Sisecam Resources LP
Q3 2014 Earnings Call Transcript

Published: 9 Nov 2014

[Operator:]

Welcome to OCI Resources Third Quarter 2014 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, Kristy. Good morning. This is Scott Humphrey, Director of Finance and Investor Relations for OCI Resources. Thank you for joining us to discuss OCIR’s third quarter 2014 earnings results. Kirk Milling, our CEO will discuss our third quarter results. Kevin Kremke our CFO will provide additional details related to our third quarter financials. Kirk will follow that with an updated outlook for the remainder of 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 will now turn the call over to Kirk.

[Kirk Milling:]

Thank you, Scott. Good morning, everyone. Welcome to OCI Resources’ third quarter 2014 earnings call. So September marked our one year anniversary as a public company. We continue to make progress in the quarter on execution of our plans to increase both the efficiency and capacity of our facility and we remain on pace to deliver a record year in both production and sales volumes. Our maintenance outage in September was completed on schedule and we came out of the outage running at a very strong production pace. Our focus on operational excellence initiatives and expansion investments to debottleneck our capacity is leading to efficiency improvements that have resulted in production rates, lower energy consumption and the lowest ore to ash ratio in our sites’ history. Our ore to ash ratio was 1.49 in the quarter and year-to-date has improved 7.5%. Our energy consumption year-to-date is down 3.5% and our production levels have improved 3.4%. So these improvements along with lower cost of product sold contributed to 27.4% increase in EBITDA over the prior-year third quarter. Our continued stable cash flows combined with our improving operational performance gave us the confidence to raise our distribution by 5% this quarter. Following up on our prior guidance our year-to-date sales volume improved 1.5% compared to the first nine months of 2013, driven by an improvement of 3.4% in domestic volume. Third quarter sales volumes were negatively impacted, because we ended September with 38,000 tons in transit to our European warehouses, so we experienced – we think we will experience higher sales volumes in the fourth quarter once these shipments are sold to our customers in Europe. International prices increased 6.2% year-to-date versus 2013 and we continue to believe full year international prices will be up somewhere in the 3% to 5% range compared to last year, as the fourth quarter of 2013 marked the beginning of the increased prices we have enjoyed year-to-date. We had another strong quarter of growth in our domestic volumes. As previously stated we recaptured some share in the domestic market for 2014 and saw 10.1% improvement in third quarter volume compared to last year. Turning to the Asian market, and specifically China, production rates and apparent soda ash demand in China are both up about 5% year-to-date, but operating rates for the Hou producers have come down to approximately 65%, due to the decreased ammonium-chloride credit leading to negative profitability. Many of the Hou producers took extended maintenance outage during the third quarter, most likely because their cash cost exceed domestic prices for soda ash in China. Prices in the rest of Asia were up $5 a ton in the third quarter and we expect those to remain fairly stable through year-end. The market in Latin America continues to be strong, especially in Mexico [Technical Difficulty] Brazil are up 16% over last year with U.S. and South America at record levels. The robust market has been driven by container glass in Mexico and flat glass in Brazil. Also in the fourth quarter we initiated a new natural gas hedge program to eliminate the volatility in the largest input cost affecting our cash flows. 70% of our natural gas purchases are now locked in for the next 12 months at favorable pricing and Kevin is going to provide a little more detail on that later in the call. So in summary we posted another solid quarter of earnings in spite of a larger than expected inventory build in Europe, combined with a successful maintenance outage in September and execution of several capacity enhancing projects during the quarter, we feel really good that we’re well positioned to have a strong finish to the year. So next 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. Today, I will update you on a few of the key financial highlights from the quarter including our overall cash generation. Insights and the changes in the cost of products sold, natural gas pricing and our capital spending program. Our revenues for the quarter were $109.8 million up 4% compared to third quarter of 2013. Revenues were lower sequentially versus second quarter 2014, due to the impact from 38,000 tons of products in transit to our warehouses in Europe as Kirk mentioned earlier. We expect that most of these sales will be recognized in Q4. Year-to-date our revenue increased to $339 million, up 4.4% compared to the first nine months of 2013. International sales increased by 6.8% to $189.2 million year-to-date, compared to $177.2 million in the 2013 period. The increase in international revenue was due to a 6.2% increase in average sales price primarily from higher ANSAC pricing. Domestic sales increased by 1.6% to $149.8 million year-to-date, compared to $147.4 million in 2013, primarily as a result of 3.8% increase in sales volume due to market share gains. Cost of product sold decreased by 3.9% in the third quarter to $76.3 million, compared to $79.4 million in 2013. The decrease was primarily due to favorable changes in the actuarial assumptions for our pension plan, as well reduced freight expense from a mix change resulting in reduced sales in Europe this quarter. Natural gas prices continue to drop sequentially in the quarter, more in line with our expectations for overall 2014 and the outlook for the next 12 months appears stable near the current levels. As Kirk mentioned, we recently executed on a new long-term natural gas hedging program whereby we locked in a portion of our expected gas fees with a fixed price physical forward supply agreement including bases to the Northwest Wyoming pool for up to five years. Through this program we now have locked in 80% of our price exposure for the next six months, 60% for the following 12 months and stepping down from there in a structured hedge over the next 60 months at a weighted average price of under $4 per mmBTU. SG&A expenses remained higher than 2013 this quarter due to the additional costs required of publically traded company. Cash provided by operations year-to-date was $86.7 million, up 21.4%, compared to the $71.4 million provided in the prior year nine months driven by the increase in net income. OCI Resources had earnings per unit of $0.52 in the third quarter as net income increased 55% versus the prior year quarter. OCI Resources has now delivered a $1.55 in earnings per unit in 2014. Turning now to our capital spending program, we spent $9.2 million on CapEx in the third quarter of 2014 compared to $7 million in Q3 2013. $7.2 million of the total spend in Q3 was expansion capital and we expect another quarter of relatively higher expansion CapEx spending in Q4 as we continue executing on our high return expansion projects. I will now turn the call back over to Kirk for our outlook.

