Sisecam Resources LP
Q2 2015 Earnings Call Transcript

Published: 10 Aug 2015

[Operator:]

Welcome to OCI Resources Second 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 opened 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 OCIR's second quarter 2015 earnings results. Kirk Milling, our CEO will discuss our second quarter results; and Kevin Kremke, our CFO will provide additional details related to our financials. Kirk will then follow with our outlooks for the remainder of 2015 and the recently announced OCI General transaction. 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:]

Thanks Scott and good morning everyone. Welcome to OCI Resources second quarter of 2015 earnings call. We're really excited to report that we continue to build on the momentum created in the first quarter with another strong quarter of production at our Green River facility which in fact was the highest second quarter of production on record for the site. For the quarter, we produced almost 655,000 tons which represented a 9% improvement compared to the same quarter last year. This is particularly strong given that we also had a significant planned maintenance outage for our largest production unit during the quarter. On a year to date basis our production levels are up 78,000 tons which is up more than 6% compared to last year. Combining our production performance with a 7% increase in international prices and lower natural gas costs we delivered an 11% increase in adjusted EBITDA. We continue to expand some headwinds from a stronger U.S. dollar negatively impacted our margins in Europe by just over $1 million in the quarter compared to last year. As we reported on our last call, we ended Q1 with a higher level of tons in route to Europe than normal which led to production volumes exceeding our sales volumes. But we did begin to see a reversal of a portion of this during the second quarter. Overall, we increased our sales volumes by 50,000 tons or 8.2%, compared to last year’s second quarter. These higher volumes or a direct result of the capital investments we’ve been making since last year to debottleneck our production capacity. Our continued strong performance in the quarter coupled with our outlook allowed us to increase our distribution for the fourth consecutive quarter and should allow us to continue executing on our distribution growth strategy. We have now increased our quarterly distribution by 8.9% since the second quarter of 2014. Turning to international market dynamics; while demand for soda still appears to be growing it is definitely at a slower pace than where we’ve done in the last few years. The engine for growth on a global basis has been driven by China and the most recent [indiscernible] report is actually showing a slight decline in demand in their domestic markets. While it is not a significant decline it just speaks to how things of slowdown throughout their economy and in fact we’re now starting to see an impact in future plans for capacity. There have been over 6 million tons of plant capacity additions that have been delayed or canceled outright. So while initial expectations were calling for increases of almost 3 million tons per year in both 2015 and 2016, reports coming out now or calling for a net reduction of 760,000 tons this year and a further decline of 1.3 million tons next year. That’s a swing of over 8 million tons in two years which we believe will help to get their supply demand more balanced in the short to mid-term. Given the weak domestic demand and lower input costs which have helped margins we have seen the Chinese producers start to focus more in the export market. Through May, their exports are up 37% compared to 2014. But our exports are up in Asia as well. So in some ways they’re serving demand that we cannot supply. However, we are closely monitoring the situation particularly with the recent rise in ammonium chloride prices. Until demand starts improving in their domestic market, we think prices are likely to remain stable for the balance of the year. In other markets, Latin America remained mixed with weakness in Brazil due to weak construction in auto sectors for flat glass offsetting growth in Chile, Colombia and Mexico. Overall our sales volumes in the Latin American region are up 5% year-to-date. So considering all of the markets outside of China, we continue to see demand growth outpacing capacity growth which we think should keep break soda ash prices stable to slightly increasingly. Now I’m going to turn the call over to our CFO, Kevin Kremke, who will share our financial results and more detail.

[Kevin Kremke:]

