Q3 2019 Earnings Call
Welcome to the Topia third quarter 2019 earnings conference call and webcast.
During the call all participants will be in listen only mode.
After the presentation, we will conduct a question and answer session.
Instructions will be provided at that time.
If at any time during the conference you need to reach an operator, Please press star followed by zero.
A reminder, today's call is being recorded.
I would now like to turn the meeting over to your host for today's call matched <unk> director of Investor Relations for cardiac. Please go ahead Matt.
Thank you Chelsea good morning, welcome to Cobiz third quarter 2019 earnings conference call joining us on todays call a written a bar, our chairman President and CEO and Andrew like Executive Vice President and CFO .
Our remarks. This morning include forward looking statements, which are subject to various factors that may cause our actual results could differ materially from those projected in the forward looking statements.
Forward looking statements speak only as of today's date, we undertake no obligation to update those statements for more information. Please refer to the risk factors discussed in our filings with the FCC and this mornings press release.
We'd also like to remind you that during today's call will provide non-GAAP financial measures, including segment contribution margin EBITDA and adjusted EBITDA.
These financial measures used by management to monitor and evaluate the ongoing performance of the company and to allocate resources reconciliations of GAAP results to non-GAAP results are included in this mornings press release, which is available on the Investor Relations section of our website.
This morning, we published Investor presentation to accompany this call, which can be found on the Investor Relations section of the website as well.
Additionally, our commentary during this call regarding periods to prior to June 1st 2018, well focus on a pro forma combined financial results for Cobia, which will reflect the combined legacy Univision and Fairmount Santrol results for the Empire entire appeared just discussed and exclude the results of the high purity course business shown as a discontinued op.
Operation for periods prior to June 1st 2018.
Reconciliations to reported numbers have been included our earnings release issued this morning, now I'll turn the call over to Rick Thanks, Matt and good morning, everyone and thank you for joining US today I would like to update you on our third quarter results provide an update on our markets and discuss our strategy.
In the third quarter energy market headwinds intensified starting in late August resulting in a disappointing quarter.
Our MP and service or customers reduced work earlier than we have seen in previous years.
We were on pace to meet our guidance at August However, the rate of decline in September was significant this led to an underperformance of our results relative to our expectations.
Despite the market challenges, we continued to make substantial progress in executing on our strategy to reposition our energy business.
Organically grow the profitability of our industrial business and to strengthen our balance sheet.
We closed on $240 million, a non core asset sales, we improved our working capital and we pulled cost out of the business.
In fact, we lowered sq, an 8% or $3 million compared to the second quarter.
And 17% or seven and a half million dollars compared to prior year period, and we also made progress reducing other costs.
Our industrial segment demonstrate the benefits of serving our diverse end markets as we posted year over year profitability growth.
The growth in industrial profitability was result of operating the business more efficiently.
As we had slightly lower volumes driven by the sale of our clear aligned business early in the quarter in the impact of the general Motors strike on the metals and foundry markets.
All in our industrial segment gross profit was up 11% year over year.
Excluding the impact of the asset sales.
Our coatings and polymer business had excellent volume growth up 15% from the prior year driven by continued market share gains and strength in end markets.
As a reminder.
Our coatings and polymers business is primarily served by our Canadian nibbling cyanide asset.
We control the only naphthalene side I'd asset of its kind in North America, which gives us an industry leading position.
Our containerized glass business in Mexico also continued its solid growth.
With volumes up 5%.
Our Canadian and Mexican market remains strong with attractive growth prospects going into 2020.
Our industrial profitability was driven by improved pricing and better cost controls.
After monetizing two noncore assets, we're now sharply focused on organic growth and optimizing cost to grow our industrial profitability.
Turning back to energy as I mentioned earlier demand in third quarter was relatively strong through July and most of August and we were on track to meet our guidance.
However, we saw volume declines throughout September across all basins.
Although we took actions and realized significant cost reductions in the second quarter.
We were unable to further reduce our fixed costs enough late in the third quarter to match the volume declines.
This naturally impacted our profitability as we did not have the volume to absorb our fixed costs. This is something that we are definitely addressing.
The short term in September and also reinforced our view that we must adapt and evolve our business model to the new realities of the energy market.
