OCI Partners' (OCIP) CEO Ahmed El-Hoshy on Q4 2017 Results - Earnings Call Transcript

OCI Partners LP (NYSE:OCIP) Q4 2017 Results Earnings Conference Call March 5, 2018 11:00 AM ET

Executives

Hans Zayed - Director, IR

Ahmed El-Hoshy - President and CEO

Fady Kiama - CFO

Analysts

Hassan Ahmed - Alembic Global

Ivan Krsticevic - Brigade Capital

Operator

Good morning. My name is Jessie, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the OCI Partners LP 2017 Fourth Quarter Results Conference Call. All lines are in place on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

Hans Zayed, Director, Investor Relations of OCI Partners LP, you may begin your conference.

Hans Zayed

Good morning, everyone, and thank you for joining us on our fourth quarter 2017 results conference call. May I remind you that we’ll provide certain forward-looking statements on the Partnership’s outlook? In this regard, we direct you to the risk factors and other cautionary statements set forth in the Partnership’s most recent reports and other filings with the SEC. As you review the press release posted on the Investor Relations section of our website at www.ocipartnerslp.com, and as you listen to this conference call, please recognize that they contain forward-looking statements as defined by federal securities laws.

Actual results may differ materially from those projected as a result of certain risks and uncertainties, including those detailed in our press release and from time to time in the Company’s SEC filings. These forward-looking statements are made as of today and the Company assumes no obligation to update any forward-looking statements. We will also include references to certain non-GAAP financial measures such as EBITDA. The non-GAAP financial measures section of our earnings press release reconciles EBITDA to the most directly comparable GAAP financial measure.

With me today are, Ahmed El-Hoshy, OCIP’s President and CEO, who will start off by providing an update on our business; and Fady Kiama, our CFO, who will provide an overview of the financial highlights for the quarter. At the end of the call, we will host a question-and-answer session.

I would now like to turn over the call to Ahmed.

Ahmed El-Hoshy

Thank you, Hans, and thank you all for joining us today. Firstly, as you’ve seen in the press release this morning, Fady Kiama will be leaving us. I’d like to thank Fady for all his contributions to the Company and for his service prior to joining the Company. Fady has been with the company for five years, helping build out the finance organization since before the IPO in 2013, and was also a key member in the OCI N.V. finance management team for 11 years prior to joining OCI Partners. We are very appreciative of his past contributions and wish him well in the next stage of his career.

Beshoy Guirguis will assume the role of CFO from the 15th of March, and I’d like to welcome him to his new role. Beshoy brings a wealth of industry and finance experience, and thanks to his successful time at OCI N.V. in the past eight years, where he is currently CFO of OCI in the Americas, I’m confident that his familiarity with the business will ensure a smooth transition.

Let me turn to our operations now and start with highlighting how pleased I am that we’ve continued our excellent safety track record throughout 2017. We’ve had no OSHA recordable incidents or lost time incidents in 2017. And given the nature of our industrial operations a safe and healthy working environment is of the highest priority to us. I’d like to thank all of our employees for their continued support to maintaining a safe and a healthy working environment.

Operationally, our ammonia and methanol production units operated efficiently during the quarter, and both experienced downtime of approximately three days, resulting in capacity utilization of 102% for ammonia and 97% for methanol.

Our EBITDA for the quarter improved significantly compared to both the fourth quarter of 2016 and compared to the third quarter of 2017. Higher sales volumes and realized selling prices were a main driver of this. Our average realized methanol price was $319 per metric ton in the fourth quarter, an increase of 24% from the $257 per metric ton in the same quarter of 2016.

Methanol prices benefited from good demand from the MTO sector in China and global construction activity as well as a number of supply outages in different regions and higher feedstock cost. After reaching multiyear lows in the third quarter of 2017, ammonia prices increased throughout the fourth quarter, driven by firming phosphate and urea end markets and several supply curtailments in key export hubs. Our average realized ammonia price was $246 per metric ton in Q4, up 24% from $199 in the same quarter of 2016.

I’m pleased that our continued focus on cost management is also starting to filter through into our results with significant decrease in SG&A and other fixed costs compared to a year ago. Looking forward to the first quarter of 2018, we expect our business to benefit from a recent increase in methanol and ammonia prices. The monthly U.S. weighted average methanol price continues to increase in 2018 from $393 per metric ton in Q4 ‘17 to $490 per metric ton on average in Q4 ‘18. The monthly Tampa CFR ammonia contract price increased from $345 per metric ton in December to $355 in January, but has since then softened and dropped to $305 per metric ton in March. Despite this recent drop, on average the Tampa CFR only contract price has been at higher levels in the first quarter of ‘18 versus the fourth quarter of 2017.

