This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk01: Good morning, everyone. Welcome to the Adams Resources and Energy Second Quarter 2023 Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw from the question queue, please press star then two. As a reminder, this call is being recorded. Now I will turn the call over to John Beisler, Investor Relations at Three-Part Advisors. Please go ahead.
spk07: Thank you, and good morning, everyone. Welcome to the Adams Resources and Energy Second Quarter 2023 Conference Call. Joining me on the call today are Adams Resources and Energy President and CEO, Kevin Woodcraft, and the company's EVP and CFO, Tracy Elmark. Additionally, Greg Mills, President of Gulfmark Asset Holdings, and Wade Harrison, President of Service Transport Company, will be joining us for the Q&A session at the end of the call. This call is also being webcast. It can be accessed through the audio link on the Investor Relations page at AdamsResources.com. Today's call, including the Q&A session, will be recorded. Please be advised that any time-sensitive information may no longer be accurate as of the date of any replay or transcript reading. I would also like to remind you that the statements made in today's discussion that are not historical facts, including statements or expectations or future events or future financial performance, are forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements by their nature are uncertain and outside of the company's control. Actual results may differ materially from those expressed or implied. Please refer to the earnings press release that was issued yesterday for our disclosures on forward-looking statements. These factors and other risks and uncertainties are described in detail in the company's filings with the Securities and Exchange Commission. Adams Resources and Energy assumes no obligation to publicly update or revise any forward-looking statements. Management will refer to non-GAAP measures, including adjusted EBITDA, free cash flow, return on, and adjusted net income and earnings per share. Reconciliations to the nearest GAAP measures can be found at the end of the earnings release. Finally, the earnings press release issued yesterday is posted on the investor relations section of the website, AdamsResources.com. A copy of the release has also been included in an 8K submitted to the SEC. Now, I would like to turn the call over to the company's president and CEO, Kevin Roy Krause. Kevin, please go ahead.
spk06: Thank you, John, and good morning, everyone. I will begin today's call with some color on the quarter before turning it over to Tracy for a deeper dive into the financials. I will then close the prepared remarks by discussing the outlook for Q3 and beyond. Myself, Tracy, and our division presidents will be available for your questions at the conclusion of the prepared remarks. I am pleased with the improved sequential quarter-over-quarter performance of the company. Adam saw adjusted cash flow rise from just over $5 million in Q1 to just over $7 million in Q2 of this year, an increase of 50%. Adjusted net income also improved by $800,000 over the same time period. These results were largely driven by the improved performance of our Gulfmark Energy division. These improvements were achieved despite continued market challenges. These challenges included sticky inflation, depressed chemical manufacturing, falling crude oil prices, oil production declines in our primary basins, and even a weather event that forced Gulfmark Energy's largest refining customer to declare force majeure where they had to shut down their production. I am extremely proud of the entire team for the resilience to fight through these challenges and to deliver these positive results. As previously mentioned, Gulfmark Energy's performance was a significant driver of our improved Q2 results. Although we saw lower volume in Q2, Gulfmark is successfully executing its plan to improve margins on our buy-sell contracts and reduce expenses. For the quarter, Gulfmark legacy volumes were 92,152 barrels per day. As I touched on earlier, Gulfmark's largest refinery market was forced to shut down operations in June due to a lightning strike that caused a fire at the plant, completely destroying one of their primary product storage units. The marketing team at Gulfmark showed amazing agility by finding alternate markets to place June's already purchased barrels. The ability to place these barrels on very short notice and to do so at comparable margin really shows the resilience of the team and the business overall. Gulfmark's Red River area in Oklahoma and North Texas showed volume growth as a new customer came on board mid-quarter, giving a boost to results. In this area, the volume grew from 26,005 barrels per day in Q1 to 26,139 barrels per day in Q2. The VEX pipeline and storage assets saw volumes drop quarter over quarter, largely due to the force majeure at the previously mentioned refinery, which was affected by product markets feeding the supply. Q1 barrels per day on VEX were 10,088 versus 8,560 barrels per day for Q2. On a positive note, the drop in volume was partially offset by the asset gaining new third-party customer revenue for storage and barge loading activity