We have demonstrated in the past year that we are willing and able to drive expense out of the business. We've continued to take significant steps to streamline our organization. So we can react more quickly to meet our customers changing needs.
Already in the fourth quarter, we have taken action to consolidate more capacity into our lowest cost assets by I believe another 5 million tons, including the full idling of Arca soda, Minnesota plant.
Although these actions are always difficult they are necessary to help us navigate the current market challenges.
And position us for future success, when the markets improve.
Now I'd like to turn the call over to Andrew to cover the financials. Thanks Rick.
Second quarter revenues totaled 409 million, an 8% decline from the second quarter, driven primarily by lower proppant volumes and pricing.
Total segment gross profit was 77 million compared to 99 million in the second quarter and 118 million in the prior year period.
Total segment contribution margin totaled 84 million compared to 106 million in the second quarter and 125 million in the prior year period.
In our industrial segment third quarter 2019 revenues, excluding the impact of our asset sales declined 3% driven by lower transportation related revenue, which was partially offset by volume strength in coatings in polymers and a favorable mix and building products. We also benefited from low single digit average pricing.
Increases that were instituted at the beginning of the year.
Third quarter 2019, industrial gross profit and contribution margin were 59 million compared to 57 million in contribution margin for the third quarter of 2018.
Excluding the impact of asset sales segment gross profit grew 10% year over year, driven by both price increases and the improved operating performance of our assets.
It's important to remember that going forward cholera and the W. W will no longer be included in results, but are still included in prior periods.
In our energy segment third quarter 2019 revenues for 223 million, representing a sequential decrease of 28 million.
The decline was driven by lower northern white volumes and pricing across most product lines, which declined approximately dollar 25 per tonne led by local sand pricing declines.
Northern White sand pricing was more resilient during the quarter, but we did experience pricing pressure in September .
Our energy gross profit was 18 million contribution margin was $25 million for the third quarter were approximately $5.88 per ton.
This compares to 41 million or $8.93 per ton in the second quarter.
The decline in contribution margin was driven by lower volumes, particularly in September which resulted in substantially higher operating costs that Rick discussed earlier.
As we mentioned earlier, we have made significant additional adjustments to our capacity to consolidate production into our lowest cost facilities. However, the higher costs are expected to persist throughout October .
Once volumes recover to more normalized levels in 2020, we expect to benefit not only from the recent cost actions, we have taken but also those made in prior quarters.
Total SG in a for the quarter was 35.6 million down 8% compared to 38.6 million in the second quarter.
The decrease was driven primarily by the realization of cost reduction actions that we announced on our last call.
As we completed the merger in the second quarter of 2018, we have reduced our SGN a levels by 31% or $64 million annually.
Adjusted EBITDA for the third quarter totaled 43.2 million versus 65.3 million in the second quarter due primarily to the performance of the energy segment.
Our third quarter tax expense was 22 million driven by the book gain on sales of our non core assets.
Cash taxes on these asset sales will mostly be deferred as we will utilize any wells to offset our 2019 tax liability.
Third quarter capital expenditures were 16 million a decrease of 10 million from the second quarter.
Nearly all spending during the quarter related to maintenance capital and the expansion of our commentary this plant in Mexico, which will support our industrial customer growth.
Operating cash flow was $17 million for the quarter driven by lower working capital.
We ended September with approximately $530 million of liquidity, comprising 340 million in cash and 190 million available under our revolver.
The large increasing cash from the second quarter was driven primarily by the net proceeds from the sale of the clear line business and Ww railroad as well as improved working capital.
Before turning the call over to Rick I would like to address the question that we get asked most frequently which is how we will deploy the cash from the asset sales.
As we mentioned on the last call, we believe that lowering our debt is the single best way in the near term deliver shareholder value.
At the same time, we also believe it is important that we maintain an appropriate level of flexible liquidity to support our business given the uncertainty around the energy segment.
For this reason, we expect to replace our existing stand by $200 million revolver with a less restrictive facility once that facilities in place I expect cobia to begin opportunistically purchasing debt at market rates.
Now I'll turn the call back over to recover current market dynamics.
Thank you Andrew I'll begin with the industrial market, where overall conditions remained very solid.
The growth, we experienced for coatings and polymers throughout the year is expected to continue our container glass.
Markets remained solid, particularly in Mexico.
