Sisecam Resources LP
Q4 2014 Earnings Call Transcript

Published: 11 Feb 2015

[Operator:]

Welcome to OCI Resources Fourth Quarter and Full-Year 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, Paula. Good morning. This is Scott Humphrey, Director of Finance and Investor Relations for OCI Resources. Thank you for joining us to discuss OCIR’s fourth quarter and full-year 2014 earnings results. Kirk Milling, our CEO will discuss our fourth quarter and full-year results. Kevin Kremke our CFO will provide additional details related to our financials. Kirk will follow that with our outlook for 2015. We will then take your questions. Before we begin, I’d 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:]

Thanks, Scott, and good morning, everyone. Welcome to our fourth quarter 2014 earnings call. So we finished 2014 with a strong fourth quarter. We executed on our plans to increase both the efficiency and capacity of our facility in Green River and as a result we delivered a record year in both production and sales volumes. We are excited that we were able to deliver a total shareholder return in 2014 of 38% which puts us in the top 12% of all MLPs for 2014. Our focus on operational excellence initiatives in expansion investments to debottleneck our capacity led to efficiency improvements that resulted in higher production rates, lower energy consumption and the lowest ore to ash ratio in our sites history. Our ore to ash ratio was 1.52 in 2014 which compare to 1.62 in 2013. Our production volumes overall improved 3.3% for the year which was an increase of 82,000 tons. These improvements along with lower cost of products sold contributed to a 15.4% annual increase in adjusted EBITDA in 2014. Our continued stable cash flows combined with our improving operational performance gave us the confidence to race our distribution by 1.2% -- 1.24% this quarter and as we move to a strategy of quarterly distribution increases with the goal of 3% to 6% annual growth. Following up on our annual guidance, our 2014 sales volume improved 2.3% which was driven by a 2.4% increase in international volumes and a 1.9% increase in domestic volume. International prices increased 6.8% for the year, which was slightly better than our expectations. We had a weaker quarter than expected in our domestic volumes. One of our largest customers had a temporary plant shut down and one of our container glass customers permanently closed one of their locations. We do not currently anticipate that this fourth quarter weakness will carry over into 2015. Turning to the Asian market and specifically China, operating rates were down slightly year-to-date in November at 78%. There continues to be a divergence between the Hou process and Solvay process producers with the Hou producers taking extended maintenance outages due to the low ammonium chloride prices, while Solvay producers are running at higher operating rates in an attempt to seize more market share. Solvay process economics improved during 2014 driven by lower input costs. The key input of salt has dropped 30% to 40% during 2014, which has dropped their cash costs by roughly $20 a ton. Lower oil prices have not had a material effect on the Chinese cost structure as the majority of their energy comes from coal and coal prices have been down already 25% through September. Prices in the rest of Asia where stable in the fourth quarter as expected. The market in Latin America remains strong in the fourth quarter especially in Mexico and Brazil. Soda ash imports into Brazil were up 19% over the last year with imports into South America as a whole up 12% to 2014. Both container and flat glass have been driving the increased demand. In summary, we posted another solid quarter of earnings and along with improving operating metrics again gave us the confidence to raise our distribution. So next I'm going to turn the call over to our CFO, Kevin Kremke, who will share the financial results in more detail.

[Kevin Kremke:]

