Adams Resources & Energy, Inc.

Welcome to the Adams Resources and Energy First Quarter 2024 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 telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. Now I will turn the call over to John Beisler, Investor Relations at Three Part Advisors. Please go ahead.

Thank you, and good morning, everyone. Welcome to the Adams Resources and Energy First Quarter 2024 Conference Call. Joining me on the call today are Adams Resources and Energy President and CEO, Kevin Roycraft, and the company's EVP and CFO, Tracy Omar. This call is also being webcast and 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 certain non-GAAP measures, including EBITDA. Reconciliations to the nearest GAAP measures can be found at the end of our earnings release. Finally, the earnings press release we issued yesterday is posted on the investor relations section of our website. 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 Roycraft. Kevin?

Thank you, John, and good morning, everyone. Thank you for your continued interest in Adams. I will begin today's call with some details on the quarter before turning it over to Tracy for a more in-depth dive into the financials. I will then close the prepared remarks by discussing the outlook for the second quarter, and for the full year 2024. Myself, Tracy, and our division presidents, Greg Mills and Wade Harrison, will be available for your questions at the conclusion of the prepared remarks. In the first quarter, we began to see some encouraging signs of recovery in certain segments of our business, especially in the latter half of the quarter, where volumes and margins of our oil segments were much improved. We're hopeful that this trend will continue into Q2 and encouraged with our current visibilities. For the first quarter of 2024, the company produced $6 million in EBITDA. These results include $1.8 million in earnings from inventory valuation and liquidation. This compares to $4.4 million in EBITDA from Q1 of 2023. The 2023 number includes inventory valuation and liquidation losses of approximately $1 million. I am generally pleased with the direction the business is headed, even with the continued economic headwinds we face. Cash and liquidity continued their positive trend, showing improving positions over the last three quarters. Cash improved 10% over Q4 2023 as we ended the first quarter with $36.6 million in unrestricted cash. Liquidity improved $3.3 million over the fourth quarter of 2023 from $80.3 million to $83.6 million. We were able to deliver these improvements while still achieving our stated goal of accelerating payments towards our $25 million term loan that was used to repurchase the KSA share ownership in October of 2022. Additionally, during the quarter, we made additional principal payments of $2 million. The balance on the loan at the end of Q1 was approximately $19.5 million. Gulf Park Energy's legacy area truck volumes, which include South Texas, Michigan, and Louisiana, steadily ramped up as the quarter progressed, adding nearly 6,000 barrels a day. Along with these improving volumes, we were able to maintain strong quarter-over-quarter margins. Turning to the VEX pipeline, volumes on the line continued the recent positive trends as we saw barrel counts improve by 20% on a sequential quarter basis to an average of 11,260 barrels per day for Q1. This growth was primarily driven by our Gulfmark Energy Division's ability to route much of their increased volume through the VEX. As a reminder, moving these barrels via pipeline instead of transporting them by truck improves safety, internal profitability on the line, as well as strengthens Gulf Marks margins. VEX's terminal location in Victoria, Texas, also saw third-party activity resume as our customer was successful in securing barrels in the quarter and began building back inventory with intentions to restart barging operations in the second quarter. Phoenix Oil, our hydrocarbon repurposing segment, experienced a slowdown during the quarter due to reduced truck deliveries of fuel oil, one of their primary products. We expect this slowdown to be temporary, lasting until the back half of Q2 before resuming again in Q3. I will provide further detail on Phoenix's plan to combat this later in the outlook section of this call. Our recently purchased crude oil hauler, Firebird Bulk Carriers, had a favorable start to the year, largely driven by improved volumes and recent rate increases taking hold. Firebird saw record volumes in the quarter, hauling nearly 3 million barrels. This was a 7% improvement over Q4 2023 and a 24% improvement over the same quarter a year ago. The soft market for service transport, our over-the-road chemical hauling division, continued in the first quarter. STC did experience a sequential increase in volume and mileage. However, rate levels remained depressed due to shippers successfully demanding rate reductions throughout the course of last year. The spike in demand is encouraging, and if this demand can be sustained, it should allow for rate increase negotiations in the back half of the year. I will touch on the outlook for Q2 and 2024 later, But now I'll turn the call over to Tracy for a deeper dive into the financials. Tracy?

