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Ciner Resources LP (NYSE:CINR)
Q3 2020 Earnings Call
Nov 3, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to Ciner Resources Third 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 -- Vice President, Supply Chain and Finance

Thank you, Laurie. Good morning, and thank you for joining us to discuss our third 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 -- President and Chief Executive Officer

Thanks, Ed, and good morning, everyone. Welcome to Ciner Resources' third quarter 2020 earnings call. To begin, I'm happy to report that we continue to successfully operate our business through the ongoing COVID crisis. Our safety protocols have worked effectively since implementing them in March, avoiding any emergency or contingency actions. We have reduced exposure to outside contractors, we structured shift schedules, increased sanitation, and implemented individual requirements such as masks and temperature checks. As always, safety is our first priority, and I applaud our entire workforce for its dedication to the additional procedures needed to better ensure our 24/7 operation isn't disrupted.

Our production levels begin to normalize in the third quarter, running near full capacity, although we did experience a major storm in Green River, which caused areawide power outages and shut down our plant for almost two days. Due to the stoppage of our production process, it took several additional days to resume full utilization. The unplanned downtime reduced our production volume, which totaled 460,000 tons for the quarter, but thanks to inventories on hand and strategic use of our rail car fleet, we were able to meet all of our customer orders in the quarter.

Turning to sales. The third quarter mark an encouraging rebound, as improving market conditions led to strong sequential revenue growth for the second quarter. We have seen a considerable recovery in domestic customer demand from quarter two levels and idled or curtailed production has largely come back online. However, pricing levels particularly international markets, remained depressed compared to historical levels as customers continue to work through elevated inventories and the global economy continues to endure the impact of COVID-19 pandemic.

Our domestic business showed some resiliency in the third quarter due to a strong rebound in the downstream market and contracted pricing structures. Automotive manufacturing, which saw production come to a near standstill in the second quarter has recovered to 2019 levels, providing key demand for our auto glass customers. Likewise, construction spending is on the rise and approaching highs seen in the first quarter with strong residential housing starts underpinning demand for architectural glass. Container glass demand has remained steady in the US as personal consumption of food and beverages has remained high throughout the year.

Internationally, subdued demand in key export markets continues to result in weakened sales. Despite quarter-over-quarter improvements, volumes to Asia remained below historical levels due to lower demand, high customer inventories, and competition from exports out of China. Chinese exports were up 8% over 2019 through the first eight months of the year and total production was up 1.5%. However, in September, industry cutbacks and plant shutdowns due to flooding have since tightened Chinese supply, reducing its export potential as it seeks to fill domestic orders at favorable pricing and lowering producer inventories to normalized levels. Latin America imports were also down year-over-year, with glass producers operating in the range of 80% to 90% of pre-COVID level. Lithium carbonate production in Chile and Argentina has been largely stable. Old or new projects have generally been delayed out of 2020 and 2021.

All said, we sold 540,000 tons in the quarter, representing a 26% increase over the second quarter, but well below the record 709,000 tons sold in the third quarter of 2019. Declining global inventories and recovering demand are positive signals for our export volumes and we are encouraged by the overall relative stability in the domestic market, which we proactively chose to increase our exposure entering the year.

As we navigate a lower pricing environment in an uncertain pace of recovery across global economies, we continue to focus on liquidity and prudent cash management. While we maintain a cautiously optimistic outlook for earnings improvement and greater flexibility with our cash, we must be acute to weather downside risks such as a resurgence of COVID-19 and new containment measures.

Our efforts proved successful in the third quarter, ending the period with $130 million in liquidity and comfortably within our leverage covenant by repaying $28 million of debt. Still, our leverage ratio rose to 1.7 times at quarter end, evidencing the impact of unavoidably lower trailing 12-month EBITDA figures. The distribution suspension was a key piece to bolstering liquidity this quarter, as we prioritized the day-to-day financial strength of the business. We will also continue to carefully manage our costs and capital expenditures through the remainder of the year. We expect to realize cost savings in the range of $20 million in 2020. And achievement, I am quite proud of considering we did not layoff or furlough any of our employees.

With that, I am now turning the call over to Ed, who will discuss our financial results for the quarter in more detail.

Ed Freydel -- Vice President, Supply Chain and Finance

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 third quarter performance, the major financial drivers from the quarter, and some key metrics we use to evaluate our business.

Production volume for the third quarter of 2020 was 460,000 short tons, a decrease of 35% from the record 711,000 tons produced in the third quarter of 2019, due to several days of unplanned downtime resulting from an unusual weather event. Sequentially, our production grew 1.5% over the second quarter. Domestic volumes sold in the quarter increased 25% over the second quarter to 244,000 tons, as domestic customers returned to near normal production levels following shutdowns and containments in Q2. Year-over-year domestic volumes rose 2% as a result of shifting volume from the international market in favor of more stable domestic contracts. Total international volumes sold in the third quarter of 2020 was 297,000 short tons, a 37% decrease from Q3 2019, but a 28% sequential increase over the second quarter.

Demand in our export markets has improved from the trough levels seen in Q2, but the market remains well supplied and subdued economic activity has kept soda ash consumption below pre-COVID levels. Our average domestic price in the third quarter of 2020 declined 7.7% from the prior year quarter and our average international price fell 12.1%, evidencing the pricing effect from the abrupt halts in overall demand, compared against record pricing levels experienced in 2019. However, compared to the second quarter, average international price rose 8.3%, demonstrating the impact COVID had on export markets during the peak of the pandemic last quarter.

