Sisecam Resources LP
Q3 2015 Earnings Call Transcript

Published: 7 Nov 2015

[Operator:]

Welcome to Ciner Resources Third Quarter 2015 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. 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 afternoon. This is Scott Humphrey, Director of Finance and Treasurer for Ciner Resources. Thank you for joining us to discuss our third quarter 2015 earnings results. Kirk Milling, our CEO will discuss our ownership change as well as third quarter results. Kevin Kremke, our CFO will provide additional details related to our financials. Kirk will then follow with our outlook 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:]

Thanks Scott. Good morning, everyone. Welcome to Ciner Resources third quarter 2015 earnings call. On October 23rd, OCI Company completed the sale of their approximate 75% ownership in OCIR to Ciner Enterprises, the U.S. subsidiary of the Ciner Group of Turkey. Today our name officially changed from OCI Resources to Ciner Resources and tomorrow, our ticker symbol will change from OCIR to CINR, to reflect our new ownership. We want to welcome our new owners and express our enthusiasm, as we embark on the next chapter for our Company. We are very pleased to report that we had another strong quarter of production in sales at our Green River facility. For the quarter, we produced 656,000 tons which represented a 3.5% improvement compared to the same quarter of last year. And on a year-to-date basis, our production levels are up 100,000 tons which is more than 5% compared to last year, a direct result of the capital investments we’ve been making to debottleneck our production capacity. Sales volumes were up 40,000 tons or 6.7% compared to last year’s third quarter and for the full year have now increased 88,000 tons. Combing higher volumes with a 4.2% increase in international prices and lower natural gas costs, we delivered a 14.7% increase in adjusted EBITDA. Our strong performance in the quarter coupled with our outlook, allowed us to increase our distribution for the fifth consecutive quarter. We have now increased our quarterly distribution by 10.2% since the second quarter of 2014. Turning to international market dynamics, IHS’s reporting third quarter pricing in the China domestic market dropped about $15 per metric ton and export prices to Asia were down almost $10 per metric ton in the quarter. While reports are still showing modest growth in their domestic market, the largest end use in China is for flat glass, which is slowing significantly due to the drop in housing and construction projects. This is clearly putting pressure on local producers and reports from HIS are showing net capacity being reduced by 1.5 million tons between 2015 and 2016, either through extended maintenance outages or outright permanent shutdowns. As a result, we started to see a slowdown in the rate of exports coming out of China. On the cost side, the [indiscernible] based producers were getting some tailwind from higher ammonium chloride prices. However, due to seasonality and weak urea prices, we anticipate those prices peaked in September and are likely to trend downward over the fourth quarter. Obviously, we are closely monitoring how this situation plays out over the fourth quarter and then ultimately how it will impact pricing as we move forward into 2016. In other markets, Latin America continues to show a decrease in demand for imports which are down 3.5% year-to-date. South America is only down 1.5%, as the decline in Brazil has been more moderate than prior numbers indicated. Weakness in flat gas driven primarily by auto and construction sectors have caused the decline in both Brazil and Argentina, which has been offset by growth in Chile. Moreover, two new container furnaces are expected to start up in Brazil before end of the year which should boost demand in the region. I am 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. And good after, everyone. As Kirk discussed, overall, we had another great quarter, both operationally and financially, as we continue to realize the benefits from our accretive production expansion programs that we have been investing in, over the last couple of years. These capital investments have enabled us to continue delivering value to our unitholders through a fifth consecutive increase to our quarterly distribution. Today, I will