Ciner Resources LP (NYSE:CINR) Q2 2016 Earnings Conference Call August 5, 2016 8:30 AM ET
Kirk Milling - CEO
Kevin Kremke - CFO
Scott Humphrey - Director, Finance and Treasurer
Daniel Jester - Citi
Welcome to Ciner Resources Second Quarter 2016 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, Maria. Good morning this is Scott Humphrey Director of Finance and Treasurer for Ciner Resources. Thank you for joining us to discuss our second quarter 2016 earnings results. Kirk Milling, our CEO will discuss our second quarter results. Kevin Kremke, our CFO will provide additional details related to our financials. Kirk will follow that with our outlook for the remainder of 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.
Thank you, Scott and good morning everyone. Welcome to Ciner Resources second quarter 2016 earnings call. Before I get going, I would like to start off by commending all of our outstanding employee at Ciner Wyoming who are committed each and every day to creating a safe working environment for themselves and all their teammates. Not only that we have zero recordable injuries in the quarter but our team was also awarded several prestigious safety awards.
The State Mine Inspector of Wyoming Safest Mine Award, the Wyoming Mining Association Safety Sam Award and the Wyoming Workforce Service Award presented to us from Governor Matt Mead. Generally, the first underground mine to win this award so kudos to all our team in Wyoming and all they do to create such a great culture.
As you saw in our earnings release last night the production issues we encountered during the first quarter seemed to be behind us. The corrective actions we undertook to improve our ore quality, the output of our deca operation and modifications we made through our processing equipment all combined to drive a 2.8% improvement in our average ore grade, our ore to ash ratio down to an all time low of one 1.46 to 1 and our production volumes up over 2% compared to last year.
On a year-to-date basis, we are only slightly ahead of last year's production volumes but we believe we can to can sustain the Q2 improvements over the second half of the year that will ultimately drive our production volumes 2% to 4% higher versus 2015.
On the pricing front, average international prices were virtually flat with Q1but that was driven from higher prices in the Asian region offset with some negative mix shift in Latin America due to stronger demand in Brazil. We think going forward, volumes in Brazil may soft and once we get past the Olympics period, so some of this mix variant to may unwind over the second half.
I'm proud to say our team has made solid progress in managing our cost of goods sold which were down 3.6% compared to the same period last year. But more importantly on the things we can control such as mainly expenses, employee and operating cost, those are down 11% compared to the same period last year. This has given us a big boost in helping to offset the decline in pricing which is the primary driver contributing to our lower EBITDA in the quarter.
So in spite of the tougher market conditions, we've been able to demonstrate a 7.4% increase in our distributable cash flow during the quarter as well our EBITDA was more than offset by lower maintenance CapEx compared to last year.
As we look forward, we are seeing lower spot prices throughout most of the Asian region as the demand disruption caused by the shutdown of China's largest sawdust manufacturer has been balanced by increased production rates and some restarts of previously mothballed facilities. Having said that demand for ammonium chloride appears to be soft and we are continuing to see prices fall. We think this is at least part of the motivation behind recent efforts of Chinese producers attempting to turn the tide and start to raise the prices again. It's too early to tell how this will play out over the balance of the year but at least in the near term we expect slightly softer Asian prices in Q3 compared to what we have experienced last quarter.
So in summary, we're excited about the operating improvements we made in the second quarter and we will look to sustain that momentum to strengthen the business even further over the balance of the year.
Now I am 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 from the call. Today I will update you on our second quarter performance versus outlook, a few of the key financial highlights from the quarter including our capital spending program and some key metrics around our strong financial positioning and disciplined approach to managing our business.
Let me start with a recap of our actual results versus our 2016 outlook provided last quarter. Overall, we're still on track to achieve our full year outlook. Total volume sold increased 2.5% in the quarter and 1.8% year-to-date, compared to our outlook of 2% to 4% growth. We were able to overcome our slow start in the first quarter with strong sales volume in Q2.
Our domestic volume increase by 0.7% in the quarter and our year-to-date increased stands at 3.1%. Under the low end of our 4% to 6% full year range but we expect balance of the year production performance to bring us right in line with outlook.