[Kirk Milling:]

Thanks, Kevin. So we expect the fourth quarter to be our best production and sales volume quarter in the year, as all of our planned maintenance outages are behind us and we are seeing the full benefits of our debottlenecking investments. As Kevin mentioned, we have heavy CapEx spend plan during the quarter, so our team is very focused on execution of these projects that will help build momentum towards further volume growth heading into 2015. In closing, I want to thank everyone for their interest in OCI Resources. This concludes our prepared remarks. Kristy, please open the line for questions.

[Operator:]

Thank you. The floor is now open for questions. (Operator Instructions) Our first question is coming from Brian Maguire of Goldman Sachs.

[Brian Maguire:]

Hey, good morning, guys.

[Kevin Kremke:]

Good morning, Brian.

[Kirk Milling:]

Hi, Brian.

[Brian Maguire:]

Had a topic in chemical these days is obviously the impact of lower oil on everybody. And Kirk, I was curious to hear your take on how that might impact the cost curve for soda ash and particularly you expect it will reduce the cash cost or any of the overseas and all their Hou producers and how that might impact international prices in the near-term, mid-term and then also the contract discussions for 2015 that you guys are going to start having domestically.

[Kirk Milling:]

Sure, Brian. So I think obviously if you believe that oil pricing is a barometer for overall energy prices, as you know that’s one of the significant competitive advantages that natural producers have is, the energy consumption is far lower than the synthetic producers in China and elsewhere around the world. So I think with lower oil prices, again, if you believe it’s a barometer for other energy related products such as gas and coal, I think that could have an impact on their overall cost curve to produce synthetic soda ash. Related to your second question of prices as we head into 2015, obviously, we’re right in the throes of negotiations into next year. I think it’s a bit yearly to kind of be able to gauge where that’s going to land, but as you know and as we talked about in the past, I think there is a lot of fundamentals that are attractive for us on positive momentum on pricing as we head into next year.

[Brian Maguire:]

Okay. And similarly, can you maybe kind of remind us the impact of a stronger dollar for you guys. I know a lot of your volume, about two-thirds of it is exported. Just curious how those contracts denominated in dollars and if so did the stronger dollar hurt the competitiveness of U.S. based product and how the sort of ANSAC responding to that?

[Kirk Milling:]

Yes, so virtually everywhere ANSAC sells is in dollars. There’s a little bit of FX exposure they have in a few small markets. Obviously, moving product into Europe, it’s not a positive position for strengthening dollar, but overall there’s not a lot of local production in some of our core markets such as Latin America, so I don’t really anticipate a lot of impact there. But there’s no doubt, the product moving into Europe it could have an impact on us as we head into next year.