Thank you, Kevin, and good morning, everyone. Total revenue for the first quarter of 2024 was $661.1 million, compared to $650.2 million in the prior year quarter. The increase was primarily driven by an increase in the market price of crude oil, partially offset by lower crude oil volumes. The increase in crude oil price was primarily due to continued uncertainty in the Chinese economy, geopolitical tensions in the Middle East, and continued concerns over economic recession, which caused crude oil prices to fluctuate. Now let's look at the quarter by individual segments. First quarter revenues for a marketing segment were $623.8 million compared to $608.5 million in the prior year quarter. Operating income for the quarter for the marketing segment was $6.7 million compared to $1.9 million in the first quarter of 2023. The increase is due to inventory valuation changes and an increase in the average market price of crude oil and lower operating expenses in the 2024 period. Our transportation segment reported $23.2 million of revenue in the first quarter compared to $26.4 million in the prior year quarter. Operating income was $213,000 versus $901,000 for the first quarter of 2023. The decrease is primarily due to decrease in volumes and transportation rates during 2024 as a result of the softening of the transportation market. Our logistics and repurposing segment revenues, which consists of Firebird and Phoenix that we acquired in August 2022 were $14 million compared to $15.2 million in the prior year quarter. Firebird's revenues increased primarily due to increased transportation rates and volumes, while Phoenix's revenues decreased due to lower volumes and activity. The segment reported an operating loss of $1.5 million compared to $535,000 of income in the prior year quarter. General and administrative expenses were $4.8 million for both the first quarter of 2024 and 2023, with higher outside service costs, audit fees, and legal fees offset by lower banking fees, insurance costs, and director fees. Interest expense increased to $793,000 for the first quarter of 2024 versus $696,000 in the prior year quarter, primarily due to higher interest rates over the past 12 months, partially offset by a lower loan balance compared to the prior year quarter under the Accredit Agreement and additional finance leases that were put in place during the course of last year. Net loss for the quarter was $498,000 or 19 cents per share compared to a net loss of $2 million or 79 cents per share in the first quarter of 2023. For the quarter, cash provided from operating activities was $13.1 million compared to $23.7 million in the prior year. This decrease was a result of an increase in the price of our crude oil inventory and a 23% increase in the number of barrels held in inventory. Capital expenditures for the quarter totaled $6.2 million, primarily for the purchase of 17 tractors, 13 trailers, and other field equipment. Our available cash and cash equivalents as of March 31, 2024 totaled $36.6 million compared to $33.1 million on December 31, 2023. Total liquidity as of March 31 was $83.6 million versus $80.3 million in the prior quarter. Now I'll turn the call back over to Kevin for some final comments.