International prices decreased 8.1% in the quarter and 7.3% for the year roughly in line with our full year expectations with the variance being driven by significant drop in our volume sold into Europe where we recognized freight all the way to the customer which was offset by those times going through ANSEC where we only recognize revenue for fright to the US port.
Maintenance capital for the quarter and year-to-date was $1.8 million and $2.8 million respectively, which is below the run rate to head our range of $11 million to $13 million for a full year. Capital spend is not always pro-rata per quarter and looking forward we are on track for a full year expectation.
Expansion capital was $3.2 million in the quarter and 7.6 million year-to-date right in line with the run rate to hit our range of $15 million to $18 million for full year.
Before we jump into revenues I want to remind everyone on how we treat freight in our sales figures. Freight is typically included in our sales prices and we have a wide variation in freight cost by customer and region, so different mixes of freight cost and our customer base can obscure the reported top line revenue figure. Further we have seen a recent trend with some of our larger customers arranging their own freight instead of using our services which removes that component from both the revenue and freight expense lines. It has no impact to our bottom line but makes the revenues and cost both look lower. Our revenues for the quarter were $116.7 million down 4.5% compared to the second quarter of 2015. Year-to-date revenues of 231.3 million were 4.7% below the first six months of 2015. The unfavorable variances were largely driven by the anticipated decrease in prices I mentioned earlier.
Domestic sales of $48 million were down from 49.8 million in 2015, a 3.6% decrease in the quarter. On the year-to-date basis, domestic sales were down 2.5% compared to 2015. This is driven by two of our larger customers arranging their own freight which hits the gross price and sales lines but again has no impact to EBITDA.
International sales decreased by 5.1% to $68.7 million due in part to the expected lower international pricing I mentioned but also from selling lower cost of freight tons. This price decrease is driven by shipping volume from Europe to ANSEC where we have an $80 to $90 per ton freight cost differential. We sold approximately 36,000 tons less to non-ANSEC markets in Q2 of 2016 than we did in 2015. This change had a major impact on reported international pricing in the second quarter, further due to the favorable margins between ANSEC and Europe, the net impact of decreasing gross price and offset in freight expense but the mix shift is net favorable to EBITDA.
Cost the product sold in the quarter including freight decreased from $91.4 million in the first quarter of 2015 to $88.1 million this year, due primarily to lower freight cost from the mix shift out of Europe that I mentioned but also meaningfully from the benefit of the 23% decline in operating and maintenance cost driven by lower negotiated prices for supplies and overall lower contract maintenance. These benefits were partially offset by almost 29% increase in our royalty expense due to higher rates.
The Federal royalty rate reverted from 4% back to 6% beginning in October 2015 and our other significant lessor also raise the royalty rate from 7% to 8% which is in dispute and more details can be found in our most recent 10-K..
Year-to-date cost of products saw decrease from $179.4 million in 2015 to $174.5 million this year with the same drivers of the second quarter that I mentioned. Freight has declined 8.8% year-to-date while operating and maintenance costs were down 21.3%. These cost improvements have been partially offset by 21% higher royalty rates that we discussed.
SG&A expenses of $6 million were approximately 1.3 million higher than the prior year quarter driven primarily by a low comp in Q2 of 2015 as a significant amount of employee comp was allocated to OCI enterprises related activities. In addition, we do have slightly higher salaries and benefit cost as expected.
Cash provided by operations with $66.1 million through the second quarter of 2016 up 7.5% compared to the 51.5 million provided in the first half of 2015 driven predominantly by continued efforts to reduce working capital.
Turning now to briefly review adjusted EBITDA for the quarter, we delivered $29.1 million in adjusted EBITDA in Q2 of ’16 versus $31.4 million in the same quarter last year. As we expected, lower international pricing was the primary driver behind the drop in both adjusted EBITDA and net income.
Ciner Resources had earnings per unit of $0.52 in the second quarter of ’16 and $1.03 year-to-date compared to $0.59 in the second quarter of ’15 and a $1.23 through the six months of 2015. As net income decreased as year over year as have discussed.