update you on a few of the key financial highlights from the third quarter, including our distributable cash flow and resulting coverage ratio, impacts from changes in foreign currency relationships, natural gas pricing, and our capital spending program. Our revenues for the quarter were $117.3 million, up 6.8% compared to the third quarter of 2014. Year-to-date revenues of $360 million increased 6.5% over the previous year, thanks to a 4.7% increase in volumes sold coupled with a 1.4% increase in average sales price. Quarter-over-quarter favorability was driven by increases in both soda ash volumes sold at 6.6% and average international sales price of 4.2%. Domestic sales of $47.2 million were down from $49.5 million or 4.6% in the quarter compared to Q3 of 2014. This was driven primarily by lower volume due to two large customers taking plant outages during the quarter, which we do not expect to persist. In addition to the average sales price impact of a large customer arranging their own freight, which we have discussed in previous quarters that lowers both sales line and a freight expense line but has not impact to EBITDA. International sales increased by 16.3% to $70.1 million compared to $60.3 million in the third quarter of 2014. The increase in international revenue was due to a 4.2% increase in average sales price, primarily from higher ANSAC pricing, combined with an 11.6% 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 about $850,000 versus the same quarter of 2014. On a year-to-date basis, international sales are up 13.3% due to a 6.5% increase in pricing and a 6.4% increase in volume. Cost of product sold in the quarter including freight, increased from $81.6 million in 2014 to $84.9 million this year, due primarily to higher sales volume and increased pension costs. Offsetting that, we continue to realize a benefit from lower natural gas costs in 2015 with cost per Mmbtu down $0.87 year-over-year. SG&A expenses of $4.5 million were approximately $500,000 lower than the prior year quarter, primarily due to reduced allocations form shared services to our soda ash business. Cash provided by operations was $102.9 million in the first nine months of 2015, up 18.7% compared to the $86.7 million provided in the first nine months of 2014. This was driven by the increase in net income and improved working capital performance, resulting from a working capital optimization initiative we launched during the year. Ciner Resources had earnings per unit of $0.65 in the third quarter, as net income increased 24.5% versus the prior year quarter. We have delivered year-to-date earnings per unit of $1.88, a 21.3% increase over the first nine months of 2014. Turning now to briefly discuss adjusted EBITDA, which we view as the key non-GAAP measure that is most relevant to evaluating performance of an MLP, we delivered $33.6 million in adjusted EBITDA in Q3 of 2015 versus $29.3 million in the same quarter last year or an increase of 147%, as we are now hitting our stride on delivering the increased production of sales volume from our organic expansion projects. Next, I’d like to review our capital spending program and distributable cash flow. We spent $10.6 million of CapEx in the third quarter of 2015 compared $9.2 million in the third quarter of ‘14. The split for the quarter was $6.2 million of expansion capital and $4.4 million on maintenance capital. Comparatively we had $2 million in maintenance CapEx during the same quarter last year. In 2014, we had less evenly distributed maintenance capital spend with much more being loaded in the fourth quarter of the year. While EBITDA was up almost 15% year-over-year, the maintenance capital spend timing differences led to distributable cash flow being up, both quarter-over-quarter and year-to-date by only 0.8%. As we discussed last quarter, we expect a lighter Q4 maintenance CapEx spend. And combined with strong Q4 EBITDA performance, we expect to produce favorable distributable cash flow and a similar coverage ratio for full year versus 2014. Our coverage ratio is 1.22 for the quarter while trailing four quarters averaged 1.24 which we believe is a robust coverage considering that we have increased our distributions 5% over the prior year quarter. Overall, we are very pleased with our performance in the quarter and year-to-date. I’ll now turn the call back over to Kirk for outlook.

