OCI Resources LP's (OCIR) CEO Kirk Milling on Q2 2014 Results - Earnings Call Transcript

Aug. 8.14 | About: Ciner Resources (CINR)

OCI Resources LP. (OCIR) Q2 2014 Results Earnings Conference Call August 6, 2014 8:30 AM ET

Executives

Scott Humphrey - Director, Investor Relations

Kirk H. Milling - Chief Executive Officer

Kevin Kremke - Chief Financial Officer

Scott Humphrey - Director of Finance and Investor Relations

Analysts

Brian Maguire - Goldman Sachs

Dan Jester - Citi

Operator

Welcome to OCI Resources Second 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, 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 2014 earnings results. Kirk Milling our CEO will discuss our second quarter results. Kevin Kremke our CFO will provide additional details related to our second quarter financials, Kirk will follow that with an updated outlook for the second half 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 H. Milling

Great. Thank you, Scott. Well good morning everyone. Welcome to OCI Resources second quarter 2014 earnings call. Today we’re going to try and provide an overview of our second quarter performance, discuss current market conditions in the soda ash our business and provide our outlook for the second half of 2014.

So we continued to build positive momentum in the second quarter and we remain on page to deliver a record year in both production and sales volumes. Our extended maintenance outage in May was completed on schedule and we’ve been running at a very strong production pace ever since. Our focus on operational excellence initiatives and capital investments to de-bottle neck our capacity is leading to efficiency improvements that have resulted in higher production rates, lower energy consumption in the lowest ore to ash ratio in our sites history.

Our ore to ash ratio was 1.52 in the quarter demonstrating our improved operational performance. This improvement along with lower cost of product sold contributed to a 14.6% increase in EBITDA in the second quarter. Although natural gas prices were headwind in the first quarter, current and forward prices for the balance of 2014 are now more inline with our previous expectations.

Following up on our guidance from February our year-to-date volume improved just over 2% compared to the first half of 2013, driven by a 3.2% increase in our international volumes.

International prices increases 5% year-to-date versus 2013 and we continued to believe full year international prices will be up somewhere in the 3% to 5% range compared to last year.

We finally begin to see some improvement in our domestic volumes for a change. As we previously stated, we recaptured some share in the domestic market for 2014 and saw a 3.8% improvement in the second quarter volume compared to last year.

Overall, I’d say U.S. soda ash demand remained sluggish year-over-year through May although the outlook for flat glass remains positive as strong housing starts in improving automotive sales are providing a catalyst for consumption.

Unfortunately container glass demand has remained weak, driven by lower beer consumption.

Turning to the Asian market and specifically China, I’d say the data remains mixed. Production rates in China are up 5% year-to-date and combined with slower than expected demand growth of 2% operating rates have come down into the mid 70% range.

Inspite of this, prices are increasing outside of China. We think primarily due to the negative impact which lower ammonium chloride prices are putting on the [low] based producers which is driving their cash cost above $250 a ton. We believe this negative impact is driving the producers to lower their operating rates and take extended maintenance outages which should lead to a tighter supply situation in China going forward.

With average export prices [indiscernible] China in the range of $225 to $245 a ton, total Chinese soda ash exports year-to-date are down 16%. So we’re pleased that our second quarter and first half results are in line with our expectations as rising volumes and higher international pricing grows improvements in overall profitability.

Next, I’d like to introduce you all to Kevin Kremke, our new CFO who will share our financial results in more detail.

Kevin Kremke

Thank you, Kirk, and thanks to everyone joining us today. This is my first earnings call with OCI Resources. I am very happy to be here with such a strong team and during such an exciting time in our business. I look forward to working with all of you in the coming years as we continue to grow.

Today, I’ll 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 $113 million up 2% compared to the second quarter of 2013. Year-to-date, our revenues were $229.2 million up just under 5% compared to the first half of 2013. International sales increased by 8.4% to $128.9 million in the first half compared to $118.9 million in the 2013 period. The increase in international revenues was due to a 3.2% increase in volume of tons sold and 5.1% increase in average sales price primarily from higher ANSAC pricing.

Domestic sales increased by 5.1% to $51.7 million for the three months ended June 30, 2014 compared to $49.2 million in the second quarter of 2013, primarily as a result of a 3.8% increase in the sales volume in the domestic market. After a slow start to the year in the domestic market OCI Resources finished the first half with domestic revenues slighter higher than the corresponding 2013 period.