in the quarter. Two additional new customers were secured for this business, with one of the new customers having signed a one-year commitment to utilize the asset's storage and barge loading facilities. As mentioned on our previous earnings call, the connection with Max Midstream is complete. However, commercial in-service has been delayed due to the connecting pipeline needing additional repairs before it becomes operational. In the third full quarter under the ADAMS umbrella, the acquisition of Phoenix Oil and Firebird bulk carriers produced just over $1 million in cash flow for the quarter. Phoenix saw margin pressures as commodity prices fell in the quarter. However, the business saw results improve in June as the commodity prices began to rise. Firebird's hauling volumes remained steady at around 25,000 barrels hauled per day. We are pleased with the progress regarding the integration of these acquisitions, as we saw a significant increase in intercompany business through load sharing and customer crossover opportunities. In the quarter, the company closed on land in Dayton, Texas. It will be the future home of Phoenix Oil. We expect to break ground on the rail spur later this year. Turning to Service Transport Company, our over-the-road chemical hauling division, SDC's results were largely flat quarter over quarter, delivering approximately $2.4 million in cash flow for the company. A continued soft chemical manufacturing environment is leading to excess hauling capacity in the market, pressing shippers to bid out business in efforts to drive down rates. The positive side of this bidding activity is that it affords SEC the opportunity to add new customers to its recently expanded footprint, setting up this division for a strong rebound when the markets strengthen. I will touch on Q3 and future outlook later in the call, but I am confident the company is well positioned for strong performance when the market conditions improve. I will now turn the call over to Tracy for a deeper dive into the financials.
spk05: Thank you, Kevin, and good morning, everyone. Total revenue for the second quarter of 2023 with $624.8 million compared to $992.1 million in the prior year quarter. The decline was primarily driven by lower revenues in our crude oil marketing segment, which are directly tied to the price of oil and were partially offset by revenues related to our acquisitions of Firebird Bolt Carriers and Phoenix Oil last August. Now, let's look at the quarter by individual segments. Second quarter revenues for our marketing segment were $585.3 million compared to $962.5 million in the prior year quarter. The decrease is primarily due to a 34% decrease in the price of crude oil over the past year and a 3% decrease in daily volume. Operating income for the marketing segment was $3.4 million compared to $5.1 million in the second quarter of 2022. The decrease is due to an inventory valuation loss of $1 million in this year's second quarter versus a loss of $1.5 million in the second quarter of last year, as well as higher operating expenses, reflecting cost pressures across the business. Our transportation segment recorded $24.5 million of revenue in the second quarter compared to $29.5 million in the prior year quarter. Operating income was $1.1 million versus $2.9 million for the second quarter of 2022. The decrease is primarily due to lower fixed cost coverage brought about by reduced transportation rates and higher depreciation and maintenance expenses. Our logistics and repurposing segment, which consists of Firebird and Phoenix that was acquired in August of 2022, added $14.8 million in revenue for the second quarter of 23. The segment reported a loss of $133,000 for the quarter which includes the allocation of corporate overhead. General and administrative expenses decreased by $2.5 million from the second quarter of 2022 to $1.7 million this quarter. The decrease is related to the reversal of an accrual related to the contingent purchase price consideration from the acquisition of Firebird and Phoenix. Without this accrual, the G&A expenses were mostly in line with last year's expenses. Interest expense increased to $800,000 this year versus $100,000 in last year's second quarter, primarily due to the term loan we put in place to finance a part of the repurchase of approximately 1.9 million shares of stock from KSA last year. Net income for the quarter was $827,000 or $0.32 per diluted share compared to net income of $2.5 million or $0.56 cents per diluted share in the second quarter of 2022. For the quarter, cash used in operating activities was $27.3 million, primarily driven by the timing of payments and receipts from crude oil customers and changes in inventory due to fluctuations in crude oil pricing and barrels held. Capital expenditures for the quarter totaled $4 million, which includes the $1.8 million for the purchase of the land for the Phoenix relocation and expansion. Our available cash and cash equivalents as of June 30, 2023 totaled $9 million compared to $20.5 million on December 31, 2022. Total liquidity as of June 30 was $48.6 million, which includes $39.6 million available under our $60 million credit agreement. Now I'll turn the call back over to Kevin for some final remarks. Kevin?