Thank you, Tracy. Turning to our outlook for the second quarter and for full year 2024. As all divisions are continuing their work to control costs and improve operational efficiencies, we are seeing signs that the markets we serve are awakening. Even with drilling activity slowing in our legacy areas, Gulfmark has experienced steadily improving volumes throughout the year while maintaining their margins. We expect that trend to continue into the second quarter. Gulfmark's increasing volumes also should have a positive effect on the results for the VEX pipeline, as we have been able to route much of the increased oil volume through the line this year. This ability allows VEX to improve internal cash flows and helps reduce Gulfmark's costs by shipping more barrels via pipeline versus the expense of trucking barrels. Also, our third-party customer that utilizes the VEX Victoria, Texas barge loading terminal has started consolidating barrels again in our storage tanks, and their barge shipments should resume in Q2. Our hydrocarbon repurposing business, Phoenix Oil, will most likely continue to experience soft results in Q2 as our fuel oil business transitions from delivering by truck deliveries to mostly by barge. Later this quarter, Phoenix expects to sign an agreement with a terminating location in the Houston area, which barge deliveries expected to start in late Q2 or early Q3. Phoenix recently broke ground on our 11-acre land purchase in Dayton, Texas, which will be the future home of Phoenix Oil. We are targeting to have the rail spur on this property operational late in 2024. An operational rail spur will improve costs and efficiencies for Phoenix by reducing the expense of trucking the product from our current leased rail location to our current storage location that is 24 miles west of Neville, Texas. The new spur will allow for unloading of product from rail car directly into our storage tanks. This will eliminate the trucking cost and rail lease expense associated with this business and significantly improve operational efficiencies. We expect full completion of the project, which will move all of Firebird's trucking operations onsite late in 2025. Speaking of Firebird, the crude oil trucking operations saw volumes increase steadily throughout the first quarter, and recorded record monthly volumes in March. This, along with a series of positive rate adjustments, led to much improved results as the quarter progressed. Early Q2 returns show this trend holding, and we are optimistic this trend will hold for the balance of the year if crude oil volumes can remain at steady levels. Late in the first quarter and continuing into early stages of Q2, our Chemical Transportation Division, Service Transport, began to see capacity tighten and pockets of their service area. In the upcoming quarters, they will need to work to add drivers to meet this increasing demand and then begin the process of targeted rate increases to offset the rate reductions we incurred over the past year. STC is well-placed to take advantage of a recovering chemical market. In closing, I am not yet ready to say that a market recovery is imminent. However, I am encouraged with the prospect of improving markets across all of our divisions that we have seen in recent months. I am convinced the actions we have taken in response to the economic headwinds faced over the past year have made us a more cost-effective and efficient company. And that Adams is well-positioned to capitalize on the opportunities in front of us, try to improve results, and deliver long-term value to shareholders. Lastly, we will be participating in the Three-Part Advisors Ideas Conference in New York City on June 13th. Qualified investors that would like to attend or schedule a meeting with Tracy and I should contact three-part advisors. With that, I would like to open the line for questions. Operator?

We will now begin the question and answer session. To ask a question, please press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Liam Burke with B. Riley. Please go ahead.

Thank you. Good morning, Kevin. Good morning, Tracy.

Hi, Liam. Good morning, Liam.

Kevin, on the Gulfmark business, margins were up nicely from a year ago. Did the exit from Red River trucking help at all on that?

No, I wouldn't say that would be the case. I mean, Red River really is a series of events where a contract was expiring. We were not able to come to terms on a rate agreement with Red River, but It was really a separate environment for us, and the margins at Gulf Park really sort of stand on their own. I'll let Greg maybe comment on that, too, if you'd like.

I'd say margins are strong in the first quarter, maybe a little better than last year, but a lot of focus on cost control. We've dashboarded our business as we're watching all of our expenses very closely and really dialed in on the marketing side, providing the high-value customer relationship that our guys do. And, you know, just things are running smoothly. Crude price is not, you know, it ran during the first quarter. Didn't hurt us too bad. So things are just kind of, you know, moving along steadily.

Yeah, and, Liam, we also operated a separate P&L internally for the Red River business. So they really operated and were run separately. So we didn't have any crossover there.

Okay, cool. And on STC, revenues are down about 12%, but volumes down, I mean, mileage only down about four. So obviously, you'd highlighted this in the past that pricing was getting tough on a weak chemical market. Kevin, I think you said that that is starting to reverse itself as we move through the year. Did I get that right?