Finally, we look forward to closing our recently announced refinancing in the coming weeks, which will allow us to markedly reduce our debt service cost and extend the maturities.

This concludes the business update, I’ll now hand it over to Fady, who will provide review of our financial performance as well as the brief overview of the refinancing? Fady?

Fady Kiama

Okay. So, during the fourth quarter of 2017, we reported consolidated revenues of $98 million, a 48% increase over the same period last year. The increase was driven by both the methanol and ammonia businesses, which benefited from higher volumes and significantly higher prices. Methanol revenues went up by 45% to $74 million. Our realized methanol selling prices were on average $62 per metric ton higher than in the fourth quarter last year. Methanol sales volumes increased by 18% to approximately 233,000 metric tons. Ammonia revenues increased by 60% to approximately $24 million for the quarter. Our realized ammonia selling prices were on average $47 per metric ton, higher than in the fourth quarter last year. Ammonia sales volumes increased by 26% to approximately 97,000 metric tons. The combination of these higher sales volumes and realized selling prices during the quarter with slightly lower natural gas cost of an average $3 per MMBtu and our continued focus on cost management resulted in a significantly higher results for the quarter.

We had EBITDA of $38 million compared to $16 million in the fourth quarter of 2016. We had net income of $13 million compared to a net loss of $17 million in the fourth quarter of 2016. EBITDA and net income margins were 39% and 13% respectively compared to an EBITDA margin of 24% and the net loss margin of 26% during the same period in 2016.

On the balance sheet side, as of December 31, 2017, our total senior secured debt outstanding was $248 million. Total debt outstanding was $448 million, including inter-company facilities. As you have seen, we previously announced on February 20h this year the pricing of a proposed $455 million term loan B facility and a proposed $40 million revolving credit facility. The term loan B facility is expected to be priced at LIBOR plus 425 basis points mature in 2025 and include a leverage based set down provision. The revolving credit facility is priced at LIBOR plus 375 basis points with the maturity in 2020.

We intend to use expected net proceeds of the term loan B facility to repay in full our existing $232 million facility and to repay in full outstanding inter-company loans from OCI N.V. of $200 million. The commitments in respect of term loan B facility and the revolving credit facility and the terms and conditions thereof including applicable interest rates remain subject to the execution of the definitive documentation. The closing of the term loan B facility and revolving credit facility is expected to occur in March 2018 and is subject to customary closing conditions.

Moving on to distributions. Based on the results of the three months ended December 31, 2017, the Board of director of the general partner of the Partnership has approved a cash distribution of $0.27 per common unit or approximately $23.5 million in the aggregate.

Our distribution of $0.27 with respect to the three months ended December 31, 2017, reflects an average realized methanol price of $319 per metric ton, and average realized ammonia price of $246 per metric ton and an average natural gas price of $3 per MMBtu.

The cash distribution would be paid on April 6, 2018, to unitholders of record at the close of business, on March 23, 2018. To assist investors, in making the linkage between these prices and potential future distributions, we provide below a sensitivity analysis assuming 95% on stream time with 99% capacity utilization.

A $0.50 per MMBtu change in annual average natural gas prices would result in an approximately $0.25 impact on annual distributions per common unit. A $10 per metric ton change in annual average methanol prices would result in an approximately $0.10 impact on annual distributions per common unit. A $10 per metric ton change in annual ammonia average prices would result in an approximately $0.04 impact on annual distributions per common unit.

In addition to the impact of commodity prices, our distributions are subject to fluctuations in capacity utilization, working capital, capital expenditures, debt service and other contractual obligations, reserves for future operating or capital needs and other factors, including overall business, regulatory and financial considerations that may affect the availability of cash to distribute. Please see forward-looking statements below.

We intend to review our run-rate quarterly distribution following the expected closing of the term loan B facility to reflect our capital structure and other factors.

Thank you again for joining. We will now open for questions.

Question-and-Answer Session

Operator

[Operator Instruction] Your first question comes from Hassan Ahmed. Please state your Company. Your line is open.

Hassan Ahmed

Good morning, gents. It’s Alembic Global. Couple of questions, one on the demand side of things, as it pertains to the near term. Obviously, you guys sort of flagged the MTO side of things and MTO sort of being relatively strong in Q4. It also seems that the conventional demand in general was quite as well, acetic acid in particular. So just a question around the sustainability of that demand strength. I mean, do you see both the MTO and acetic demand being relatively strong through the course of 2018?

Ahmed El-Hoshy

Thanks, Hassan. Yes. From a demand perspective, we have seen underlying major economies that continue to exhibit GDP growth as well as downstream demand for wood products has seen additional demand growth that we believe is sustainable for the remainder of this year. And we are seeing recovery in global markets, central banks responding with potential interest rate rises as they see that kind of demand recovery across the board.

