Q1 2020 Earnings Call
[music].
Good day and welcome to current resources first quarter Twentytwenty earnings Conference call. At this time, all the participants probably not listen only mode. Today's conference is being recorded and at this time I would like it through the called over to Jason Finkelstein from the P.S. Savvy Group Inc. Please go ahead Jason.
Thank you operator, and good morning, everyone welcome to the core resources first quarter 2020, earning conference call.
Our earnings release was distributed over the wire services after the close of the financial markets yesterday afternoon.
Presenting on our call today will be pack worlds, President and Chief Executive Officer. In addition to Sami Ahmad Chief Financial Officer, Chris gross or corporate controller will also be available for the question answer session, which causes management's prepared remarks before we get started I would like to review the Safe Harbor statement.
Statements on this call that are not historical facts are forward looking statements as defined in the private Securities Litigation Reform Act of 1995.
We're looking statements.
Our based upon management's beliefs and expectations will lead to date of this teleconference may six two guys its body.
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.
Of course filings with the FTC, 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.
Webcast is accompanied by a slide presentation, that's available on the company's website www Petrocorp dot com.
At this time I'd like to turn the call over to two core as president and CEO.
Portals.
Thank you, Jason and good morning to all those participating on today's call.
The onset of 2019, we set our priorities and launched a disciplined process for driving shareholder value with a focus on improved earnings enhance free cash flow and meaningful debt reduction.
Delivering on these priorities has allowed us to enter this period of global uncertainty in a position of relative strength and stability.
Through increased operational reliability steady execution and disciplined cost control the company's first quarter 2020 results yielded cash flow from continuing operations.
$4.4 million, a 3.5 million dollar improvement from the first quarter 2019.
Third quarter 2020, net income from continuing operations, excluding a tax benefit from the enactment of the cares Act was breakeven due to the negative impact to earnings from falling feedstock prices during the quarter.
Consolidated adjusted EBITDA from continuing operations was $5.5 million.
During the quarter overall demand to all end uses was strong.
Year over year volume as lower it was mostly a reflection of unusually high volumes in the first quarter of 2019 related to timing of demand to Canadian oil sands and certain other export demand.
We did have a significant negative impact to earnings due to the dramatic fall in natural gasoline a premier feedstock during the quarter Sammy will discuss natural gasoline fell 55% across the quarter. This resulted in approximately $4.5 million of negative impacts related to inventory costing during the quarter.
Also in the first quarter I'm pleased to mentioned that multiyear improvement efforts at Trecora chemical have resulted in better performance as evidenced by growth in Tcs revenue volume and gross margin.
Over a million dollars of EBITDA this quarter due to reliable operation of essentially all the units Tc, including the hydrogenation unit, which ran well for the quarter. In addition, we had strong demand from our existing customers as well as growth with new custom processing projects at both the B plant and the hydrogenation unit.
This was further enhanced.
By a quarter of reliable wax byproduct feed from our suppliers and strong wax demand across our portfolio.
Turning to our new growth initiative launched in the first quarter, we continue to work towards both delivering on identified projects and increasing the number of projects and our current portfolio. We've added two projects since last quarter and announced the completion of an additional project the extension of our natural gasoline supply contract.
On the supply contract, we expect to realize approximately $1 million a savings this year and averaged about $2 million savings each of the subsequent contract years.
Using last year's business as a baseline we expect to say more than $3 million. This year between cost savings logistics related to the Odyssey agreement announced earlier and this extension with Martin oil and to add another million dollars from other projects in the portfolio.
Now, let me turn to covert 19, and its impact on our people our business and where we stand from a balance sheet and liquidity perspective.
In dealing with impacts of the Koby 19 pandemic. Our priorities have remained the same the health and safety of our people and those into communities in which we operate the reliability of our assets and the sustainability of our company.
We have taken early and aggressive measures to protect our people specifically, we implemented social distancing protocols in early March and relocated all non operational roles into work from home settings with no impact to work execution.
And manufacturing sites, we had daily virus temperature screenings for employees and visitors and had been able to safely maintain or assets and continue to meet the needs of our customers.
To date, we have not experienced any infections and our workforce as.
As the situation develops we continue to take cautious steps consistent with recommendations from the CDC and World Health organization as well as local authorities.
Our manufacturing operations global supply chain and customer order fulfillment have not experienced any material impacts thus far.
However, we are seeing reduced demand emerging and certain end markets and geographies in particular durable and uses.
This is being partially offset by higher demand and nondurable sectors with our products being an essential components and goods such as expandable polystyrene for foodservice.
