Trecora Resources

Good day, and thank you for standing by. Welcome to the Tricora Resources Third Quarter 2021 Results Conference Call. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the 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 the conference over to your speaker today, Jeremy Heldman of the Equity Group. Please go ahead.

Thank you, operator. Good morning, everyone. Welcome to the Trocora Resources Third Quarter 2021 Earnings Conference Call. 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, November 4th, 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 Chikora'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.trecora.com. At this time, I'd like to turn the call over to Trecora's president and CEO, Pat Quarles.

Thank you, Jeremy, and good morning, everyone. As always, we appreciate your interest in Trecora and are happy that you can join our call this morning. We're pleased with our third quarter results. Overall, demand continues to be strong, and we expect it to remain so through the end through year end and into 2022. A consistent topic across the industry right now is the pervasive supply chain disruptions impacting companies. So I want to take a minute to discuss how they have impacted our company and the actions we have taken to mitigate them. The most acute impact has been on domestic trucking availability and costs. Turcora has long maintained its own trucking fleet, which delivers about two-thirds of our truck-based solvent customer demand. This capability allowed us to maintain our service levels to our customers in almost all instances during the quarter, as well as avoid much of the freight cost increases being felt across the industry. We were able to add additional trucks to our fleet in the quarter and will continue to grow this capability as we prepare for new contracted demand this year and into next year. Despite this advantage, we still experienced several impacts. Freight costs for the remaining third of our truck-based demand increased significantly. Delivery of feedstock for custom processing activities resulted in delays to realizing processing revenues. Exports of solvents were held back due to marine container and shipping availability. Similar to the second quarter of this year, we estimate these cost increases and delays reduce our adjusted EBITDA by about $1 million during the third quarter. There have been some positive impacts. We have had success throughout this year in increasing our wax prices. Our principal competitors in the market produce their products outside the U.S. The global supply chain constraints have limited their supply into the U.S., and we see this continuing to support further price increases in the fourth quarter and into 2022. For solvents, our third quarter volume benefited from the startup of a new pi ethylene plant in August. This is the first of three new PE plants starting up over the next year. We are contracted for most of that market growth. Overall, the increase in prime product demand in the quarter was driven by polystyrene and polyisofoams and synthetic rubber end uses. Oil sands was largely flat. As Sami will discuss, the dramatic increases we've seen for natural gasoline has impacted our fairly negotiated customer margins. Organic growth initiatives continue to be a focus as we target operational efficiencies and productivity improvements. We're also working to innovate with new products and expand our customer base. We estimate our organic growth initiatives will result in an incremental EBITDA benefit of more than $7 million this year. At the end of the third quarter, we had 10 projects focused on delivering new products or entering new markets, 16 projects focused on driving asset utilization, which do not require any significant capital investment, and five projects focused on improving productivity and reducing costs. Within the portfolio, we have a total of 31 active projects. Of these, 13 are in execution phase. We were asked last quarter to provide some more insight on the status of these projects. As you can see in slide nine of our earnings presentation today, nine of those projects are commercially executed and four are in final trials. During the third quarter, we had approximately $2.8 million of non-recurring expense associated with professional service and due diligence work related to a significant M&A opportunity. We ultimately determined not to pursue this opportunity because we concluded that it was unlikely to create shareholder value. For the first nine months of 2021, non-recurring expenses related to this opportunity were approximately $4 million. This work sits within the larger framework with our board of continually evaluating all avenues to create shareholder value and expect that work will continue. 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 third quarter performance in more detail. Total bank debt at September 30th stood at $42.9 million. Our third quarter leverage ratio under our bank covenants declined to 1.2 times from 1.34 times at June 30th. We continue to remain well below our previously articulated target leverage of 1.5 to 2 times. As of September 30th, our revolver remains undrawn and has availability of approximately $75 million. In the third quarter, we received full forgiveness on the PPP loan for Turcora Chemical for $2.2 million. The forgiveness is recognized as a gain on extinguishment of debt in the financial statements and excluded from adjusted EBITDA from continuing operations. The remaining $4.2 million PPP loan for Southampton remains outstanding. We expect full forgiveness for this loan as well. Cash on the balance sheet as of September 30th was approximately $44.4 million, up sequentially from $39.1 million on June 30th. Moving on to cash flow. Cash flow from operations for nine months year to date was $9.3 million. This includes the benefit of the increase in payables associated with non-recurring professional services and due diligence work that Pat referenced. Cash flow from operations also includes the significant negative impact of the Texas freeze event earlier in the year, as well as use of cash of approximately $9.2 million for working capital, primarily driven by rising prices, particularly natural gasoline feedstuffs.

Excuse me, this is the operator. I apologize, but there will be a slight delay in today's conference. Please hold, and the conference will resume shortly. Thank you for your patience.

And Tina, have we rejoined?

Yes, please go ahead.