[Kirk Milling:]

Thanks Kevin. Our performance in the first nine months of the year has reaffirmed our outlook for 2015. We’re maintaining our guidance for international prices to improve 3% to 5% versus 2014, despite being up 6.5% through nine months. If you recall, international pricing sliced in Q4 of 2014, so our comps will be much tougher in the fourth quarter. In the domestic market, our expectation is still for modest improvements in both volume and margins in 2015. On the operating and SG&A cost side, nothing has changed since last quarter. Maintenance capital for 2015 is expected to be in line with the high-end of our outlook of $14 million to $17 million with the majority of those expenditures having already been incurred. Expansion related capital for 2015 is expected to be at the bottom or slightly below our original outlook in the range of $17 million to $19 million. These investments are expected to set us up well for continued capacity and sales volume increases in 2016. We are poised to finish 2015 with an excellent fourth quarter for sales and production volume. The absence of a planned outage in the fourth quarter combined with the ongoing benefits of our CapEx investments have set the stage for a great finish to 2015. As for next year, we are still in the process of negotiating customer contracts. So, we will provide our 2016 outlook with fourth quarter earnings results. So, while we have a new name and a new majority sponsor, our vision is unchanged. We will be running the business the same way with a similar operating strategy, management team and under the same long-term strategy of growing the business, both organically and through strategic acquisitions. We are really excited to move forward with a partner that has strategically invested in both the global soda ash business and mining of natural resources. We look forward to working with Ciner to help us continue our growth of Ciner Resources. In closing, I want to thank everybody for their interest in Ciner Resources. This concludes our prepared remarks. Maria, please open the line for questions.

[Operator:]

The floor is now open for questions. [Operator Instructions] Our first question comes from line of Brian Maguire of Goldman Sachs.

[Brian Maguire:]

Hi. Good morning, guys.

[Kirk Milling:]

Good morning, Brian.

[Brian Maguire:]

Afternoon, now I guess. Just a question for you. I know, it’s only been a couple of weeks under new ownership, but just wondering if you think having Ciner as a parent would change the growth strategy going forward, particularly the mix between organic and inorganic growth? Do you think that they bring anything new to the table in terms of what their goals are for the industry and capacity expansions, and what other kind of new opportunities do you think that they might bring to the table?

[Kirk Milling:]

Yes, thanks Brian. I think it’s a bit early to tell. Obviously, we just concluded the transaction less than two weeks ago and prior to that, we were competitors. So, we really couldn’t have much in the way of discussion. I do think what’s exciting for us is this is the only business they have in North America. I think clearly they are showing aggressive growth in the soda ash business, in Turkey and elsewhere around the world. So, that’s encouraging to us that they like the business and they are willing to invest in it, particularly if they have a good well-maintained strategic asset like ours. But I think secondly, this will provide them a platform to hopefully allow us to continue growing the business and the MLP here in North America. Again, we’ve not had the opportunity yet, I think to have specific discussions, but overall I’m encouraged that they want to help us continuing to grow the MLP.

[Brian Maguire:]

So to your understanding, they’re comfortable with the current structure and the MLP structure, and you wouldn’t expect there to be any change to that from what you can tell so far?

[Kirk Milling:]

Exactly. Everything as I said thus far is that they intend to kind of allow us marching down the same path that we’ve been on.

[Brian Maguire:]

Just one kind of one on the Chinese and Asian pricing trends. Do you expect -- it’s probably early to give a look on ‘16 but if pricing held into where they’re kind of existing ‘15, do you think that would probably imply flattish international pricing in ‘16 or maybe a little bit of a downward pressure on it?

[Kirk Milling:]

Yes. I think clearly we’ve seen some downward pressure on prices say second half of ‘15 compared to first half of ‘15. If they are to hold it that level, then I do think we’re definitely finishing the year lower than when we started the year. Clearly, as I said in my comments, we’ve seen demand pretty soft in China, particularly in the flat glass sector. I’d say on the positive side, we are starting to see them take notice of that and we’re starting to see either extended maintenance outages or even permanent shutdowns. I think it will be interesting to see how it plays out as China government seems to be getting more interested in environmental issues. And they’re going to have to do something I think with the soda ash plants that are sitting in very densely populated areas. So, I don’t know if that’s necessarily a 2016 issue, but I definitely think the trend is going to be that that will put more pressure on those older soda ash plants located along the coast.

[Operator:]

Our next question comes from the line of Jason Freuchtel of SunTrust.

[Jason Freuchtel:]

Can you quantify how much of your energy costs are natural gas related versus electricity, and how should we think about the sensitivity of natural gas prices to your results next quarter?