And beginning in the first quarter 2020, we expect to benefit from the commissioning of a customers new furnace and the completion of our contracted Cana, we just expansion.
In our foundry business, the GM strike lingered into the fourth quarter.
Which will have a negative impact on the business as well as the glass windshield market. The positive news that these disruptions were temporary and now the strike as resolve we expect Dan demand to rebound.
As we've seen over the past several quarters, our industrial segments predictability and diversity plays a critical role in offsetting some of the market driven volatility in the energy segment.
And we are further focused on growing and strengthening the segment.
Well, we've been more vocal about the recent sales of non core industrial assets. We've also been working behind the scenes to expand our profitability through more efficient operations expanding our business.
With existing customers and adding new customers and new products to this business. We believe our industrial business provides exceptionally attractive returns.
Moving to the energy segment. It is widely known that the customer budget exhaustion has led to sharp decline in demand. This is expected to continue in the fourth quarter.
Looking further into 2020 longer term visibility remains challenged.
However, most of our customers expect activity to bounce back in the first quarter as budgets refresh.
With this is the backdrop. It is our view that pricing has fallen well below the level of all in cash production costs for many proppant producers, particularly when factoring SDMA maintenance and capital spending.
This cannot continue indefinitely and has resulted in reduced economical production capacity.
We expect this trend to continue the near term in most basins, particularly in the Permian, which has the greatest supply and demand imbalance.
Over the past several weeks, we've noticed an increasing amount of reported local supply in the Permian coming off line either through plant the ratings are complete shutdowns.
As suppliers have exited the market, we have received increasing interest from customers looking to procure sand from a reliable source.
Particularly those with multi basin offerings. They know they can count on cobia to reliably deliver the products they need.
And we are establishing long term partnerships with NPS and Servicers, who we believe will be the industry leaders.
Our competitive position with these customers is further strengthened by our large and diverse industrial segment, which helps support us through troughs in the energy market.
And our strong liquidity of nearly $530 million, including $340 million in cash and more than five years remaining on our debt.
We will continue to focus on repositioning the energy business to ensure that we remain a safe low cost producer and then we can officially meet the needs of our customers.
This will include optimizing production to leverage our lowest cost plants.
Tightly managing capital spending and.
And reducing overhead and excess costs, including excess railcar in terminal cost of you've seen us do throughout 2019.
As I reported last quarter in connection with these strategic goals, we've launched a companywide process improvement program to realize efficiencies and improve margins were in the process of implementing these initiatives and expect to fully realize the benefits by the end of next year.
We believe the execution of our strategy will allow us to delever the business and manage through the current energy downturn as well as position us to benefit when market conditions improve.
I'll now turn the call back to Andrew to cover guidance. Thanks, Rick starting first with industrial for the fourth quarter, we are forecasting volumes to be between 3.3 3.5 million tons.
This guidance includes the negative impact from the sale of Calero.
Within energy and as Rick has mentioned, we've got very limited visibility in the back half of Q4, and we're planning for volumes to decline at least 15% from the third quarter.
SG named for the full year is expected to be in the range of 145 to 155 million and that includes 10 million of stock compensation.
Capex for the full year is expected to be between 85, and 95 million, which is a narrowing of the range. We have previously provided.
This implies fourth quarter capex of approximately $10 million to $20 million.
With that I'll turn it back order rate.
So before we open the lines for Q in a I want to remind you would we do expect the fourth quarter and energy to be challenging. However, we also expect continued positive contributions from our industrial business and we believe that the execution of our strategic an operating initiatives coupled with the quality of our energy and industrial assets.
And most importantly, our outstanding team here Cobia will position us to be profitable in all market conditions and strongly leverage us to market improvements.
So that concludes our prepared remarks, I would like to ask Chelsea to open the line for Q and eight.
If you like to ask your question. Please press star one on your telephone we'll pause for just a moment chicken QSR roster.
Thanks.
Your first question comes on of Kurt Hallead with RBC.
Hey, good morning, everybody.
I want to occur morning, Kurt.
I appreciate that I appreciate that update then.
Context around what's going on in both the industrial and energy markets and think of this is going to start my last question here on the energy front as you probably expect.
So in the in the context on prior calls you guys have provided some general sense of what was going on in terms of pricing.
On.