Yes lane for packaging and hot melt adhesives for home deliveries.
Although near term market conditions present uncertainty and are likely to remain unpredictable. We believe our underlying long long term demand remains intact.
We've also taken several important steps to proactively maintain our strong balance sheet.
In addition to the $10 million and proceeds from our partial amec share sale.
One of abundance of caution we pulled $20 million in borrowings from our revolver. This brought consolidated cash it ended the first quarter to $37 million.
Furthermore, with the Corona virus aid relief and economic Security Act or the cares Act.
We expect approximately $14 million of cash sometime in the third quarter from tax refund claims.
We also anticipate receipt of approximately $6 million in may for the paper check protection program, or PPP, which will support the continuity of our workforce and these uncertain times.
Now I'll turn the call over to Sami Ahmad our Chief Financial Officer for a more detailed discussion of our Q1 results.
Thanks, Pat and good morning to everyone.
Let me start with a discussion of liquidity debt and cash flow.
And I will discuss our first quarter performance.
As Pat mentioned that the ended the first quarter, we had cash and the balance sheet of 37, and a half million dollars and this compares to $6.1 billion at year end 2019.
As previously announced in March we receive gross proceeds of approximately $10.1 million from the amax share sale to army goes.
We also borrowed $20 million on a revolver out of an abundance of caution and stack the cash.
Addition, we have availability on our revolving facility for an additional $21 million a further borrowings.
Our cash balance grew in April to approximately $45 million as we realize the cash benefit from falling feedstock prices.
At the end of April our total liquidity, including availability on a revolver stands at approximately $65 million.
Balance sheet debt at the end of the first quarter was $102 million and this compares to 83 million at year end 2019.
The increase of course, largely reflects the $20 million of revolver borrowings.
Total debt net of cash at the end of the first quarter was about $65 million.
Total revolver borrowings at the end of the quarter stood at 23 million.
And our leverage ratio under our Bank agreement was 2.9 times at March 31, compared to 2.2 times at year end 2019.
Cash flow from continuing operations for the quarter was approximately $4.4 billion, a three and a half million dollar improvement from Q1 last year.
Fourth quarter 2019 cash flow from continuing operations was approximately $5.2 million.
Free cash flow for the for first quarter, which is cash flow for operations less capex and debt service was $1.1 billion.
Recall at the end of last year, we recorded insurance receivable of $1.1 million related to the weather event at the end of October at our South Hampton plan.
We received insurance payments of point Threemillion against this receivable in the first quarter and additional payment of approximately 0.7 million in may.
We expect to receive the final smaller payment later this quarter to effectively close out this insurance claim.
In the current environment, we continue to manage working capital and cash flow in a disciplined manner.
In addition to managing all of our discretionary expenses, we're closely monitoring the aging of our trade receivables and assessing customer credit exposures for potential risks.
We're also evaluating capex, while mantech, maintaining focus on asset reliability as well as environment health and safety projects.
Capex for the first quarter was approximately 1.9 million compared to 3.8 million in the fourth quarter of 2019 and $1.9 million quarter in this first quarter last year.
Now moving onto a discussion of first quarter earnings and results.
Recall that we disclosed in the third quarter last year their investment in a Mac is now classified as held for sale and thus reflected as discontinued operations in our financial statements.
Net income from continuing operations in the quarter was 5.9 million or 23 cents per diluted share compared to net income from continuing ops of 1.8 million.
Or seven cents per diluted share in the first quarter last year and a net loss of 18.7 million or 76 cents per diluted share in the fourth quarter 2019.
Net income from continuing ops for the quarter includes an approximate income tax benefit of approximately $5.7 million or 22 cents per diluted share.
From the changes to the tax laws as a result of the enactment of the care Zack.
The cares act allows for the deferral of income and social security tax payments.
A five year carry back for net operating losses changes to interest expense in business lost limitation rules, certain new tax credits and certain new loans and grants to businesses.
This will result in the filing a refund claims totaling approximately $17.8 million to recover prior taxes paid.
On April Thirtyth, we filed our first refund claim for approximately $14 million, we expect which we expect to receive in the third quarter.
Additionally, as Pat mentioned, we were approved for the PPP loan under the cares Act for approximately 6.1 million, which will further add to our liquidity.
We expect to receive funding on this loan later this week.
We are securing appropriate amendments for our banks such that this debt will be excluded from financial and other covenants in our debt facility until determination or forgiveness.
Gross profit in the first quarter was $8.1 million or gross profit margin of 13% as a percent of total revenues.
This compares to gross profit margin of 13.5% in the fourth quarter and 15.5% in first quarter last year.
