Ciner Resources LP (NYSE:CINR)
Q4 2015 Earnings Conference Call
February 11, 2016, 08:30 ET
Kirk Milling - CEO
Kevin Kremke - CFO
Scott Humphrey - Director, Finance and Treasurer
Jason Freuchtel - SunTrust
Brian Maguire - Goldman Sachs
Daniel Jester - Citi
Welcome to Ciner Resources Fourth Quarter and Full Year 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. [Operator Instructions]. It is now my pleasure to turn the floor over to Scott Humphrey. You may begin.
Thank you, Jackie. Good morning this is Scott Humphrey Director of Finance and Treasurer for General Resources. Thank you for joining us to discuss our fourth quarter 2015 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 2016. We will then take your question.
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.
Thanks Scott and good morning everyone. Welcome to Ciner Resources fourth quarter 2015 earnings calls. So we’re excited to report today that we finished on a strong note with new records established both for sales and production volumes. For the first time ever we sold more than 700,000 tons in a quarter and for the year our production levels were up almost 120,000 tons. Clearly a direct result of the capital investments we've been making to debottleneck our production capacity. I'm especially proud that we achieved these results in a safe manner finishing the year with a very low incident rate. And I'd really like to salute our hardworking exceptional employees for these results.
As expected we finally started to realize the decline in international prices during the quarter which had been falling in Asian markets since earlier in the year. Our international prices were down just under 3% primarily the result of lower prices in Asia. Even with the softer quarter we still ended the year with international prices up almost 4% and right at the midpoint of our guidance. The improvements in both volume and pricing combined with lower natural gas prices contributed to an 11.1% increase in adjusted EBITDA in 2015 and almost 16% increase in earnings per unit for the year. Our strong performance in the quarter coupled with our outlook allowed us to continue executing our distribution growth strategy for the six consecutive quarter. We delivered almost 5% distribution growth this year which again was right in line with our prior guidance.
Turning to soda ash market dynamics IHS is reporting Q4 export pricing from Chinese producers was down about $10 per metric ton compared to the third quarter. However we are beginning to see this trend reverse. Latest reporting is indicated that Chinese prices are rising in both their domestic market as well as with their quoting for exports. We think there are several factors driving this the biggest of which has been the decrease in ammonium chloride prices. They have now declined $20 to $30 per metric tons since peaking in the third quarter.
With urea prices forecasted to remain under pressure for the foreseeable future, we anticipate this same price pressure will apply to ammonium chloride as well and ultimately force the marginal Chinese [indiscernible] producers to raise prices to compensate.
In addition there have been several developments on the supply side. The first came with the 1 million ton per year Qingdao soda plant closing as scheduled at the end of December. The second and potentially more meaningful development has been the recent shutdown of the largest soda ash plant in China due to a failure in a wastewater dam. This plant produces 3 million metric tons per year and is one of the largest Chinese exporters. We don't know the extent of supply impact quite yet, however due to the size of the plant any extended downturn to remedy the situation should serve to significantly tighten their local market and reduce their volume available for export.
So given these dynamics we are optimistic that prices in Asia have bottomed and should start to rise over the balance of the year. In other markets Latin America continues to be soft with imports down 4% based on the latest estimates for 2015. Generally speaking, our container volume has held up fairly well in these markets but most of the other segments are expected to remain weak in the near term. In summary we posted another solid quarter and a record breaking year in 2015 along with steady distribution growth.
I'm now going to turn the call over to our CFO Kevin Kremke who will share our financial results in more detail.
Thank you, Kirk and thanks to everyone joining us on the call. Today I will update you on our 2015 performance versus outlook, a few of the key financial highlights from the fourth quarter and for full year including our capital spending program and some key metrics around our strong financial position and disciplined approach to managing our business. As Kirk mentioned, overall we had another great quarter both operationally and financially which resulted in a good finish to another strong year. Let me start with a recap of our actual results versus our 2015 outlook which we provided just over a year ago and revised towards the middle of the year noting that all results were in-line with our outlook.