Dynamics.
So I was wondering if we get an update on on that and as you talked about the decline in volumes in the energy business.
Going into the into the fourth quarter the year.
Challenges around fixed cost absorption and so on.
Just wondering what the decremental margin could be on that energy business as you go into a go into the fourth quarter.
Sure Curt I'll start I would I think as it relates to pricing certainly you've you've seen the pricing come off in the Permian on spot business to some extent, we don't think thats sustainable in the long term as we said earlier on we were Fortunately, we have contracted business over the long term. It allows us to mitigate some of that softness, but we're not immune from it so we have.
Some of that will flow through our numbers going forward as we see a little bit founded on average our cost decline as we try to keep the volume up in the business in the short term and we're seeing some of that in the northern White Biz markets as well, we are pretty stable in northern white throughout most of the third quarter. We saw it come down a bit towards the end I think we were down overall in energy dollar plus $20.
Five and overall price.
So as we look into the fourth quarter. We don't have you asked a question about volumes in the fourth quarter. We just don't have as good of visibility.
Our guidance, we sit probably down 15% it could be higher could be lower just top see what happens after Thanksgiving Andrew I.
So I think I think thats right I would just echo that the lower volume is going to negatively impact our margins. We we do have certain fixed costs some of which that we are addressing through the idle into the facilities, but we have other costs around railcars and certain terminal costs, which will persist in the quarter and thats going away on our margins. In addition to the price declines.
I mean.
Okay. Appreciate that maybe just as a follow up Rick you mentioned the opportunity to kind of grow your industrial businesses wondering if you provide some additional insights on where you might see those opportunities.
You know whether to ask Mexico, what kind of sub markets are you looking at.
Sure. We think will you mentioned you guys have new us in Mexican Mic Mexico of course, we mentioned the 350000 tons that we expect to get next year related to the candidates expansion is the at a furnace new furnace down there. So we see some growth in net container glass business. There. We've also feel like we've got some new offerings in our coatings and polymers.
Area, there as we expand that marketing reach into markets that we havent had before or Netflix sign at assets out of Canada and in the building products were looking at some new products and some ability to expand our touch point with number of customers. There. So we think we've got some good opportunities to continue to focus on growing that business and same time, we think we can reduce our costs to the.
Delivery as well.
Okay. Thank you.
Your next question comes from George O'leary, with TPH and company.
Morning, guys.
George.
On the industrial side of the equation. It sounds like there were some you had the sales some assets that so many us in cradic issues that they may not repeat that kind of dented demand on a sequential basis or year over year basis.
Do you think about the at the end markets fundamentally can you talk about.
Whether you're seeing underlying demand kind of stagnation or retrenchment or the underlying demand trends.
Actually looked good and maybe break that down a little bit by what looks best and maybe where where there is the most.
Officers Sluggishness sure sure I think I think.
We feel good about what we see on containerized glass out of Mexico in the U.S., we see that down a little bit bits customers choose other alternatives potentially so we've seen that kind of slip off but we're still up on the containerized glass.
Coatings and polymers, we expect to remain strong.
And it's been and had been a good drivers we issued as we noted we were up 15% in the quarter.
And on metals and foundries, we certainly had the GM strike, but we're seeing a bit of softness in metals and foundry was you can imagine with economic concerns. So thats. The one market is probably as we will be impacted more on economic concerns.
So.
Thats kind of around the horn on most of the industrial markets you want to Andrew.
Hey on balance, we're we're pretty constructive about the outlook as Rick said, there's there's some things we expect to do quite well and some other that lease off but we're not expecting.
Significant declines.
At all based on how we see.
Conversations with customers.
That's helpful. I appreciate that and then.
Energy business in particular.
Q4, 18 last year I think.
Gross profit or contribution margin.
Collapsed call it 40% to 50% quarter over quarter in the fourth quarter just.
Given what you guys have done on the cost side, but taking into consideration things like fixed cost absorption in the volume compression quarter over quarter.
Is thinking about margins compressing to that degree in the fourth quarter, a reasonable bogey to use or are we being overly punitive again, given the cost measures that you guys have taken.
Yes, George I think that where we see the fourth quarter this year being more challenging than.
What we saw last year from of certainly from a pricing perspective.
