Trecora Resources

Good day, and thank you for standing by. Welcome to the Tricora Resources fourth quarter 2021 results 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 the session, you'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If we require any further assistance, please press star 0. I would now like to hand the conference over to Jeremy Hellman with the Equity Group. Please go ahead.

Thank you, Operator, and good morning, everyone. Welcome to the Trocora Resources Fourth Quarter and Full Year 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 upon management's beliefs and expectations only as of the date of this teleconference, March 9, 2022. 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 Tricordo'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 online in the investor section of the company's website, www.tricorah.com. At this time, I'd like to turn the call over to Tricorah's President and CEO, Pat Quarles.

Hey, thank you, Jeremy. Good morning, everyone, and thank you for joining. We're pleased with our fourth quarter and four-year results, which set the stage for continued growth in 2022 and beyond. Overall, demand continues to be strong for both our specialty petrochemicals and our specialty waxes, and we expect it to remain so through 2022. Our custom processing services are also benefiting from the favorable demand picture, allowing us to utilize more of our productive capacity. This strong demand environment is allowing us to command favorable pricing from our customers. By the end of December, we realized $1.05 per gallon of prime product price increases versus 94 cents per gallon of natural gasoline cost increases for the year. For waxes, we achieved 23 cents per per pound of increases by the end of December. The war in Ukraine is tragic, and we're feeling the impacts on our cost inputs. In the first quarter, our greatest exposure is on natural gasoline pricing, where we have seen prop prices rise from $2.15 a gallon at the end of February to $2.69 per gallon as of this past Tuesday, a $0.54 per gallon increase. We've implemented a $0.22 per pound increase at the beginning of March and have announced a further 55 cent per gallon increase effective mid-March. We expect to stay ahead of this price spike given the strong demand we see in the market. We've been successful in our organic growth initiatives and expect further revenue and profit growth in 2022. Our growth projects contributed $7 million of EBITDA in 2021. By the end of January of this year, we converted an additional four projects to commercial business which will contribute to EBITDA in 2022. With more projects advancing through the development process, our current total project count is up to 38. As you will see in our guidance, our growth program is expected to contribute profit improvement in 2022. Lastly, we're winning in the market. We've captured 95 percent of all new demand for our prime products required by the polyethylene plants starting up in 21 and 22, and 95% of the prime product demand to new poly iso plants starting up in 2022 in North America. We're already shipping two of these new facilities, have orders on the books for a third, and expect orders to the remaining two by mid-year. Our commercial successes paired with our strong balance sheet enabled our commitment to return capital to shareholders. We purchased over $11 million of shares during 2021 six and a half million dollars of which was in the fourth quarter. As of today, we have just under nine million dollars remaining on our repurchase program, which expires in June of 2023. We think our shares offer a very attractive return at current levels and intend to continue repurchasing shares under the program, subject to market conditions. I'll pass the call over to Sammy now.