Total volume sold increased 4.2% which is right at the midpoint of our outlook of 3% to 5% growth. And international prices increased 3.8% consistent with full year guidance of the 3% to 5% increase. Maintenance capital for the year was 16.1 million right at the midpoint of our $15 million to $17 million outlook and expansion capital was right at $18 million compared to our outlook of $17 million to $19 million.
On that note our expansion capital debottlenecking program that Kirk mentioned has been key to our steadily improving volumes and financial results. We continue to realize the benefits from a capital investments we've made over the past few years which were contributed to unit holders at roughly 2 to 4 times EBITDA which makes them very creative to distributable cash flow. These capital investments have enabled us to deliver value to unit holders with an almost 5% increase in quarterly distribution versus Q4 of 2014. Our revenues for the quarter were 126.4 million up 0.3% compared to the fourth quarter of 2014. Quarter-over-quarter favorability was driven by 13% increase in domestic sales volume. For full year 2015 revenues of 486.4 million increased just over $21 million versus the previous year thanks primarily to a 4.2% increase in volumes sold.
Domestic sales of 48.5 million were up from $45 million or 7.8% in the quarter compared to Q4 of 2014. This was driven by higher volume which offset the impact of a drop in average sales price due to a large customer arranging their own freight which we’ve discussed previously in previous quarters that lowers both sales and freight expense, but has no impact to EBITDA.
In 2015 we achieved our goal of growing sales volume by 4.2% to 2.655 million short tons [ph]. International sales decreased by 3.8% to 77.9 million compared to 81 million in the fourth quarter of 2014. The decrease in international revenue was due both to a 2.6% decrease in average sales price primarily from lower pricing in Asia and the 1.2% decrease in international volume. The price decrease includes the impact of a stronger U.S. dollar versus the euro which negatively impacted the quarter by about $875,000 versus same quarter 2014. On a full year basis international sales are up 8.2% due to the increase in pricing I mentioned and an overall increase in volume sold.
Cost of products sold in the quarter including freight increased from 91 million in 2014 to 91.7 million this year due primarily to higher sales volume as well as increased royalty expense and fringe benefit costs. Offsetting that we continue to realize the benefit from lower natural gas cost in 2015 with cost per Mmbtu down 12.8% quarter-over-quarter.
SG&A expenses of $5.9 million were approximately $100,000 lower than the prior year quarter primarily due to reduced allocations to our soda ash business.
Turning now to cash flow, cash provided by operations was 150.2 million in 2015 up almost 42% compared to the 106.1 million provided in 2014, driven somewhat by the increase in net income and also significantly from a working capital optimization initiative that we launched during the year. Ciner Resources at earnings per unit of $0.69 in the fourth quarter as net income increased 3% versus the prior year quarter. We delivered earnings per unit of $2.58 in 2015 and almost 16% increase over 2014.
Turning now to briefly discuss adjusted EBITDA which is one of the key non-GAAP measures that is most relevant to evaluating the performance of an MLP, we delivered $35.9 million in adjusted EBITDA in Q4 of 2015 versus 34.8 million in the same quarter last year. For full year we increase adjusted EBITDA by just over 11% at 133.9 million compared to 120.5 million in 2014.
Next I would like to review our capital spending program and distributable cash flow. We spent $7.8 million on CapEx in the fourth quarter of 2015 compared to $14.3 million in the fourth quarter of 2014. The split for the quarter was 5.5 million of expansion capital and 2.3 million on maintenance capital. We ended the year with maintenance CapEx of 16.1 million and expansion CapEx of 18 million both within our guidance ranges that we provided throughout the year. In addition to adjusted EBITDA the other key non-GAAP measure use in evaluating our performances in MLP is distributable cash flow of. Our DCF was $16.7 million in the quarter, a 16.8% increase over the prior year quarter. For the full year we delivered distributable cash flow of $55.7 million, a 4.9% increase over 2014. We achieved that level of DCF with a relatively conservative coverage ratio of 1.5 for the quarter and 1.27 for the full year which we believe is robust coverage considering that we also increased our distributions just under 5% over the prior year quarter and 6.5% full year 2015 over full year 2014.