I also want to touch on a capital spending program and distributable cash flow. We spent $5 million on CapEx in the second quarter of 2016 compared to 10.7 million in the second quarter of ’15. As I mentioned earlier, the bulk of this spend went to expansion projects in Q2 as we continue to be bottleneck our facility to add to our production capacity.
In addition to adjusted EBITDA, the other key non-GAAP measure using evaluating of performance as an MLP is distributable cash flow. Our DCF was $13 million in the quarter, the 7.4% increase compared to prior year quarter. Lower maintenance CapEx spending helped to offset lower EBITDA in the second quarter. On the year-to-date basis, DCF of 25.5 million in 2016 is basically flat to DCF of 25.6 million last year despite the lower international price environment that we are experiencing this year.
Our coverage ratio of 1.14 for the quarter resulted in a robust trailing four quarter coverage ratio of 1.24 which is exactly in-line with our stated objective of staying between 1.20 and 1.25. We continue to maintain a very conservative balance sheet with the current leverage ratio of 0.69 times net debt to EBITDA. We utilize our operating cash flow in the second quarter to pay down an additional $7.5 million on our revolving line of credit line. So we currently have approximately $104 million in remaining debt capacity and almost $17 million of cash on our balance sheet. This positions us well as we continue to seek out opportunities to use our liquidity and strong balance sheet for acquisitions which would be accretive to our unitholders.
I will now turn the call back over to Kirk for more specifics on 2016 outlook.
Thanks, Kevin. As we look ahead to the rest of 2016 we will take our typical maintenance outage in the third quarter to complete some planning. Our target remains to grow sales volume in the range of 2% to 4% in 2016 as we strive to sustain and improve upon our production rates from the second quarter. As our results demonstrate, we have recaptured some domestic market share and expect our domestic volume to grow closer to the high end of our 4% to 6% range in 2016.
Moving to the international market, we are still projecting pricing overall to be down 3% to 6% but are closely monitoring the supply situation in China and are optimistic we could see prices rebound later this year. So, all in really happy that we were able to rebound from a tough first quarter with a solid performance in Q2 and looking forward to carrying this momentum into the second half of the year.
In closing I want to thank everyone for their interest in Ciner Resources, this concludes our prepared remarks. Maria, please open the line for questions.
[Operator Instructions]. Our first question comes from the line of [indiscernible] of SunTrust Robinson Humphrey.
Good morning. A question on your distribution you have increased to the 0.5% versus the first quarter, that pretty strong relative to the MLP inverse. I'm just wondering if you could comment on your expectations for increases of the distribution in the second half.
Yes, I mean basically, Jim what we're going to do is continue to maintain our coverage ratio in that 1 to 2, 1 to 5, so we're going to have to kind of monitor the pricing environment see how Asian prices play out here over the balance of the year and assuming we also hit our production targets. So we're just going to have to continue to monitor it. We obviously would love to continue growing it but we'll have to wait and kind of see how the market plays out over the second half.
Great and on the 2017 contract prices, a couple of your peers have nominated $10 per ton price increases. What is your outlook for 2017 contracts and you expecting to raise price by similar amount.
Yes, we have not made the decision on that yet, but we do think the market dynamics will support an increase for next year. So, I don't want to comment yet on what we're doing because we haven't made a final decision but like I said ultimately I do think the market dynamics will dictate that we will have some increase in the domestic market.
Great and your ore to ash ratio at 1.46, this is really strong and I am just wondering how sustainable that rate is and can you explain how you got there?
Yes. So as we have talked about last quarter, one of our objectives increasing the production rates, one was to improve the ore quality and the second was also to improve our deca throughput and in both cases we had a nice improvement in the deca operation and as I said earlier we had like just under a 3% increase in or grades. So both of those factors were the big contributing components driven that ore to ash ratio lower. Now, I don't want to get hung up on 1.46 but I think definitely below 1.5 should be our expectation over the balance of the year.
Thank you very much.
[Operator Instructions]. Our next question comes from Daniel Jester of Citi.