Altogether, our volumes sold decreased 169,000 tons from Q3 2019, resulting in third quarter net sales of $98.2 million, a decline of 28.4% year-over-year. Sequentially, net sales rose 29% from the second quarter.

Caustic products sold, including freight, in the third quarter of 2020 fell 16% to $78.8 million, compared to the same period in 2019, primarily due to lower sales volumes and in part to fix cost savings. SG&A expenses decreased by 8% from Q3 2019 to $4.7 million in the quarter as a result of lower employee benefit and travel expenses. Sequentially, SG&A expenses were down 22% from the second quarter.

Cash provided by operations of $21.2 million in the third quarter of 2020, decreased 48% from Q3 of 2019 as a result of a $24.5 million decrease in net income from the prior year quarter. The decrease in net income was partially offset by a release of $7.7 million in working capital in the quarter, as we focused on cash management and accounts receivable collections.

Net income of $5.4 million, in the third quarter was a $10.8 million increase over the second quarter. This leads into the discussion of our distribution strategy in the context of key non-GAAP financial metrics we monitor as an MLP: adjusted EBITDA and distributable cash flow. In the third quarter of 2020, we recorded a $14.6 million of adjusted EBITDA, an increase of $11.8 million from $2.8 million in the second quarter. Distributable cash flow attributable to Ciner Resources is $3.8 million for the third quarter of 2020, compared to a negative $1.4 million in the second quarter.

As Oguz touched on, the current operating environment increases more than ever the importance of a conservative balance sheet. At the historical $0.34 per unit distribution, our distribution coverage ratio would have been 0.55 times for the third quarter of 2020, meaning we would have had to borrow on our revolver to pay the distribution.

Given our focus on liquidity and access to capital, the Board of Directors of our general partner unanimously decided to maintain the distribution suspension for the third quarter. This decision allowed us to pay down $28 million of debt in the quarter, bring our revolver balance below $100 million for the first time since 2018. Nevertheless, our leverage ratio increased quarter-over-quarter from 1.58 times to 1.7 times, as our trailing 12-month EBITDA fell as strong quarters from the prior year are replaced by lower figures this year.

Management and the Board of Directors will continue to evaluate each quarter, whether it is 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 near and long-term growth objectives.

Oguz Erkan -- President and Chief Executive Officer

Thanks, Ed. I'm pleased with our financial performance this quarter, considering the current climate in which we are operating. While the COVID-19 outbreak was a setback to our industry and global economies as a whole, our operating flexibility, financial strength and commitment to safety continued to be a bright spot during these challenging times. Minimum disruption to our operations over the past six months is a testament to our high safety standards and COVID-19 mitigation procedures.

Financially, we have long maintained a conservative capital structure, which has positioned us to better withstand the current downturn and recover quickly from what we believe to be a market bottom. Moreover, we want to avoid overburdening our balance sheet as we prepare to embark on major capital plans while also resuming quarterly distributions to our equity holders as soon as presumably possible.

Turning to our Green River Expansion Project, we were forced to revisit the timing of our construction this year, as we preserve cash amid the weakened market. We believe that long-term soda ash market continues to support our expansion initiative and we are refining our preliminary studies in the interim leading up to more detailed engineering. With some built-in room in the original schedule, we think we will have construction complete and operations commissioned within a similar timeframe as originally provided, give or take a quarter or two.

If we do experience a delay, a one to two quarters, we do not anticipate any impact to our production that is resulting from depletion of our deca supply, because we have preserved it during the downturn to provide flexibility between completion and commissioning of the Green River Expansion Project.

We are also designing the production unit to provide additional synergies to maximize utilization of our entire asset base. We will assess our project capital needs in tandem with a refinancing of our current credit facility, which matures in August 2022. As such, in the first half of next year, we anticipate moving forward with a strategy to secure the most economical funding in advance of our major construction, while still generating strong distributable cash flow at Ciner.

As we quickly approach the end of the year and our official exit from ANSAC, we are excited to take control of our export business, utilize our parent company's existing distribution network and gain better insight into key end markets and geographies. Preparing for this transition is proceeding as planned and we have begun building relationships with international customers. As part of our exit agreement, to help ensure a smooth transition for both sides, we will continue to sell specific volumes directly transact for a limited time.

As we steadily ramp up our own export volumes, we will build out our international supply chain with holistic effect and margin optimization in mind. While it is tough to project pricing past the near-term, we are confident that the global demand for soda ash will return to pre-COVID levels, as evidenced by historically stable consumption growth and rapid recoveries from downturns in the past. We are especially confident in our business position within the industry as a low-cost leader, our capital strength, and appetite and capacity for growth and innovation.

In closing, I'm proud of our team's tireless efforts to keep our operations running smoothly and the commitment as always to the safety and high standards that makes us successful during these extraordinary times.

Thank you for your continued interest in Ciner Resources. This concludes our prepared remarks.

Operator

[Operator Closing Remarks]

Questions and Answers:

Duration: 18 minutes

Call participants:

Ed Freydel -- Vice President, Supply Chain and Finance

Oguz Erkan -- President and Chief Executive Officer

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