Covia Holdings Corporation (NYSE:CVIA) Q4 2019 Earnings Conference Call March 10, 2020 9:00 AM ET
Rick Navarre – Chairman, President, Chief Executive Officer
Andrew Eich – Executive Vice President, Chief Financial Officer
Matt Schlarb – Director, Investor Relations
Conference Call Participants
George O’Leary – Tudor Pickering Holt
Ladies and gentlemen, welcome to Covia’s fourth quarter 2019 earnings conference call and webcast. During the call, all participants will be in a 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 the star followed by zero. As a reminder, today’s call is being recorded.
I would now like to turn the meeting over to your host for today’s call, Matt Schlarb, Director of Investor Relations for Covia. Please go ahead, Matt.
Thank you Chris. Good morning and welcome to Covia’s fourth quarter 2019 earnings conference call. Joining us on today’s call are Rick Navarre, our Chairman, President and CEO, and Andrew Eich, our 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 statements. Forward-looking statements speak only as of today’s date and we undertake no obligation to update those statements. For more information, please refer to the risk factors discussed in our filings with the SEC and this morning’s press release.
We would also like to remind you that during this call, we will provide non-GAAP financial measures, including segment contribution margin, EBITDA and adjusted EBITDA. These financial measures are used by management to monitor and evaluate our ongoing performance and to allocate resources. Reconciliations of GAAP results to non-GAAP results are included in this morning’s earnings release, which is available in the Investor Relations section of our website.
This morning we published an investor relations presentation to accompany this call, which can be found on the Investor Relations section of our website.
Additionally, our commentary during this call regarding periods prior to June 1, 2018 will focus on the pro forma combined financial results for Covia, which reflect the combined legacy Unimin and Fairmount Santrol results for the entire periods discussed and exclude the results of the high purity quartz business, shown as a discontinued operation, for periods prior to June 1, 2018. Reconciliations to reported numbers have been included in 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 plan to cover 2019 and highlight 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 and our guidance.
Before I begin discussing our results, I would like to address recent developments that are impacting global markets, and 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 Covia, we are working to assess how these changes will impact our customers and us, and how we can best adapt our operations. While we are developing plans to operate under a range of possible scenarios, we are also focused on controlling what we can, just as we have throughout 2019 and 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 Covia. Our industrial segment has 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 with a rebalancing of our capacity to better match our customers’ demand. This included consolidating 15 million tons of capacity, fully ramping up two West Texas plants including opening a low cost local sand resin plant in the Permian and commissioning our Seiling, Oklahoma regional facility. Additionally, we made progress in rationalizing our energy logistical assets, including terminals and rail cars. We exited more than 15 leased terminals that are no longer needed to serve customers, and in December we successfully cancelled our obligation to purchase 2,500 unneeded rail cars, representing $195 million of future purchase commitments.
The rapid shift away from Northern White sand has resulted in us having a significant surplus of rail cars. Approximately 6,000 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 3,000 rail cars and today we have a fleet of about 17,000 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 rail cars and terminals.
The entire frac sand industry is over-supplied with rail cars, and in addition to having surplus cars, virtually all of our rail car 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 delivered cost per ton for key customer destinations, which has been mutually beneficial and allowed us to utilize more rail cars in our network.
Moving to our second key strategic area, we executed on a 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 to fuel future growth. Our Canoitas facility in Mexico recently completed an expansion that will add 350,000 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 nepheline cyanide operations in Ontario, Canada. This unique mineral is seeing solid demand growth from its end markets, which includes coatings, polymers, glass and ceramics. When the project is completed in 2021, the benefits will be multi-fold. It will be a safer facility, a 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 and growth in margins.
We’re also evaluating several other new product offerings that are in our pipeline that have attractive margin profiles. Many of these projects are targeting end markets with good growth prospects, such as the building products line.
Strengthening our balance sheet is our third area of strategic focus and one where we have continued to make progress. During 2019, we reduced our net debt by over $250 million driven by asset sales and improved 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 2019.
