Q4 2019 Earnings Call
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Let's turn the meeting over to your host for todays call matched floor director of Investor Relations for Korea. Please go ahead.
Thank you Chris Good morning, and welcome to Cobiz fourth quarter 2019 earnings conference call joining.
Joining us on today's call a written a bar, our chairman President and CEO, and Andrew I 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 to differ materially from those projected in the forward looking statement.
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 in this mornings press release.
We'd also like to remind you that during this call will provide non-GAAP financial measures, including segment contribution margin EBITDA and adjusted EBITDA.
These financial metrics are used by management to monitor and evaluate our ongoing performance into allocated resources reconciliations of GAAP results. non-GAAP results are included in this morning's earnings release, which is available in the Investor Relations section of our website.
This morning, you published Investor Relations presentation.
<unk> accompanying this call, which can be found on the Investor Relations section of our website.
Additionally, our commentary during this call regarding huge prior to June 1st 2018, well focus on a pro forma combined financial results for Colombia, which reflects the combined legacy unit Fairmount Santrol results for the entire appeared as discussed and excludes the results of the high purity course business shown as a discontinued operation for a period.
Prior to June 1st 2018.
Reconciliations to report 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.
And to cover 2019 highlights and I like the progress we've made executing our strategic objectives and also update you on our priorities for 2020, and Andrew will cover our financial performance in our guidance.
Before I begin discussing our results I would like to address recent developments that are impacting global markets.
In oil and gas markets in particular.
The sharp decline in oil and gas prices has added significant uncertainty.
Into a market where visibility was already very limited.
At Cobia, we're working to assess how these changes will impact our customers.
In us and how we can best adapt our operations.
Well, we are developing plans to operate under a range of possible scenarios. We're also focused on controlling what we can just as we have throughout 2019 in early 2020. This includes operating safely managing our costs and reliably serving our industrial and energy customers as efficiently as possible.
Now turning to the results to summarize 2019, it was a year of transition for Colombia.
Our industrial segment had a solid year that was overshadowed by challenges in our energy segment, where we experienced fundamental changes that required us to adjust how and where we operate.
While much work remains to be done I'm proud of what our team has accomplished.
I'd like to take the opportunity to highlight the progress we've made in our three key strategic areas.
First we continue to reposition our energy segment, where the rebalancing of our capacity to better match our customers demand.
This included consolidating 15 million tonnes a capacity.
Fully ramping up to West Texas plant.
Including opening in a low cost local saying resin plant in the Permian.
And commissioning our ceiling, Oklahoma regional facility.
Additionally, we made progress and rationalizing our energy logistical assets, including terminals and railcars, we exited more than 15 lease terminals that are no longer needed to serve customers and in December we successfully cancelled or obligation to purchased 2500 on needed railcars representing 109.
$95 million a future purchase commitments.
The rapid shift away from northern White sand has resulted in us have any significant surplus of railcars.
Approximately 6000 cars were in storage at the end of 2019, and this has negatively impacted our cost structure, most notably in the fourth quarter.
As a reminder, just 18 months ago, we had a fleet capable of serving 24 million tons of rail delivered product.
Throughout 2019, we returned 3000 railcars and today, we have a fleet of about 17000 cars, consisting of both lease cars and customer cars.
We have right sized our production capabilities much faster than our logistics chain due to the multi year lease commitments associated with railcars and terminals.
The entire Frac sand industry is oversupplied with railcars. In addition to having surplus cars virtually all of our railcar leases lease rates are well above market prices combined this adds approximately $40 million to $60 million to our annual cost structure. This is a problem that is not sustainable.
And one that we are working very hard to solve and we will solve.
Another logistical area, where we have made progress is with our railroad partners by working together, we've been able to lower our deliberate cost per ton for key customer destinations, which has been mutually beneficial and allowed us to utilize more railcars in our network.
Moving to our second key strategic area, we executed on number of fronts to grow our industrial business throughout 2019, we relentlessly focused on reducing costs, which helped us increase gross profit and profit margins over the prior year after excluding our divested assets.
We're also making key investments for to fuel future growth.
Our Cana, we just facility in Mexico recently completed an expansion that will add 350000 tons of annual silica production capacity to help meet the increasing demand for customers in that area. This includes a new glass furnace that is scheduled to come online within the month.
We've also resumed the project to modernize and expand our naphthalene cyanide operations in Ontario, Canada.
This unique mineral is seeing solid demand growth from at the end markets.