Mr. Thank you, Pat, and good morning to everyone. Let me start with a brief overview of our full year 2021 results, starting with our consolidated results. Our full year 2021 adjusted EBITDA was $21.6 million, or $25.1 million after adjusting for the impact of the previously disclosed Texas freeze event. This compares to 2020 adjusted EBITDA of $22.2 million. Note that 2021 adjusted EBITDA excludes costs for professional services and due diligence work related to a terminated M&A initiative we previously disclosed. For the full year, these costs totaled approximately $4.5 million. No additional costs are expected for this activity. Adjusted EBITDA for 2021 also excludes a $6.1 million gain from the extinguishment of debt related to the PPP loans. We achieved full forgiveness for the two PPP loans that we had received. The reconciliation schedule to get to adjusted EBITDA is included in our earnings release. Let me touch on a few other points related to our consolidated results, and then I'll briefly review the two business segments. Net cash generated from operating activities for 2021 was $4.4 million. Working capital was a significant use of cash in 2021. This was primarily due to the sharp increase in natural gasoline feedstock costs. The market price history of natural gasoline is shown on slide 21 of our deck, which is available on our website. Additionally, we built inventory in 2021 at Southampton in preparation for the scheduled plant turnaround outage planned for March 2022. In total, full year 2021 use of cash for working capital was about $19 million, with $12 million in the fourth quarter. For this purpose, working capital is defined as accounts receivables plus inventory, less accounts payables. Capital expenditures for 2021 were $14.2 million compared to $13.4 million in 2020. Major items included $4 million for the multi-year upgrade of our natural gasoline feedstock pipeline and approximately $2 million for repairs at both plants following the freeze last year. The remainder was spent on plant maintenance and compliance work. General and administrative expenses for 2021 were approximately $26.1 million compared to $24.3 million in 2020. The GNA expenses include both plant-level GNA as well as corporate overhead. The main driver for the nearly $2 million increase was higher cost of insurance, especially property insurance, which increased more than 20% year-on-year. Insurance costs seems to have stabilized, and we just completed a renewal where we were able to maintain roughly flat premiums for the 2022-23 renewal period. Cash balance at year end was $30.5 million, while our $75 million revolver remained undrawn. Debt at year end was $41.9 million. As Pat mentioned, we completed share repurchases of 1.4 million shares at a cost of $11.5 million, resulting in an average share repurchase price of approximately $8.20 per share. Finally, we further simplified our corporate structure through the sale of the inactive mining assets of Pioche Eli Valley Mines in Nevada for net proceeds of about half a million dollars. We dissolved the PEVM legal entity in February 2022. I will now move to a brief review of each of our big business segments, starting with Specialty Petrochemicals. Business segment performance summary is laid out on slide 20. Our Specialty Petrochemicals business had relatively strong performance in 2021 with adjusted EBITDA of $25.9 million. Prime product sales volumes grew 5.5 percent or 3.4 million gallons compared to 2020. We saw robust growth in polyethylene, expandable polystyrene, and poly iso end-use markets, which more than offset a nearly 3.5 million gallon decline in sales to the Canadian oil sands. Total export sales of prime products excluding oil sands were approximately 12.5 million gallons in 2021 a 5 percent increase compared to 2020. 2020 adjusted EBITDA for special petrochemical segment was $26.4 million. It is important to point out that the relatively strong performance in 2021 was despite the impact of the freeze, the run-up in feedstock costs, as well as higher fuel gas and logistic costs. On the margin side, we played catch-up on pricing to offset sharp increases in feedstock costs as well as fuel gas costs. Byproduct spread for the year was 40 cents per gallon compared to break-even in 2020. In the fourth quarter, the byproduct spread was about 23 cents per gallon. Thus far, through the first quarter of 2022, demand for prime products remained strong, and we continue to drive price increases in the face of rising feedstock costs. The reduced feedstock purchases in the first quarter as we draw down inventory built for the turnaround should help mitigate somewhat the effect of rising feedstock costs. We estimate the cost of the turnaround itself to be approximately $1.4 million. Specially waxes, or trichorochemical, reported solid 2021 results with adjusted EBITDA of $3.1 million, driven by strong WAX revenues. This compares to $2 million of adjusted EBITDA in 2020. Results improved despite the impact of the freeze to both the WAX and custom processing businesses, as well as significantly higher utility costs compared to 2020. Cost control at Tricor Chemical was very successful, as the business was able to offset inflationary and other cost pressures through efficiency. Specially wax's segment had revenues of $38.6 million during the full year 2021, a 6.4% increase from 2020. Revenues included $29.2 million of wax product sales and $9.4 million of processing fees. Wax revenues increased 15.5 percent in 2021 compared to 2020, as average selling prices increased more than 17 percent. Wax revenues and sales volumes are shown on slide 22. Let me pass the call back to Pat now.

