Ciner Resources' (CINR) CEO Kirk Milling on Q3 2016 Results - Earnings Call Transcript

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About: Ciner Resources LP (CINR)
by: SA Transcripts

Ciner Resources LP (NYSE:CINR) Q3 2016 Earnings Conference Call November 4, 2016 8:30 AM ET

Executives

Kirk Milling - CEO

Kevin Kremke - CFO

Scott Humphrey - Director, Finance & Treasurer

Analysts

Operator

Welcome to Ciner Resources Third 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.

Scott Humphrey

Thank you, Lorrie. Good morning this is Scott Humphrey Director of Finance and Treasurer for Ciner Resources. Thank you for joining us to discuss our third quarter 2016 earnings results. Kirk Milling, our CEO will discuss our third 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.

Kirk Milling

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 employees at Ciner Wyoming who are committed each and every day to creating a safe working environment for themselves and all their teammates. On October 22 we had a very significant milestone.

Two million man hours were worked without a logged time accident. It's been 25 years since we last accomplished this feat and I can't tell you how excited and proud I am to work with a team that put safety above all else. As you probably saw in our earnings release last night, we continue to build momentum on the production momentum that started in Q2 as we set an all-time quarterly record of 690 tons produced during Q3.

Our investments to produce both efficiency and productivity combined with proactive actions we took earlier in the year led to a 5.2% increase in volume produced during the same quarter in 2015. On a year-to-date basis, higher production has led to an increase in sales volume by more than 4% compared to last year. We believe this puts us in good position to hit our full year outlook of 2% to 4% increase in sales volume for the year.

On the pricing front, international prices rose to their highest prices of 2016. As we expected Asia prices were softer in the quarter but that was more than offset from a larger percentage of our international involving moving into the Latin American region. As we look forward we are seeing higher spot prices in China as cost increases and weak ammonium chloride prices are putting pressure on margins.

Coal, coke and freight cost are all on the rise in China driving producers to raise prices. With robust demand in flat glass and the outlook for solid demand growth for next year in Asia, combined with these rising costs, we believe there is momentum building for higher prices over the near term in the region.

Now, I am 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 and thank you everyone for joining us on the call and our continued interest in Cenir Resources. Today I will provide some additional detail on our third quarter performance and how that relates to our outlook; some commentary on the significant 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 and balance sheet.

Let me start with a recap of our actual results versus our 2016 outlook provided last quarter which we expect to achieve for the full year. Total tons sold in the quarter were right in line with our outlook of 2% to 4% growth over 2015 with just over 9% in the quarter and just over 4% year-to-date. On our domestic volume outlook we expect to be right in line with 4% to 6% increase given our almost 7% increase in the quarter and over 4% improvement year-to-date. As we expected international prices decrease 6% in the quarter and 7% for the year roughly in line with the full year expectations. With the variance being driven by significant drop of our volume sold into Europe.

We sold approximately 18,000 tons less in non-ANSEC markets in Q3 of 2016 than we did in Q3 of last year. And this change had a major impact in our reported international pricing in the third quarter. Shifting volume from Europe to ANSEC where we have a significant rate cost differential reduces our international revenue per ton. Further due to the payable margins between ANSEC and Europe, the net impact of the decrease in gross price and the offset in freight expense but the mixture is net favorable to EBITDA.

Maintenance capital for the quarter and year-to-date was $3 million and $6 million respectively, which is below the run-rate to hit our range of $11 million to $13 million for full year. Even still we believe that full year should land near to that range as we intend to ramp up spending in the fourth quarter. Expansion capital was just over $3 million in the quarter and roughly $11 million year-to-date, slightly below the run-rate to hit our range of $15 million to $18 million for the full year.

Before we jumped into revenues, I wanted to give my standard quarterly disclaimer on how we treat freight costs in our sales figures. Freight is typically included in our reported sales prices and we have a wide variation in freight cost by customer and region so different mixes of freight cost in our customer base can obscure the reported top line revenue figure and make comparisons quarter-over-quarter less meaningful. Our revenues for the quarter were $121 million, up 3% compared to the third quarter of 2015.