Which includes coatings polymers glass and ceramics.
When the project was completed in 2021, the benefits will be multifold, it'll be a safer facility at lower cost facility. It will require less maintenance capital going forward and we'll have expanded our capacity to serve attractive markets. We expect these improvements to fuel.
Future growth in the industrial business in India in growth and margins.
We're also evaluating several other new product offerings that are in our pipeline that have attractive margin profiles.
Many of these products are targeting in markets with good growth prospects such as the building products line.
Strengthen our balance sheet is our third area of strategic focus in one where we've continued to make progress.
During 2019, we reduced our net debt by over $250 million.
Driven by asset sales and improve working capital.
In the fourth quarter, we repurchased $63 million.
And retired $63 million of our term loan at 77% of par, which when coupled with expected lower interest rates should reduce our annual interest expense by $20 million compared to 29 team.
We recently announced that we received a commitment for a new revolving credit facility backed by our U.S. accounts receivable. This facility is expected to close at the end of the month and will provide $75 million in backstop liquidity.
As we've communicated in the past improving the balance sheet and developing a sustainable capital structure, our top priorities for Covia.
Before turning the call over Andrew I'd like to cover SG. As this has rapidly become a key focus for the broader investment community. Importantly, this is not a new topic for cobia, we've been very active in SG for decades.
We've made investments in our local communities investments and safe operations and environmental stewardship. They are the corner cornerstones of our operating philosophy.
Highlighting safety our facilities reported safety metrics in 2019, well below industry norms, and I'm, especially proud to announce that our rock, Oklahoma plant, which has not had reportable energy energy injury, and nearly 34 years 34 years.
They receive the prestigious signals of safety award from the National Mining Association. This past year. This award is the highest form of safety recognition in the mining industry.
Given to the nation's safest mines.
In addition to safety, we have a longstanding history of investing in our local communities in restoring the land we work into natural habitat.
We encourage you to read about Cobiz achievements in our 14th annual corporate responsibility report, which will be issued later this year.
With that I'll turn the call over to Andrew to cover our fourth quarter and 2019 results. Thank you Rick.
2019, we sold total volumes of 30.5 million tons and generated revenues of 1.6 billion.
Two figures represent a decline of 13% and 31% respectively on a pro forma basis and were driven by lower energy demand and pricing.
Full year 2019, net loss was 1.3 billion and included a 1.4 billion noncash impairment charge on certain energy assets, which we recorded in the fourth quarter.
Adjusted EBITDA for 2019 totaled 143 million down from 456 million in 2018, the decrease attributable to lower energy demand and lower profit pricing.
Which negatively impacted our fixed cost absorption, particularly our railcars.
Moving to the fourth quarter volumes totaled 6.6 million tons, a 16% decline from the third quarter led by lower proppant market demand and a typical seasonal slowdown for certain industrial end markets.
Our fourth quarter revenues totaled 313 million, 23% decline in third quarter, driven primarily by lower volumes and prop and pricing.
We generated gross profit of $34 million in the fourth quarter, which comprised 46 million of gross profit from our industrial segment and a $12 million loss within energy total segment contribution margin totaled 48 million compared to 84 million in the third quarter.
Turning to our industrial segment I will discuss our year over year comparative performance, excluding the impacts of the Collabra MWW Railroad divestitures.
Customer volumes declined 4% compared to the fourth quarter 2018.
Softness in foundry and ceramics more than offset growth in our building products group, where demand was robust and we added new customers.
Our industrial revenues decreased 4% compared to the prior year period, but were flat when excluding transportation related revenues, which we have been actively eliminating from our commercial agreements given the significant working capital investment it requires.
We benefited from low single digit average pricing increases that were instituted at the beginning of the year in 2000 at beginning of the year.
In 2020, we again instituted price increases across most of our product line, which should average low single digits year over year.
As mentioned earlier fourth quarter industrial gross profit contribution margin were 46 million up 2% from the fourth quarter 2018.
For the year industrial gross profit increased 3% over 2018 due in large part to pricing increases and a sharp focus on reducing costs.
In our energy segment volumes declined 21% sequentially to 3.3 million tons in the fourth quarter. This decrease mirrored a decline in broader completions activity during the quarter caused by MP budget exhaustion.
Revenues in the fourth quarter were down 32% sequentially. In addition to lower volumes on like for like pricing decreased $3.70 per tonne, which were based on price declines that were implemented at the end of the third quarter and contributed to the decrease over the full fourth quarter.