First quarter 2019 earnings.
First quarter 2020 earnings were negatively impacted by the sharp decline in feedstock prices for our specialty petrochemical business.
This rapid decline along with reduction inventory volume resulted in approximately four and a half million dollars cost of materials impact.
Consolidated adjusted EBITDA from continuing ops for the first quarter was five and a half million.
This compares with adjusted EBITDA from continuing operations of 6.4 million.
For the fourth quarter, and eight and a half million first quarter last year.
Gee and expenses for the first quarter were $6.7 million compared to 6 million first quarter last year.
Increase relative to Q1, 2019 is primarily due to property higher property taxes higher insurance costs and compensation expenses.
Interest expense for the first quarter was approximately 0.9 million compared with 1 million in the first fourth quarter 2019, and one and a half million first quarter last year.
The decrease in interest expense was mainly due to debt reduction in the second half of 2019 combined with lower interest rates.
Now, let me walk you through our business segments, starting with specialty petrochemicals.
Adjusted EBITDA from continuing ops for specialty petrochemicals in the first quarter of 2020 was six and a half million compared to 8 million in the fourth quarter and 11.4 million first quarter last year.
Especially specialty petrochemicals volumes in volume in the first quarter was 19.7 million gallons compared to 20.3 million gallons in the fourth quarter and 22.5 million gallons in the first quarter 2019.
The volume reduction is mostly attributed attributable to timing of demand in the first quarter of 2019, when we had unusually high demand into oil sands and also timing of certain export sales.
We saw some minor reduction in export demand in March of 2020, which we attribute to the pandemic.
Prime product volumes in the first quarter was 16.2 million gallons compared to 16.3 million gallons in the fourth quarter and 17.6 million gallons in the in Q1 of last year.
Byproduct sales volume was 3.5 million gallons in the first quarter of 2020.
Byproduct margins declined to about eight cents per gallon into the first quarter from 25 cents per gallon in the fourth quarter.
Byproduct prices, which are tied to benzene and tie between prices fell faster than natural gasoline feedstock.
Let's talk about the impact of falling natural gasoline FIS feedstock prices on first quarter results.
As you May know, we use natural gas.
Natural gasoline as feedstock for producing or specialty solvents at South Hampton.
The price of natural gasoline is highly correlated with the price of crude oil which of course collapsed during the course of the quarter.
Natural gasoline prices declined 55% over the course, the first quarter at the end of December natural gasoline price was a $1.25 per gallon and by the end of March it had fallen to 56 cents per gallon.
The decline continued in April with current average might Mark Kurt average market price for natural gasoline at approximately 36 cents per gallon.
The trend in the market price of natural gasoline as shown on page seven.
The earnings presentation that is posted on our website.
This dramatic and steady fall in feedstock prices at a negative impact on Q1 results, mainly due to the consumption of higher inventory higher cost in inventory throughout the quarter.
In addition, we drew down inventory during the quarter, which also had a negative cost impact.
Both of these inventory cost factors had an unfavorable effect on prime product and byproduct margins. The total cost of this was approximately four and a half million dollars.
Obviously, the fall in feedstock pricing had a positive impact working capital and cash flow.
Moving on to specialty waxes, especially waxes segment, which is based at our core chemical RTC facility in Pasadena, Texas had adjusted EBITDA from continuing operations of 1.1 million in the first quarter compared to 0.2 million in the fourth quarter 2019 and in.
Negative 0.9 million in first quarter last year.
Specialty wax is generated revenues of approximately $10.4 million in the first quarter, a 1.6 million dollar increase compared to 8.8 million in the fourth quarter is $2.2 million increase from first quarter last year.
Revenues included $6.8 million, a wax product sales in the first quarter wax sales volumes increased approximately 29% or nearly 2.3 million pounds from first quarter last year.
The increase sales volumes in Q1, 2020 reflect reliable supply throughout the quarter of wax feedstock and the absence of supply interruptions and our own maintenance outage that we had in the prior year quarter.
Custom processing revenues, which were 3.6 million in the first quarter increased 26, 26% for the fourth quarter, and 60% or approximately $1.4 million from first quarter last year.
The increase was due to significantly improved operation of the hydrogenated hydrogenation and distillation unit.
As well as strong revenues from other custom processing customers.
As a result of number of equipment and operating enhancements that we made to the hydrogenation and distillation units.
Its reliability has improved significantly in recent months as did the overall reliability of the Tc site.
As we enter into a period of great economic uncertainty and business downturn, we believe we have ample liquidity.
Our strong balance sheet with no near term debt debt maturities and a keen focus on cash cap on cost management.