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 have communicated in the past, improving the balance sheet and developing a sustainable capital structure are top priorities for Covia.
Before turning the call over to Andrew, I’d like to cover ESG as this has rapidly become a key focus for the broader investment community. Importantly, this is not a new topic for Covia. We’ve been very active in ESG for decades. We’ve made investments in our local communities, investments in safe operations and environmental stewardship. They are the 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 Roff, Oklahoma plant, which has not had a reportable injury in nearly 34 years – 34 years, they received the prestigious Sentinels of Safety Award from the National Mining Association this past year. This award is the highest form of safety recognition in the mining industry and is given to the nation’s safest mines.
In addition to safety, we have a longstanding history of investing in our local communities and restoring the land we work into natural habitats. We encourage you to read about Covia’s 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. For 2019, we sold total volumes of 30.5 million tons and generated revenues of $1.6 billion. These 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 non-cash 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, with the decrease attributable to lower energy demand and lower proppant pricing, which negatively impacted our fixed cost absorption, particularly our rail cars.
Moving to the fourth quarter, volume 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, a 23% decline from the third quarter driven primarily by lower volumes and proppant 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 Calera and W&W Railroad divestitures. Industrial volumes declined 4% compared to the fourth quarter of 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 2020, we have again instituted price increases across most of our product lines, which should average low single digits year-over-year.
As mentioned earlier, the fourth quarter industrial gross profit and contribution margin were $46 million, up 2% from the fourth quarter of 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 E&P budget exhaustion. Revenues in the fourth quarter were down 32% sequentially. In addition to lower volumes, our like-for-like pricing decreased $3.70 per ton, 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 stabilized during the fourth quarter, however.
Our energy loss of $13 million for the fourth quarter was primarily driven by excess rail cars in our fleet, which Rick discussed earlier. Energy contribution margin was $2 million or $0.50 per ton, driven by lower fixed cost absorption and the full quarter impact of price reductions implemented at the end of the third quarter.
Our excess asset costs were $14.2 million in the fourth quarter, up from $6.9 million in the third quarter as the number of rail cars in storage increased to approximately 6,000 cars at the end of 2019.
Our total SG&A for the quarter was $37 million, and that included $1.7 million of non-cash stock compensation. Adjusted EBITDA for the fourth quarter was essentially breakeven versus $43.2 million in the third quarter, due primarily to the performance of the energy segment as well as the typical seasonal slowdown we saw in industrial.
For the fourth quarter, we incurred a $257 million tax benefit driven primarily by the quarterly loss caused by the non-cash impairment charge. Net loss for the fourth quarter was $1.3 billion, driven by the non-cash impairment charge on our Northern White assets, rail cars, and Seiling facility, which experienced significant declines in demand. The impairment charge, while significant, will essentially reverse as 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 rail cars.
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 Canoitas 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 2019 have 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-backed 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 possible take advantage of dislocation in the market. You saw us at the end of 2018 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 to 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 E&Ps. Our industrial business was poised for growth with new volumes coming online, together with improved costs. 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 valid.
The covid-19 virus and recent actions announced by OPEC have put pressure on oil prices, may disrupt supply chains, and will reduce global GDP. It’s too early to quantify how these factors will affect our business, but they are likely to have a meaningful impact. Our industrial customers up until now have not estimated any significant impact to their businesses; however, they also acknowledge it’s too early to know. For these reasons, we are not comfortable providing a demand forecast for the full year at this time, which has been our past practice.
What we do know is that our energy segment has a healthy mix of leading E&P and servicer 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, and this will continue in 2020.
Our assets also remain well positioned to serve some of the largest blue chip industrial customers in North America. Our recent and future investment focus remains on our industrial assets and is expected to position us for long term growth. Andrew has covered our balance sheet priorities just earlier.
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 Rick. 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 the caveat that these forecasts are likely to change as we gain more clarity on our customers’ activity.