Thank you, Kirk. As we've discussed, our fourth quarter results contributed to an overall strong year across nearly all significant measures. Today I will update you on a few of the key financial highlights from 2014 both for full-year and for Q4, including our overall cash generation, natural gas pricing, and our capital spending program. Our revenues for the quarter were $126 million, up 7.1% compared to fourth quarter of 2013. For full-year 2014, our revenues were $465 million, up 5.2% compared to prior year. International sales increased by 9.4% to $270.2 million, compared to $247 million in 2013. The increase in international revenue was due to a 6.8% increase in average sales price primarily from higher ANSAC pricing as well as a 2.4% increase in international volume. Domestic sales decreased by 0.2% to $194.8 million in 2014, compared to $195.1 million in 2013, as a 2% decrease in sales price offset a 1.9% increase in sales volume due to our efforts to gain market share. Cost of products sold was flat year-over-year, but decreased on a per ton basis primarily due to favorable changes in the actuarial assumptions for our benefit expenses. These benefit expenses will revert back to 2013 levels during 2015. In the fourth quarter, freight costs increased due primarily to higher rail rates for our ANSAC volumes. Natural gas prices continue to drop on a sequential basis in Q4, through our natural gas hedging program which we discussed last quarter. We now have locked in 72% of our gas volumes in 2015, taking advantage of the continuing decline in the natural gas forward curve. SG&A expenses remained higher in 2013 this quarter due to the additional costs required of a publicly traded company as well as higher SG&A from ANSAC. Cash provided by operations was $106.1 million, up 5.8%, compared to $100.3 million provided in the prior year driven by the increase in net income and partially offset by higher working capital requirements. OCI Resources had earnings per unit of $0.68 in the fourth quarter as net income increased 8.7% versus the prior year quarter. Overall for 2014, OCI Resources delivered $2.23 in earnings per unit. Turning now to our capital spending program, we spent $14.3 million on CapEx in the fourth quarter of 2014 compared to $6.3 million in Q4 of ’13. $8.4 million of the total spend in Q4 was expansion capital, further delivering on our debottlenecking capacity growth projects. We ended 2014 with $20 million in expansion CapEx, which was slightly below our expected range due to the cost of a new mine lease coming in significantly lower than forecast. I’ll now turn the call back over to Kirk for our 2014 -- I'm sorry, 2015 outlook.

[Kirk Milling:]

Thanks, Kevin. So we remain excited about our prospects for 2015 as we aim for another record year of production in sales volumes. Our plan is to continue debottlenecking our operations spending between $18 million to $25 million on expansion CapEx during the year. These projects should enable us to grow sales volumes in the 2% to 4% range for the year. We expect international prices to improve 3% to 5% versus 2014. This range includes our expected headwind from Europe where contracted price increases have been offset by the weakened euro. Moving to the domestic market, we expect to realize modest improvements in both volume and pricing in 2015 as we continue to look to gain that market share. On the cost side, we expect lower natural gas prices will be partially offset by the pension cost increase, as Kevin already mentioned. Our focus for 2015 is on operational execution of our organic growth plans. We believe that the positive fundamentals for global soda ash have set the stage for another good year for OCI Resources. In closing, I want to thank everyone for their interest in OCI Resources, and this concludes our prepared remarks. Paula, please open the line for questions.

[Operator:]

[Operator Instructions] Your first question comes from Daniel Jester of Citi.

[Daniel Jester:]

Hey, good morning, everyone.

[Kirk Milling:]

Good morning, Dan.

[Kevin Kremke:]

Hi, Dan.

[Daniel Jester:]

So last week there was a sort of a big transaction in the soda ash market. So just wanted to get your updated thoughts on sort of your M&A outlook and how we should be thinking about that for 2015, for you?

[Kirk Milling:]

Well, it looks like our share price is undervalued on that [ph] transaction. I mean, Dan, as you know, we’re actively looking for opportunities out there and we don't really have any update to share today in terms of anything on the horizon. But no doubt we’re actively looking for opportunities both to expand our existing facility as well as products beyond soda ash.

[Daniel Jester:]

Okay. And then, maybe we can talk about a couple of specific markets. I guess, first to China, you talked about sort of the challenges with the Hou process. Maybe kind of just talk about how you see the weakness in the Chinese market? Is that spreading into other parts of Asia? And also what's -- how much new capacity do you think China brought online in 2014 and maybe give us an update of kind of how you're thinking about the supply side for China in 2015?

[Kirk Milling:]

Yes, I mean, its tough to say right now. Obviously, the one cause for concern is we’ve seen input cost for synthetic soda ash in China come down. So we think that the Solvay producers have seen improved margins and are actually operating in the positive now. The flip of that though is the Hou producers are still experiencing very low ammonium chloride prices, and so I think we’ve continued to see them take extended maintenance outages and such. And so net-net, I don't know that there has been a whole lot of change. We’ve seen prices going from fourth quarter into first quarter maybe slightly up -- fairly stable to slightly up, and so I think we’re going to have to monitor that as the year goes on. But at least as we sit here today we’ve not seen any sort of renewed competitive activity per se, in the Asian markets.

[Daniel Jester:]

Okay. And then Brazil you kind of talked about how Latin America was a source of strength in 2014. But if you listen to some of your customers, Latin American seems to be a sort of a more challenging outlook in the upcoming year. You’re not going to have the World Cup, electricity costs are going up significantly in Brazil. So can you maybe talk about how you're thinking about that particular market and how that's going to evolve this year?

