be seen how all those pieces and parts and components will come online, but if everything kind of plays out, you could be looking at 2 million to 3 million tons of additional capacity at least it’s been discussed and what we know now today could come online. Again it’s going to – lot of it is very sensitive to when it comes on during the year and whether we’ll kind of have to wait and see how demand plays out in China and whether it raises as fast as we kind of expect. I mean the good news I would say is that we are a little more bullish on demand in China this year compared to what we saw last year which was in the low single digit growth rates and this year we think we could be up closer in the 5% range. So that will help to suck some of it up. But again that’s why we’re being a little bit cautious I think right now on when this new capacity comes online obviously it could create some short term disruptions in pricing.

[P.J. Juvekar:]

And anything on the U.S. capacity announcements?

[Kirk Milling:]

Yes. I know I mean I don’t anticipate much impact from that in the near term.

[P.J. Juvekar:]

Thank you.

[Operator:]

Your next question comes from the line of Brian Maguire of Goldman Sachs.

[Brian Maguire:]

Hi, good morning guys.

[Kirk Milling:]

Good morning.

[Brian Maguire:]

Yes Kirk, I appreciate the color on the pricing outlook. I guess my question is so the 3% to 5% international pricing assumption. Did that assume that prices kind of stay flat with where they are today, so in other words you’ve already kind of seen prices to substantiate that or did that assume prices get better from here or maybe worse from here?

[Kirk Milling:]

It does assume that they will get a little bit better from here, but we’ve not put a whole lot of upside in there. We’re kind of looking at what we know today and what we see today. And I think as I’ve commented before a lot of the pricing is locked, a lot of our Latin American volume is locked, our domestic volume is obviously locked, our European volume is locked. So really that the geography of the world that kind of moves on a more (spotter) quarterly basis is Asia. And so again we’ve taken a little more cautious approach kind of given until we wait and see how things play out a little bit more over the coming months.

[Brian Maguire:]

And we’ve seen some wide swings in FX rates will have couple of weeks and I know you guys don’t sell a whole lot probably denominated in foreign currency, but curious how the contract with ANSAC are structured. Do they price things in dollars and if the dollar strengthens, does that hurt your competitiveness at all or historically have you seen any impact from that?

[Kirk Milling:]

I mean obviously it could hurt your competitiveness in markets where they have local production. But generally speaking ANSAC does price everything in dollars. There was a couple of smaller markets where we do price in local currency. We have a fair bit of that already hedged. But generally most of all of the volume is priced in dollars and so there is not a whole lot of currency risk. But to your broader question I mean yes longer term if the dollar does continue to strengthen then in those countries where they have local production what we’re competing against their cost that could hurt our position.

[Brian Maguire:]

Okay. I think on last quarter’s call you mentioned in the domestic market there was a little of bit of soft demand. It sounded like maybe in glass containers, seasonally and probably we would see a little bit of a drop in the fourth quarter. So maybe you can’t say for certain if that’s gone way or not, but what’s your kind of view on domestic demand in 2014 I think you commented that you think domestic volumes will be up a little bit. But just sort of your outlook and how you think that your market share in the domestic market will play out this year?

[Kirk Milling:]

Yes. So I mean we kind of saw the same trend I mean we saw – it didn’t necessarily get worse but it didn’t necessarily get better in the fourth quarter. I think container demand overall has been somewhat soft. Mainly what’s guiding our view that our volume will be up. There’s not so much of a fundamental market factor, it’s more so that we consciously picked up some share in the domestic market. And so that’s what’s – that’s what it will drive our growth year-on-year not any sort of underlying fundamental demand growth.

[Brian Maguire:]

Okay, great. Just one last one if I could. What – what should we expect and freight costs and maybe within the U.S. rail freight specifically?

[Kirk Milling:]

Yes. Actually the – our freight cost domestically tied to an index, a rail index. And that was I think in the 1% or 2% range something like that for this year. And on the international side we won’t see a whole lot on rail freight increase at least in 2014 as we sit today.

[Brian Maguire:]

Great. Thanks very much.

[Operator:]

Your next question comes from the line of (Peter Butler of Glenhill Investments).

[Unidentified Analyst:]

Yes, hi. I guess like everybody else new to your company. In regard to guidance, I guess you’re not going to be giving guidance on either quarter or the year earnings or is this a interim that you may or may not dependent on circumstances. What is your policy or what will it be?

[Kirk Milling:]

Yes, we’re not providing specific earnings guidance right now. What we’re trying to do is to get some color, additional color on specific drivers to the business such as volume and pricing and things like that which ultimately I think you can get a gauge on where earnings would grow, but we’re not going to provide specific earnings guidance.

[Unidentified Analyst:]

If your earnings do indeed increase during this year, what are your considerations on how much you’re going to return to shareholders of the increase?