spk06: Thank you, Tracy. I wanted to touch on Q3 and the outlook for the remainder of 2023. It appears we will be facing challenges of continued higher costs, lower oil production, and a soft chemical manufacturing environment in Q3, and most likely for the balance of the year. This will continue to make growing our oil purchasing volumes and chemical shipment volumes difficult, as well as put continued pressures on margins. On a positive note, it appears things are not getting worse. We are seeing incremental improvements as the year progresses, but we may be range-bound until market conditions improve. Our large shippers are projecting flat production for the remainder of the year before growth returns in 2024. During this time, we will continue to execute our plans to reduce costs and grow volumes and margins where possible. So far, this plan has produced positive results as we have seen sequential quarter-over-quarter improvement for the last two quarters. There are many signals that point to higher commodity prices in the back half of the year, and we have seen a jump in these prices early in the third quarter. This should significantly help margins at our Phoenix Oil Division and hopefully spur additional drilling activity in the Gulfmark and Firebird basins. Also, the refiner affected by the lightning strike is expected to restart limited production late in the third quarter. Since this company was founded in 1947, Adams has always overcome the challenges of a very volatile industry. Today, we are better positioned than ever to face these challenges and truly flourish when the market conditions improve. With that, I would like to open the line for questions. Operator?
spk01: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then two. The first question is from Liam Burke of B Reilly. Please go ahead.
spk03: Thank you. Good morning, Kevin. Good morning, Tracy. Good morning, Liam. On operating expenses, driver costs are a key component in there. Are you seeing any relief there or do you anticipate any relief?
spk06: You know, only from the perspective that most of our drivers are paid by the load. So doing fewer loads, I think the natural expense of the drivers will come down. But reducing driver pay directly is not a strategy that we look to implement. I think we want to be prepared to be able to quickly react to customer demand when the demand returns. And changing driver pay would certainly have a negative effect on that group. So we will reduce expenses just through fewer loads, but not by cutting the pay itself. Fair enough.
spk03: And on the refinery shutdown, it's obviously stopped your progression of higher barrels transported every quarter. You talked about the refinery possibly opening at the end of the third quarter. Would you anticipate the trend of growing barrel shipments getting back on trend in the fourth quarter?
spk06: I'll turn that over to Greg Mills, our president of Gulf Park. Liam, so he can answer that question for you.
spk02: Hi, Greg. Good morning. I think with that refiner coming back online in September, that does give us another outlet. However, I'll point out that we continue to move all the volumes, most all of the volumes that we typically move in that market. And we're easily able to place and hats off to our marketing group, but they did a great job of using our other markets to move the crude to in the middle of the month, which is very not routine in the crude oil business. We do our business a month in advance usually. As far as that goes, we'll continue to grow volumes where we can make money, and some of the volume drop off is related to some of our lower margin business that we do in our trading business.
spk06: William, I'll add, this is Kevin again, that it's really a buy side restriction, so there's a finite, because of the lack of production and lack of drilling in the area, there's a buy side limitation to us, so we have a finite number of barrels we can purchase, So when the new refiner comes back online, it will allow us to probably divert some of those barrels back. We'll continue to supply some of the new opportunities we have. But until drilling activity really increases and we see more production out of the area, we'll be able to then buy more barrels and therefore sell more barrels on the other side.
spk03: Got it. Okay, great. And finally on VEX, it's third-party revenue. You had a little bit there that wasn't max midstream. Outside of Max Midstream, which will eventually come online, do you see third-party opportunities to actually move the revenue needle here?
