Q4 2020 Trecora Resources Earnings Call
Good day, and welcome to check for resources fourth quarter and for years 2020 earnings conference call on.
At this time all participants are in listen only mode. Today's conference is being recorded and on this time I would like to turn the call over to Jason Finkelstein from the P. S. On take Group Inc. Please go ahead Jason.
Thank you operator, and good morning, everyone.
Welcome to the core of resources fourth quarter and full year 2020 earnings conference call.
The 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, and Sami Ahmad Chief Financial Officer, Christopher growth, our corporate controller will also be available for the question and answer session, which fall.
Management's prepared remarks.
Before we get started I'd like to review the Safe Harbor statement statements in this statement from.
This presentation net 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 peak this teleconference March night.
Jonathan.
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, which of course 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.
The webcast is accompanied by a slide presentation that is available on the investors section of the company's website www dot for core of Dot com.
At this time I'd like to turn the call over just of course, President and CEO Pat Quarles.
Good morning, everyone and thank you for joining us today like many of you on this call I'm pleased to turn the page on 2020 and optimistic about the year ahead.
Around this time last year. Despite the extraordinary challenges that were beginning to unfold, we communicated a set of goals that we pledged to fulfill during 2020 I am pleased to say, we're able to meet all of our commitments. The completion of the sale of our non core <unk> investment at the end of September not only simplify the company by narrowing our focus to specialty.
Chemicals, but meaningfully strengthened our balance sheet. The sale resulted in net cash proceeds allowed us to reduce our bank debt by $37 $4 million and meet our target leverage ratio of between one five and two times.
This brought our year end debt towards the lowest level since 2014.
With our cash balance at the end of December at approximately $56 million or significant liquidity allows us to continue our focus on growth opportunities.
A year ago, we launched our diversified portfolio of growth projects to deliver sustainable organic growth.
This resulted in better than expected value creation of $4 $5 million on EBITDA in 2020.
At year end, our final had 14 projects focused on delivering new products are entering new markets 17 projects focused on driving asset utilization with revenues that don't require significant capital and for projects focused on improving productivity and reducing costs.
In 2020, we successfully completed for commercial trials with a further two trials being executed in the first quarter of this year. We expect many of these to result in sustained custom processing revenues beginning in the second quarter.
Turning to our financials for <unk> 'twenty 'twenty operating results reflect the resilience of our business in spite of widespread challenges from the pandemic.
Net income for full year 2020 was $31 million, which includes the net gain from the sale of Ambac of $26 million. This compares the net loss of $15 million for 2019 adjust.
Adjusted EBITDA from continuing operations for 2020 was $21 $6 million compared to adjusted EBITDA from continuing operations of $31 million for 2019.
While prime product sales volume for the year was severely impacted by the pandemic declining nearly 10% from 2019 fourth quarter Prime product demand increase from weekend levels in the second and third quarters and exceeded sales volume of fourth quarter of 2019.
The growth was driven by solid demand in the polyethylene and expandable polystyrene markets.
Also on the fourth quarter wax sales volumes increased approximately 14, 5% or for $1 1 million pounds from the fourth quarter of 2019.
As we start the year, we're very encouraged by the continued recovery in the economy and in our end use markets as the year progresses, we expect pent up demand and the strength of our end users to show growing momentum.
This combined with our robust growth growth portfolio has given us the confidence to initiate our recently announced $20 million share repurchase program.
This program, which has been authorized through March of 2023 reflects our commitment to maximize stockholder value through the continued prudent allocation of our capital.
Now, let me turn it over to sandy to discuss the specifics of our fourth quarter and full year results.
Thanks, Pat and good morning to everyone.
Let me start with the discussion of liquidity debt and cash flow and then I'll discuss our fourth quarter and full year performance in some more detail.
As Pat mentioned in 2020, we reduced our bank debt from $83 million at the end of 2000 $19 million to $46 million at the end of 2020.
The debt reduction as you know was funded by the proceeds from the <unk> sale.
Our leverage ratio under our bank credit agreement declined to 165 times at the end of 2020 compared to two two times at the end of 2019.
Total debt, including our PPP loans stood at $52 $2 million at the end of 2020.