Pat Miller Hey, thanks, Sammy. I want to spend a few minutes discussing the drivers we see for our future growth, and then I'll review our 2022 financial guidance. before closing with some comments on our long-term growth potential. Also, I'll just remind everyone that we have an updated presentation available on our website, which I will refer to at times in my comments to follow. Tricora's profit growth will be driven by three distinct drivers and underpinned by continued discipline around cost control. First, demand growth. Our products are essential in the high growth end uses of our economy today. Polyethylene, or PE, is the largest end-use market our solvents go into. The US PE industry is in a period of significant asset expansion due to their advantage cost position globally. This has resulted in three new polyethylene plants being constructed in North America in the near term. Trocora has contractually captured 95% of all the new demand in polyethylene which use our solvents. The first of those plants started up in the third quarter of 2021. We have been consistently delivering to this new facility since that time. The second facility is an expansion of an existing site. They've placed their first fill orders, which we will begin delivering in the second quarter of 2022. The third facility is a world-scale plant starting up in mid-year. We expect to receive first fill orders for that plant in the coming few weeks. Together, we expect these plants to consume more than 3 million gallons per year when fully operational. The next two largest end uses for our solvents are for polyiso foam production, used in flat roof applications, and EPS and XPS polystyrene, also used in construction insulation. Our products are an essential element enabling insulation systems to achieve their highest R-value, supporting maximum energy efficiency. As you can see on slide 13, Construction is expected to grow well beyond GDP in the coming years. Even more notable is that insulation used in construction is expected to grow even faster as the market prioritizes energy efficiency. For polyiso, we already have a significant market share of that end use. We have captured 95% of the solvent demand required by two new facilities being constructed in the U.S. in 2022. For polystyrene, demand is significantly ramping up, driving higher utilization of existing capacity in the market. Our sales to these customers jumped in the fourth quarter of 21, and we see continued growth into 22. This demand growth gives us good visibility into our expectations for this year and gives us confidence in further growth as our PE customers continue to be cost-advantaged and motivated to de-bottleneck their existing capacity and announce new capacity in the years to come. Similarly, the importance of energy efficiency supports the demand growth we see in 22, and we believe that trend will be sustainable for years to come. The second primary driver is margin expansion. By the end of last year, we successfully implemented energy surcharges to almost all of our solvent, wax, and custom processing customers. We also implemented price increases to our freely negotiated solvent customers. On March 1 of this year, we implemented a $0.22 per gallon market increase for solvents, and announced a further $0.55 per gallon increase for March 18th. As you see on slide 10, the formula component of our solvent contract portfolio, which is about two-thirds of the solvents we sell, has provided protection in the face of cost increases that we have had over the past year and a half. With success in our current round of increases, we will more than offset the current level of cost increases we have seen and expect to continue to maintain our margin in the face of these higher costs. For waxes, we announced a six-cent-per-pound increase effective April 1st of this year. As a result of the steps we've taken, we expect both solvents and wax margins to improve versus 2021. Our third driver is our growth program. During 2021, we successfully converted four growth projects into new business. We've seen a resurgence in demand for both the legacy custom processing we've been doing for our customers, as well as further interest in new projects. On slide 17, you'll see the total number of our projects has expanded to 38 as of the end of January 2022. The number of commercialized projects has also increased to 12. This gives us significant confidence in our ability to increase custom processing revenues to 22, as well as in the following years. Although not a standalone driver per se, a focus on productivity underpins all we do and has now been built into our basic operations. We have metrics and accountability at both our facilities to identify, resource, and deliver on cost improvements. As you see on slide 15, these programs help to significantly offset inflation within our operations. Given the confidence we have in our businesses, we're introducing financial guidance for 2022. As indicated on slide 18, we expect to achieve between $27 million and $31 million of EBITDA in 2022. You can see the components outlined. Building from our adjusted EBITDA of $21 million in 21, you see we're adding back the impacts from last year's freeze event. From there, we layer in expected benefits from the demand growth tied to new solvent demand, contribution from our growth programs, and increased wax margins. We will also have the full year impacts to our costs that began increasing last fall. As you can appreciate, there's always uncertainty in our forecasts. The biggest risk we see today relates to the war in Ukraine and its potential impacts on further hydrocarbon increases and demand destruction generally in the economy. Extending the growth trends, we discussed for our key end uses, successfully returning our solvent margins to 2019 levels, and continuing to deliver on the momentum we achieved in our growth programs, we're very capable of raising our EBITDA north of $40 million over a three- to four-year timeframe. Let me speak to CapEx. Regarding CapEx, we expect to spend between $12 million to $14 million this year. This includes about $5.5 million for the multi-year feedstock pipeline upgrade work. Our growth programs are focused on driving utilization of our existing assets. We don't expect any meaningful CapEx this year to support our growth. Lastly, let me touch on capital allocation. As you saw in the fourth quarter last year, after we put down the potential M&A project, we purchased a sizable block of stock. You should expect us to continue to prioritize a return of capital to shareholders this year. And with that, now I turn the call back over to the operator and open up the phone line to questions.

Thank you. As a reminder, to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, please press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Rosemary Morbelli with Cabelli & Company. Your line is open.

Thank you. Good morning, everyone.

Good morning, Rosemary. Good morning, Rosemary.

Good morning. Pat, you mentioned that you are benefiting from the new polyethylene plants coming on stream, and I understand that those manufacturing processes are also working in using less solvent. So could you touch on what you expect the contribution to be and what would it have been without any improvement in their operations And can they continue to lower the amount of outside solvents they need?