[Kirk Milling:]

Yes. So right now we don’t have any definitive plans of moving the distribution, the $0.50 distribution. Obviously we’re watching and we’ll carefully kind of see how the market begins to play out. We’re also increasing our volume which I think we discussed in – on the past call and in the S-1 through some CapEx investments that we’re making. So I think if we’re successful in executing on those investments and we do in fact see the volume growth that we expect as well as some rebounding in the international markets. I think that will put us in a good place to revaluate the distribution in the future. But for now at least we’re going to maintain our $0.50 level and we’ll see how things play out.

[Unidentified Analyst:]

It actually helped.

[Operator:]

(Operator Instructions) Your next question comes from the line of (Walter Kaif of Kingfisher Waterfall).

[Unidentified Analyst:]

Thank you for taking my question. I actually had two, I hope you bear with me. The first one is that it seems to me one of your major advantages is the cost of American natural gas and while you may not have hedged that in the past. Could you explain and this is the end of my first question, the metrics, your decision making process on hedging that cost advantage going forward? My second question is unrelated and with NRP earnings 49% of Wyoming. What are your plans for trying to buy it in?

[Kirk Milling:]

So with respect to the first question, we have had for sometime now a policy for forward purchases of natural gas where we go out as much as 18 months and we layer it in. Typically that only locks us in about a third of our purchases one quarter out. Now that’s what we’ve done historically. Right now we’re in the process of kind of rethinking that approach and whether or not we want to maybe either hedge or forward purchase a higher percentage than what we had in the past. We’re not currently doing it, we’re evaluating it though and I’m not sure where that will land at this point. But now that we’re seeing a little more volatility in natural gas I think it’s a prudent thing to do. With respect to NRP, we don’t have any plans of purchasing their remaining 49% obviously they are new into the business; it’s been a great partner thus far. I don’t see any changes in that going forward.

[Unidentified Analyst:]

Thank you very much.

[Operator:]

(Operator Instructions) At this time there are no further. I’m sorry we now have a follow-up question from the line of P.J. Juvekar of Citi.

[P.J. Juvekar:]

Hey Kirk I was wondering if you can discuss demand by some end markets talk about flat glass, container glass, soaps and detergents etcetera. Just some big end markets, can you jus tell us what you’re seeing there?

[Kirk Milling:]

Yes. So I kind of comment on container glass earlier I mean I think last year container glass was down total volume 3% to 4% something like that. I think one thing we have seen trend wise recently is at least in Latin America we demand at least from what we started to see in Q1. I would say we’ve had some pickup; it’s been a little stronger than the way compared to what we finished the year. And on flat glass, flat glass is obviously going to be very sensitive to economic conditions. So as things begin to rebound in the U.S. you naturally will expect to see some improvement in flat glass, I mean all-in at least here we think there is a lot of pushes and pulls and net-net you probably don’t end up with more than flat to maybe 2% maximum growth in North America. I think in Asia as I said earlier I think we’re a little more bullish kind of on where we see China thinking they could be up in the 5% range year-on-year which is say a million tons of new demand. And then I think Latin America that’s a little again with everything going on there probably a little more modest growth in the 3% to 5% range something like that.

[P.J. Juvekar:]

Thank you.

[Operator:]

Your next question comes from the line of Peter Butler of Glenhill Investments.

[Unidentified Analyst:]

Yes. Hi, again you discussed the additions to global capacity but could you briefly review what you’re seeing in the way of subtractions, who maybe saying goodbye and folding the (10)?

[Kirk Milling:]

Yes, I mean obviously there have been some things that have been announced. And actually since our last call Tata has I think formally disclosed that they’re going to be taking off-line their – one of their UK lines. We’ve also got the Solvay previous announcements of bringing down capacity in Europe. There is actually been some delays of some capacity coming online for instance Turkey (indiscernible) announced they’re going to delay their project till 2016. We’ve got now a full year of the Australia plant being off-line. There have been some announcements, also I think in Japan there have been actually even some discussions of some uncompetitive capacity coming off-line in China. But those –I haven’t seen any further formal announcements, I think these are just things that are hanging out there and I think likely will happen. And that’s why we’re taking a little more cautious approach I think on pricing because while it’s – you see a lot of these sort of announcements and people building new capacity that also can obviously be offset with capacity coming down and off-line. And so directionally speaking I think you will continue to see some of this less competitive capacity again whether it’s Japan similar to what we saw in Australia, Europe etcetera, that will continue to shutter as time goes on.

[Unidentified Analyst:]

Again thanks.

[Kirk Milling:]

You bet.

[Operator:]

At this time there are no further questions. Thank you. This does conclude today’s teleconference. Please disconnect your lines at this time. And have a wonderful day.

[Kirk Milling:]

Great, thanks very much.