Overall we're very pleased with our performance in the quarter and for a full year and with the value that we've delivered to unit holders during the year. In addition to our financial performance I also want to briefly discuss some of the market dynamics we're seeing and how we stand out amongst our MLP peers. During periods of uncertainty or challenging capital market environments as we're seeing today in MLP space and to a lesser extent the broader global markets, attention often turns to stability and financial positions. Here we believe that we compare very well as reflected in several key metrics. We have always managed our business in a conservative way and disciplined manner and given all the turmoil in MLP world in the last few years it appears that the equity market has listened and set us apart from many other MLPs.
We have deliberately maintained a very conservative balance sheet with the current leverage ratio 0.67 times net debt to EBITDA. We've also delivered a healthy distribution coverage ratio in the 1.25 to 1.3 times range while providing annual distribution growth of around 5%. Importantly our capital program has and continues to be funded through operating cash flows in excess of our distributions. In addition, we have continued to deleverage our balance sheet and we currently have $90 million in remaining capacity under our revolving credit facilities in addition to $20 million of cash on our balance sheet. This sets us apart from many of our MLP peers, positions us to whether any storms in both our industry and the capital markets and poises us to be opportunistic when accretive growth prospects arise.
I will now turn the call back over to Kirk for 2016 outlook.
Thanks, Kevin. So as we look ahead to 2016 we're aiming for another year of record production and sales volumes. Our plan is to continue debottlenecking our operations spending between 15 million and 18 million this year on expansion CapEx. These projects will enable us to grow sales volume in the range of 2% to 4% for the year. Included in this we've continued our focus on recapturing some domestic market share and expect our domestic volume to grow between 4% and 6% this year. Along with this we are also expecting some modest improvement in domestic prices.
Moving to the international market we expect pricing overall to be down 3% to 6%. As mentioned earlier we think Asia pricing has bottomed and we anticipate prices to rise over the balance of the year. But Latin America pricing will also be lower in 2016 as increased competition from China during the fourth quarter negotiating season put some downward pressure on prices. That market tends to be firm for the calendar years so there is minimal upside for price improvement this year compared to Asia where prices are locked in for much shorter durations.
On the operating side we expect to enjoy a modest tailwind from soft natural gas prices. However we will also experience some increases in royalty and freight costs moving to our international markets. On a positive note we are forecasting reduced maintenance of business CapEx of 11 million to 13 million which will be a benefit to our cash available for distribution.
So obviously we have some challenges ahead. We're trying to pull all the levers we can to mitigate the impact from lower international prices. We will look to continue a similar pattern of growing our distributions based on business performance, but at the same time we'll continue maintaining a conservative coverage ratio that is appropriate for our business. In closing I want to thank everyone for their interest in general resources. This concludes our prepared remarks. So Jackie please open the line for question.
[Operator Instructions]. Our first question comes from the line of Jason Freuchtel with SunTrust.
Just wanted to touch on the large China producer that I guess experienced a deemed [ph] outage, how long typically would you expect incident like that to be repaired. How long could that potentially be out and what's the potential impact on pricing and maybe if you could touch on if you have any idea maybe what percentage of capacity that represents for the export market?
Yes. So in total the plant is about 3 million tons out of China's 30 million, so it's roughly 10% of the overall capacity in China and they export -- last year they exported somewhere between 400,000 and 500,000 tons, so they are a fairly significant exporter within. In terms of the impact you know it's a pretty large environmental impact any time you have a dam breach like this it's very difficult to deal with but you know how long it's going to be I think is more dependent upon the impact of the environment. You know we've heard mixed reports but I still think it's a bit early to know the full impact and how long it's going to be down but like I said I think regardless it's going to have at least in the near term a fairly sizable impact to the overall available tons within China.
And then I think in 2015 your compensation and benefits expense increased primarily due to pension costs, do you expect the compensation and benefits expense to be similar to 2015 and 2016 or could that potentially increase again?
In 2016 we’re seeing almost $6 million reduction in expansion expense but that is offset by increased medical benefit costs resulting from our split with OCI, so what happens with medical benefits is that we lost the San Antonio business which was generally a younger workforce and so now we have kind of a smaller employee population that on a weighted average basis is slightly older. So the allocated cost of medical benefits to the soda ash business went up a little bit.