Pricing stabilize during the fourth quarter. However.
Our energy loss at 13 million for the fourth quarter was primarily driven by excess railcars in our fleet, which Rick discussed earlier.
Energy contribution margin was $2 million or 50 cents per tonne driven by lower fixed cost absorption and the full quarter impact of price reductions implemented at the end of third quarter.
Our excess asset costs were 14.2 million in the fourth quarter up from 6.9 million and third quarter as the number of railcars in stores increased to approximately 6000 cars at the end of 2019.
Our total SG and aim for the quarter was 37 million and that included 1.7 million noncash stock compensation.
Adjusted EBITDA for the fourth quarter was essentially breakeven.
It is 43.2 million in the third quarter due primarily to the performance of the energy segment.
Well as the typical seasonal slowdown we see United we saw an industrial.
For the fourth quarter, we incurred to a 257 million tax benefit driven primarily by the quarterly loss caused by the noncash impairment charge.
Net loss for the fourth quarter was 1.3 billion driven by the noncash impairment charge on our northern white assets railcars and ceiling facility, which experienced significant declines in demand.
Impairment charge while significant.
Essentially reverses the step up in asset value, which was recorded at the timing of the merger.
Additionally, the impairment wrote down the value of our right of use assets, which primarily relate to railcars.
Our fourth quarter capital expenditures were $12 million, a decrease of 3 million from the third quarter and at the low end of our guidance nearly all spending during the quarter related to maintenance capital and completing the expansion of our economy. This plant in Mexico to support industrial customer growth.
Full year capital spending totaled 88 million.
Our operating cash flow was 35 million for the quarter and over 100 million for the year driven in large part by working capital improvements.
Moving to our balance sheet. The actions. We took in 29 team has provided us with significant liquidity with nearly 320 million in cash at year end, which is critically important in this challenging environment importantly, our credit agreement provides significant flexibility to further enhance our liquidity.
As Rick mentioned earlier, we received a commitment for an accounts receivable back credit facility with an expected size of 75 million to be in place by the end of March beyond that we have additional capacity to raise over 200 million of incremental facilities.
This liquidity when combined with the maturity of our credit agreement in 2025 is expected to give us flexibility to navigate these markets and possibly take advantage of dislocations in the market.
At the end of 2019 react to favorable market conditions and repurchase our debt significantly below par.
We are likely to have similar options in 2020 that we will evaluate against our outlook, our liquidity needs and other investment opportunities.
With that I'll turn it back over to Rick cover the outlook for 2020, and our other priorities for the year.
Okay. Thanks, Andrew.
At the start of 2020, we expected profit demand to be slightly lower year over year, driven by reduced capital spending among the NPS.
Our industrial business was poised for growth with new volumes coming online together with improved costs and through the month of February our actual results have supported our early view. However, as we sit here today. This view is really no longer valley.
The cobot 19 virus and recent actions announced by OPEC It put pressure on oil prices.
May disrupt supply chains in will reduce global GDP.
It's too early to qualify or quantify how these factors will affect our business, but they're likely to have a meaningful impact.
Our industrial customers up until now it not estimated any significant impacted their businesses. However, they also acknowledged it's too early to know.
For these reasons, we're not comfortable providing a demand forecast for the full year at this time, which has been our past practice.
Well, we do know is that our energy segment has a healthy mix of leading NP and service or customers. Our assets are among the lowest cost most diverse and we will continue to optimize this network to manage our costs. We've made significant progress repositioning our energy segment in 2019 in response to market changes this.
Revenue in 2020.
Our off our assets also remain well positioned to serve some of the largest blue chip industrial customers in North America. Our recent in future investment focus remains on our industrial assets and is expected to position us for long term growth.
And Andrew has covered our balance sheet priorities.
Just earlier so in summary, 2020 started solidly although much uncertainty remains around how demand will progress throughout the year.
Regardless, we are going to stay focused on what we can control, which is to manage our costs maintain financial flexibility execute on our strategic priorities and above all else safely deliver consistent high quality products to our customers I'll now turn the call back to Andrew to provide guidance. Thanks.
Okay.
We recognize that the macro outlook is extremely fluid, which greatly reduces our ability to forecast longer term, but we would like to provide some outlook into our businesses with caveat that these forecasts are likely to change as we gain more clarity on our customers activity.
So starting first with industrial for the first quarter, we are forecasting volumes to be between 3.3 and 3.4 million tons.
This guidance includes the impact of divesting the clarifications.
