Trecora Resources

Good day and thank you for standing by. Welcome to the Tricora Resources second quarter 2021 resource conference call. At this time all participants are in a listen only mode. After the speaker's presentation there will be a question and answer session. To ask a question during this session you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance please press star 0. I would now like to hand your conference over for your speaker today, Mr. Fred Bonacore of the Equity Group. Please go ahead.

Thank you, Nita, and good morning, everyone. Welcome to the Tracora Resources Second Quarter 2021 Earnings Conference Call. We at the Equity Group are very excited to be working with Tracora as their investor relations firm. Our contact information was listed at the bottom of the earnings release distributed over the wire services after the close of the financial markets yesterday afternoon. Presenting on our call today will be Pat Quarles, President and Chief Executive Officer, and Sami Ahmad, Chief Financial Officer. Christopher Groves, our Corporate Controller, will also be available for the question and answer session, which follows management's prepared remarks. Before we get started, I would like to review the Safe Harbor Statement. Statements in this presentation that are not historical facts are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on management's beliefs and expectations only as of the date of this teleconference, August 5, 2021. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected. These risks, as well as others, are discussed in greater detail in TRICOR's filings with the SEC, including the company's most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q. During today's call, management will also discuss certain non-GAAP financial measures for comparison purposes only. For a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results, Please see the earnings release issued after the close of the financial markets yesterday afternoon. This webcast is accompanied by a slide presentation that is available in the investor section of the company's website, www.Tricora.com. At this time, I'd like to turn the call over to Tricora's president and CEO, Pat Quarles.

Thank you, Fred, and good morning, everyone. As always, we appreciate your interest in Trocora and are happy that you can join our call this morning. We're pleased with our second quarter results. After continued economic challenges over the last five quarters, including both the COVID-19 pandemic and the extreme weather event of the Texas freeze, the second quarter illustrates the earnings potential of our businesses. With these external headwinds easing, the benefits of the transformative actions we've taken and investments we've made with respect to safety, reliability, operational processes, coupled with our productivity measures, have yielded positive results as evidenced by our performance during the quarter. Our second quarter EBITDA of $8.1 million was over an $8 million improvement from the first quarter and nearly double the second quarter of last year. Demand improved for all products. For solvents, the increase was led by the polyethylene, synthetic rubber, and blowing agent end uses. Domestic polyethylene wax demand grew in the quarter, allowing us to shift our sales back toward our higher margin U.S. customers. The strong demand environment also supported our pricing initiatives. Solvent margins for our market-based customers expanded despite the rise in natural gasoline costs, while our formula-based prices rose with feedstocks. Our average polyethylene wax selling price increased 9 cents per pound versus the first quarter. We also benefited from very strong byproduct values during the quarter. We had record byproduct margins in both May and June, driven by very high benzene pricing. Like many, we were challenged in the quarter by supply chain disruptions. These impacts ranged from third-party truck availability and freight costs, customers running at reduced rates due to the lack of availability of other non-Tracora feedstocks, and reduced demand in automotive end uses due to chip shortages. We estimate this resulted in about a negative $1 million impact to our second quarter. We advanced our organic growth program in a quarter. At the end of the second quarter, we had 11 projects focused on delivering new products or entering new markets. eleven projects focused on driving asset utilization, which do not require any significant capital investment, and six projects focused on improving productivity and reducing costs. Of the asset utilization projects, we converted two of our successful commercial trials to new custom processing business beginning in Q2. These projects have allowed us to significantly load the distillation column at TC. On productivity, as we mentioned last quarter, In April, we executed a significant cost reduction project at TC. Our focus on TC's asset utilization and improving the business's cost structure significantly benefited the site's financial performance. At Southampton, we executed a cost-saving project to outsource our product's handling activities, which will begin to contribute to earnings in the third quarter. Since we started our growth program, we have a total of nine projects that are commercial, with A further four, they're in the commercial trial phase. We also advanced our commitment to drive stockholder value by executing on our share repurchase program. Through mid-year, we repurchased a total of $5 million of shares, totaling $633,000, under our $20 million share repurchase authorization. Now, let me turn it over to Sammy to discuss our quarterly results in more detail.