Moving to the cost section cost of products sold decreased by 3% in the second quarter to $79.9 million compared to $82.4 million in 2013. The decrease was primarily due to favorable actuarial discount rates and market returns for our pension plan which reduced pension expense by $2.7 million in the quarter. This was offset by modestly owned favorable natural gas pricing by around $0.60 per mmBTU versus Q2 2013.

But as Kirk noted, we are seeing a favorable trend here with lower Henry Hub forward curve and on that point, we have recently gained approval from the OCIR board of directors to modify our natural gas hedging program to allow for longer tenure and higher volume of hedges to allow us to mitigate more of the volatility in our cost of products sold.

SG&A expense remained higher than 2013 this quarter, due mostly to the additional cost required of being a publicly traded company. Cash provided by operations year-to-date was $49.2 million compared to $45.8 million in the prior six months, in the prior years six months, driven by the increase in net income.

OCI Resources had earnings per unit of $0.51 in the second quarter as net income increased 27% versus the prior year quarter. OCI Resources has now delivered $1.03 in earnings per unit in 2014.

Moving to CapEX, we spent $5.5 million on CapEx in the second quarter of 2014 compared to $.17 million in Q2 of ’13. We expect approximately $21 million to $25 million of our previously disclosed $24 million to $30 million expansion capital program to be spent in 2014 with the remainder extending to 2015.

We also expect this to stand in 2014 approximately $10 million to $13 million of our previously disclosed $12 million to $15 million of maintenance CapEx with the balance being pushed out to 2015.

I will now turn the call back over to Kirk for our outlook.

Kirk H. Milling

Thanks, Kevin. So as we look ahead to the second half of the year, we are expecting some modest improvement in international pricing primarily coming from higher prices in Asia. We have another plant maintenance outage scheduled in the August September timeframe, but it is not scheduled to be as long as our May outage. So this should keep our third quarter volume below first quarter levels that are higher than what we saw in the second quarter and then we expect fourth quarter to be our best production volume quarter of the year as all of our maintenance outages will be behind us and we will begin to realize the full benefits our de-bottle necking investments.

The OCI team remains focused on execution of our operational plans which should continue to build on the momentum gained thus far in 2014. So in closing I’d like to thank everyone for their interest in OCI Resources. This concludes our prepared remarks. Maria, please open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question is coming from the line of Brian Maguire of Goldman Sachs.

Brian Maguire - Goldman Sachs

Good morning, guys.

Kirk H. Milling

Good morning, Brian.

Brian Maguire - Goldman Sachs

Hey Kirk, a pretty nice showing on the volume mix with a big swing towards domestically you talked about getting back some market share there, just wondering if that’s a sustainable level or maybe benefited a little bit from the lower production volumes and you know you choke off the international first you know kind of how should we see that mix trending for the rest of the year.

Kirk H. Milling

Yes obviously as our volumes begin to improve, you will see a disproportionate share of the incremental volume going to international. We’re anticipating that our domestic volumes should remain pretty steady at around that $200,000 ton mark for the balance of 2014.

Brian Maguire - Goldman Sachs

Okay. And could you comment on your decision to push out some of the CapEx spending, was that related to any project delays or are you just seeing cost need becoming lower than you are expecting and should we think about the associated volume gains on some of that expansion CapEx is being pushed out as well?

Kirk H. Milling

No, so I’d say two primary points on that. One, we had some permitting delays on some of the projects that we put in place earlier this year in the first half and so that kind of pushed things a little bit into the second quarter. And then secondly, there’s a large investment we are making which is spread out over a three year period in our pond complex and we’re pulling forward some of that investment into 2014 but that’s causing us to push some other expected investments into 2015.

So our overall plan have not really changed there’s just a little different timing on when we’re going to spend some of the CapEx and some of that will just slip into 2015.

Brian Maguire - Goldman Sachs

That’s still sort of targeting about 100,000 tons a year of added capacity.

Kirk H. Milling

Yes. It won’t impact our overall volume scenario.

Brian Maguire - Goldman Sachs

Okay and just one last one if I could on the distribution amount I think we’re kind of holding it at $0.50 still the coverage ratio for the quarter around 1.24, what kind of coverage ratio do you feel like you need to be comfortable to start lifting that distribution and when do you think the board might get an answer addressing that?