spk02: Yeah, very much so. We're working on a number of activities that have, you know, outside of the Max connection, which would include potential shippers on the VEX pipeline, but especially an opportunity to do an increased amount of and increased volume of terminaling at our Victoria terminal. So that business activity is actually busier than it's been in the last year, and we see some good opportunities there to, independently of the MAX business, to bring on some new revenue there. And I'll also say that with respect to the MAX business, I think we've got some good targets there that will add some good value to us and bring some volume. Great. Positive volume.
spk03: Mm-hmm. Great. Thank you very much. Thank you, Liam. Appreciate it.
spk01: Again, if you have a question, please press star, then 1. The next question is from Chris Sakai of Singular Research. Please go ahead.
spk04: Yes, hi. Good morning. Hi, Chris. Good morning. Just a question on the VEX pipeline. Wanted to get your sense of how barrels per day for the remainder of the year? How should we be looking at this quarter and next quarter for barrels per day for VEX?
spk02: I think we're going to be a little better than we've been in the last several months. We had some, you know, when you change your demand structure, you change your supply, and we rerouted some barrels around VEX. I see with the market coming back on in September, that we will see an increase in VEX volume just within our normal business routine in the next several months. And we're actually, since we closed the second quarter, we're up a bit already from there by almost 1,000 barrels a day. So I see it returning to kind of where we were in the beginning of the year.
spk04: OK, sounds good. And then for Firebird and Phoenix, Can you comment on how these had a positive impact on quarterly cash flow?
spk05: Yeah, this is Tracy. It generated a little excess of a million dollars of cash flow for the quarter. Again, not meeting what our original expectations are, but when we acquired it and set up our expectations, the price of crude oil was substantially higher now. As price of crude oil goes up, we expect to see that the cash flow generated continue to improve.
spk06: This is Kevin. I'll add that late in the quarter when commodity prices did start to rise, we saw better performance out of Phoenix. And we've seen some of that continue into July and August. So we're bullish on that as long as commodity prices continue to move in the right direction.
spk04: Okay, great. And then Can you comment on driver retention? How is that this quarter?
spk06: Yeah, maybe I'll turn it to Wade. Wade, would you like to talk about driver retention, what you're seeing on the service transport side?
spk08: Sure. On the service transport side, we actually recorded pretty close to identical numbers to 2022, running pretty much a year-to-date number of around 35% or so. Drivers, we did have some driver movement, particularly on the contractor side, not so much on the company driver side. Opportunities are fairly slim in the chemical market right now. A lot of companies, similar to us, have kind of reduced their hiring strategies based on current volumes. And so I think it's limited the opportunities for drivers to move around as much as they have in the past, and that's kind of helped with our retention. most companies have kind of cut back on their hiring as we have due to volume. And so it's kind of helped drivers stay put, which has helped reduce our training and hiring costs.
spk06: Yeah, I'll just add, Chris, during this time, I think we see drivers tend to flock to stable companies. I believe we're one of those stable companies. The Fed last week announced a freight recession out there. And so drivers are are looking for solid homes. So we've been able to really maintain our driver base and increase it in areas where we can without, as Wade mentioned, having much advertising expense at all because drivers are generally just coming to us and applying.
spk05: You might touch on the service, I mean, on Gulfmark and Firebird.
spk06: Yeah, and Gulfmark and Firebird have always had, since their drivers are home every day and in some remoter areas, we don't have turnover issues like you do with the road fleet. And the slowdown we've seen since the beginning of the year has not really affected their turnover at all.
spk04: Okay, great. Thanks for the answers.
spk06: Thank you, Chris. Appreciate the interest.
spk01: This concludes our question and answer session. I would like to turn the conference back over to Kevin Roycraft for closing remarks.
spk06: Thank you, Kate. And thank you, everyone, for your continued interest in the company. We will be participating in the three-part advisors ideas conference in Chicago on August 23rd. And we look forward to providing you an update on our progress when we report third quarter results in November. Thank you.
spk01: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Disclaimer