[Brian Maguire:]

Okay. And one last one before I turn it over, one of your large competitors there in Green River has changed their strategy from, I think standard of their soda ash business to now a sale. I’m sure you’re aware of that, just curious your appetite for large M&A, the word to kind of consolidate the industry?

[Kirk Milling:]

I mean, I don’t want to comment specifically on the public reports that are out there, but as we stated before I mean I think we’re bullish on soda ash. We remain very committed to the market and I think to the extent that opportunities arise, we’re keenly interested in looking at them.

[Brian Maguire:]

Okay. Thanks very much.

[Operator:]

(Operator Instructions) Your next question comes from Dan Jester of Citi.

[Daniel Jester:]

Good morning, everyone.

[Kirk Milling:]

Hey, Dan.

[Daniel Jester:]

So on these European shipments, this 38,000 tons, was this just a timing issue or are you seeing some of the logistic challenges, some of the other big rail customers had been talking about this year?

[Kirk Milling:]

No, it was solely a timing issue. So we obviously had planned because we knew in the second quarter we had that extended maintenance outage and so we purposefully loaded up the third quarter on shipments to Europe to help us on overall sales in the second quarter. And we got caught a little bit with timing, with a lot of those shipments leaving later in the third quarter than what we expect [Technical Difficult] in transit to Europe. But most of that will unwind during Q4.

[Daniel Jester:]

So in the fourth quarter should we expect your international sales volumes to be a bigger share of the mix than you would typically see in a fourth quarter because of this?

[Kirk Milling:]

Yes, I think that’s fair, yes.

[Daniel Jester:]

Okay. Okay. And then just a couple of questions on CapEx, it seems like your guidance for the full year on the expansion CapEx is down a little bit from your previous comments, anything specific driving that, and then maybe if you could also give us an update on your outlook for maintenance CapEx spending this year?

[Kirk Milling:]

Yes, so, on the expansion side there’s nothing in particular driving it. I think we just caught up a little bit with timing. As we mentioned, some of it was pushed to later in the year resulting from some permitting delays and I just think we’ll get caught up in little bit of timing so we’re – therefore we’re kind of suggesting more on the lower end of our guidance. On the maintenance side, I think we’re going to finish the year, somewhere in the $12 million to $13 million range.

[Daniel Jester:]

Okay. Great. And then just one last one if I could, ore to ash ratio $1.49, I think that’s probably the best you guys have ever done. How should we be thinking about that going forward? Is this sustainable or is this just a really great quarter from an efficiency standpoint?

[Kirk Milling:]

No, we think this is sustainable and we think there are further improvements to come on top of that. So it’s not a one-time.

[Daniel Jester:]

Great. All right. Well, thanks guys.

[Kirk Milling:]

Thank you.

[Operator:]

Thank you. You have a follow-up question from Brian Maguire of Goldman Sachs.

[Brian Maguire:]

Yes, just following up on the question on the delay and the shipments to Europe. Should we be thinking about the fourth quarter volumes in just a little bit less than 700,000 tons? And I know you said, it will be the strongest for the year, but are there any other timing impacts that might offset that in the fourth quarter or should we just kind of add 38,000 to whatever your production rate would be in the fourth quarter?

[Kirk Milling:]

Yes, I don’t know that we’ll unwind all of those sales, but clearly we’ll unwind the majority of them. And yes, I don’t have the exact number of what our forecast. I think we gave some guidance on total year sales volumes, so I think it probably is somewhere in that just south of 700,000 tons.

[Brian Maguire:]

Okay. And then any sense for inventory levels at your customers and how they might be trying to manage that into year end, anything unusual going on right now that you can tell?

[Kirk Milling:]

I think in general the supply chain, not only with us here but around the world is pretty tight. I think inventories are probably going to be a little lower as we head into 2015 than where we started the year.

[Brian Maguire:]

Okay. I appreciate it. Thanks.

[Operator:]

There are no further questions at this time. I will hand the floor back over to management for any further or closing remarks.

[Kirk Milling:]

Thank you, Kristy. We have no further comments. Thanks everybody.

[Operator:]

Thank you. This does conclude today’s teleconference. Please disconnect your lines at this time, and have a wonderful day.

[Kirk Milling:]

Great, thanks.