Thanks, Pat, and good morning to everyone. I'll start my comments with a discussion of our debt, liquidity, and cash flow, and then I'll discuss our second quarter performance in more detail. Total bank debt at June 30th, excluding PPP loans, stood at $44 million. Our second quarter leverage ratio under our bank covenants was 1.34 times, compared to 1.62 times at March 31. We remain below our previously articulated target leverage of 1.5 to 2 times. We have availability on the revolver of approximately $72 million as of June 30th. Cash on the balance sheet as of June 30th was approximately $39 million, down sequentially from $53 million as of March 31st. The decrease in cash was primarily driven by an increase in working capital in the second quarter. Just as working capital was a source of cash in the second quarter of last year with the sharp decline in business activity, in the second quarter of 2021, with the increase in sales volumes and prices, we saw significant increase in trade receivables and payables. Together, these two items consumed approximately $12 million in cash. We also increased inventory at Southampton, partly in preparation for a planned maintenance turnaround in the first quarter of 2022, resulting in approximately $4 million additional use of cash. Finally, share repurchases in the second quarter accounted for approximately $4.3 million of cash. As we mentioned in the first quarter earnings call, on April 1st, we received our final tax refund under the CARES Act tax law changes of $2.4 million. In addition to cash on the balance sheet, our revolver remains undrawn as of the end of the second quarter. We remain well positioned from a liquidity and balance sheet standpoint with more than adequate flexibility to fund our operations and advance our growth initiatives. Operating cash flow from continuing operations for the second quarter was a negative $4.3 million, while CapEx for the second quarter were $3.9 million. For the first six months of 2021, operating cash flow from continuing operations was negative $0.5 million, and CapEx was $8.7 million. We're evaluating our full-year capital expenditure estimate of $13 to $14 million for the full year 2021. This may increase slightly due to additional capital related to repairs following the February freeze event. 2021 CapEx spending is primarily driven by continued feedstock pipeline replacement work as well as higher level of plant maintenance and turnaround spending. Free cash flow for the second quarter defined as cash flow from operations less CapEx and less required debt amortization was approximately a negative $9.3 million. For the first six months of 2020, free cash flow was negative $11.4 million. We have now applied for full forgiveness of our PPP loans, totaling approximately $6.1 million. Although we don't know when we will receive determination on forgiveness, we believe we qualify for full forgiveness based on the SBA criteria. As you will note on the 630 balance sheet, These PPP loans are now shown as current liabilities, reflecting their maturity in May of 2022. Now let's take a closer look at our second quarter performance. We report net income from continuing operations of $2.3 million, or $0.09 per diluted share. This compares to a loss from continuing operations in Q1 of 4.4 million or 18 cents per diluted share and a net loss from continuing operations of 1.9 million or 7 cents per diluted share in Q2 2020. Adjusted EBITDA from continuing operations was $8.1 million for the second quarter compared with adjusted EBITDA from continuing operations of a negative 0.5 million in Q1 2021 and $4.2 million in the second quarter of 2020. Second quarter results benefited from a $1.4 million settlement with the utility provider related to the February freeze event. This benefit reduced our estimated impact of the freeze event from $4.5 to $5 million, as previously stated, to approximately $3.5 million. General and administrative expenses for the second quarter were $7.7 million compared to $6.3 million in Q2 of 2020. G&A includes plant-level general administrative expenses as well as corporate expenses. The increase is due to higher consulting, insurance, and compensation costs. For the first six months of 2021, G&A was $15 million compared to $13 million last year. The increase largely reflects higher consulting, insurance, and compensation costs. Interest expense for the second quarter was approximately $300,000 compared with $700,000 in the second quarter of last year. The reduction in interest expense is due to debt reduction combined with lower interest rates. Bank debt has been reduced from $78.2 million at the end of Q2 2020 to $44 million at the end of Q2 2021. Our effective interest rate for the second quarter dropped to 1.87% from 2.52% in Q2 of 2020. Income tax expense for the quarter was $0.7 million, reflecting an effective tax rate of approximately 23.8%. Our expectation for the full year 2021 is an effective tax rate of 21 percent. Now let me walk you through our business segments starting with specialty petrochemicals. Adjusted EBITDA for specialty petrochemicals in the second quarter was 9.7 million compared to 2.6 million in Q1 2021 and 5 million in Q2 2020. Adjusted EBITDA margin for the second quarter was 16.4 percent for the specialty petrochemical segment compared to 5.6 percent in Q1 2021 and 15.4 percent in Q2 2020. The improving economic environment increased both our top and bottom line in this segment. Second quarter results for the specialty petrochemical segment benefited from the 1.4 million utility settlement that I mentioned earlier. Additionally, the segment also benefited from a positive inventory costing impact due to the inventory build in the quarter, as well as the increase in feedstock pricing during the course of the quarter. Specialty petrochemicals total sales volume in Q2 2021 was 20 million gallons compared to 17.2 million gallons in Q1 and 15.3 million gallons in Q2 of 2020. Prime product sales volumes in the second quarter was 16.9 million gallons, an increase of approximately 3.8 million gallons or 28.8 percent from Q2 of 2020. This increase is largely due to the strong demand we're seeing for our specialty petrochemicals products. Moving on to specialty petrochemicals feedstock. Benchmark natural gasoline feedstock prices have followed a trend of continued increases since bottoming out in the second quarter of 2020 at 42 cents per gallon. Prices increased to $1 per gallon by the end of last year, and reached $1.43 per gallon by the end of Q1 2021. At the end of June, natural gasoline was priced at $1.54 per gallon, and it continued to increase in July. The July average is approximately $1.60 per gallon. The upward trend in market pricing of natural gasoline is illustrated on slide seven of the second quarter earnings deck that is posted on our website. As you can see in the slide, feedstock pricing has rebounded back to levels higher than in 2019 and 2020. Now, moving on to byproducts. Byproduct sales volumes improved to 3.1 million gallons in the second quarter from 2.5 million gallons in Q1 2021, as prime product sales volumes also increased. As a reminder, byproducts are produced as a result of prime product production and their margins are significantly lower than margins for prime products. Byproduct spread improved to 62 cents per gallon in the second quarter from 30 cents per gallon Q1 and negative 29 cents per gallon in the second quarter of 2020. The upward turn in byproduct spread was driven by higher byproduct prices as a result of sharply higher prices for the aromatic components, specifically benzene and toluene, as the main component in our byproduct stream. Moving on to specially waxed segment. The specially waxed segment had adjusted EBITDA of $1.3 million in Q2 compared to a negative $0.5 million in Q1 and $0.9 million in the second quarter of last year. The specialty waxes segment generated revenues of approximately $9.6 million in the second quarter compared to $8.7 million in the first quarter and $8.3 million in second quarter 2020. Revenue in second quarter included $6.9 million of wax product sales, an increase of 26.1 percent compared to Q2 of 2020. We continue to experience strong demand for wax products especially in our high-value hot melt adhesives and markets. We also continue to be sold out on waxes, and as Pat mentioned, we implemented further price increases during the second quarter. Processing fees, which were approximately $2.7 million in the second quarter, decreased 5.2% in the second quarter of 2020. The modest decline was due to customer supply chain disruptions combined with residual impacts from the Texas freeze event, which caused the ramp up on new custom processing projects to take longer than expected. This concludes the financial summary, and I will now turn the call back over to Pat.

