Earnings Transcript for SIRE - Q2 Fiscal Year 2020

Operator: Welcome to Ciner Resources Second Quarter 2020 Earnings Conference Call and Webcast. Hosting the call today from Ciner Resources is Mr. Oguz Erkan, Chief Executive Officer. He is joined by Mr. Ed Freydel, Vice President of Finance. Today's call is being recorded. It is now my pleasure to turn the floor over to Ed Freydel. You may begin.

Ed Freydel: Thank you, Stephanie. Good morning and thank you for joining us to discuss our second quarter 2020 earnings. Before we begin, I would like to remind you that the comments included in today's conference call constitute forward-looking statements within the meaning of federal securities laws. These are based on our beliefs as well as certain assumptions and information currently available to us. 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, including adjusted EBITDA, distributable cash flow and distribution coverage ratio, are non-GAAP financial measures. Reconciliations of those non-GAAP financial measures can be found in our earnings press release. I will now turn the call over to Oguz.

Oguz Erkan: Thanks, Ed, and good morning, everyone. I hope you, your family and loved ones are staying healthy during this difficult time. Welcome to Ciner Resources' second quarter 2020 earnings call. The second quarter of 2020 was challenging for our business, as we endured, major impacts from the COVID-19 pandemic and a slowing global economy. Our uncompromising approach to safety and employee well-being continues during this pandemic. While safe operations have always been a pillar of our business, adapting to operating our facility amid global health crisis was a new challenge altogether. But we continue to implement and execute the necessary procedures to keep our employees and their families safe. We have thus far avoided disruption to our workforce, with the six positive cases confirmed year-to-date, not impacting our ability to operate. This is largely due to the dedication by our team to the high standards of health and safety that make us successful. Overall, market softness and resulting downward pressure on export soda ash pricing had a significant effect on our operating performance in the second quarter. First, we reduced production by approximately 33% compared to the prior year quarter in response to production curtailment by several domestic customers and a reduction in international volumes. We took advantage of the flexibility in our assets by first reducing production from our highest cost operations. We also helped production from our DECA supply, which in turn extends its useful life beyond 2022. While producing at less than our capacity is an unusual mode of operation for us, we were able to devote our employee resources towards maintenance and improvement initiatives and reduce our reliance on outside contractors. This also helped reduce the number of third parties entering our facility, which supported our health and safety initiatives. The decision to limit production was largely driven by lower demand on the international side, which was reduced by 46% as compared to our expectations at the beginning of the year. The global soda ash market experienced a sharp decline in demand as manufacturing activity was limited and customers closely manage their soda ash inventories to navigate the impact of coronavirus. Additionally, the international market began the year with a surplus of supply due to strong production levels in 2019. The long nature of market has been further impacted by Chinese production, which was higher than 2019 by nearly 4% through the first 5 months of the year despite the lower demand, leading to additional inventory buildup and export sales. The compounding effect of high inventories and lower demand led to price deterioration in our key export markets compared to 2019. On the domestic side, demand was stripped particularly by flat glass producers as stalled auto manufacturing for automotive glass plants to idle production in April and May, and reduced construction activity led to lower architectural glass output as well. Specialty glass and oil and gas customers likewise faced weakened downstream demand, while Container Gas has been much more resilient in the U.S. The impact of our second quarter sales was significant, although we hope much of the demand loss to be temporary, as we see positive indications from many other -- many of our domestic customers. However, there are potential headwinds to recovery as the country grapples with a resurging spread of coronavirus. I will note that our domestic pricing is generally protected from short-term mortality due to the fixed price nature of our annual contracts. Overall, volumes sold were down 37% from the second quarter of last year, which translated to $76 million of net sales and $2.8 million of adjusted EBITDA in the quarter. With year-to-date adjusted EBITDA of $25.2 million and market weakness expected to persist through the end of the year, we have taken measures to improve cash flow and better ensure sufficient liquidity to meet our financial obligations. We have undertaken several cost-cutting initiatives, including using internal resources versus contracted services or labor when possible, avoidance of noncritical maintenance work and renegotiated pricing with suppliers and essential contractors. We are also actively managing inventories at the plant and throughout our supply chain to mitigate excess logistics costs. From a personnel standpoint, we have frozen the hiring of several positions that are deemed discretionary and have focused on adjusting shift schedules to reduce employee interaction while also attempting to avoid excess overtime costs. I'm very proud to say, we have not laid off or furloughed any employees during this crisis as the livelihood of our workforce is a top priority for us. We invest in our people for the long term, and it is a principle that underlies our success. All said, we expect these cost savings efforts to reduce our fixed operating costs in the range of $20 million for 2020. We have also eliminated discretionary capital expenditures for the remainder of the year, with maintenance capital projects limited to critical needs and rescheduling the large expenditures of the expansion capital projects. This includes slowing down additional capital expenditures for our 1 million annual ton Green River expansion project. And instead, focusing on our desktop analysis, and value engineering in the interim, these adjustments are expected to reduce our capital expenditures for the year by roughly 50%, providing considerable support to our cash flow and overall liquidity. Nevertheless, low adjusted EBITDA marks will put pressure on our leverage ratio and tighten the historical comparable margin we have maintained with respect to our leverage covenant. Therefore, in July, we proactively amended our credit facilities to increase our leverage covenants on a structured basis over the next 5 quarters. The additional leverage tiers provide critical flexibility to maximize our liquidity and allow us to maintain our success to capital amid an uncertain time line for demand recovery and a weakened pricing environment. I will now turn the call over to Ed, who will discuss our financial results for the quarter in more detail.