Yeah, we're seeing some volumes, especially in certain pockets, the Gulf Coast, Louisiana, Texas, starting to pick up and seeing some capacity tighten. The spot market rate for chemical shipping rates have improved a little bit. The challenge for us is these big shippers, the major chemical producers, have gone through a very long and extensive RFP process to get new rates in place. A lot of those got in place in the fourth quarter or were effective early in the first quarter, and they're not going to just turn around and start renegotiating that because they just really upset their whole market. So as we see capacity tighten and we see the market rates continue to get better, that's our hope at least, then we'll be able to go back and ask for more substantial rate increases. But I don't see that happening until we get a little farther into the year. And if things get better, shippers will really need to add capacity. And once they get to the point where they can't get loads covered, they'll be seeking, rates become less of an issue for them. So we'll look at that. We're not quite there yet, but we're hopeful we can get there if the market continues to trend in the right direction.

Great. And if I can just slide in one more on logistics. Sure. Driver commission was up substantially year over year. on lower revenues, what factored into that?

Are you looking at the Firebird business in particular?

Yes.

Yeah, so the biggest piece of that is the number of drivers we've added. So when we acquired Firebird, I think we had 96 drivers, 97 drivers, and we're up over 123 now. Really to capitalize on some opportunities that we've had from new shippers in that business. So we're pretty bullish on the direction the Firebird business is going. We had a little quality of revenue issue that we're addressing through our first round of rate increases, which I think all got in place in March. And we expect that to continue to trend in the right direction. And we're continuing to add drivers. We'd like to be in excess of 125, 130 drivers there. Great. Thank you very much. Thank you, Liam. Appreciate the support.

The next question is from Jason Ersoner with Bumbershoot Holdings. Please go ahead.

Good morning. Congrats on the progress you're making, and Kevin, really appreciate the details kind of on all of them at the end. Just a quick one, kind of following up on Liam. On the chemical side, so when you're saying it's tightening a bit, is that more anecdotal in what you're seeing, or is that actually in kind of the volumes and the pricing outside of, you said, sort of the major customers or major chemical shippers in general.

Maybe I'll pass that to Wade, our president of that division, since he's living it every day. Wade, could you take that one?

Yeah. What we're seeing is most of our major chemical customers are starting to produce more volumes than they had in the past. We, over the past, probably through 2023, we kind of reduced our overall driver count as did a lot of other carriers. And so it's a combination of volumes slowly, steadily creeping up and not having enough drivers to capitalize on those increased volumes. And so as this continues, you know, the old adage of adding drivers to the fleet, And so they kind of go hand in hand. And so we're starting to beef up our hiring efforts as these volumes continue. And I think it will steadily progress as the year goes on. So as we continue to see volumes improve, we'll add more headcount and be able to capitalize on these increased volumes.

Okay. And just generally, I guess, what do you guys see driving the increase? Is it just, you know, I guess my perception is a lot of it's general economic activity. which there's kind of been mixed reads. You know, what do you see application-wise that's kind of driving the increased volumes right now in chemical?

I think it's really just kind of normalization of the market. You know, over the past 12, 18 months, it's really kind of been a depressed market from historical, quote-unquote, normal volumes. And so it's kind of a – false increase, so it's not really additional volumes. It's just kind of getting back to what's normal. For the past several years, they've been kind of running ahead of normal, and we've actually spent a lot of time with the major guys, and it's really just kind of getting back to a normal-type level, whereas before they were exceeding normal, and now they're just kind of turning back towards normal.

And, Jason, I'll add that the main markets to focus on the STC business is really automotive, housing starts. And we have not seen a lot of good headlines in either of those areas, but we do think there's some rebuilding of inventories going on right now and some slight recoveries in those markets. But as you see them start to boom a little bit, whether it's the latex or wood-treating products or, you know, foams that go into automobiles – then I'll really start getting busy. But I think to get a full recovery and get back even close to where we were in 2021, those industries will have to have a significant improvement.

Got it. But it sounds like kind of everything is at least on the path to maybe getting a little stronger, either in the numbers or more anecdotally, which is positive to hear. So anyway, just congrats on the progress. Appreciate all the details. And I'll hop back and let someone else ask questions. Thanks.

Thank you, Jason.

Again, if you have a question, please press star then one. The next question is from Chris Sakai with Singular Research. Please go ahead.