Sure. Thanks for your question. So a couple of comments. I had mentioned the current new units, which there are three of them, when they're up and running, they'll have to get through their startup process. We'd expect them to be consuming about 3 million gallons a year on top of the base demand that we had previously. We're not really seeing, from a polyethylene perspective, real impacts from higher efficiency or reduced use of solvent. In the environment that we're in with U.S., particularly U.S. polyethylene producers being so advantaged from a cost perspective due to their ethane position, they're driving for maximum capacity utilization. And that means they run in a condensing mode, as they say, which actually drives higher solvent consumption. So I think as long as we see The cost curves reflect their advantage position globally and reasonable demand in the market. We don't anticipate, you know, efficiencies reducing the demand growth that we're seeing. And that's really been proved out really since, you know, early last decade once the ethane advantage came to the U.S. All these units have been running extraordinarily high rates, and the only impacts we see are from time to time due to their own reliability incidents.

Oh, great. That is very helpful. And then I was wondering if you could touch on the potential for increasing demand, or I am not too sure how to phrase this, but the demand from the Canadian oil sand has declined. And with the situation in Ukraine and the sanctions, not buying any more oil from Russia, et cetera, can that situation change, and can you see the demand from the Canadian oil sands I mean, go back up to its initial level?

So the short answer, candidly, is no. What we've seen in oil sands, really that began probably in 19, is our principal customer there, this is an area where they have been driving efficiency, and we've seen that trend continue consistently, as I said, beginning in 19. So the loss of our demand is less about their production rates of oil. It's more about their consumption of solvent in their process. So I don't anticipate that reversing. I mean, it's unfortunate, but we just don't really see that happening.

Okay. And then if I may ask one last question. When you took over, there was an enormous amount of excess capacity due to the buildup of new plants which were not actually working properly by your predecessors. What is your capacity utilization currently?

So, we're still running in the 50 to 60 percent range. We're seeing good growth of our key end uses that we've talked about, polyethylene and insulation markets for poly-ISO and for EPS or styrene. But, of course, we've had the headwind of the loss of oil sands. So, primarily what we've been focused on doing is applying that capacity in markets that don't impact our core prime products. We've had, we've established access into other kind of fuel blending type markets. It's lower value for sure, but given the excess capacity, it makes sense for us to bring that in. Those volumes have exceeded from time to time over a million gallons a year. I think with crude returning to the values that it's returning to, I think with the focus on providing more hydrocarbons outside the U.S. from shale oil and shale gas, I think the differentials or the spreads, if you will, between the cost structure in the U.S. and the global market should be providing us more opportunity for volume, and we're working on that. We're trying to move it to where it's been fairly opportunistic, I would say, because we have to follow the relative trading prices between the sales price of our product and our input costs, of course, and those have been volatile. but we're trying to find more structural solutions to that so that we can both have reliable demand but also increasing demand. That's not in our base plans right now to grow significantly, but I think given how dynamic hydrocarbon pricing is in the world today, it's something we're clearly focused on and are more optimistic about.

Thanks. Appreciate it.

We look forward to speaking with you tomorrow. We'll be at the G Research Investor Show tomorrow.

Okay, we are now called Gabelli Funds.

Ah, Gabelli Funds, sorry.

Yes, more important, very important.

See you tomorrow.

Okay, thanks, Pat.

Thank you. And again, ladies and gentlemen, to ask a question, that's star 1. And at this time, I'm showing no further questions in the queue. I'd like to hand the conference back over to Mr. Quarles for any final remarks.

Thank you very much. Thank you all for your question, Marise-Marie, and everyone's interest in Trocora. I always like to conclude my remarks by acknowledging my appreciation for our employees and recognition of their success. As I reflect back on 21, I couldn't be more proud of our organization. Despite the ever-present impacts of COVID, they promptly repaired our operations after the freeze event and were ready to meet the needs of our customers even before most of our customers were ready for our products. That recovery quickly turned into a supply chain crisis across our economy. They moved quickly to add new trucks and drivers to our solvents fleet to meet our customers' demand and began what has become a daily battle to secure both supplies into TC and access to deliveries to our customers from both our sites. I want to thank them for their tireless work. And with that, again, I'll thank you for your participation today.

This concludes today's conference call. Thank you for your participation. You may now disconnect.