Ed Freydel: Thanks, Oguz, and thank you, everyone, for joining our call and for your continued interest in Ciner Resources. Today, I'll provide some detail around our second quarter performance, the major financial drivers from the quarter and some key metrics we use to evaluate our business. Production volume for the second quarter of 2020 was 453,000 short tons, as we were forced to cut approximately 250,000 tons from expectations to react to lower customer demand. As Oguz mentioned, the reduction in our export volumes comprised approximately 80% of that total. Domestic volumes sold in the quarter decreased by 2% year-over-year to 195,000 short tons. Total international volumes sold in the second quarter of 2020 was 231,000 short tons, a 52% decrease over the 480,000 short tons sold in Q2 2019. Timing of the COVID-19 outbreak, coupled with market oversupply, resulted in abnormally low consumption levels in the quarter, which we believe represent a demand trough for the soda ash market. Average domestic price in the second quarter of 2020 declined 6.3% from the prior year quarter versus a drop of 18.8% in international prices, evidencing the pricing dynamic difference between contracted domestic sales and international sales that have significant spot pricing exposure. Lower net pricing in the quarter, combined with a decrease of 252,000 tons sold from Q2 2019 resulted in first quarter net sales of $76.2 million, a decline of 41% year-over-year. Cost of products sold, including freight in the second quarter of 2020, fell 24% to $74.2 million compared to the same period in 2019, primarily due to lower production volumes and proactive cost management initiatives for our fixed costs. SG&A expenses decreased by 14% from Q2 2019 to $6 million in the second quarter as a result of lower employee benefit expenses, professional fees and contracted services. Cash provided by operations of $14.5 million in the second quarter of 2020, decreased 35% from Q2 2019 as a result of a $29.2 million decrease and net income from the prior year quarter. The decrease in net income was partially offset by a release of $12.9 million in working capital in the quarter, as we focused on cash management through maintaining strict guidelines on inventories and reducing our overdue accounts receivable balances. From a balance sheet perspective, we continue to maintain a conservative capital structure despite strained adjusted EBITDA marks year-to-date, ending the first quarter with gross debt to adjusted EBITDA ratio of 1.58x. In evaluating our leverage and in the context of a weakened pricing environment and uncertain time line for market recovery, we proactively approached our lenders to amend the leverage covenant in our revolving credit facilities. With an existing maximum leverage covenant of 3x gross debt to trailing 12-month EBITDA, we need to ensure that we maintain full access to our revolvers over the next 5 quarters. While we do not anticipate that our debt balances will increase materially, the amended terms are key to preserving our liquidity needs and flexible access to capital. Due to strong relationships with our banks, we were able to quickly close the amendment at favorable terms, which include unchanged margins up to 3x and ratably increased margins on higher leverage tiers. We agreed to restrict distributions if leverage surpasses 2.5x, which is notably only half a turn lower than our existing 3x covenant. If leverage surpasses 3.5x, we will pledge our personal property at security. I will also note that when leverage is below 2x, security will be released, and the facility will again be unsecured. This leads into the discussion of our distribution strategy, in the context of key non-GAAP metrics we monitor as an MLP, adjusted EBITDA and distributable cash flow. In the second quarter of 2020, we recorded $2.8 million of adjusted EBITDA, compared to $32.8 million in the second quarter of 2019. Distributable cash flow attributable to Ciner Resources was a negative $1.4 million for the second quarter of 2020, compared to $13.9 million in the second quarter of 2019. At the historical $0.34 per unit distribution, our distribution coverage ratio would have been a negative 0.21x for the second quarter of 2020. The significant decline in our distributable cash flow in addition to our commitment to maintaining a flexible balance sheet, forced us to redirect our focus to near-term liquidity and diligent cash flow management through the current downturn. With that in mind, we made the difficult decision to suspend our second quarter 2020 distribution. Management and the Board of Directors will continue to evaluate each quarter, whether it's appropriate to resume the distribution which will depend on our liquidity and leverage as well as anticipated capital expenditures. Now I'll turn the call back over to Oguz to provide more commentary on our distribution suspension, business strategy and growth objectives.

