Ciner Resources' (CINR) CEO Kirk Milling on Q4 2016 Results - Earnings Call Transcript

| About: Ciner Resources (CINR)
This article is now exclusive for PRO subscribers.

Ciner Resources LP (NYSE:CINR) Q4 2016 Earnings Conference Call February 17, 2017 8:30 AM ET

Executives

Scott Humphrey - Director of Finance and Treasurer

Kirk Milling - CEO

Kevin Kremke - CFO

Analysts

Daniel Jester - Citi

James Sheehan - SunTrust Robinson Humphrey

Derek Hernandez - FBR Capital Markets & Company

Operator

Welcome to Ciner Resources Fourth Quarter and Full Year 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. 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 Treasurer for Ciner Resources. Thank you for joining us to discuss our fourth quarter 2016 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 2017. 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 fourth quarter 2016 earnings call. In-spite of a challenging fourth quarter, I’m pleased we were able to deliver results to write in line with our full year outlook. Ultimately, our efforts to invest in organic growth grow sales volumes up 3% for the year, which help to partially offset the impact we saw from lower global soda ash prices. We are also pleased that our total shareholder return of 40.9% put us in the top third of all MLPs in the Alerian MLP Index.

Moving on to the quarter, I want to walk through a couple of the major drivers that impacted our results. The biggest impact came from lower than expected production, which negatively impacted our EBITDA by approximately $5 million. I’d like to provide some color around why our production lagged in the quarter. First, we experienced periods of extreme weather in December with temperatures reaching negative 40 degrees at one point. This caused issues for us on the surface as we battled frozen pipes and other mechanical problems that were exacerbated from the extreme low temperatures.

This led to lower on-stream time for our production units and therefore lower sales volumes. In addition, we dealt with lower ore grade and limited ore production levels for a period of 10 days as we dealt with sense vacated citation from MSHA. As a result of the reduction in ore availability, we lost about 15,000 tons of production. We are now back operating at full ore production rates.

On the pricing front, international prices rose to their highest level of 2016, mostly driven from our efforts to integrate globally at Ciner, and as a result, we are supplying some new volume into Europe as we begin preparations for new capacity coming online in Q2 of 2017.

And turning to the global market, it is a parent higher costs European synthetic producers began taking aggressive price actions to lock-up multi-national accounts in anticipation of our lower costs capacity coming online in 2017 and 2018. This is the primary driver as to why we are expecting lower net prices in North and South America. Offsetting some of this impact we believe will be higher than expected prices in China, which are up now over $100 a ton since September. Coupled with reduced operating rates to rising input costs for synthetic production, we think the pressure will be on Chinese producers to raise prices further at least in the near-term.

Offsetting some of the earlier discussed pricing impacts, we should have some tailwind on our cost of goods sold this year. Debt to cost should come back down from 2016 levels, and we will see some benefits at ANSAC from some older higher costs fuel hedges, which rolled off at the end of 2016. Combined with some of our other cost focused we’ve had, we expect plant costs and SG&A levels to be down year-on-year.

Now, I’m 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 thanks everyone for joining us on our call and your continued interest in Ciner Resources. Today, I’ll provide some additional detail on our fourth quarter and full year performance and how that relates to our outlook we provided a year ago. I will discuss the significant financial drivers 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. Despite the negative impacts to production that Kirk discussed, total volume sold increased 3% for the year compared to our outlook of 2% to 4%. Our domestic volume increased by 4% in the quarter and 4.3% for the full year, right in line with our 4% to 6% outlook. International prices decreased around 2% in the quarter and 5.6% for the year, also in line with our full year expectation of 3% to 6%.

Maintenance capital for the quarter and year-to-date was $4.7 million and $10.7 million respectively, which is just slightly below our range of $11 million to $13 million for full year. Expansion capital was $4.8 million in the quarter and $15.5 million for the year, again right in line with a range of $15 million to $18 million for the full year.

Before we jump 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 of freight costs by customer and region. So, different mixes of freight costs in our customer base in any give quarter can obscure the reported top-line revenue figure, and make comparisons quarter-over-quarter less meaningful. Our revenues for the quarter were $123.1 million, down 2.6% compared to the fourth quarter of 2015.

Full year revenues of $475.2 million were 2.3% below [technical difficulty] full year 2015. The unfavorable variances were largely driven by the anticipated decrease in international prices. Domestic sales of $48.3 million were down 0.4% from 2015. On a full year basis, domestic sales were down 0.7% compared to 2015. This was driven by two of our larger customers are ranging their own freight, which hits the gross price and sales line, but again has no impact to EBITDA.

International sales decreased by 4% to just around $75 million due to an approximate 2% decrease in both international volumes and prices. Cost of products sold in the quarter, including freight, increased by 5.6% to just under $90 million, primarily due to an increase in volumes sold to an affiliated company in Europe, where we recognized full inland and ocean freight costs in our results compared to ANSAC volumes, which only includes rail freight to the U.S. port. We also saw an increase in cost associated with deca due to higher usage of deca in the quarter as we attempted to mitigate our production issues in the mine.