For energy based on sales activity through February we estimate volumes will grow between 10% to 15% sequentially in the first quarter.
I will not be providing an outlook on the second quarter volumes point.
As you name for the full year is expected to be in the range of $135 million to $145 million, which would include 10 million.
Stock compensation.
Capex for the full year as expected to be between 60 and $70 million. As mentioned. This includes this figure includes 20 to 25 million to be spent in 2020 for the nestling cyanide modernization expansion project in Ontario, Canada.
For the full year, SGN and Capex I would like to reiterate that these are current forecasts, but are subject to change as we adjust our operations in response to market conditions.
That concludes our prepared remarks, this morning, and now and I'll turn it over to Rick like to ask Chris actually to open the line QNX.
Thank you, but at this time I would like to remind everyone in order to ask a question.
Stars on the number one on your telephone keypad.
We'll pause for just a moment the compiled acuity roster.
Your first question comes from Georgia Leery of Tudor Pickering Holt Your line is open.
Morning, guys.
Good morning, George.
I realize it's early days, yet, but just curious.
Over the last few days.
The disaster, there was a Friday OPEC plus negotiations occurred.
Have you guys had discussions with any customers about their near term plans is it started to impact volume yet or is it too early.
To see in India that on the energy side of your business.
I'd say, it's a bit early Georgia, we've had conversations with many customers probably 20 customers in this space and you are getting mixed bag. It's too early to tell some are waiting to see how the market turns out for the rest the week others have actually announce some reductions in fleets.
In Frac crews, so it's a little bit of a mixed bag at this point in time and I think its and we're starting to see hopefully the next few days will start to gain more clarity.
You guys have done a really good job of cutting cost reducing debt.
Selling some billings and.
Good noncore assets.
As you think about incremental cost cut leverage it sounded like from the prepared remarks, a lot of that may still come on the logistics side of the equation, but are there any other buckets outside of logistics, where you have some some levers to pull that could reduce costs.
This become.
Very negative market on the on the energy side of equation and there'll be some impacts on the industrial side, what do you guys mulling over what levers do you have to pull on the cost get side.
Sure George Sandra up the Great question that I'd say the number one thing we'll be looking at as volumes evolve is how best to optimize our network of plants.
We've got we still have a number of facilities that are operating and we'll continue to consolidate capacities as as needed depending on market demand.
As Rick and I talked about in the script the railcar exposure as a significant one for us in one of that we're laser focused on.
And then I think that when you look at our facilities, we do have an ability to to de rate facilities and a very efficient way.
For example, many of our plants have modular plant design. So we can we can economically idle capacity without seeing a meaningful uptick in operating costs in a particular facility by virtue of the design. So those are just semis some areas, where we'll be focused on.
In order to to manage through this and I can tell you right now George we're in the process of scenario planning many different options as we look forward. So we're going to be we're right on top of this as best we can.
Good day to day.
It is hopelessly going more and if I could even talked a little bit about taking advantage of dislocation in the market in mentioned that the advantageous debt repurchases you guys executed on last year.
Sounds like there's potentially more of those kind of debt oriented opportunities as we progress into 2020.
Anything else that feature interest from a dislocation in the market perspective, I just want to make sure I understand kind of all options you guys are or mulling over on that front.
Yet George I mean, what we're really evaluating all options.
We've got.
Close to 300 million of.
Liquidity today, we've talked about.
Anticipate additional 75 million that we're closing on.
Capacity to further add to that liquidity base, so thats going to give us flexibility to repurchase debt. If we if we see attractive pricing.
And we'll give us an opportunity to take advantage of some of these dislocations potentially look at consolidation opportunities I think we're going to be our prior our primary focus is to ensure we've got the right levels liquidity to run our business beyond that.
That excess liquidity, we're going to be looking opportunistically at how best to deploy it.
All right. Thanks, guys I'll turn it back over.
Again, if you look to ask a question for a star is on the number one.
Pat.
Your next question comes from two board.
Im sorry that line has dropped.
There are no additional questions at this time.
During the call square footage.
Excuse me, we do have forced to take on thank you Chris Okay. Sure No. One more question Refis are my apologies, we have a question from volume does not have them anymore.
Okay. So we don't have any more questions Chris.
Thank you very much and before signing off I want to specialty recognize and thank our employees for all their efforts and the job they do each and everyday and navigating these challenging markets. We know it's difficult and certainly appreciate all you do for us. Thank you.
This concludes todays conference call. Thank you for participation you may now disconnect.
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