Oguz Erkan: Thanks, Ed. As discussed earlier, the COVID-19 pandemic and resulting economic contractions have significantly impacted the global soda ash market and entire value chain. While there is little doubt the strong fundamentals for the long-term remain, and our business is positioned as an industry leader for decades to come, the impact on our near-term outlook has forced us to realign our priorities. Our immediate focus is to improve our cash position and maintain our liquidity, which has required us to amend our credit facility and make some tough decisions, such as slowing down certain capital plans and suspending our distribution. Suspending the distribution was not a decision that the Board of Directors and management took lightly. Given current market conditions and macroeconomic uncertainty, we are keenly focused on maintaining our access to liquidity while continuing to look forward to our long-term growth strategy. Meeting the obligations of day-to-day operations is our foremost concern. And while the distribution is the last lever we want to pull, it was necessary to suspend the distribution as well as amend our credit facility to help ensure we maintain sufficient liquidity through the remainder of the year to meet our operating and capital needs. The suspension will allow us to maintain a conservative capital structure as we navigate a down market an inevitably lower trailing 12-month EBITDA figures, we direct in free cash flow to debt repayment will be critical to maintaining our leverage ratio at a prudent level. We will continue to reevaluate our capital position and trajectory of the market to develop a pragmatic strategy for the resumption of distributions and continuation of our long-term growth plans. On that front, we have also slowed down the large capital expenditures of our Green River expansion project, which is expected to reduce our capital spend by approximately $40 million this year. We believe that by currently halting our DECA harvest activities in response to lower demand, we will be able to better preserve our full production capability and have more flexibility in the timing of when the new project will be online. We continue to be confident in long-term demand fundamentals of soda ash market to support the additional volume. While the current downturn has significantly affected pricing and current consumption, the long-term expectations of demand growth remain the same. The fundamentals for our business as low-cost natural soda ash producer remains strong and the favorable per ton economics of our expansion project will further strengthen our low-cost production position. As we continue to refine our growth plans, I'm happy to announce our strategic decision to exit from ANSAC, which will now be effective December 31, 2020, 1 year earlier than previously disclosed. The exit will allow us to have more direct control over our export sales and work collaboratively with our parent company, WE Soda, a subsidiary of Ciner Group, to more efficiently reach our global customers. WE Soda is the world's largest natural soda ash producer and has well-established global distribution channels and a robust sales and marketing organization, which we can leverage to target key markets and optimize our supply chain from plant to customers. Moreover, we will gain a better level of transparency into our export sales, which will help us not only navigate to more volatile COVID-related demand environment but also allow us to control our sales and marketing strategy for our current and incremental volume we will place once our Green River expansion project comes online. In closing, as we navigate a stress soda ash market in an unfamiliar economic landscape, we remain confident in the long-term fundamentals of our industry and are excited to embark on transformational changes to our business, such as independently managing our export activities beginning next year. Last but not least, I want to recognize our team for their continued commitment to safety, including the new protocols we have implemented in response to COVID-19 to ensuring employee health and safe operations. It is thanks to our people that we have avoided significant disruption to our operations and maintain a bright future for our business. Thank you for continued interest in Ciner Resources. This concludes our prepared remarks.

End of Q&A: This concludes today's conference call. You may now disconnect.