Our cash balance at year end was $56 million, which includes proceeds of $6 1 million from the PPP loans.
In addition, our revolver remains undrawn with availability of $52 $4 million.
A few comments on the PPP loans we.
We believe we qualify for Fulton for full forgiveness based on the SBA criteria.
All of our PPP loan funds were segregated from our operating funds and we specifically use them solely for payroll and benefits thus preserving employment at our sites.
We expect to complete the forgiveness application process for the next several weeks.
<unk> received of termination on forgiveness later this year.
We also received partial federal income tax refunds as a result of the tax law changes under the cares Act.
In the third quarter of 2020, we filed.
Refund claims totaling approximately $16 $5 million.
In November we received about $14 6 million, including interest from the IRS.
Our final refund claim of $2 $4 million is still outstanding and is included in taxes receivable on the consolidated balance sheet.
We expect to receive this final refund later this year.
The approximately $15 1 million increase in deferred income tax liability on our balance sheet from 2019 reflects this realization of deferred tax assets deferred tax assets, specifically, our net operating losses.
Our 2020 full year operating cash flow from continuing operations was $29 $6 million.
Full year 2020, Capex spending was $13 4 million compared to approximately $10 million in 2019.
Capex spending at Southampton in 2020.
<unk> was up nearly $4 $4 million from 2019. This increase was primarily maintenance spending for the Gulf State pipeline at South Hampton, which is part of a multiyear capital plan to rehabilitate and upgrade the feedstock pipeline.
Capex spending for the specialty waxes segment was $2 million.
Free cash flow for 2020, which is cash flow from operations less capex and less required debt amortization was approximately breakeven.
We were able to fund all of our Capex and mandatory debt paydown with operating cash flow, while preserving liquidity in a challenging business and operating environment.
In 2021, we anticipate capital expenditures of approximately $13 million to $14 million.
2021, Capex spending is primarily driven by continued feedstock pipeline work as well as higher level of plant maintenance spending at South Hampton.
Now, let's take a closer look at our fourth quarter and full year performance.
We reported net loss in the fourth quarter of 2020 of <unk> 1 million or a penny per diluted share compared to a net loss of $19 7 million or <unk> 80 per diluted share in the fourth quarter of 2019.
Net loss from continuing operations of in the fourth quarter of 2020 was <unk> 1 million or a penny per diluted share compared to net loss from continuing operations of $18 7 million or <unk> 76 cents per diluted share in the fourth quarter of 2019.
Adjusted EBITDA from continuing operations was $4 8 million for the fourth quarter of 2020. This compares with adjusted EBITDA from continuing operations of $7 1 million in the third quarter of 2020, and $6 4 million in the fourth quarter of 2019.
Gross profit in the fourth quarter was $6 million or 10, 3% of total revenues compared to $8 3 million or 13, 5% of total revenues in the fourth quarter of 2019.
Gross profit for full year, 2020 was $28 7 million or 13, 7% of total revenues compared to $38 5 million or 14, 9% of total revenues for the same period in 2019.
Yes.
G&A expenses for fourth quarter were $6 2 million compared to $5 9 million in the fourth quarter of 2019.
Full year G&A expenses were $24 9 million compared to $24 4 million in the same period last year.
G&A includes plant level Jen.
General and administrative expenses as well as corporate expenses.
Interest expense for the fourth quarter was approximately <unk> 3 million compared with $1 million in fourth quarter last year.
Full year was approximately $2 5 million compared to $5 1 million in 2019.
The $2 $5 million reduction in interest expense due to debt reduction combined with lower interest rates our factor of interest rate for the full year was two to six 3% compared to $4, 56% in 2019.
Now, let me walk you through our business segments, starting with specialty petrochemicals.
Adjusted EBITDA for specialty petrochemicals in the fourth quarter was $6 $4 million compared to $8 5 million, the third quarter and $8 million in the fourth quarter last year.
Adjusted EBITDA margin for the fourth quarter was 13, 1% for the specialty petrochemicals segment compared to 21, 6% in the third quarter and 15, 2% in the fourth quarter of 2019.