Thanks, Sammy. I'll wrap up our prepared remarks by emphasizing how excited we are about Tricora's growth opportunities. We expect the strong demand for our products that we saw in the second quarter to persist through the second half of the year, given the favorable outlook for our key end-use markets. Additionally, with respect to our growth portfolio, we expect to see further contribution from a number of the projects we are executing as we move through the remainder of the year. We expect the polyethylene wax business to improve in the third quarter on both price and volume, which will mostly offset the utility credit we received at Southampton this past quarter and the expected decline in byproduct spread. As always, we remain committed to our goal of creating long-term value for our stockholders. While we advance our organic growth projects, we continue to explore all capital allocation options, including inorganic opportunities, where we believe we can achieve higher earnings and cash flows. Now, I'd like to turn the call back to the operator and open up the phone line to questions.

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, you will need to press the pound key. Please stand by while we compile the Q&A roster. And your first question comes from the line of Mitchell Fett with Grand Slam Assessments.

Hey, guys. Really nice quarter. So the first question has to do with the freeze and how it affected volumes in Q2 from both a polyeth, well, your pentanes and hexanes, and then also if you could sort of give us a ballpark of how it affected your custom processing businesses in terms of revenues or however you want to frame it.

Sure. Sure. So in the aggregate, you heard me say, we think about a million dollars across the entire company of negative impacts of a variety of things. And you can point to COVID and you can point to chip shortages or the freeze event. They all kind of came together for, as we've all been hearing, supply chain challenges across the whole industry. In our case, On the solvent side of the business, once we returned to operations, we didn't have any supply issues. We had the pipeline connection over to Mont Bellevue, and our operations were solid. Supply was no problem. So the challenges there only then became downstream of us, and it was comprised of a few things. Early in the quarter, the trucking market, as we've all been hearing, was a nightmare. Now, we have the benefit of an owned fleet for a significant portion of our solvent demand that we deliver through trucks. So that certainly, I think, advantaged us. But for our third-party trucks, you know, we certainly had impacts, and we had impacts to customers, unfortunately. We were pretty quick in taking action. We added additional third-party trucking firms to bolster our supply of well, to bolster our availability of trucks. And then we've also started, begun the expansion of our own fleet that will, you know, just increase our capabilities there. And that both addresses the current situation and anticipates the structural growth that we're expecting in our business. So solvents, you know, had their impacts. On custom processing, there's a combination of a few things. At the very beginning of the quarter, Our focus as we recovered from the freeze was getting our wax production up. As we moved through the plant, we prioritized getting wax supply up and then moved over to custom processing. That had a little bit of a lag into Q3. Frankly, then we started running into supply chain issues of our customers, either issues with getting raw materials in to conduct the custom processing on their behalf. In some instances, their demand in the market impacted as well. It was scattered throughout, no single significant thing, but lots of things that bit us during the quarter. Generally, custom processing, by the end of the quarter, we were up and running. Operations were okay. The demand is still there. We just need to wrestle down these supply chain challenges.

With respect to custom processing, the distillation and hydrogenization units you have at TC, with these new commercial customers that are coming in, are you getting closer to full utilization, or do you still have a long way to go?

Well, we significantly loaded up the distillation part of that unit with the new projects we talked about during the second quarter, so that helped us. On hydrogenation, you may recall we had a very large project that kicked off in the first quarter of 2020 that really did load up the hydrogenation unit. That went away largely due to COVID. That is still a potential out there for us. We have actually a few projects. that are targeting the hydrogenation unit, but it didn't run in 2Q, so those projects are still to be delivered.

Okay. And then with respect to the wax, I know you talked in the past about getting some additional feedstock sources to increase volume. How is that going?

Yeah, it's moving forward, I would say, without getting into too many details. One of our commercial projects that we're doing in 3Q relates to additional sources of feed. And then we also have other growth projects that are longer cycle time that would bolster our product offering and supply for polyethylene waxes. Okay. That's not a 2020. Just to be clear, that stuff is not 2021. That's going to have to come later.

Okay. And then in terms of G&A expenses, the consulting and insurance If you can just talk about both of those things, is the consulting expected to reoccur and is the insurance kind of a new normal?

So I'll start with insurance because we have absolutely incurred higher insurance rates as we went through our renewal last year. We've gone through another renewal. So just unfortunately the nature of the market today is those costs are increasing for us. I don't think they're increasing differentially for us, but that is rolling in. So unfortunately that's going to be structural. You know, in the consulting projects, I would say, you know, we use consultants from time to time for a variety of things, from improvements or external projects. And so, you know, it's hard to predict where they're going to go, but I would expect them to go up and down just depending on, you know, what we're looking at at any particular time.

Okay, cool. I'll get back at the queue. Thanks. Thanks, Mitch.

Your next question comes from the line of Matt Dane with Titan Capital Market Management.