And then I guess lastly you mentioned that your freight and royalty costs will likely go up in 2016, could you provide us with a potential range or maybe how you’re thinking about those expense items?
Yes. So on the freight cost side I think to international markets it's somewhere around 5% and on the royalty side as you know in Q4 the reduced Fed rate of 4% went back to 6%. We're still trying to get that brought back down but as of now it's -- we've assumed that for the time being at least it will remain at six. In addition to that we're also experiencing a smaller increase in royalty rates from our other lesser [ph] Anadarko. So the combination of the two like I said will have a full year of the new Fed rate versus just one quarter last year, that's 2% and then we're also potentially going to experience a smaller increase from Anadarko throughout the year.
Our next question comes from the line of Brian Maguire with Goldman Sachs.
Kevin, the comments on the international pricing outlook does that assume that you know from here on out the price will stay kind of flat with current levels or they will get a little bit worse or they will be a little bit better throughout the year, it's kind of what's embedded in that down to 3% to 6% outlook.
Yes that outlook assumes not a lot of recovery in pricing, a little bit in -- at the very end of the year. So like I said we're optimistic that things may bottom and they're going to start to increase but we've not assumed a whole lot of recovery in these numbers.
Okay. And I've seen your volume, it looks like you’ve domestic volumes growing faster than overall which guess is a little bit counter to the notion that the domestic markets overall pretty flat so you can just comment if you're taking a little of market share there and how you're kind of able to do that you know just maybe some thoughts on the competitive environment and domestic pricing overall?
Yes. The market did grow, call it 1 to 1.5 points last year, but primarily over I don't know a 3 or 4 year period we had lost some domestic market share here and so part of what we're trying to do is just rebalance our portfolio. So the last couple years as you know we've had a little bit more focus and emphasis on not trying to be too aggressive and bite off too much but we have made a conscious effort to recapture some of the share and get up to a share level at least it's more similar to what our overall capacity share is.
Okay. And I think your comments towards the end of the outlook about the distribution kind of growing in line with the fundamentals, it seems like the pricing headwind and some of the cost headwinds, EBITDA a bit down in '16. So does that imply that we might not get any distribution growth in '16?
No I don't mean to imply that. I think again we've got some room I mean I think what we're going to be focused on is keeping our coverage ratio north of 1.2. So we've got a little bit of room there but we're going to evaluate it I think as each quarter goes on and see how see how things are going and see kind of where this pricing starts to move but I'm optimistic we will still be able to maintain some further growth this year.
Our next question comes from the line of Daniel Jester with Citi.
Maybe just a follow up on Brian's question on volume growth. Maybe we can square some of your comments, I think if domestic volume growth of 4% to 6% kind of implies international volume growth at maybe 1% to 2% this year. You grew international volume 4% in 2015. So I'm just wondering if you think the Chinese export competition could potentially weaken why is growth in international volumes going to decelerate year-over-year?
So it's primarily because we only have x tons right? We're selling everything we can. As I said you know you can do the math on what the 2% to 4% range looks like but I would say of that growth we've just allocated a greater portion of it this year to domestic volume compared to last year was a little more heavily weighted on the [indiscernible] side.
And then on your comments on some of the dislocation you've seen from your MLP tiers, you’ve necessarily talked in the past about potential M&A opportunities and it seems like the environment for MLP qualifying income acquisitions has changed a lot over the last 6 or 12 months. So maybe you can provide some updated thoughts there.
Yes, I don't really have a lot to report on that. I mean we’re continuing to look and the team is very engaged in evaluating opportunities. I don't think in terms of the kinds of businesses that we were considering. They're not really affected by any change in the tax laws that were discussed or the potential tax changes that were discussed last year. You know we're looking for things very similar to ours that would be mining and operating type assets of industrial mineral. So we're evaluating stuff as you know these things you can't necessarily predict them. We're going to keep doing and working as hard as we can and looking at as many opportunities and hopefully will be able to hit on something.
That was our final question. This does conclude today's conference call. Please disconnect your lines at this time and have a wonderful day.
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