Kevin Kremke

Yes so kind of as we had talked about before, I mean I think the main point that we wanted to see is to ensure that we were realizing the benefits of the capacity improvements. I think we are starting to realize that. I think we’ll really see that in full swing in the second half of the year and I think that will put us in a very good position to start reconsidering the distribution.

We don’t necessarily have any target right now on a coverage ratio. I think we’ve taken a conservative approach at this point, but I do think you know what kind of the optimum coverage ratio will be it’s something that we are going to discuss here I’d say over the balance of the year at the board level.

Brian Maguire - Goldman Sachs

Great. Thanks very much.

Operator

Our next question comes from the line of P.J. Juvekar of Citi.

Dan Jester – Citi

Hey good morning, it’s Dan Jester on for P.J. today.

Kirk H. Milling

Good morning, Dan.

Dan Jester – Citi

Good morning. Can you expand a little bit on what you are seeing in different international markets you know maybe where are you seeing strength that you weren’t expecting a the start of the year and maybe where is demand maybe not as good as you previously expected?

Kirk H. Milling

Yeah I think the biggest concern more than anything is China. I think the growth that we are seeing in China right now is below where we thought it would be. We don’t really sell a lot of product in China but as you know what happens in China has a pretty big influence on the overall international market. I’d say latter end has been better than expected, Brazil has been running very strong, I mean all indications are that we are in for a very strong second half of the year. On the domestic front, I think domestic in Europe not a whole lot of change pretty much the same as before better in some markets like flat glass here domestically but also we’re seeing weakness in container glass.

So all-in-all I think the domestic market is pretty flat overall and pretty much the same in Europe.

Dan Jester – Citi

Okay, that’s helpful. And then I guess sticking with China for a moment, I think you had previously said that you had seen or seeing maybe 2 or 2.5 million tons of kind of new capacity in the pipeline in that market. Any update of thoughts as to sort of the size and when that could potentially come on.

Kirk H. Milling

You know it’s hard to say right now because there’s also some offsets to that, right. So I think as mainly the [who] based producers have experienced these low ammonium chloride prices their margins have just crashed and their production cost are much higher. And so we are seeing a lot of these guys go down for extended maintenance outages. I mean, there were producers that went down in the second quarter that had yet to restart because of where the price point is right now.

So, I think on a net basis those, that capacity is there ready to potentially come online sometime between the second half of this year and early next year but whether it will or what the net amount of capacity that will come on I think is a little bit of a question mark right now with again negative margins being experienced for those guys it just doesn’t make any sense.

Dan Jester – Citi

Okay. That’s very helpful. And then just one last quick one is there any update on your real contract negotiations I know that contract expires at the end of this year?

Kirk H. Milling

No. I mean there’s really no update on it. We’re continuing to be in discussions with the Union Pacific but no conclusion on that as yet.

Dan Jester – Citi

Great. Thank you very much.

Operator

(Operator Instructions) our next question comes from the line of [indiscernible] of Credit Capital Investments.

Unidentified Analyst

Hey thanks for taking my question. So I just wanted to go through – you talked about increasing your solutions by raising the volumes at your current facility, but I think is there any other way that your value added group raised the dividend so specifically what is your appetite for M&E?

Kirk H. Milling

I didn’t catch all the question, could you repeat that?

Unidentified Analyst

Yeah sure. So I guess in terms of dividend growth you talked about increasing the volumes at your current facility but what other options do you have?

Kirk H. Milling

Yes so obviously the number one point is we’re focused on our de-bottle necking projects and improving the overall capacity at the site. That will kind of give us I think a good base load to hopefully raise the distribution in the future. On the M&A side, I would say we’re actively looking at things that are going to be complimentary to soda ash. I can’t speak of anything specifically right now that to talk about but definitely M&A is something that we’re very active in and looking forward to?

Unidentified Analyst

Good quarter. Thank you.

Operator

And thank you. And that was our final question. This does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day.

Kirk H. Milling

Thank you.

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OCI Resources (NYSE:OCIR): Q2 EPS of $0.51 beats by $0.06. Revenue of $113M (+2.0% Y/Y) misses by $0.4M.