Hassan Ahmed

And now, switching over to the supply side. I mean, obviously a lot of noise around sort of Chinese supply curtailments and the like. I mean, what’s your intelligence on that? I mean, is there a number you can put on that in terms of what you feel, what sort of capacity in China has been taken offline, so call it for pollution related reasons, how much of that may potentially come on line, how much may potentially be shuttered permanently?

Ahmed El-Hoshy

Yes. I mean, from a supply perspective, what we have seen generally in both the methanol markets as well as the nitrogen fertilizer markets on the urea side has been, one, the environmental push looking for cleaner air. And we’ve seen in North China, actually bluer skies, and the results and effect of that helping this now social issue in China. So, we anticipate seeing additional closures in the coming quarters, particularly for producers that are near large populations. Hard to put an exact number on it. We’ve also seen just rising feedstock prices, when you look over the last few -- last several quarters, driven by higher natural gas and higher coal pricing. We could see some of that come off a little bit on the natural gas side, as you have the winter natural gas price decrease into Q2. But believe that the combination of additional demand growth in downstream sectors and the continued focus on the environmental side with an elevated cost curve for methanol to help support the overall supply-demand mix.

Hassan Ahmed

Understood. And a final one if I may. If I take a look at your realized methanol price through the course of the quarter and compare that to sort of the U.S. market non-discounted price, it seems, there was as much as a 20% discount rate. So, I’m just trying to understand why the discount rate is high? I mean, was it just a function of maybe potentially higher sales volumes early in the quarter rather than later in the quarter, because obviously pricing for methanol rose as the quarter went on?

Ahmed El-Hoshy

Sure. I think the driver -- and we see this happen in an upward-moving pricing trajectory, but probably the biggest driver is the fact that our contracts often have one-month lag. And so, as prices rise, you’ll get the benefit one-month later. So, comparing it to the straight quarter, the average will likely result in a little bit of a larger discount than you’d expect.

Operator

Your next question comes from Ivan Krsticevic. Please state your company name. Your line is open.

Ivan Krsticevic

Thanks for taking my call. It’s Ivan Krsticevic, Brigade Capital. So, I got two questions. I guess, one is just to confirm. It looks like, there was about $4 million of one-off CapEx in fourth quarter. And I guess we were to adjust for that, it would have been around $0.04 to $0.05 of incremental distribution. Is that correct?

Ahmed El-Hoshy

One-off CapEx is you’re referring to the reserve for CapEx and working capital?

Ivan Krsticevic

Correct. Yes.

Ahmed El-Hoshy

So, when we do the distribution, it’s taking into account current quarter type expenditures, as well as expenditures looking forward. So, it’s something that we assess with our Board and come up with an appropriate level for distribution to adequately either reserve forward for that quarter spending or for anticipated spending that we see in the near-term.

Ivan Krsticevic

Got it. And then, I guess, if I take your -- the disclosures in your earnings release about the first quarter realized pricing for methanol and ammonia, and I take this -- the various facilities that you discussed as well, I calculate about $0.50 distribution per common unit in first quarter this year. And I just wanted to confirm if that jives with kind of what you guys are expecting at this point?

Ahmed El-Hoshy

We can obviously point you to the sensitivities and our run rate guidance from late 2015 that we’ve been proving the sensitivities for. Won’t be able to give you an exact view on what that number comes out to be for Q1 as it’s going to be reviewed after our completion of Q1, as well as the discussions we have around distribution. But, I will say that we are updating our run rate as we indicated in the press release and will be providing an update to that run rate to reflect the new capital structure that hopefully will be put in place with the closing this month, which will markedly decrease that service cost, as well as some updates to our overall fixed costs and SG&A that have come down over the last several quarters.

Ivan Krsticevic

Well, I guess, I appreciate that you may not be -- that you may be sensitive in terms of saying whether or not $0.50 is the right number as opposed to $0.49 or $0.51. But can you just directionally, just given how cheap the units are trading, confirm our understanding and math that the number for first quarter should be substantially higher than it was for the fourth quarter of ‘17?

Ahmed El-Hoshy

I can confirm that the overall assumptions and inputs are definitely more robust in Q1 versus Q4, given what we’re seeing in the markets, but not going to be able to comment on the level of accuracy of your estimate with regards to the distributions. And as I noted, there are several factors that flow into distributions including reserving for working capital and or FX needs as well as some as well as for example how the plants operate and other assumptions that flow into that.

Operator

[Operator Instructions] There are no further questions at this time.

Ahmed El-Hoshy

Okay. Well, thank you. I’d like to thank everyone for joining today’s call and the interest in our Company. And look forward to speaking to you again in the future. Bye.

Operator

This concludes today’s conference call. You may now disconnect.