Thank you Kirk. As Kirk discussed overall we had another great quarter both operationally and financially as we're now fully realizing benefits from our accretive production expansion programs we have been investing in over the past two years enabling us to continue delivering value to our unit holders through a fourth consecutive quarterly increase to our distribution. Today I will update you on a few of the key financial highlights from the second quarter including our distributable cash flow, impacts from changes in foreign currency relationships, natural gas pricing, capital spending program. Our revenues for the quarter were $122.2 million up 8.1% compared to the second quarter of 2014 year-to-date revenues of 242.6 million, increased 5.8% over the previous year. Thanks to a 3.9% increase in volume sold coupled with a 1.9% increase in average sales price. Quarter-over-quarter favorability was driven by increases in both soda ash volume sold or 8.4% and international average sales price of 7%. Domestic sales of $49.8 million were down from $51.7 million or 3.7% in the quarter compared to Q2 of 2014. The overall positive results were partially offset by a decrease in domestic average sales price of 7.8% during the second quarter of 2015 over the second quarter of 2014, primarily driven by change in one of our large customer contracts to take delivery of product at our plant, thereby excluding freight from their price. Generally we sell soda ash on a deliver basis inclusive of a freight which is included in both net sales and cost of product sold. This change had no impact to EBITDA or distributable cash flow as it equally decreased both the sales line and freight expense line by approximately $2.3 million in the quarter. Otherwise domestic prices were relatively flat. International sales increased by 18.1% to $72.4 million compared to $61.3 million in the second quarter of 2014. The increase in international revenue was due to a 7% increase in average sales price primarily from higher end [indiscernible] pricing, combined with the 10.4% increase in international volume. The price increase includes the impact of a stronger U.S. dollar versus the euro, which negatively impacted the quarter by $1.2 million versus the same quarter of 2014. On a year-to-date basis, international sales are up 11.9% due to a 7.6% increase in pricing and a 4% increase in volume. Cost of products sold in the quarter including freight increased from $85.7 million in 2014 to $91.4 million this year, due primarily to higher sales volume and increased pension costs. As we mentioned last quarter we took a true-up credit in Q2 last year for the first half of 2014 pension expenses. In 2015 our pension costs have reverted back to higher 2013 levels a pervasive result tending to impact most pension programs due to historically low interest rates. Offsetting that, we continued to realize the benefit from lower natural gas prices in 2015 with cost per Mmbtu down $0.95 year over year. The year to date benefit from natural gas is approximately $3.4 million despite higher sales volume. SG&A expenses of $4.7 million were approximately $400,000 lower than the prior year quarter primarily due to reduced allocations in the quarter from shared services to our soda ash business. Cash provided by operations was $61.5 million in the first half of 2015, up 25% compared to the $49.2 million provided in the first half of 2014, driven by the increase in net income and a proved working capital performance. OCI Resources had earnings per unit of $0.59 in the second quarter as net income increased 16.1% versus the prior year quarter. We have delivered year to date earnings per unit of $1.23 per unit, a 19.4% increase over the first half of 2014. Turning now briefly to discuss adjusted EBITDA, which we view as the key non-GAAP metric that is most relevant to measuring the performance of an M.L.P. We delivered $31.4 million dollars in adjusted EBITDA Q2 of 2015 versus $28.2 million in the same quarter last year or an increase of just over 11%. As we are now hitting our stride on delivering on the increased production and sales volume for our debottlenecking projects, overall pricing remains favorable and cost of products sold has been well hedged and managed. To end with, I would like to discuss our capital spending program and distributable cash flow. We spent $10.7 million on CapEx in the second quarter of 2015 compared to $5.5 million in the second quarter of 2014. That is split between $4.9 million dollars of expansion capital and $5.8 million on maintenance capital. Comparatively we had $1.9 million in maintenance CapEx same quarter last year. In 2014 we had a less evenly distributed maintenance capital spend with much more being loaded in the back half of the year, combined with an abnormally light Q2. The maintenance capital spent timing differences lead to distributable cash flow being down slightly quarter-over-quarter and flat through today. Despite almost $4 million higher maintenance CapEx in Q2 of 2015 versus Q2 of 2014, our distributable cash flow was lower by only $300,000, at 12.1 million. Our coverage ratio was 1.11 for the quarter, but it’s more relevant to look at the trailing four quarters to remove the seasonal factors than the summer outage where we produce fewer tons and spent more capital. The last four quarters averaged 1.25 which we believe is robust given that we increased our distribution 8.9% over prior year quarter 0.2% versus Q1 of 2015. Overall we’re very pleased with our performance in the quarter and year-to-date. I will now turn the call back over to Kirk for outlook.

[Kirk Milling:]

Thanks Kevin. Our performance in the first half of the year has reaffirmed our outlook for 2015. The global markets for soda ash, we think remain stable and we maintain our guidance for international prices to improve 3% to 5% versus last year, which includes the currency impact on our European sales. In the domestic market, our expectation is still for modest improvements in both volume and margins in 2015. As a reminder, we have our second scheduled maintenance outage in the third quarter which will be similar and linked to the outage we experienced in Q2. On operating and SG&A cost side, nothing has changed since last quarter. Maintenance capital for 2015 is expected to be in line with our outlook of $14 million to $17 million with the majority of those expenditures being incurred by the end of the third quarter. Expansion related capital for 2015 is also expected in line with our outlook of 18 million to 25 million. These investments are expected to set us up well for continued capacity in volume increases in 2016. While we are very focused on delivering strong operating and financial results as well as executing our capital programs provide additional volume growth. We are really excited about the announced OCI General transaction which we believe can help take us to the next level. We have posted a transaction overview presentation on our Web site, which provides some details, but I’d like to talk about some of the highlights. To summarize, OCI Enterprises entered into an agreement to sell their entire stake and OCI resources to General for 429 million. From a valuation standpoint, this equates to about 9.5 times EBITDA based on current analyst estimates for 2015 and depending upon how you value the GP units and incentive distribution rights that equates to at least a range of $27.50 to $28 per unit. This represents a 15% to 20% premium based on the most recent OCIR trading ranges. The price is also consistent with recent transaction multiples and what we believe to be our value based on underlying business fundamentals and our operating and financial performance. We believe that the OCIR unit has not yet incorporated the full value of our business, particularly given the recent broader MLP market dynamics. As I said we're really excited about our new majority owner. The General Group is already involved in the industrial mineral space through their ownership of Eti Soda in Turkey as well as other mining energy media and shipping businesses. Eti Soda solution mines trona to make soda ash and sodium bicarbonate as Turkey contains the second largest deposit of trona in the world behind the deposit of Wyoming. General expects to run the business and the MLP with our same team and very much the same operating strategy a OCI. In addition we will continue our relationship with ANSAC as we believe they are the most efficient vehicle for serving our customers in international markets. General also shares our vision to grow the MLP through continuing to invest in organically growing our existing soda ash business along with making future strategic acquisitions which we believe will allow us to continue raising our distributions to unit holders. Overall, we think this is a great outcome for OCI. and our unit holders and allows us to move forward with a partner that is invested in the global soda ash business and also has experience in other areas of mining. We look forward to working with them to help us grow OCI resources. The deal is expected to close near the end of the third quarter. Obviously as we get closer through the transaction close we will have more details and color to provide. I'd also like to take this time to acknowledge and thank OCI for their support for our soda ash business through their stewardship, we have significantly invested in our facility to where we are now the most environmentally friendly site in the Green River Basin, and the most productive plant in terms of output per employee and the lowest energy consumer of all sites. We successfully completed an I.P.O. back in 2013 and been able to grow our distribution for four consecutive quarters while investing in initiatives. 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. The floor is now open for your questions. [Operator Instructions]. Thank you. Our first question comes from line of Jim Sheehan of SunTrust.