Okay, thank you. Apologies, everyone. We had a power blip here that kicked us off the call. Go back to Sammy.

Thank you, Pat. I may just repeat a little bit here. Cash flow from operations includes the significant negative impact of the Texas freeze event earlier in the year, as well as a use of cash of approximately $9.2 million for working capital and primarily driven by rising prices, particularly natural gasoline feedstock, with costs continuing to climb. Turning now to CapEx, we continue to invest in a disciplined manner, focusing on plant health and maintenance, as well as environment health and safety projects. Year-to-date, our CapEx is approximately $12.3 million, which includes about 1.7 million related to repairs following the Q1 freeze event. CapEx in the third quarter was 3.6 million, which includes 1.5 million for the maintenance and upkeep of the GSPL feedstock pipeline. For the full year 2021, we expect CapEx of approximately $14 million. Free cash flow for the first nine months was negative 6.6 million. We define free cash flow as cash flow from operations, less capex, less mandatory debt payments. Free cash flow was negatively impacted during the year by the freeze event in Q1 along with working capital and the cost for the M&A activity that Pat referenced earlier. Now let's take a closer look at our third quarter performance. We reported net income from continuing operations of $1.9 million, or $0.08 per diluted share. This compares to a net loss in the second quarter of 2021 of $2.3 million, or $0.09 per diluted share, and net income of $1.1 million, or $0.04 per diluted share, in the third quarter of 2020. Adjusted EBITDA from continuing operations was $7.5 million for the third quarter, compared with $8.9 million in the second quarter and $7.1 million in the third quarter of 2020. Note that adjusted EBITDA excludes the gain on extinguishment of the PPP loan, as well as one-time professional services and other due diligence costs related to the business combination opportunities. You may also recall that second quarter adjusted EBITDA benefited from a 1.4 million settlement with a utility provider for Southampton related to the February freeze event. General administrative expenses for a third quarter were 8.9 million compared to 5.8 million in third quarter 2020. GNA includes plant level general administrative expenses as well as corporate expenses. The increase is primarily due to the non-recurring expense of $2.8 million in the third quarter related to the cost for the M&A opportunity. For the first nine months of 2021, G&A was $23.9 million compared to $18.7 million last year. The increase over the nine-month period was also primarily due to the non-recurring M&A-related expenses which totaled approximately $4 million for the full nine-month period. Interest expense for the third quarter was $0.3 million compared with $0.5 million in the third quarter of last year. The reduction in interest expense is due to debt reduction combined with lower interest rates. Income tax benefit for the quarter was approximately $0.2 million, and for the first nine months, the income tax benefit was approximately 0.5 million. The benefit was primarily due to a foreign tax credit carryover from 2019 related to AMAC, which offsets our current tax expense and is included in our taxes receivable of 0.9 million on the balance sheet as of 9-30. We filed for the refund in connection with our 2020 income tax return in October. Now let me walk you through our business segments, starting with specialty petrochemicals. Adjusted EBITDA for specialty petrochemicals in the third quarter was $7.2 million compared to $9.7 million in the second quarter of 2021 and $8.5 million in the third quarter of 2020. As I mentioned previously, the second quarter 2021 results for specialty petrochemicals include a $1.4 million utility settlement. While the improving economic environment continues to drive solid demand and revenue growth in this segment, the sharp and rapid increases in feedstock and natural gas prices, along with higher freight costs, negatively impacted margins in the third quarter. Specialty Petrochemical's total sales volumes in the third quarter was approximately 20.9 million gallons compared to 20 million gallons in the second quarter and 17.9 million gallons in the third quarter of last year. Prime product sales volume in third quarter was 17.2 million gallons, an increase of approximately 2.4 million gallons, or 16.6% from Q3 2020. Nine months year-to-date prime product sales were 48.7 million gallons, a 10% increase from the same period last year. Growth was broad-braced across all major end markets except for oil sands. Focusing further on specialty petrochemicals feedstock, benchmark natural gasoline feedstock prices have followed a trend of continued increases since bottoming out at 42 cents per gallon in the summer of 2020. Since that point, natural gasoline prices have continued a steady increase, Average third quarter pricing was $1.62 per gallon, with September price at $1.70 per gallon. Prices have continued the sharp upward march, with October closing at $1.92 per gallon, as you can see in slide seven of the third quarter earnings deck that is posted on our website. Now moving on to byproducts. Byproduct sales volume improved 18.3 percent to 3.7 million gallons in Q3 from 3.1 million gallons in Q2. As a reminder, byproducts are produced as a result of prime product production and their margins are significantly lower than margins for our prime products. Byproduct spread was 38 cents per gallon in the third quarter compared with 62 cents per gallon in Q2 but still well above Q3 last year when margins were 10 cents per gallon. As of now, we expect spreads to continue to narrow into the fourth quarter. Moving on to specialty waxes segment. The specialty waxes segment had adjusted EBITDA of $2 million in the third quarter compared to $1.3 million in Q2 and $0.13 million in Q3 of last year. This is the best financial quarter for specialty waxes since the first quarter of 2016. The specialty waxes segment generated revenues of approximately $11.3 million in Q3 2021, compared to $9.6 million in Q2 and $8.5 million in Q3 2020. Revenue in Q3 included $8.5 million of wax product sales and increase of 41.6% compared to Q3 of last year. We continue to be sold out on wax products. Average selling price of our wax has increased approximately 28% compared to Q3 of 2020. Processing fees, which were approximately $2.8 million in the third quarter, increased 10.4% from third quarter of last year. This concludes the financial summary, and I'll now turn the call back over to Pat.