Now we'd like to open the lineup for your questions.
Ladies and gentlemen, if you have a question on line. Please.
And then the number one key on your Touchstone telephones. If your question has been answered are you wish to any of your cellphone. The Q. Please press the pound.
We have with first question from the line of Jon Tanwanteng from CJS Securities. Your line is now.
Good morning, gentlemen, thanks for taking my questions and nice quarter.
Thanks, John Good morning.
Could you start maybe by breaking down where you're seeing strength and weakness that you exited March and then during April and into Bay, maybe break it down between packaging.
Trucks, and the oil sand and then custom processing and if that.
Net volumes to be up or down overall in the sequential basis, given all the puts and take share.
Sure Yes.
It shouldn't be surprising right. So if you if you think about how our.
Product demand is tied to two end uses its fairly clear cut along durable and non durable and uses.
And of course, some of our applications such as polystyrene touched both right. So I'd say, our polyethylene demand is relatively stable as we would expect.
Most of our essentially all except perhaps one or two us assets continue to run in our portfolio. So that remains steady.
If you talk about EPS polystyrene.
Food packaging has been an offset to the decline in cuts in construction related end uses.
We still see that net negative to be clear.
Similarly for poly ISO again, a lot of tied to commercial construction and again this would normally be their strong season, where we would expect volumes to be ramping up in the second quarter. We're not seeing that we are seeing some declines and I'll wrap this all up aggregate level in a minute, but let me I'll just go through the end uses.
Another important in used to us is synthetic rubber like butyl rubber applications, both export as well as domestic.
Tied automotive again down fairly significantly in the near term.
And then oil sands and as you guys know oil sands is we're tied to the large producer in that market and while there circumstance has been dire.
These large manufacturing units don't turn quickly.
So I wouldn't say, we're seeing anything unusual in demand in oil sands, yet although we.
It's certainly a risk what is happening as we've been talking about for about a year is that.
Our customer is implementing efficiency projects and so our demand to them in the second quarter is down consistent with that prior expectation, but I really don't attribute that to the pandemic.
So if you take it the aggregate level.
In March we saw very minor impacts.
We all know that this started in Asia and started rolling through Europe in the U.S.
So our initial impacts were on some.
Polyethylene consumers in southeast Asia, the had turned down demand as they saw supply chains backup so that was really economic driven but it was related to the pandemic.
So that was late in March and frankly, that's actually returned so that's not really the driver in our domestic business, which is of course, the bulk of our demand.
That really started a little bit in April and I think in May we are seeing another gear down in terms of demand. So as we look across the second quarter today.
Nine unlikely that we'll see notionally, a 15% demand reduction and demand in the solvents business.
In a Tc on waxes.
Of course, we have a lot of exposure from an end use perspective hot noted pieces, but again that has some split to it between.
Like the home delivery home.
Corrugated box type applications, which are strong.
But we also have exposure to furniture applications and use southeast so.
It's probably we're going to feel some downward pressure I would expect.
In the second quarter, we're working to mitigate that I mean, the benefit we have in the wax business is that were frankly were small in the context. The overall business. So we're working hard to see whether or not we can find alternative markets for that product, but from an underlying demand perspective, it's net down also.
And then lastly on custom processing.
We have a portfolio of in uses there like everything else fairly diversified some of it ties into polyurethane in uses which again have their automotive and construction and homebuilding type application ties and we've seen some reduction of some of the custom processing.
But I would say, it's not as not to the level that we see in solvents at this point something less the 15% overall, it's what I would expect.
Got it thank you Patrick.
Great color.
Can you comment a little bit on the the benefit that you're expecting from lower inputs in Q2 at this point I know you commented on Q1 last time you recorded.
Maybe talk about what's that you're seeing that I wonder if byproduct credits as well.
The extended from what everyone Q1 also.
Yes, so actually.
Yes, that's going to be in a challenge for us in the second quarter somebody talk through a little bit of that.
So as we as we talked about if you look at our selling.
Kind of cash cycle kind of cash cycle as it relates to cost of goods coming in and our selling prices. We've said that our payables were long payables right. So we have a lag essentially in a falling market that hurts us. So if you imagine overlaying for instance, the graph that you've seen our deck on the decline.
Line and the prompt to market for natural gasoline with a lag you can see that we actually today or maybe I should say two days ago.
There was a continuation of falling feedstock.
On profile in our portfolio. So what that means is there were there there continued to be negative impacts in the second quarter with respect to falling feedstock prices. So we still have that headwind as of today.
And I should speak a little bit about what's going on and kind of the general hydrocarbon market. So.