Specialty petrochemicals volumes in the fourth quarter of 2020 was $22 1 million gallons compared to $17 9 million gallons in the third quarter and $20 3 million gallons in the fourth quarter of 2019.
Full year volume in 2020 was $75 1 million gallons and this compares to $84 8 million gallons in 2019.
Prime product sales for the year were severely impacted by the pandemic declining nearly 10% from 2019.
This was due to the lower sales to the polyethylene end use markets as well as lower sales to Canadian oil sands customers.
Sales to other end use markets were also generally weaker compared to 2019 due to the pandemic.
However, fourth quarter of prime product volume increased to $17 6 million gallons from weakened levels in the second quarter in the third quarter and from fourth quarter of 2019 of $16 3 million gallons volume.
Volume growth was driven by solid recovery in demand in the polyethylene and expandable polystyrene markets.
For the full year specialty petrochemicals net income was $14 $9 million in 2020 compared to net income of $25 6 million in 2019.
Adjusted EBITDA in 2020 was $26 4 million compared to $39 2 million for the same period, a year of growth a year ago.
Gross margin decreased from 77% of gross revenue in 2019 to 15, 8% in 2020.
The decrease in gross margin was driven by a significant decrease in byproduct margins, which were impacted by lower component prices.
The offset by lower operating costs.
Benchmark natural gasoline feedstock prices increase from 42 per gallon at the end of second quarter to 86 per gallon at the end of third quarter and the dollar.
Per gallon at the end of the year.
Going into the first quarter January's average national natural gasoline price was $1 20 per gallon while February came in at $1 36 per gallon.
The trend in market pricing of natural gasoline is shown for you on slide eight of the earnings deck.
As you can see on the slide feedstock pricing has basically rebounded back to 2018 levels.
Recall that the sharp decline of feedstock prices for the first half of 2020.
Led to a negative earnings impact of approximately $5 $5 million due to the consumption of higher cost inventory.
The second half of the year saw on equivalent reversal as feedstock costs rose sharply in the third and fourth quarters, leading to a $5 4 million positive inventory costing impacts impact.
Now moving on to byproducts byproduct.
Byproduct sales volume grew to $4 5 million gallons in the fourth quarter from $3 1 million gallons in the third quarter and this was in conjunction with the increase from prime product sales.
For the full year byproduct sales volume declined 19, 4% versus 2019, primarily due to lower prime product production.
Byproducts are produced as a result of prime product production and their margins are significantly lower than margins for our prime products.
Byproduct spreads declined to negative <unk> <unk> per gallon in the fourth quarter of 2020 from positive <unk> in the third quarter and positive 2025.
For the fourth quarter of 2019.
The sharp drop in byproduct spreads was driven by lower byproduct prices.
Results from lower prices for for the aromatic components in the byproduct stream.
Let's move on to specialty waxes the.
Specialty waxes segment had adjusted EBITDA of a negative <unk> $2 million in the fourth quarter compared to positive <unk> 1 million of the third quarter and positive <unk> 2 million in for.
Fourth quarter last year.
Especially waxes segment generated revenues of approximately $9 million in the fourth quarter the half million dollar increase.
From the third quarter and roughly flat from fourth quarter last year.
Revenue in the fourth quarter included $7 $1 million of wax product sales wax sales volumes increased approximately two 3% from the third quarter and 14, 5% from fourth quarter last year, which was impacted as you recall by wax feed supply disruption disruptions.
We continue to be sold out on wax and we pursue opportunities to upgrade the value of of wax products.
Product mix in order to further increase profitability.
Processing fees.
Which were approximately $2 million in the fourth quarter of 2020 decreased 31, 6% for approximately <unk> 9 million from the fourth quarter of 2019, and this was due to reduced customer demand from.
For custom processing services drew.
Driven by the pandemic.
For the full year, especially waxes segment had adjusted EBITDA of $2 million compared to negative <unk> 2 million in 2019.
Wax sales volumes in 2020 increased approximately 6% from 2019 and our feet supply increased in 2020 relative to full year.
2019.
Custom processing revenues for 2020 was where.
Nearly $11 million for approximately 9% higher than in 2019.