Thanks, Sammy. Let me end by saying how positive I feel about the direction of our business today. Despite the supply chain challenges, which persist, we see our business growing in 2021 and are confident that will continue into 2022. We are highly contracted for new end-use demand in both polyethylene and polyisofoams in the next year. Based on current feedstock costs, pricing initiatives for our solvents business should catch up to the feedstock costs by the end of the year. We also believe we can further increase our wax prices due to the current market dynamics. We see our organic growth portfolio providing new custom processing opportunities, several of which have already become commercial and should provide growth next year. In addition, relief of the supply chain disruptions into next year should reduce pressure on certain in-use markets that have continued to struggle, such as automotive. 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, simply press star 1 on your telephone keypad. Again, that is star 1 to ask a question. Our first question comes from Tom Herenberg with Carl M. Henning Investments.

Yeah, good morning, fellas. Pat, how many shares did you repurchase in the most recent quarter?

We purchased nine in the third quarter.

You know, originally, the sale of the mine, which generated $60 million net to the company, 100% of that originally was going to go to the shareholders. Then it was down to 50%. Lettuce was that you're going to buy $20 million. It's down to 40%. You know, we're getting screwed, quite frankly. And here you piss away $4 million on an acquisition. How you can spend that much money before you find that it isn't a good fit? that $4 million would have bought another 500,000 shares at $8 a share. And it would have been a hell of a lot more creative to the shareholders than an ill-fated potential acquisition. We're still suffering from last acquisition. Finally, you make the comment in 2016 with the specialty wax business, you're now finally starting to show some improvements. I'd like your comments on that.

Sure, and thanks for your feedback, Tom. Hey, listen, we're as disappointed as you are in kind of how our work on the M&A transaction went. As we said, and really have been saying for some time, our focus has been anything we look at needs to be very aligned with our core businesses, which is really the profitability driven by solvents, and it needed to be cash flow and earnings accretive. And we certainly went into the activity having those expectations. And listen, as we went through the work, and it was quite a bit of work, ultimately we determined we weren't satisfied that on a risk-adjusted basis it was going to meet our criteria. So we set that down. So, yeah, we're disappointed, but we have to continue to focus on the plan that we have. We've got encouraging expectations, as I mentioned, on how solvent growth is expected to grow next year. We're contracted into new plants that are coming. both for poly-ISO as well as polyethylene. And on the WAC side, I think the benefits we talked about and how supply-demand is shaping up in the U.S., being able to drive margins there is very encouraging and finally getting, as you said, a return on the WAC side. And, of course, for TC to really perform the level it needs to perform, we've got to load out those assets. And I think the growth portfolio that we have, which is largely focused on custom processing, which means really TC, We're very encouraged that that's going to continue to grow as we go into next year. So, you know, as I said, Tom, I like the direction the business is going right now. And as it relates to capital allocation, you know, we will continue to do what we've always done, you know, very active discussions with the board on really where we should apply that capital. You'd appreciate while we were involved in those activities during the third quarter, you know, we couldn't be in the market buying shares. So that's why that had to come to an end. And we'll continue to work with the board on all these capital allocation decisions.

So have you purchased any shares since the end of the third quarter?

I can't really comment on that, Tom. We report that, as you know, at the end of the quarter in our financial reports.

Okay. Well, I'm extremely disappointed, and I think you got that message loud and clear.

Appreciate that, Tom.

As a reminder, press star one to ask a question. Again, that is star one to ask a question.

So at this time, Tina, I'll wrap up. I want to thank all you guys for the questions, and Tom, I appreciate your feedback, as I said. I always like to conclude my remarks, however, by acknowledging my appreciation for our employees and recognition of their success. In the third quarter, we had to contend with widespread supply chain and logistical issues as we fought hard to maintain the exceptional service level we have to our solvent customers and meet the strong demand of our wax customers. As a result of their hard work, we achieved $2 million of adjusted EBITDA at TC for the quarter and grew solvent volumes versus the prior quarter. That was due to exceptional commitment by those at TC and Southampton to meet our customers' needs. At this point, I'd like to thank you all for your participation.

Thank you again for joining us today. This does conclude today's presentation. You may now disconnect.