Starting first with industrial, for the first quarter we are forecasting volumes to be between 3.3 million and 3.4 million tons. This guidance includes the impact of divesting the Calera business. For energy, based on sales activity through February, we estimate volumes will grow between 10% to 15% sequentially in the first quarter. We will not be providing an outlook on the second quarter volumes at this point.
SG&A for the full year is expected to be in the range of $135 million to $145 million, which would include $10 million of stock compensation. Capex for the full year is expected to be between $60 million and $70 million. As mentioned, this figure includes $20 million to $25 million to be spent in 2020 for the nepheline cyanide modernization and expansion project in Ontario, Canada.
For the full year SG&A 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 I’d like to ask Chris to open the line for Q&A.
Your first question comes from George O’Leary of Tudor Pickering Holt. Your line is open.
I realize it’s early days yet, but I’m just curious, over the last few days since the disaster that was the Friday OPEC+ negotiations occurred, have you guys had discussions with any customers about their near term plans? Has it started to impact volumes yet, or is it too early to have seen any of that on the energy side of your business?
I’d say it’s a bit early, George, but we’ve had conversations with many customers, probably 20 customers in the space, and we’re getting a mixed bag – it’s too early to tell. Some of are waiting to see how the market turns out for the rest of the week; others have actually announced some reductions in fleets, in frac crews, so it’s a little bit of a mixed bag at this point in time. I think we’re starting to see–hopefully in the next few days, we’ll start to gain more clarity.
You guys have done a really good job of cutting costs, reducing net debt, selling some of your, quote-unquote, non-core assets. As you think about incremental cost cut levers, 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 levers to pull that could reduce costs, should this become a very negative market on the energy side of the equation and there’d be some impacts on the industrial side? What are you guys mulling over, and what levers do you have to pull on the cost cut side?
Sure George, it’s Andrew. Great question. 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 capacity as needed, depending on market demand. As Rick and I talked about in the script, the rail car exposure is a significant one for us and one that we’re laser focused on.
I think that when you look at our facilities, we do have an ability to de-rate facilities in a very efficient way. For example, many of our plants have modular plant designs, so we can economically idle capacity without seeing a meaningful uptick in operating costs at a particular facility by virtue of the design. Those are just some areas where we’ll be focused on in order to manage through this.
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 right on top of this as best we can. It’s day to day.
That’s helpful. I’ll sneak one more in, if I could. You talked a little bit about taking advantage of dislocation in the market, and mentioned the advantageous debt repurchases that you guys executed on last year. It sounds like there’s potentially more of those kind of debt oriented opportunities as we’ve progressed into 2020. Anything else that piques your interest from a dislocation in the market perspective? I just want to make I understand all the options you guys are mulling over on that front.
Yes George, we’re really evaluating all options. We’ve got close to $300 million of liquidity today. We’ve talked about an anticipated additional $75 million that we’re closing on, and we’ve got capacity to further add to that liquidity base, so that’s going to give us flexibility to repurchase debt if we see attractive pricing. It will give us an opportunity to take advantage of some of these dislocations and potentially look at consolidation opportunities.
I think we’re going to be–you know, our primary focus is to ensure we’ve got the right levels of liquidity to run our business, and 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 would like to ask a question, press star then the number one on your telephone keypad.
Your next question comes from–I’m sorry, that line has dropped away. There are no additional questions at this time. I will now return the call to our presenters.
Excuse me, we do have a question from–
Okay, thank you Chris. Oh, one more question?
Yes sir, my apologies. We have a question from Guillaume Desnoy [ph] of Demanor [ph].
Okay, so we don’t have any more questions, Chris. Thank you very much, and before signing off, I want to especially recognize and thank our employees for all their efforts and the job they do each and every day in navigating these challenging markets. We know it’s difficult and I certainly appreciate all you do for us. Thank you.
This concludes today’s conference call. Thank you for your participation. You may now disconnect.
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