[Kirk Milling:]

Yes, obviously we see the same thing. And so I think we do have some concern about how this is going to play out, not to mention the stronger dollar and the impact it could have. We are not forecasting a whole lot of growth in Latin America year-on-year. It should be more modest than what we saw in 2014. But generally speaking, container glass is going to hold up through most different types of cycles. I think there might be more risk on the flat glass side.

[Daniel Jester:]

Okay. And then, just one last housekeeping question, if I may, the 3% to 6% distribution growth, is that growth off to 2014 full-year base or also of the annualized fourth quarter distribution?

[Kirk Milling:]

Off of the 2014 full-year base.

[Daniel Jester:]

Great. All right. Thanks, guys. Good luck this year.

[Kirk Milling:]

Yep.

[Operator:]

Your next question comes from Brian Maguire of Goldman Sachs.

[Unidentified Analyst:]

Good morning. This is Ryan Barney [ph] on for Brian. I was wondering if could talk a little bit about the impact of the transaction that Dan referred to last week and if you see buying or pricing becoming any less disciplined considering the new buyer?

[Kirk Milling:]

No, I mean, I really can’t speak about that as of yet and what their intensions are from what I’ve read publicly. It sounds like they’re going to continue operating it as a separate business unit. But beyond that, I don’t really know that what will change with the new owner.

[Unidentified Analyst:]

Okay. And then what you -- comment on Latin America, do you -- could you provide us an outlook on your price negotiations and export [ph] pricing going into the year?

[Kevin Kremke:]

Yes, so I think in our outlook we did provide some direction on what -- where we forecast international prices to rise during the year. Included in that number you'll also see some increased freight costs. So what we provided was a gross number and that will be offset a little bit with some incremental freight cost year-on-year.

[Unidentified Analyst:]

Okay, great. And then just one last one from me, on the NAT gas hedging program, you said you would get some benefit. Can you size it all -- how that might look in the first quarter year-over-year?

[Kevin Kremke:]

It will be favorable to 2014 for sure. I mean, we’re hedged about 80% for Q1. So it's probably somewhere in the -- probably $1 million to $2 million-ish range of favorability to 2014.

[Kirk Milling:]

Yes, if you remember last year in Q1 obviously, we had a lot of headwind from energy prices. And so, we should have a very favorable comp in the first quarter at least. As the year goes on, obviously that will slide back because gas prices start to trending down as the year progressed. But definitely there should be a favorable comp in year one -- I mean, sorry, in Q1.

[Unidentified Analyst:]

Great. Thank you very much.

[Operator:]

[Operator Instructions] Your next question comes from Peter Butler of Glen Hill Investments.

[Peter Butler:]

Good morning. Good morning. In the recent transaction the buyer paid I think $1.64 billion for FMC soda ash business [ph]. From the outside it’s very difficult to make all the adjustments, but I’m assuming that you guys have put your sharp pencils to it and if FMC was worth $1.64 billion, what does it make your business worth?

[Kirk Milling:]

Well, if you look at our unit price, our unit price had a similar multiple should be trading just under $30 a unit. So we’re quite a bit lower than that as we said today.

[Peter Butler:]

So I presume that when you saw the $1.64 billion you were quite surprised and that probably cause you to go back to your valuation model and take a look?

[Kirk Milling:]

I mean, I think it just speaks to -- we got a healthy business. I think they’ve a healthy business and obviously we had a number of interested parties who were interested in jumping into the soda ash market.

[Peter Butler:]

Okay. What has happened in the last several months regarding industry capacity? Have there been any notable changes in intensions to close or loop new projects et cetera?

[Kirk Milling:]

Not in the world outside of China other than what you’ve already seen mentioned. I mean, I think in North America you continue to see people debottlenecking whether its us or others, and as I said I think in China because of the economics of the Hou process you’ve seen those guys take extended maintenance outages, but a lot of that’s all kind of been reported. From a big picture standpoint, there is no other major announcements that have come out representing any significant capacity changes here over the last few months.

[Peter Butler:]

Okay. Well, thanks for the help and keep sending money and we appreciate it.

[Kirk Milling:]

You bet. We are going to do our best.

[Operator:]

At this time, there are no further questions. I'll now turn the floor back to management for an addition of closing remarks. End of Q&A

[Kirk Milling:]

That's all we have. Thanks very much.

[Operator:]

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