I think that I think that we'll have volumes will be lower than what they were in the fourth quarter of last year as well.
And so that combination together with.
Some of this fixed costs that we can't drive out of the business in a quarter.
Particularly around railcars.
Certain terminal costs, that's going to that's going to negatively impact on the performance relative to what we saw last fourth quarter.
And I think I would add it.
The good news is that we have reduced fixed costs, and we're running where we will be sourcing.
The volume out of our lower costs plans going forward, so that will help and as Andrew mentioned in the railcars in the terminals we are working.
Feverously to reduce those cost and at some point in time will those leases will expire and will have the benefit of.
Fewer railcars in our system.
Not having that overhang on tougher operations.
It is the other thing I'd add is is we did not see a significant of a price decline in the third quarter.
But we have taken actions in price and that that's going to be the primary driver.
Around our margin degradation in Q4.
All right. That's helpful and is there any reason to think just given the capacity that's come offline that.
Pricing doesn't go to where we were in the fourth quarter last year. So nice rise in the first half of this year from a pricing standpoint, but.
Again, it seems like.
Despite the volume that's come off pricing should migrate back towards Q4 18 levels is am I thinking about that correctly are now.
I think when you look at pricing in the levels that were seen in the market. Today. We don't think those are sustainable long term and because or below most people's quite a cash cost. So we're being very selective as to the new business that we're taking on and making sure that its cash margin positive for us. So we'll see we've seen a decline certainly we've got good contra.
Next that continue to help us mitigate some of that but as we continue to Ed volume to our facilities to make sure. We're running them. Most efficiently we are happening to bring down our average price.
And the only thing I'd add to that George is we're at a point in the cycle as it relates to pricing that.
We have no intention of reactivating any capacity.
Anytime soon until we see a very significant meaningful improvement in price.
All right guys. Thanks, very much for that goal I reckon, Andrew I'll turn it back over.
Again, if you like to ask a question press star one on your telephone.
Your next question comes on John Watson with Simmons energy.
Thank you good morning.
Good morning, John .
Hey, guys, Hey, I apologize if I missed this but could you provide some premerger parameters to help us think about gross profit per ton within iron ore for Q4.
Sure. So George I think Gil you typically we'll see a seasonal decline in the gross profit per ton for.
And industrial segment, so that typically can be.
Dollar couple of dollars generally speaking, we would expect our gross profit dollars to be relatively flat to Q4 of 18, excluding the impact of the asset sales.
So we feel that thats, a reasonable assumption going into Q4.
And just a reminder, on average I mean Q3, we are gross profit per ton was probably a margin of low 30%, 35% that also includes our lower margin Containerize glass. So it probably comes down a little bit into the due to the mid to high Twentys probably in Q4, that's right usually during the summer months, our higher margin business out right the tire.
Volumes and so you you'll tend to see our gross margin percent decline in Q4 as well as Q1.
Okay. Okay. That's helpful. Thank you.
There are leased mentions de rating capacity at several oil and gas facilities does that include any in basin or local sites.
No it doesn't.
So those are all northern white sites.
So can we actually had a very strong October in our in basin facilities and set some record volumes for us in in October .
Okay, great. Thank you.
And then lastly.
If you had that are in there and are willing to quantify could you give us the percentage of your volumes that came from Permian mines in the third quarter and then also compare your Permian profitability to your overall oil and gas profitability.
Sure John I would say that in the third quarter, the the Permian and local mid Con plant ceiling facility was probably a little less than a third of our total volumes for the quarter.
With with northern White.
Representing the vast majority of the remainder.
And in terms of the overall profitability.
I would say that our regional plans.
Probably did better than our northern white.
And that's really driven by.
A decline in northern white volumes in the back half of the quarter, which which we didnt, we'd lost and fixed cost leverage I think we we made significant improvements in our operating costs in locals in the local plants.
That was offset by pricing degradation that we saw.
Northern white pricing actually held up much better however, the volumes dropped and we lost fixed cost leverage.
Okay. Appreciate the candor, thanks, guys I'll turn it back.
Thank you.
Well, thank you Chelsea.
And everybody else on the call. Thanks adult.
Interest in Colby today, but I'd also like especially recognize the cobia team, who is going to remarkable job navigating through these challenging market conditions. So thank you for joining us today that concludes our call.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.