[Jim Sheehan:]

So could you just comment on the transaction that was just done? Obviously this is a pretty well capitalized company that's getting involved with you. How do you think that supports your opportunities for Growth?

[Kirk Milling:]

Yes I mean obviously. Thanks Jim. Obviously as you know they are in the Soda ash business already they're also in some other mining businesses, marine sodium bicarbonate which we're not in. So we think it will be very complimentary. Generally the markets they serve today are not markets that we are currently serving. Obviously we do have a little bit of overlap in Europe. But more broadly speaking at least in North America and as it relates to OCI's [indiscernible] they don't have, General doesn’t presently have any assets here. So I think that both well for us to continue to grow the business here using the resources that are generated from our existing business to help us do that. We no longer have other sort of competing businesses for the capital that we're generating.

[Jim Sheehan:]

Great and on the Eti Soda portion they’ve had some plans to expand their trona based capacity. Could you just comment on where that stands and where do you think that -- how do you think their plans would affect global market dynamics and your position in Europe?

[Kirk Milling:]

Yes, we have not had any discussions with them, regarding their plans -- I mean the intention right now is to run the businesses independently. And what they have stated to us is they want us to continue executing the existing plans that we have.

[Operator:]

[Operator Instructions]. Our next question comes from the line of Brian Maguire of Goldman Sachs.

[Brian Maguire:]

Just a follow-up on that as -- it's still a preliminary stages here with the Ciner, and they haven't closed on the transaction yet. But any indication from them if they're happy with the current MLP structure or would they be open to or looking for any changes to that and any thought you might have on that?

[Kirk Milling:]

Yes, so Brian from what they told us at this point, they like the MLP structure, they think it's a good vehicle to help us fund growth and what they continue to reiterate to us at this point is that they're not anticipating any changes.

[Brian Maguire:]

Okay great and then I guess just a question on the impact of the drop in oil prices that we've seen lately. Presumably that in a flat of miss the cost curve out a little bit I mean, you alluded to earlier, some waning demand in Asia. Should we be concerned around some of the export prices and how is ANSAC kind of seeing export prices for the latest kind of cargos that you've shipped out?

[Kirk Milling:]

Yes, so I mean right now I mean they have seen a little more competitive activity, no doubt from the Chinese particularly as ammonium chloride prices have picked up which has I think helped [indiscernible] base producers in China, but overall they're forecasting and projecting pricing to remain fairly stable for the balance of the year. And as you know ammonium chloride is a bit seasonal in the spring and in the fall so not entirely unusual to see those prices tick up right now, but I don't know if that's really sustainable On the positive side as I mentioned in the comments, we have started to see some influence on the demand side in their expansion plans. And we've seen capacity that was projected now is coming off line and some existing capacity even being taken off. So I think while there is some overhang now at least that's a positive sign I think going forward and hopefully will help to stabilize prices if not even see an increase in the future.

[Brian Maguire:]

Okay. Just one if I could, you are minority owner as you have Wyoming, if you think they've come under a little bit of financial pressure lately. Just wondering if you have had any conversations with them or if they're open to the idea of selling down some of that stake or if you guys would be interested in heading into your ownership position at OCI Wyoming?

[Kirk Milling:]

I think to the question of what would we be interested, the answer is yes, we've not had any discussions with them at that point at this point. I think as you know from their portfolio I think they've been trying to do diversify their portfolio and we clearly fit into that. So I think they've been very happy with the investments, but obviously if they might be interested in something we'd love to add to our position.

[Operator:]

Thank you. Ladies and gentlemen this does conclude today's conference. Please disconnect your lines at this time and have a wonderful day.