As.
As you appreciate.
Our byproduct value is tied to the pricing of benzene toluene and those are highly related to what's going on in fuels market and frankly as we've all seen the feels market as has been and complete this array for the last four weeks five six weeks.
We saw the negative WT posting at the end of last month. So so right now by putting by values are highly compressed I mean due to the point of being materially negative in April so thats going to be a challenge for us what I expect is these markets rebalance as they always do.
Back we've seen a remarkable change as we're all watching.
These past five days in hydrocarbons writes a WT is up over 100% in the last five trading days.
We've seen natural gasoline daily price go from.
Really 40 cents two days ago to 50 cents yesterday.
So I really can't give you very valid forward look on.
How these hydrocarbon has hydrocarbon volatility is going to play through.
But if you're watching does urge you to watch.
VTI and that will have a quarter in Brent will have a strong correlation to our inputs on natural gasoline and gasoline volatility.
An impact on have benzene is going to be trading around which will influence our coproduct values for the remainder of the quarter, but.
Unfortunately.
I just have to tell you it's uncertain time, and we're just taking appropriate actions.
That we can control.
To manage through volatility that we're facing.
Got it. Thank you and then finally, just understanding how much of the carriers and the PPC cast that you're getting in the door.
Yes kind of a forgivable grant alone that you can keep or how much this be returned at some point.
Well first of all the.
That the cares act loan is designed to support our continuation of our workforce as is.
In terms of wages benefits head count and all that so.
That's where that money is going to go in terms of the forgive ability piece, John we're going to examine that.
You know there our criteria in terms of how much has to be used a four for payroll. There are other allowed uses in terms of things like utilities in rents and those kind of thing. So we'll have to go through that analysis later in the quarter.
Along with our orders and determine what's what's a forgive forgivable amount.
Okay. So we considered 100% known at this point.
I think that's the conservative scenario is to consider 100%.
We believe that we will qualify for a significant amount of forgiveness, but I don't know what that amount is right now.
Okay got it. Thank you and then if you had just any final comment on.
The rest of the sale of the American Mr. brand extension.
The buyers.
Sure I mean, no no real update as you appreciate.
We updated at the end of March early April.
The next we were able to close the army co piece of course and didn't have the rest of the buyers come in due to all the shutdowns that we're going on in the region those shut down situations actually havent changed both Saudi and Dubai and the other GCC countries remain largely and shut down and of course this.
Mutt beginning.
Couple weeks ago, we're now into Ramadan. So things are really just quiet in the middle East and I really don't expect.
Anything to change until we get into early June they return back from Ramadan and hopefully we'll begin to open up their economies.
Got it. Thank you very much guys appreciate the answers thanks John.
Your next question from the line of Joseph Let me go away from Roth Capital Partners. Your line is now open.
Morning, guys and congrats on a good start to the year. Thanks, Jeff Thanks, Joe.
So.
Prior caller asked most of the questions like that just to maybe two other things I'm, sorry about my voice as well I'm struggling with allergies locally.
Wax pricing.
Was down quarter over quarter.
You know about 10% 10, 15%.
So your volume Spike back up is was it you know higher volume of lower priced waxes that drove that or any other color you could give there.
Yeah, I think it's mostly a mix effect.
But I listen to all of our customers are watching input costs and what they call everyday looking for relief because because we're all suffering in this environment right. So everyone is appropriately and aggressively pushing on pricing is as do we so I don't think we've seen significant.
Erosion in pricing at this point.
But it's a pressure we face, but that particular effect with more about mix.
Okay, and then I'm just kind of following on some of the stuff in the prior caller.
With pricing.
With feedstock pricing kinda now stabilizing a bit.
And W.T.I.s rebound do you.
Guys expect that.
There'll be an opportunity to catch up some of the negative impact of the falling price for during that occurred during April possibly during may to where it will you know somewhat wash out.
Or do you think you're going to have.
Compressed margin this quarter.
So if you.
So we we talked about the foreign half in the first quarter and if if we were at.
Feedstock pricing from two days ago I.
I would tell you that we still have some negative impacts in the second quarter, but they're less so sequentially it'll be less negative right. So you'd have in convoluted sequential math that means its improvement.
But the candidly it's anybody's guess how are these hydrocarbons are going to price out further in the near term. So as I said, we jumped from 40 cents to 50 cents a gallon.
Yesterday today, well yesterday effectively those true goes up over 20% yesterday and I just I can't tell you, where it's going to be tomorrow.
So it will you know it's a structural.
Element for us so whether it's good or bad it will flow through.
Ultimately.
