Sisecam Resources LP
Q1 2015 Earnings Call Transcript

Published: 7 May 2015

[Operator:]

Welcome to OCI Resources First Quarter 2015 Earnings Conference Call and Webcast. Hosting the call today from OCI Resources is Mr. Kirk Milling, Chief Executive Officer. He is joined by Kevin Kremke, Chief Financial Officer; and Scott Humphrey, Director of Finance and 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, Maria. Good morning, this is Scott Humphrey, Director of Finance and Investor Relations for OCI Resources. Thank you for joining us to discuss OCIRs first quarter 2015 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 outlooks for the remainder of 2015. 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 will now turn the call over to Kirk.

[Kirk Milling:]

Great. Thank you, Scott, good morning everyone. Welcome to OCI Resources first quarter 2015 earnings call. So we’re very pleased with how we started off 2015 as we set a new all time quarterly production recorded in the first quarter. Our investments to debottleneck our Green River facility growth production volume is 3.8% higher than last year. Combining this with an 8% increase in international prices and lower natural gas cost we delivered a 17% increase in adjusted EBITDA. And that was despite some headwinds from a stronger U.S. dollar that negatively impacted our margins in Europe by just over $1 million compared to Q1 of last year. Our sales volume was basically flat compared to last year as we ended the quarter with the higher level of tons in transit than normal. We produced 20,000 tons more tons than what we recognized at sales in the quarter. Our performance coupled with our full year outlook, allowed us to increase our distribution for the third consecutive quarter and should allow us to continue executing on our strategy to raise distributions by roughly 3% to 6% in 2015. Turning to international market dynamics, operating rates in China were down slightly year-to-date February of 77%. There continues to be a divergence between the different production technologies in China with the Hou producers taking extended maintenance outage due to the low ammonium chloride credit, which has negatively impacted cash margins. Over $4 million metric tons of supply were offline at some point in the first quarter due to maintenance outages and some of those have not announced start updates as yet. The market in Latin America was mixed in Q1 with some weakness in Brazil offset by strong growth in Chile, Mexico, Columbia and Peru. Soda ash imports in the Latin America were up 11% as a whole over the last in the first quarter. Demand has been very strong in Mexico with growth been driven by container glass and flat glass for automobiles. So in summary, we’re very pleased with the way we started the year, particularly on the production front. I’m now 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. As Kirk indicated overall, we had a great quarter both operationally and financially, as we’re experiencing the benefits from our capacity expansion programs. Today I’ll update you on a few of the key financial highlights from the first quarter, including our overall cash generation, impacts from changes and foreign currency relationship, natural gas pricing and our capital spending program. Our revenues for the first quarter were $120.4 million, up 3.6% compared to the first quarter of 2014. Domestic gross sales up $48.6 million were flat compared to 2014. However, our domestic gross sales price was negatively impacted by one of our largest customer’s decision to arrange their own freight for 2015. We typically sell soda ash on a delivered basis, inclusive of freight this change decreased both sales line and the freight expense line by approximately $2.2 million in the quarter, resulting a no impact to the bottom line. International sales increased by 6.2% to $71.8 million, compared to $67.6 million in the first quarter of 2014. The increase in international revenue was due to an 8% increase in the average sales price, primarily from higher ANSAC pricing, which offset a 1.6% decrease in international volume due to the increase in inventory in transit that Kirk mentioned. The price increase also includes the impact of the stronger U.S. dollar versus the Euro, which impacted the quarter by $1.1 million versus same quarter 2014. Cost of product sold including freight decreased from $84 million in 2014 to $82.4 million this year, due primarily to lower natural gas prices and the lower domestic freight expense, which I went over earlier. The lower cost will partially offset by higher pension expenses. As we mentioned last quarter, our pension expenses will revert back to 2013 level during 2015. We will see a larger increase in the second quarter versus last year as we took a true-up of our lower year-to-date pension expenses in Q2 2014. SG&A expenses of $49 – I am sorry $4.9 million were higher than the prior year quarter due to higher administrative cost from ANSAC. Cash provided by operations was $34.7 million, up about 143% compared to the $14.7 million provided in 2014. This was driven mostly by a reduction in working capital and obviously from the increase in net income. The bottom line of all this, we discussed, resulted in Oci Resources earnings per unit of $0.64 in the first quarter as net income increased 22.7% versus the prior year quarter. Turning now to our capital spending program; we spent $5 million in CapEx from the first quarter of 2015, compared to $1.4 million in Q1 of 2014. $1.4 million of this quarter’s total spend was expansion capital. We spent $3.6 million on maintenance CapEx in the first quarter compared to $600,000 same quarter last year as we have implemented a plan to spread maintenance CapEx more evenly throughout the year. I will now turn the call back over to Kirk for outlook.

[Kirk Milling:]

Thanks Kevin. So after delivering record production in the first quarter, we have raised our outlook on sales volume to increase 3% to 5% in 2015. As a reminder, we typically schedule our maintenance outages in the second quarter and third quarters every year. However just to note, our second quarter outage of this year will be shorter than what we experienced last year as we took an extended outage in 2014 due to scheduled refractory work on our largest production unit. As we work off some of our in transit inventory, we should get our sales pays backup to our annualized forecast levels of 3% to 5% versus last year. We continue to expect international prices to improve 3% to 5% versus 2014 and that includes the currency impact on our European sales. In the domestic market, we expect modest improvements in both volumes and margins in 2015. And on the cost side, we’re enjoying a tailwind from natural gas prices, which will be offset by the pension cost increases, Kevin already mentioned. The positive fundamentals for global soda ash as well as our execution of debottlenecking projects have set the stage for another great year for Oci Resources. So in closing, I want to thank everyone for their interest in Oci 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 Daniel Jester of Citi.