That concludes the financial summary, and I would like to turn the call back to Pat and then we'll open the line for your questions.
Thanks, Amie and before we take questions. Let me make a few comments on how we see the market looking in the first quarter and other items related to our results in the quarter.
We're in the midst of managing the impacts from the widespread utilities failures in Texas, which were created after the cold front brought record low temperatures snow and rolling blackouts across the state, creating disruptions for our suppliers our customers and.
And at our own facilities, the impacts of an unprecedented for the industry in terms of the breadth of the outages and damage to facilities, mostly due to freezing at true.
Of course, we brought our plants down proactively in order to prepare them for the cold.
At South Hampton, we're fortunate not to experienced the loss of electricity or natural gas. We are out of operations for one week during that time, we were able to repair most of the damage to our equipment, which is largely related to water handling equipment, we avoided any supply disruptions to our customers and.
At <unk> chemical we lost both electricity and natural gas operations of TC were down roughly two weeks and again, we've been able to complete most of the repairs to damaged equipment.
In the first quarter, we're going to see the costs associated with our repairs as well as impacts due to loss of supply from some suppliers and lots of demand from customers in the Gulf Coast area.
We don't yet have a full estimate of these impacts, but we expect they could range from $2 million to $3 million.
In addition, our maintenance activities for 2021 at South Hampton are largely occurring in the force in the first quarter. These expenses will be about $1 million higher than the fourth quarter.
Lastly, we discussed in the fourth quarter, we were surprised by the high demand coming from Canadian oil Sands that demand was not sustained in this quarter and has returned to low levels.
Looking beyond the impacts of the storm, we are enthusiastic about the direction of our business in 2021 day.
Demand from our core and usage continues to grow one indication of that strength is our successes on prime product pricing. We noted last quarter. The successful implementation of of 10 to 12.
For gallon price increase of our prime products in November we implemented a further 15 per gallon increase effective February one of this year.
And our customers engagement with the company on our growth growth projects is greater than it's ever been.
In closing I'd like to take this opportunity to note the Joe Tanner, our senior Vice President of commercial book will be.
Retiring in March Joe's contributions to true core I have been significant and meaningful our commercial organization's execution has been upgraded considerably during the two years he was with us.
As part of our planning for his transition Joe will continue to be retained as a consultant.
Thankful for Joe the service to <unk> and wish he and his family all of the best following his retirement.
And now we'd like to open up the phone line for questions.
As a reminder to ask the question you will need to press star one on your telephone.
To withdraw your question Chris of the pound key.
Please standby, while we compile the Q&A roster.
<unk>.
Our first question comes from the line of Rosemarie more belly from G Research Your line of California.
Good morning, everyone.
Morning, Rosemarie good morning Rosemarie.
I was wondering Pat if you could give us a few more details.
Details on your growth projects.
On the type of products the type of the end markets you are targeting and what is the.
On the top line.
Sure.
So our focus has been given the.
The kind of the wave of capital investment the company made several years ago, we've got ex.
Excess capacity, particularly around our new hydrogenation and distillation units at Tc in true core chemical and as well as the ability to process the prime products and sales.
Our focus is on the quickest way to leverage those operations to higher revenue and higher profitability and that leads us to putting most of our effort behind custom processing activities here, where we can utilize the unique capabilities, particularly of the hydrogenation distillation.
Units to meet other meet our customers' needs for kind of a specialty chemical processing. The nature of those is that they're confidential. So we can't really talk about specific.
Chemistries of products and markets that they're.
Focused on but what I would say is kind of consistent with.
On the customer mix that we have in custom processing for our legacy.
The custom processing businesses. These are major chemical producers, where we're taking unique streams from them and adding value to them across the capabilities of the study.
And we will do that we would expect to be able to do that as we go through our.
Commercial trials, which we've been discussing these last couple of quarters, and then will convert debt into long term sustainable custom processing revenues, we're optimistic that that will begin to build up as we get into the second quarter.
Previously that these are singles and doubles, we're not out looking for big home runs that are kind of suddenly transformed the asset will be incremented our way up.
And we'd also expect the.
Bit of a benefit there from a diversification of those both products and markets that theyre going into to help us over time as well.