If you believe we returned to prior norms of.
Crude pricing then that will flow back through the piano consistent with that returned to a higher prices but.
So Joe it's just a everyday is kind of a new day on the and the crude world.
But you did say the benefit on the cash side, Joe and I mentioned that in.
In terms of April cash that growth was really mostly driven by the fact that HP reduced as a result of lower prices.
Okay Fair.
Fair enough and then.
One final thing you mentioned you know byproduct.
Values are materially negative right now.
Or at least they had at some point reach that level.
Do you guys have any ability to.
Build up a byproduct inventory and wait for an opportunity to sell that it somewhat of a less negative a valuation.
So two components that answers the short answer is physically no could we just we don't inventory nor nor do we had the storage capability to play physical inventories for market timing and frankly, the second answer is we don't think we have any particular wisdom on calling.
Hydrocarbon prices, so didn't seem prudent for us to be effectively trading by moving those inventories around.
My inclination would have been at.
$40 crude maybe we would build inventory and then it goes to 20 rights I just don't feel like.
That's a smart position for us to take so we we just try and run low cost run efficiently and lean and then managed volatility through our portfolio.
Okay fair enough I'll turn it over thanks, guys Yep.
Next question is on the line of business.
Hi them capital your line is I welcome.
Okay. Thank you.
First of all I, just want to come back to that four and a half million dollar feedstock impact how much of that was due to.
Your reduction at inventory and chewing into that higher price inventory and and then how much is.
Weren't enough billion due to the contract leg, yeah that you would be experiencing with your customer, which we anders customers, which we would I understand you think we understand that there is just a natural lag feedstock prices do work into.
Into pricing so if that's correct when you break those out those two out please.
Yes, roughly about 1 million to million half was volume as we pulled volume down and the balance of that call. It three and a half 333 and a half.
Was.
Price slash cost impact.
In Sammy would you would you be comfortable Whitney characterizing that is a contract lag impact.
Yeah effectively it is I mean, you know our is the.
The the cost layers are not.
Pat mentioned this overhang on our not overhang, but HP versus a our difference.
That's really the driver on the price cost slash price side.
Okay. So maybe I'll take this offline and you're welcome to caught me off here, but.
It would be my understanding so correct me, where I'm off here that when feedstocks.
Pricing goes down.
And yeah, there is a lag well actually that lake is supposed to working here in your favor when feedstock goes down and and work against you wouldn't feedstock or is that correct.
No I think of it this way so we have lags on the sell side. So we have so we've talked about before I had a significant portion of ourselves contractor on formula right. So they reference a natural gasoline price.
And many of those formulas reference of prior month price.
Okay, and then on the feedstock side, we also have.
The combination of both a reference to a prior month as well as the actual physical inventory that's in our system.
So those when you come when you think about those things in aggregate that basically means youre your cost of goods sold reflects an older price.
Than the adjustment in your product price.
Then we talk about the lag that's what we're talking about so in a falling market.
Your product pricing.
Is reflective of a.
Have a market price that's newer than your feedstock pricing. So that's why we lag were long payables and we get the negative impact of that in a falling market.
Understood and ship.
I'm, sorry, I just cut you off I know, it's just a little bit noise and system go ahead.
So, yes feedstock prices were simply lap.
From this level, which seems highly unlikely given the volatility and unlikely.
But if feedstock prices were flat.
Then you would see just like it back go away.
Because the feedstock we didn't catch up with the the newness of the market Bryce.
That's right, but recognize that.
In April we had effect, we had negative effects because it was still falling in April just so we're talking about within the current quarter just recognize we're starting already in April with some negative effects right.
Right. Okay. Thank you for that clarity and then.
I'm going to jump to the mine for a second kind of go off on a potentially squarely direction. When does the guy in gold production began at the mine and given the delays in the closure.
Your sale are there any adjustments that may work in your favor.
Hi, Guy in gold production begins to before before you close the rest of the the sale.
Sure So the Guy and mold Gold project of course that was launched and approved by the board early last year and as a capital project that's been continuing.
They were anticipating completion by the summer and they've had some impacts on their ability to complete the project frankly, because they can't get.
External to Saudi resources and for certain technical work. So thats just delayed the project for some period of time not not extensively but they have some delays.
So, but it's progressing and it looks to be a good project that was all contemplated a course in our negotiation. So I wouldn't say that and we have negotiated a price it's not a formula so the price is the price.
We expect.
The buyers to pay the price and and we expect them to we expect to get this in close by the end of the third quarter.
Great. Thank you and then lastly would you talked about a year shape sales initiatives.