[Kevin Kremke:]

Our energy costs are pretty well evenly split half and half between electricity and natural gas. And we consume about 8 bcf per year of natural gas and it’s pretty well evenly distributed throughout the year. So that implies that $1 change in natural gas pricing equates to an $8 million impact for full year results. So, just kind of run the math on that. But keep in the mind that we are pretty heavily hedged. So, we approach any given quarter roughly 80% hedged, so not a lot of exposure to the spot market.

[Jason Freuchtel:]

And I guess also, is there a possibility the Congress could delay or change the step up in the royalty payments?

[Kevin Kremke:]

Yes, there is -- it’s actually in committee right now. There is a proposed bill which would serve to take it from 6 to 2, but the previous bill did expire at the end of September. And so the rate -- Fed rate at least has already stepped up from 4% to 6% effective October 1st.

[Jason Freuchtel:]

And do you have an expectation on new proposal?

[Kevin Kremke:]

We don’t. I mean what I am encouraged by is I think there’s a lot of support for it, at least from what we see right now. But as to what the timing will ultimately end up and how it will move through Congress, you might know better than me.

[Operator:]

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

[Daniel Jester:]

Can you maybe just talk a little bit about how your negotiations with your domestic customers are going? I know you talked about the Chinese market weakening into yearend. Sort of how does that play out with your domestic customers in the conversation you’re having for pricing for 2016?

[Kirk Milling:]

There were pricing increases announced to the domestic market earlier this year, late-summer timeframe. And I would say, it’s still a bit early; we’re still in the midst -- very much in the midst of finalizing things. Generally, I would say we are seeing prices increase, although I would say somewhat modestly here. I think clearly with the global multinational account, they see what’s going on in the world, they see what’s happening in Asian and with China. And I think clearly they are trying to use that to their advantage. But there’s very little risk of import pressure coming into the U.S. So generally, year-on-year, I would still anticipate that we will see some degree of price increase in 2016.

[Daniel Jester:]

And then I thank you -- if I got this right from your prepared remarks, I think you guided that your coverage ratio for 2015 is going to be pretty similar to the coverage ratio for the full year of 2014. So, I am just wondering kind of what are puts and takes thinking about lowering that coverage ratio, given sort of the nature of the soda ash business today?

[Kirk Milling:]

Again, as Kevin said in his remarks, at least in Q4, we’re going to have a pretty robust quarter, at least from what we see right now. We’re seeing the full benefits of no maintenance outage, so very high volume that are going to hit us in Q4, and then a very low CapEx spend because we spent most of our maintenance CapEx dollars year-to-date. So for the full year, I would say, it will be fairly similar to where we were in 2014. Going forward, I think we’ve kind of been focused on keeping that coverage ratio somewhere in that 1.2ish range, plus or minus, give or take a little bit, but call it somewhere in the 1.2 range. I don’t think we’re going to dip overly below that given the commodity risk that we have in the pricing cycle for soda ash. But we’ll be within that range, I’d say.

[Daniel Jester:]

And then one, just last quick one from me. If I look at your ore to ash ratio, it’s been pretty stable at this 1.5 number for few quarters now. As you think about organic growth opportunities in the future, is there an opportunity for this ratio to become more favorable or is this going to be at a runrate that we should expect for the next year or so? Thanks.

[Kirk Milling:]

Yes. Obviously we are -- part of the efforts of the debottlenecking and some of the improvements we are seeing in our capacity is we are improving our recovery rates, which gives you a little bit of benefit on ore to ash. But the real driver more than anything else is how much deca we’re consuming to how much ore we’re processing. And so, as we continue debottlenecking the site, we are going to debottleneck deca a little bit. And so that will give us some improvements in ore to ash ratio. I wouldn’t say there is as much as we look forward to 2016, but I think as we look out to ‘17 and ‘18, we will start to see that number trend down a little bit, as we improve the throughput of deca.

[Operator:]

Thank you. This does conclude today’s conference call. Please disconnect your lines at this time. And have a wonderful day.

[Kirk Milling:]

Thank you.