Year-to-date revenues of $352 million were 2% below the first nine months of 2015. The unfavorable variances were largely driven by the anticipated decrease in international prices we discussed. Breaking that down, domestic sales in the quarter were up 2.5% from 2015 and down slightly by 1% on a year-to-date basis. As in prior quarters this drop was driven by two of our larger customers arranging their own freight which hits the gross price and sales line with an equal offset to freight expense but again has no impact to EBITDA.

International sales increased by 4% due to the increase in international volumes offset by the price decrease I discussed previously. Cost of products sold including freight increased by 7% to $91 million driven mainly by the increase in volume sold as well as the 36% increase in our royalty expense primarily due to the higher royalty rates. As we have discussed in the previous quarters the federal royalty rates were converted from 4% back to 6% beginning in October 2015. And our other significant lessor also raised their royalty rate from 7% to 8% which is in dispute and more details can be found in our 10-K. Year-to-date cost of products sold was essentially flat to 2015 at $265 million. Freight has declined 5% year-to-date while operating and maintenance costs are down 17%. These cost improvements have been offset by the impact of high royalty expenses.

SG&A expenses of $6.3 million were just under $2 million higher in the prior year quarter driven primarily by a low comp in Q3 of 2015 as a significant amount of employee time was allocated to then parent OCI Enterprises related activity. We continue to make significant progress on our working capital initiative with a 17% reduction in a networking capital versus year-to-date 2015. Next let's turn to discuss how all of this hits the bottom line and two of the key metrics we manage is the MLP.

Adjusted EBITDA and distributable cash flow; we delivered $30.6 million in adjusted EBITDA in Q3 of 2016 which was $3 million lower than the same quarter last year. As we expect entering the year, lower international pricing was the primary driver behind in the drop in both adjusted EBITDA and net income. Our DCF was $13.4 million in the quarter, flat compared to the prior year quarter. Lower maintenance CapEx helped to offset lower EBITDA. On a year-to-date basis DCF was $39 million in 2016 is basically flat to last year despite the lower international price environment we are experiencing this year.

Our coverage ratio of 1.18 for the quarter resulted in a robust trailing four quarter coverage ratio of 1.23 which is exactly in line with our stated objective of staying in between 1.2 and 1.25. Cenir Resources had earnings per unit of $0.56 in the third quarter of 2016 and $1.58 year-to-date compared to $0.65 in the third quarter last year and $1.88 through nine months of 2015 as net income decreased as discussed. We continue to maintain a very conservative balance sheet with the current leverage ratio 0.56 time's net debt to EBITDA.

This positions us well as we continue to seek out opportunities to use our liquidity and strong balance sheet that will be accretive to our unit holders.

I will now turn the call back over to Kirk for more specific 2016 outlook.

Kirk Milling

Thanks, Kevin. So as we look ahead to the rest of the 2016 we expect to achieve our sales volume growth target of 2% to 4% as we are poised for a strong Q4 now that our annual production outages are behind us.

Moving to the international market, we are still projecting pricing overall to be down 3% to 6% as prices should remain fairly consistent to those seen in Q3. In spite of very difficult global pricing environment, that has resulted in lower EBITDA in 2016 we have been successful in keeping our DCF essentially flat with last year through higher sales volume, diligent management of costs of goods sold along with principal reduction in maintenance CapEx.

As previously announced we held our distribution flat for the quarter. This leaves us at the lower end of our targeted distribution growth rate of 3% to 5% for the year. While our growth strategy remains intact we felt more comfortable taking a pause this quarter to see how things play out as the market begins to absorb the new incremental capacity coming on line in Turkey.

In closing, I want to thank everyone for their interest in Cenir Resources. This concludes our prepared remarks. Lorrie, please open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line Walter [ph].

Unidentified Analyst

Good morning. Have there been any talks with non-operating interest owner about the accretive acquisition of that interest?

Kevin Kremke

I mean obviously we talk to an RP all the time.

Unidentified Analyst

On the topic I suggested?

Kevin Kremke

Yes, no even if we were I am not going to say anything about it. But obviously we would be interested in their interest.

Operator

There are no further questions at this time. I will now turn the call to management for any closing remarks.

Kirk Milling

That's it Lorrie, we are good. Thank you.

Operator

Thank you for participating in today's conference call. You may now disconnect.