That's the primary focus of these growth initiatives in the short term longer term.
We are introducing and developing some technology for new product introductions, but I think that will be some.
Some quarters in front of us before the reach fruition.
And then of course, we always have a base level of productivity projects that we're looking at the just overall enhance our competitiveness those started last year and we will continue to bring benefits as we get into 2021.
Okay. Thank you.
What type of answer so I am I would assume that the between the improved.
Improved mix and.
The higher volume coming out of those plants what type of gross margin do you think you can reach out for the next let's say couple of years.
Well, we believe over time this needs to be of high teens type <unk>.
EBITDA margin business, particularly at TC given the specialty profile of that business. This is a situation of Tc ware.
As we said before we have of fixed cost overhead kind of structure there with these underutilized assets so on the increment.
These projects spring tremendous margin.
And that needs to be applied across the base of costs.
We sum it all up we need to be driving toward high teens EBITDA margins at Tc.
Yes, let me.
No.
But I was just going to add to.
The path.
When these investments were made that Pat referred to the capital investments.
Some of the fixed costs are a lot of the fixed costs was installed as part of those investments. So the real focus is.
On incremental utilization as a result of these growth projects. So as you can as you can imagine the gross margin variable gross margins on variable margins should be both significantly higher than our base levels.
Alright, Thanks, and then lastly, if I may.
You talked about the impact some of the calls on didn't take sense. If I can tell it day in the first quarter do you think that you can recover all of the shortfall in the second quarter always take the all year or some of those low.
Williams will not come back.
Yes, that's the.
The question, we're asking ourselves right now honestly Rosemarie.
As we said going into it we were seeing.
The robust demand growth of started strongly for us in the fourth quarter.
Business remained positive entering this year.
And everything that we see.
If not the continues that and maybe accelerating it particularly with the recent government action on on further stimulus. So at the macro level that gives us a lot of confidence in the direction of the market and.
And you see some indications of that commodity pricing, obviously natural gasoline pricing, having significantly reverse course.
It generally is a positive indicator for our business is going to go.
So I do think that's why I made the comment about the pent up demand I do think as.
These plants resume operation there'll be an of catch up mode.
Been remarkable to me I mean being in this business 30 years.
To see the extent of these impacts.
Some of said, it's like the category five hurricane accepted spanned from Corpus Christi, the two Louisiana.
We've seen we've seen impacts on on.
The world scale assets debt.
Certainly holding back the business right now, we expect that to be largely behind us as an industry by the end of March and that should set us up for strong demand in the <unk>.
But we need to see that develop.
We need to see it develop.
Okay. Thanks, good luck.
Thank you as a reminder to ask a question you will need to press star one on your telephone.
John Your question press the pound key.
Our next question comes from the line of Bill does alone from Teton Capital. Your line is now open.
Two questions related to the prime product if he could please first of all relative to oil sands I think he'd mentioned that that was strong in the fourth quarter, but it did not continue or has not continued into Q1 would you talk broadly about your prognosis for volumes with the oil sands are in line.
Of the $65 oil price and then and then I'd actually be curious of your outlook for just prime product volumes in total.
Outside of the oil Sands, if you would please.
Sure.
Yes, so I think we've had.
Two drivers probably going in two different directions on oil sands as it relates to us on the one hand is the trend is really frankly been there for us for two to three years now which is the continued focus on their efficiency drivers, which is certainly reduced their underlying demand. If you want to say on a per barrel of crude basis and we've been.
We've been talking about that now for some time on.
On the other hand.
As I mentioned last quarter, we are seeing the Canadian government relief relief excuse me relief.
The constraints on crude production out of Alberta.
And our expectation is that they will be moving towards higher production and we did see some of that in the fourth quarter. So what.
What we see today I think as always with our customer there we see very large inventory swings. So we had a.
A big event in the fourth quarter, where they they took a lot of inventory in the.
You've told us there.
<unk> turned that down now so their inventory consuming mode here in the fourth quarter.
We are aware of some maintenance activities that will be there in the coming several weeks. So I think on the back side of that we could expect.