For full year 2016, cost of products sold increased 1% versus 2015 to $33.6 million due primarily to 27% increase in materials cost as we harvested 2016’s deca from our pond, which is located farthest away from the plant. The other major driver was the 13% increase in our royalty expense due to higher rates. Recall that the federal royalty rate reverted from 4% back to 6% beginning in October of 2015, and our other significant lessor also raised their royalty rates from 7% to 8%, which is in dispute and more details can be found in our 10-K. These increases were partially offset by efficiency improvements, which drove contract maintenance and maintenance supplies costs down 15.3% for the full year.

SG&A expenses of $5.1 million were $800,000 lower than the prior year quarter. On a full year basis, SG&A expenses of $23.3 million were 16.5% higher than 2015. Recall that in 2015, a significant amount of employee time was allocated to then parent OCI Enterprises related activities, providing for a less relevant comp.

Cash provided by options was $128.3 million in 2016, down almost 15% compared to the $150.2 million provided in 2015, driven by lower net income generated in 2016. On a positive note, we decreased working capital another $14.2 million in 2016, after an almost $18 million reduction in 2015. So, our working capital initiatives continue to bolster our free cash flow results.

Next, let’s turn to discuss how all of this hits the bottom-line on two of the key metrics we manage as an MLP, adjusted EBITDA and distributable cash flow. In the fourth quarter, we delivered $28.6 million in adjusted EBITDA versus $35.9 million in the same quarter last year. The production issues we experienced during the quarter were the primary driver behind the drop in both adjusted EBITDA and net income.

Our DCF was $10.9 million in the quarter, a decrease of $5.8 million from the prior year quarter. Higher maintenance CapEx combined with lower EBITDA drove this decrease in the fourth quarter. On a full year basis, DCF of $49.8 million in 2016 was down 10.6% compared to $55.7 million in 2015, driven by the lower international price environment we experienced last year.

I also want to touch on our capital spending program and distributable cash flow. We spent $9.5 million on CapEx in the fourth quarter of 2016, compared to $7.8 million in the fourth quarter of 2015. We expected to see an increase in capital spending in the fourth quarter of ’16 due to the timing of our projects last year, which negatively impacted DCF by $2.1 million, but again is only a timing issue.

Our coverage ratio of 0.96 for the quarter resulted in a trailing fourth quarter coverage ratio right at 1.10. The production issues in Q4 adversely impacted coverage ratio in 2016. However, this demonstrates how our strategy of keeping a relatively conservative coverage ratio allows us to maintain our distribution level when we experienced a tough quarter in a challenging pricing environment.

Cenir Resources had earnings per unit of $0.49 in the fourth quarter of 2016 and $2.08 year-to-date compared to $0.69 in the fourth quarter of 2015 and $2.58 for full year 2015 as net income decreased as we discussed. We continue to maintain a very conservative balance sheet with the current leverage ratio 0.67-times net debt to EBITDA. This positions us well as we continue to seek out opportunities to use our liquidity and strong balance sheet.

I will now turn the call back over to Kirk for more specifics on our 2017 outlook.

Kirk Milling

Thanks, Kevin. Over the course of 2017, we will begin to leverage some of the synergies associated with our parent company soda ash assets in Turkey. With Ciner’s acquisition of us in 2015, as well as our new capacity coming online in ’17 and ’18, we will become the world’s largest and lowest cost producer of natural soda ash. We are confident this puts CINR in a very strong position to capitalize on new opportunities that will be unique to this global business platform.

For the year, our outlook is for international pricing to be flat to up 3% as higher Asia prices and our new sales into Europe will offset lower prices elsewhere. We expect the tight supply situation in China to last at least through mid-year. On the domestic side, we expect prices to be flat to down 3% as we feel the impact from higher costs producers trying to maintain market share in the face of newer lower cost capacity coming online, as I mentioned earlier.

We expect to grow sales volume in the range of 1% to 3% in 2017 as we strive to sustain and improve upon our production rates as a result of our CapEx investments we made in 2016. Finally, I would like to take this opportunity to say thank you to Kevin, who is leading us in March to pursue other opportunities. Our finance organization has made tremendous progress under Kevin’s leadership over the last 2.5 years. We will miss him, and wish him continued success as he embarks on his new career with Delek.

In closing, I want to say thanks to everyone for their interest in Ciner Resources. This concludes our prepared remarks. Paula, please open the line for questions.

Question-and-Answer Session

Operator

The floor is now open for your questions [Operator Instructions]. Your first question comes from Daniel Jester of Citi.

Daniel Jester

So, I noted that several times in your prepared remarks you commented that you’re going to have a more global distribution. And that also sounds like you’re selling back into Europe again, which I think is a bit of a strategy change from previously. So, can you just talk about some of the synergies that you expected over the coming year or two from having a more global distribution footprint? And what is that mean for your participation in ANSAC?