To add to build the volumes, especially a prime product volumes.
Sure I'll talk on talk kind of about.
Our growth.
Funnel that we launched last quarter is really the way in which we think about this is we're driving value for shareholders generally so it encompasses really any work that requires.
Frankly, thoughtful execution over time to deliver value and we focus that approach on feedstocks you saw that in the Martin contract. That's actually a negotiation that started in the say a year ago effectively you saw that in our announcement of the Odyssey contract, which again really got underway that negotiation got underway last summer.
Sure. So these things do have some lead time lead time to them.
Other pieces that are in this portfolio, our custom processing projects, where we're engaging with customers to bring new business and against the assets at T C and at South Hampton. So there are projects in for both sites. There are some application type projects will drive higher utilization.
One of the assets we have.
We're looking at in some cases repurchasing assets those are very long cycle times, it's nothing that's going to hit in the near term.
But we we tend to think of it really comprehensively across the company and we want to bring both the kind of the priority in the visibility to the executive leadership team. So that the proper projects get funded and they get properly resourced. So we continue to deliver the value that we've outlined in there.
That's fair, Thank you and the and then shabby.
With the tax refund that you're anticipating the anticipation or the remainder of the mine that sale closing and then the.
Forgiveness.
The DPP at loan.
You're going to have some meaningful debt pay down what are you anticipating that your interest expense reduction will be.
Right. So in terms of debt Paydown right now I think you know we believe that's probably a little premature.
On a number fronts. None of this these items that you mentioned.
We don't have the cash in hand, just yet.
I think we'll look at it and depending upon business circumstances.
In terms of cash flow expectations for the business.
Well, we'll decide on.
How much and when to pay down, but you're absolutely right. I mean I'm you know if all these things are happened as they're supposed to a you know we should have decent liquidity and depending upon business conditions.
We could choose to pay down a meaningful amount of debt.
Hey posed the question in the Spirit has your interest expense and and this actually could be the equivalent of a one of the large projects that you are.
Well I mean, one way to think about the interest expense question.
Bill is if you look at the first quarter I mean, we didnt do the.
The revolver borrowing until until March so interest expense that we had in the first quarter is reflective of a debt balance that's roughly call it $80 million or so so and thats reflective also of current Oh current rates. So that's.
Probably a good place to start in terms of Ah you know.
Projecting.
Probably move on the next caller yeah.
Thank you okay. Thank you bill.
Next question is from the line of Eric Larson from Gaslog. Your line is Hello.
Hey, guys just as Mitch.
Most of the question asked one question I had has to do with your discussion on the price average price of wax sales and.
Can you just discuss you discussed mix a bit.
Following Hydra.
Petrochemical prices also impact and if you have a sense of how much of that was from each.
So we've talked before about our we were been on a path to augment our feed supply with other on purpose products that are higher cost right. So as part of that migration and those are higher priced products.
They also have higher costs. So that that is a driver of some of the mix effect that you've seen and just we had other sales in the quarter that basically brought the average price down our feedstock cost doesn't move that much because most of our feedstock are these by products that doesn't have quite the volatility that you see.
He is.
If you're buying ethylene for instance to to make polyethylene wax on purpose.
So.
Our niche in the market has been a we're making a product that fairly competes with on purpose polyethylene, but at a lower price point and a lower cost point for us.
It remains our niche those guys are certainly under pressure for price reductions because their customers can see their feedstock costs have come down a lot. That's why I mentioned I mean, we were under pressure everyday to sustain our pricing and but we havent had significant price reductions yet because we continue to kinda carve out this niche that we have.
Okay. So you so in terms of looking at wax sales that level that it was in the first quarter is is would seem to be sustainable level at least for this for the short term.
So we in the near term Yeah. We are tied to certain end uses right you get qualified and for those applications and when those applications turned down like our.
Exposure to furniture, you can't turn on a dime, but what I'd mentioned is your <unk> no mitigate if we can find other.
Other in uses other channels or other outlets, maybe at lower pricing than the established customers but.
We're trying to mitigate the loss of volume because the turned down and that demand I don't know that we'll get it all done this quarter, but that's that's on mitigating step to counter this reduction in demand.
Okay and then the second question to do with custom processing. She you had a nice.
Move forward in terms of custom processing is you've got the hydrogenation distillation units running.
Do you expect that to continue into the near future again visibility in terms of how that's moving.
Yes, we had we had the benefit of a combination of some really good.
Finally, seeing the turn in operations, we've been talking about right. So that was consistent across the site, including hydrogenation, which is great. It also corresponded with a circumstance and particular in use wax and use frankly.