[Daniel Jester:]

Hi, good morning everyone. So earlier this week, the IRS came out with some preliminary rulings about what can qualify as MLP income for some of the different types of MLPs and being that you are the only soda ash MLP. I was wondering if you had a take on these latest IRS rulings.

[Kirk Milling:]

Yes, we completed an initial review of the proposal regulations and believe that there is no impact to our business of mining and processing trona, but we’re going to closely monitor and see how it plays out.

[Daniel Jester:]

Okay. And then you talked about the impact of foreign exchange in Europe, but maybe can you talk a bit about what you’re seeing in terms of foreign exchange and sort of that competitive dynamics of soda ash export markets in Latin America and Southeast Asia. Is the stronger dollar having any impact [Audio Dip] than your ability to win business in those markets?

[Kirk Milling:]

No, we haven’t seen anything yet. I mean, Brazil was a bit weaker, we obviously sell in dollars in that market and there is no local producer. The primary competition though is coming from Europe, so I think it’s something we’re going have to monitor closely going forward. But generally speaking, we sell in U.S. dollars virtually everywhere. We do sell some in Japan in local currency and a little bit in Australia and as I said Europe, but every world fits in dollars.

[Daniel Jester:]

Okay. And then just maybe a couple of quick housekeeping items. I guess first on SG&A, it’s up 17% I think compared to last year. I know you call that out is being driven by ANSAC. But sort of any guidance is to how we should think about that for the rest of the year. And then also with respect to your turnarounds, you said it was going to be shorter in the second quarter. Can you quantify that to any exempt? Thanks.

[Kirk Milling:]

Yes, so on the maintenance outage; we had an extended by an additional week and a half last year versus this year. So the year-on-year impact of the shorter outage, we think is a positive impact to production of 20,000 tons to 30,000 tons.

[Kevin Kremke:]

Hi Dan, this is Kevin on the SG&A front we expect – really expect it to see it flat for balance of the year so no big surprise as one way or another.

[Dan Jester:]

Okay, thanks a lot guys.

[Operator:]

[Operator Instructions] Our next quarter comes from line of Brian Maguire of Goldman Sachs. Brian your line is open, make sure you are not on mute.

[Brian Maguire:]

Okay can you guys hear me?

[Kirk Milling:]

Yes.

[Brian Maguire:]

Okay great then, Kirk I think you mentioned there was production that was in transit into the quarter, your production volume is a couple of percent higher than sales volume maybe 2%, 3% higher. Should we think about most of that coming into the second quarter or how do you think that that will flow through and impact the quarters for the year?

[Kirk Milling:]

Yes, I don’t want to say all of that will be unwound in Q2, I mean, we kind of look to back right, we’ve had this discussion, I think, in prior quarters, because when we make particularly a large volume of shipments to Europe, as well as our parent in Korea, sometimes that impact of the sales volume in the quarter. So if we look year-on-year where we ended Q1, our inventory in transit was about 20,000 tons and what our average was for all of last year. So I can’t say for sure all be unwound in Q2, but, I think, you’ll start to see that comedown throughout the balance of the year such that we should be able to get our sales volume in line with production by the end of the year.

[Brian Maguire:]

Okay, great. Could you comment on the environment, or acquisitions, or I guess they have been looking and trying to diversify or may be look at other kinds of qualifying income. And maybe you know this preliminary IRS rulings would that change even your thinking about what kind of assets you might look at to go after, or has that changed the kind of line item [ph] what we might use and you have new assets brought into the company?

[Kirk Milling:]

Yes obviously we’re going to have to study that a bit closer given these new proposed regulations but you know we’re continuing to aggressively look for deals we obviously don’t have anything to announce at this time, but some of the things we’re looking at we don’t think will be impacted by this.

[Brian Maguire:]

Okay, great and then one last line. I guess you are just kind of rebound this year a little bit, but just wondering if there had been any impact or expected impact on international prices from the drop in oil from any of the synthetic producers seeing a little bit lower production cost everything more aggressively pricing, any kind of impact on pricing this year?

[Kirk Milling:]

I mean, obviously lower oil prices will eventually help us from a freight side, but we have seen some softening of cost in China mostly be due to lower input cost of coal and coke and salt, but for the most part prices have been pretty stable, they went up some in Q1 and I think we will see for the balance of the year as either stable to very modest increases throughout the rest of 2015.

[Brian Maguire:]

Okay, thanks very much.

[Operator:]

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

[Daniel Jester:]

Just a couple more quick follow-ups. Kevin, may be can you walk us through what we should be expecting in terms of maintenance and gross CapEx, your expectations for 2015 and then also this $2.2 million transportation impact. I know it has both the revenue and your costs, so the bottom line hasn’t impacted. But is that going to be the order of magnitude for the impact as we flow through the rest of the year or is there going to be some seasonality of that impact? Thanks.

[Kevin Kremke:]

Yes, so regarding CapEx, the forecast for maintenance CapEx for the balance of the year is $14 million to $17 million…

[Kirk Milling:]

For full year…

[Kevin Kremke:]

I am sorry for full year. And then expansion capital for full year is in the $25-ish million range. And then regarding the freight issue, yes, I think the way you characterize is exactly right. It should be pretty flat throughout the year.

[Daniel Jester:]

Okay, thank you.

[Operator:]

Thank you. Ladies and gentlemen, this does conclude today’s call. You may now disconnect and have a wonderful day.

[Kirk Milling:]

Thanks.