Kirk Milling

So, let me take that last question first. So right now, we have no claims to change our position in ANSAC. So, what we are working on though is how to optimize the network that we do have in Turkey and the U.S. that best serve the other markets sort of the non-ANSAC markets around the world. And we do think there will some synergy opportunities by doing so. I’m not prepared to get into the details, because it’s still underway. But we, like I said, are optimistic that that will provide some synergies.

Daniel Jester

And then on the $5 million EBITDA hit from production in the quarter, I think if you put that in the model, it still seems like your coverage ratio for the full year 2016 will be flat to down relative to what you’ve down in past years. So, is there any change in terms of how you’re looking at the coverage ratio going into next year giving your expectation that the pricing outlook is going to be a bit more challenging that as happened in the past?

Kirk Milling

No, not really. I mean obviously the issues that hit us in fourth quarter drove the coverage ratio lower than what we came into it in the way we were thinking. But if you look at our coverage ratio over a two or three year period, we’re still above one point -- two year range, we’re just below 1.2 and in three years we’re well above 1.2. So, I think if you think about it, we’ve had a tough challenging environment, which is why we try and maintain the coverage ratio. So, you would expect it to be slightly below what our target range is in a tough period, and above it when times are good. So, I think overall, we’re positioned pretty well and aligned with what our expectations were.

Daniel Jester

One last one from me on China. In the beginning of 2015, there were some pretty substantial supply issues in China that seem to rectify it, as the year progressed -- at the beginning in 2016. So, what’s driving your view that first half China this year is going to continue to see some tightness and some pressure in that market? Any kind of color you can provide there would be helpful. Thank you.

Kirk Milling

So, I think there’s really two issues. So I think they had some supply issues late in the year due to the government cracking down on some environmental issues. And then secondly, they’ve got higher costs ammonium chloride credits, while slightly above I think in the recent report from where they were, they’re still considerably lower than the way we came into 2016. And flat last appears I think quite strong for the year, at least we’re optimistic it will be.

Operator

Your next question comes from James Sheehan of SunTrust Robinson Humphrey.

James Sheehan

Yes, following up on China pricing, I was a little surprised that you think that the tightness in China is going to last for the entire first half of the year. Why do you think that it's going to extend that far into 2017?

Kirk Milling

Well, I don’t necessary know the tightness will last all through the first half. What I am saying is I think you start working on pricing in February and March for Q2. And so, I think the environment at least today, I am optimistic the prices will still be pretty strong in the second quarter. Beyond that, obviously, a lot to play out and we’ll have to see what happens. But at least from where we sit today, pricing is quite a bit better than where it was throughout most of 2016.

James Sheehan

And could you give us an update on your M&A pipeline please?

Kirk Milling

We don’t have anything to review or discuss. Somewhere to what I’ve said in the past, we continue to work on things. But there is nothing new to report on this call.

James Sheehan

And what is your expectation for possibly reducing the royalty rate in Washington this year?

Kirk Milling

Yes. I mean, we’re working very, very hard on that. Obviously, with things in Washington, you never know. But we remain optimistic. We’ve got a lot of support in Congress. And so, I am very optimistic. But obviously we don’t know for sure. We’ll have to wait and see how it plays out.

Operator

Your next question comes from Lucas Pipes of FBR and Company.

Derek Hernandez

Good morning. This is Derek Hernandez on for Lucas Pipes. Just one to begin with, Ciner being a large exporter soda ash, obviously, through ANSAC and non-ANSAC sales, we were curious as to your thinking on the potential for a border-tax adjustment, and what that might mean for the Company?

Kirk Milling

It’s tough to say, obviously, you’re right 65% plus of our sales come on the export side. So, anything that will be conducive to promoting exports we’re very much in favor of. As we continue to expand our capacity organically, which we’re planning to continue to do over the few years; that will only mean further exports growth to us; so, anything that ultimately help support that would be a favor of.

Derek Hernandez

And then given the supply additions, you’ve highlighted today, as well as we’ve heard. Do you expect there to be very many challenges for generative place volumes in 2017 and 2018 going out at this time?

Kirk Milling

I mean, really that’s very dependent upon how much the market grows. I mean it’s a 60 million ton markets, and they’re bringing on a couple of million tons of capacity over the next two years. So, I think there is ample places or in the places, particularly given that they’re at the very bottom of the cost curve. But how that ultimately impacts and influences the market, I think; one is how quickly some of the higher costs synthetic capacity comes offline; and then two how much the demand growth happens in the global market. If there is a little bit of pick up in global demand, I mean, you’ve got potentially 1 million to 2 million tons of new demand coming online every year. So, if we’ve got a robust global economy then I think it will be absorbed much quicker.

Derek Hernandez

And then on that line of thought, going beyond 2017, do you continue to have your long-term growth plan in place, or are there any adjustments to that in your thinking today?

Kirk Milling

There are no adjustments to that. No, same plans which we previously discussed.

Operator

At this time, there are no further questions. Ladies and gentlemen, this concludes the Ciner Resources fourth quarter earnings conference call. Please disconnect your lines at this time. And have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!