Had some supply interruptions from others. So we had an opportunity to capture a lot of volume.
Those some of those disruptions are continuing but frankly the.
Supply chain is having its own issues not related to us.
So I don't think in the second quarter, you'll see the same level of business across that unit.
We think opportunity remains there or the customer that we had.
That we did the project within the first quarter remains interested so we're optimistic that we'll be able to continued to drive business against that asset, but I don't I don't expect in the second quarter, you'll see the same level revenue against.
Thank you.
Your next question from the line of Craig Hallum I needed from Carl M. Hennig, Inc. Your line is Hello.
Hi, guys back in I think the 2014 2015, when oil crashed the margins actually went up due to some type of minimum mark up meaning you can't just keep dropping your prices.
To the point of.
You are getting killed on is that still a factor or is that what you're wrestling with here in this they're trying to work on price, but you have kind of a a minimal net you have to make you can't just keep dropping to.
Limited.
For feedstock.
Yeah, So candidly I'm not familiar with happened in 2014.
These are my yeah, So I I can't I can't really comment on specifics of what that was about that what you're describing isn't situation, we find ourselves and today.
One thing is that prior to 2017 this company was on LIFO.
Inventory County.
And they switched FIFO, so you could be thinking of those terms.
That was more just to both the fact that.
The <unk> at the lower level. The gross margins went up just due to the fact that they didn't drop the price all the way in corresponds it wasn't so much about a quarter by quarter timing, but that's that's fair enough. One other question, so you're going to keep the 20 million from the revolver.
Oh, you're going to keep that borrowed.
So, let's I would characterize where we are today guys is a very defensive posture right. We we really don't know.
You know how the market is going to unfold in the coming.
Frankly months in quarters right I.
Personally I've been through these resets in the market before and they can be brutal.
So were posturing ourselves to deal with very tough circumstances.
Today, we were at difficult circumstances.
But I've learned over the years it can always get worse frankly so.
There's some we're we're taking every action that we think is appropriate to sustain the company through a tough time and then as we as we get through that time, our strategy remains the same and our expectation with respect to our balance sheet remains the same which is we think you know around a two or less than two time lever is the right place to be ultimately.
And that we should be <unk> rewarding our shareholders.
Through other mechanisms as cash is available so I think all those things become options, but but today, we're going to remain defensively postured until things settle down and whatever that is that you know as we've seen in the last few days with hydrocarbon starting up.
Yes, good on earnings, but it has a unfavorable working capital impact cash standpoint.
So you know we've seen a you know a collapse and prices over the last number weeks I'm not saying it could go the other way but to have that defensive position is good in the event that we do have a working capital spike.
Okay and I noticed you said comp went up in Q1 have you looked at board comp executive comp in the short run to try to fits all hands on deck I know, it's another a number of other firms are looking at that or where are you out on that.
So I mean, we always test how how we reward everyone in the context of the market and you know as Weve survey. The market. We think we are appropriately positioned where things it's important to us and you saw by virtue of us.
Participating in the PPP loan.
As the maintained maintenance of our organization and our people in their pay and benefits. So while in a normal circumstance, we might be looking for significant cost reduction opportunities.
It's not really to path. We're on today, because we want to be consistent with your route intentions of the PPP program, which is to support the continuity of our workforce and that remains our priority.
Okay, Thanks, and good luck for the quarter.
Okay. Thank you.
At this time I would like to turn it back to Mr. backlog, but a final closing remarks.
I can make.
It wasn't thank thank you all for your interest in Tricor and participating on the call today I want to acknowledge the tragedies. This pandemic has caused individuals and families around the world I also want to acknowledge the hardship on our people we have drivers on the road delivering to our customers every day, we have operators coming to our sites and many and it worked from.
Relation balancing the needs of our company with the needs of their family. These present unique challenges and I. Thank all of them for their dedication hard work.
Looking into staying safe keeping those around and safe.
Meeting needs of our customers and sustaining our company.
It's been a you know candle, it's been really impressed with the maintenance of the morale of our organization and their ability to to deal with these changes very very helpfully.
Despite these current challenges our focus remains the same we continue to prioritize the safety of our people those who come to our site and communities in which we operate we're focused on improving the reliability and productivity of our operations and to advance our growth programs.
As we saw last year, we believe accelerating in these dimensions will sustain us through the current challenges and creates significant shareholder value over time.
And so again, thank you for your participation.
Mike we're done thank you.
Thank you good luck with ladies and gentlemen. This concludes today's conference call. Thank you also participate thing you may now be.
Okay.
[music].
[music].
[music].
[music].