Good Morning, everyone.
Good morning Dan.
So, can we just talk a little bit more about the mix issue in the international price in the second quarter? I was just wondering if you could dive in a little bit more detail, it seems like prices in Asia did rise a bit in the quarter, so I am wondering why your realizations were where they were?
Yes, so prices in Asia in fact we are up about $5 a ton in the quarter. The big driver was we had significantly higher volume that moved in the Brazil, in Latin America. So, normally Brazil runs 25% to 30% of our mix in Lat-Am and last quarter it was over 35%. So it was a pretty significant bump up, may be that some anticipation in preparation for the Olympics coming up. I would anticipate, forecast sort of projects that that's going to fall back down into normal level for the balance of the year, so I do think it was a bit of quarter anomaly but Brazil prices in Lat-Am are essentially some of the most competitive so that was really what the big mix variance was.
Okay and then sticking to mix going forward, if Brazil may be, it’s not going to be as a big as a contributor for the second half of the year. You have also commented that you are selling less than the Europe. So if we think about mix in the second half of the year what are the key regions where you could be shifting some tons, do you think?
Yes I mean we can't really make any further shift this year for Europe because most everything is contracted. I think you will see the same trend in the second half that you have seen in the first half and then I think we will probably look to even carry that beyond where we are today and shift out of Europe as we look towards 2017. Particularly now that we are part of General [ph] Group who is a big player in Europe already, I am not sure how much sense it makes for us to be continuing to make new partners. So, that’s sort of on a go-forward basis.
Relative to the rest of the world, as I said I do think Brazil will fall back to the more normal levels, let’s say 25% to 30% of the volume mix in Lat-Am which is again very typical. I think the bigger thing we got to look at is the Asia pricing situation, we did have a pop in Q2 on Asia prices and I would anticipate we will see that fall a little bit in Q3 as we had a little bit more softening there, but what we are hearing right now is Chinese producers are talking about increasing prices, so we're going to have to kind a sit back and wait and see what kind of success that's going to look like, but, ammonium chloride prices are weak. We are hearing reports also of some people mob following some additional capacity because margins are low right now.
So I do think the environment -- I am a bit optimistic, at least later in the year, we might see some improvement but I do think Q3 is kind of baked at this point, so we will see a little softness in the price compared to Q2.
Okay and then domestically you talked about gaining some market share, can you just may be holistically talk to us about how you kind of raising prices in the US verses or may be balancing against your desire to grow your share domestically, how do weigh these two items?
Well for the last couple of years, we've really been focused, kind of trying methodically, what I would characterize is recapture some share that we had lost in recent years. So we had success of that, I don't foresee that we're going to continue on that same pace that we been in, but I do think we will look to gain a very nominal amount next year again and kind of continue to march down that path, but prices have been relatively flat to may be a very small increase in the domestic market I think realistically we should be able to be a bit more aggressive looking at 2017 on pricing.
Okay and then one last one, this is for Kevin, can you just remind us about your natural gas hedging program and where you stand on that. Thank you.
Yes, so for the balance of year, balance of the year we are running right at kind of 80% hedge. So the hedging program goes back almost a year and a half ago and we hedged kind of five years out on the curve with decreasing head level as you go further out. So like I said balance of year about 80% and then stepping down every year thereafter.
Okay. Thank you very much guys.
Our next question comes from the line of [indiscernible] of S&P.
Gentleman, thank you very much for this update. My question is primarily for Kevin. Kevin, as Ciner Resources' is active sourcing the marketplace for a new enterprise resource planning business software platform. My question is how strategic is that project and what is the expected benefits. Please.
It’s an important project. I think the way we're thinking about strategically is that our current ERP system while has been functional and has worked well for a sort of sawdust only business, as we look at opportunities to grow Ciner Resources'. We need a more kind of nimble flexible robust platform to be able to do so.
Okay, great. Thank you very much.
Thank you ladies and gentlemen. That was our final question. We do appreciate you joining us for today’s Ciner Resources' second quarter earnings conference call. You may now disconnect and have a wonderful day.
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