Hi, good morning. Just a question on your throughput and firm rolling volumes for your pipeline segment. What should we be expecting for the next couple quarters?

I'd say more of the same. The marketing group has really targeted volumes that they can bring through the pipeline. They've been successful picking up some new production and even a few flowbacks this year. So right now volumes have been pretty steady, and the volumes actually grew each month in the first quarter, and we're kind of plateaued right now, but we think we can maintain the volumes we're at now. So I'd say more of the same that you saw in the first quarter should be about similar in the second quarter.

Yeah, I think we'll see some barging revenue from third parties start up in Q2 where they're getting close to being able to ship a barge there. That doesn't run through the line, but it does use the terminal and location in our Victoria, Texas location. As Greg said, we've seen volume steadily increase. Q2 should be a little stronger than Q1, or at least start it out that way. And then... We're still hopeful we get third-party shipping on that line. The third party that we've been targeting this year certainly won't be shipping in Q2, but they are still giving us positive signs and spending money fixing their line that they may be shipping sometime before the year's out.

Okay, thanks for that. How should we be thinking about your crude oil inventory barrels? Would you expect that to be increasing or stay the same or lowering?

Yeah, I'll take that one. The crude oil inventory, you know, we've had a focus on managing our inventory exposure. And we're doing a good job of keeping our inventories to a minimum. Now, we do have tank bottoms and line fills that we are going to have at all times. But in terms of just carrying inventory for the sake of inventory, We try not to do that, and we're effectively marketing everything we buy. So we're trying to just keep that, you know, keep it out of the numbers and keep it relatively flat.

Yeah, and Chris, I'll say it's a working inventory, so usually the fluctuations you see for us, as Greg is really focused on keeping the inventory as low as possible, is the timing of barges that may hit towards the end of the month, and that can have some relatively significant swings if a barge either leaves late in the month or it gets pushed into the next month. So, I think you see swings in that.

That's correct. And so, if you see a higher inventory number in the end of the first quarter this year, we did have some carryovers. So, not inventory that we're necessarily sitting on, but inventory that's already pre-sold, but it still counts in our numbers.

Right. We show it as inventory we own because it hasn't left our facility, but in multiple instances when that happens at that late in the quarter like that or late in anything given month, but the quarters where you see it, it probably is already pre-priced, so we don't have price exposure risk if that were to happen in the future months.

That's exactly right. And that number was probably close to 100,000 barrels at the end of the first quarter.

Okay, thanks. That's good to know. Can you talk about your capital expenditures for the remaining of the year? Do you have a target number for the year?

Yeah, a lot of the capital spending that you saw here in the first quarter was, I'll call it a carryover from orders placed both in 2022 and 2023. So going forward on both the logistics and repurposing segment and the marketing segment, the crude oil side of the business, it'll be very minimal other than the expenditures related to the Dayton facility. which is more of a growth or new revenue type capital, but just from replacement of tractors and trailers. With the shutdown of the Red River business, we took that equipment, redeployed it, both among or between Firebird and Gulfmark, so we'll have very little capital spending on the crude side of the business. And then we've got orders for tractors and trailers scheduled for delivery It's really kind of starting in early Q3 and going into Q4 on the service transportation side. But it's not a substantial amount of capital.

And I'll say, too, the lead times for equipment has really been shortened. Last year we were looking at trailer lead times in excess a year. They're down to around three months now. So generally if we order by the summer, we'll receive capex by the end of the year. It shouldn't limit how much carryover from one year to the next. what we have, which has not been the case over the last couple of years.

But also that kind of is an indicator of where the market is today. Yeah, absolutely.

Okay, thanks for the answers. Thank you, Chris. Appreciate it.

This concludes our question and answer session. I would like to turn the conference back over to Kevin Roycraft for any closing remarks.

Thank you, Debbie, and thank you all for your continued interest in Adams. We look forward to providing you an update on our progress when we report our second quarter earnings in August. Thank you for joining the call.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.