The resumption of reasonable business, there, but I always caution people I don't see it really ever going back to where it was a couple of years ago, just because of the efficiency programs. They have.
Beyond that.
And the other end uses think about polyethylene.
<unk> ISO peso, partly icf's Android phones, those we we have a great deal of confidence in.
The U S market continues to be highly competitive on a global basis and those assets are running when they're available to run at very high rates and that's been positive for us from a demand perspective.
And on <unk>, so again.
What we've seen with the application of these flat roof installations. If you think about the Amazon warehouses, that's kind of the.
The main driver for their growth we've got visibility.
There on new plants that they're building that we of contractual obligations to supply. So we've got some visibility on that demand and I should say on the polyethylene side.
The new assets that are coming into the market over the next two to three years. Similarly, we have contractual obligations that give us some visibility to growth now you add all of that up I don't think its double digit growth, but it should be solid single digit type.
Total growth for the portfolio and prime products.
Great. Thank you for that perspective.
Yeah.
Thank you at this time I am showing no further question.
<unk>.
Part of me actually our next question is from Mitchell sacks from.
From Glenn swam asset management. Your line is now open.
Hey, guys.
Talking about single digit growth in prime product that's off of the 2019 base none of the 2020 based on assuming correct. Yes. Thanks for the clarification Thats right.
Okay, and then I think you'd mentioned the quality you guys had put through a 15th net price increase back in February.
On prime.
Is that is that for formula customers or for just spot, which was part of the business is that yes. That's for the market negotiated pricing. So we're going to refrain from calling of spot anymore, because it's really not spot business. I mean, most of this business is a business that we do month end of month out, but it's on the negotiated price basis. So that's where we instituted the price increases.
For November as well as the beginning of February.
Okay, that's about a third of our portfolio.
On the volumetric basis for prime.
Okay.
And then on getting back to the byproduct again I may have missed a little bit I think you were talking about it a little bit earlier.
Can you just talk about prime product I'm, sorry of byproduct margins and kind.
Kind of where they are relative to where things were prior to the Cove.
<unk>.
Sure so yeah.
If we take 19 as kind of of the reference level for.
Byproduct values.
I think we ran about roughly 25.
Spread at that time.
Last year as horrible as to use the word.
The describes it with benzene and toluene prices very depressed given given the upset in the market. There we saw recovery of heading into the end of the year on benzene pricing, but at the same time of course natural gasoline started running so we got back up to kind of positive spreads at the end of the year for co products for.
Excuse me for byproducts, which.
Frankly, with all of the disruptions going on along the Gulf Coast right now.
It's hard to take a data point today and suggest that's where the market's headed but benzene has kind of blown out and the current in the current month I think it's I think it closed at.
Settled for March of 248, I think close to close to $2 50, which would get us back to those 2019 levels.
But I can't tell you that's going to be sustainable I think there's just so many disruptions on the supply and the demand side right now with all of these assets out.
I'd read the headlines this week that styrene in Europe.
Sold for historical record price, we saw of historical record price for propylene a week ago at $1 20 for pound, which is just completely unprecedented so.
You've got a lot of imbalances right now and I think we need to let Frank I think we need to let March kind of run out.
All of these other assets back up and running.
In Canada.
We're on where the market shakes out in early second quarter I think it can be better it's certainly going to be better I'm very confident much better than 2019 excuse me 2020.
But exactly what the level is going to be I think we need to let things settle down to see.
Okay cool thank you very much.
Rich.
Thank you.
This time line I'm showing no further questions I would like to turn the call back over to.
Over to Pat Quarles for closing remarks. Thank.
Thank you and thank you for those questions and interest in true Kora one.
To reiterate what are important time. This is for our company and how excited we are to be executing on our growth plans.
'twenty was a transformational year for our company.
On many fronts and we look forward to sustaining that momentum in 2021 and beyond.
I always like to end with the thank you to our team.
While the impacts from the winter storm in February of going to be expensive. They actually had been much broader than just business impacts almost every one of our company had some dislocation or damage to their homes and despite this we came together to safely repair the damage at our facilities and meet the needs of our customers.
Just another demonstration of the dedication of our people have and I thank them for that.
Thank you again for your for your participation.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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