Thank you. I was curious, if your price increases that you've discussed have been implemented at the beginning of the quarter and were in place for the whole quarter, what would that impact have been on a revenue or earnings basis?

I haven't done that math in my head, but I think on the WAC side, most of those increases really started in May. and into June. So we're probably only about halfway through the contribution of the higher wax as reflected in 2Q for us. So that's why I said we're going to expect further benefit as we roll into 3Q. On the solvent side, listen, we announced a May price increase for our market-based pricing. We didn't have as much success on that increase, certainly, as we would like. The competitive dynamics were just such that it was a real challenge. So there's a little bit of increased kind of ASP for the negotiated contract or the market-based contract customers and solvents for 3Q. But I wouldn't suggest it's going to be a very significant increase.

Okay. That's helpful. I appreciate it.

Again, if you would like to ask a question, please press Star 1 on your telephone. And your next question comes from the line of Tim Call with the Capital Management.

Tim Call Congratulations on a good quarter. Your share count went up during the quarter. Was that because of stock options and strike prices? And should we expect share count to fall in the quarters ahead?

Well, yeah. I mean, you're right. I mean, compensation expense has an impact on share count, particularly when you look at the diluted number.

Remember the earnings last year, diluted versus...

Yeah, and the other thing is last year we had a loss. So net income was lost. So on diluted share count, the share count didn't get rolled in. This year it was a profit, and so that increased the share count.

Okay, thank you. And with pricing of products, have there been any rollbacks in pricing, or has pricing only been in one direction?

It's only been in one direction. We just want it to be more in that direction.

Thank you. Congratulations again on such improvement.

Thank you. Is the mic still open? I just want to make one comment on that last question. Yeah. So I guess there is an exception on our byproducts because, again, we're tied to the aromatics industry. And while we don't drive the pricing, it's index-related. But just to be clear, the byproduct reference prices, benzene has come down from the second quarter. So I just want to make that clarification.

And your next question comes from the line of Tom Herrenberg with Carl M. Hennig.

Yeah, good morning, fellas. Can you give us an update on the share repurchase for the month of July? I noticed there was substantial volume on a number of days.

Yeah, Tom, actually, we'll report consistent with our quarterly reporting rather than giving kind of a – I know it's not a forward-looking comment, but nothing to report for July. So we'll just – at the end of every quarter, we'll report what we've done. One of the reasons – I'm a little sensitive to it is because – You know, the nature of our share repurchase program is we have to launch a program under certain criteria and then let that run. So I just can't comment really on anything that may be impacting the current quarter. Okay.

And can you do us an update? Yes, Sammy.

We'll be filing our Q. So you'll see the details in that for the second quarter.

For the second quarter, right. Yeah, it meant for July, though, with the increase in trading activity, it appeared. Can you give us an update on status of Piochilli Valley?

No change in status. We have a sales contract on the property. They have a certain amount of time to meet milestones in that agreement, so... There's still some time left. I think it's coming up in September, I believe, is the next test for them delivering some cash against it.

Okay. So by the end of Q3, we should know whether that's been consummated or not?

That's what we'd expect, yeah. And as you know, I mean, unfortunately, it's a de minimis amount of value, but it would be good to get it cleaned up.

Okay. Okay. Thanks for me. Thank you.

Hey, Tom, thank you.

If you'd like to ask a question, please press star 1 on your telephone keypad.

I think we see more questions. Operator, maybe we'll just wrap up.

I would now like to turn the call back over to Mr. Patrick Quarles.

Thank you. Listen, I want to thank you all for your questions and interest in Tricora. I always like to conclude my remarks by acknowledging my appreciation for our employees and recognition of their success. In the second quarter, we pivoted from an organization focused on safely repairing our facilities while continuing to deal with the realities of the pandemic to facing a resurgence of demand that was, quite frankly, a step change from levels before the freeze. And they did it. They safely completed our repairs, reliably operated our facilities, reconfigured supply chains to meet the surging demand, drove product pricing to capture the value we provide our customers, and advanced our growth plans, all while continuing to battle this resurgent virus. I want to thank everyone for their contribution to those successes. And thank you again to all of you for your participation.