Q3 2021 Trecora Resources Earnings Call

Good day and thank you for standing by welcome to the Tech Laura Resources third quarter 2021 results conference call at this time I'll participant lines aren't in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.

Please be advised that today's conference is being recorded if you require any further assistance. Please press start zero I would now like to hand, the conference over to your speaker today, Jeremy helmet I'd be equity group. Please go ahead.

Good morning, everyone welcome to the two core resources third quarter of 2021 earnings conference call, but.

I got a call today, it'll be pet squirrels, President and Chief Exec Executive Officer, and Sami them Chief Financial Officer, Christopher grows 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.

[noise] statements as defined in a private Securities Litigation Reform Act of 1995 forward looking statements are based on management's beliefs and expectations only as of the date of this teleconference November 4th 2021.

Forward looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected these risks as well as others are discussed in greater detail, which of course filings with the SEC, including the company's most recent annual report on Form 10-K, a subsequent quarterly reports on Form 10-Q during today's call management will also discuss certain.

<unk> 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 Orange release issued after the close the <unk> of the financial markets yesterday afternoon.

This webcast is accompanied by five presentation that is available and the investors section of its up his website www dot <unk> dot com at this time I'd like to turn the call over to two two course, president and CEO pet squirrels.

Thank you Jeremy and good morning, everyone as always we appreciate your interest in Tripura and are happy that you can join our call. This morning.

We're pleased with the third quarter results overall demand continues to be strong and we expect it to remain so do the end.

Two year and an end of 2022.

Consistent topic across the industry right now is the pervasive supply chain disruptions impacting impacting companies. So I wanted to take a minute to discuss how they have impacted our company and the actions we have taken to mitigate them.

The most acute impact has been on domestic trucking availability and costs.

True Cora has long maintained its own trucking fleet, which delivers about two thirds of our truck based solvent customer demand.

This capability allowed us to maintain our service levels to our customers in almost all instances during the quarter as well as avoid much of the freight cost increases being felt across the industry. We.

We were able to add additional trucks to our fleet in the quarter and will continue to grow this capability as we prepare for new contracted demand this year and into next year.

Despite this advantage, we still experienced several impacts freight costs for the remaining third of our truck base demand increased significantly delivery of feedstock for custom processing activities resulted in delays to realizing processing revenues.

Exports Assortments were held back due to marine container and shipping availability.

Similar to the second quarter of this year, we estimate these cost increases and delays reduced our adjusted EBITDA by about $1 million during the third quarter.

There have been some positive impacts we've had success throughout this year and increasing our wax prices are principal competitors in the market produce their products outside the U S. The global supply chain constraints have limited their supply into the U S and we see this continuing to support further price increases in the fourth quarter and into 2022.

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For solvents, our third quarter volume benefited from the start up of a new pine ethylene plant in August. This is the first of three new p/e plants, starting up over the next year, we're contracted for most of that market growth.

Overall, the increase in prime probably demand and a quarter was driven by polystyrene and probably I cell phones and synthetic rubber and uses oil sands was largely flat.

Sami will discuss the dramatic increases we've seen for natural gasoline has impacted are fairly negotiated customer margins.

Organic growth initiatives continue to be a focus as we target operational efficiencies in productivity improvements. We're also working to innovate with new products and expand our customer base.

We estimate our organic growth initiatives will result in an incremental EBITDA benefit Ah more than $7 million this year.

At the end of the third quarter, we had 10 projects focused on delivering new products are entering new markets 16 projects focused on driving asset utilization, which do not require any significant capital investment and five projects focused on improving productivity and reducing costs.

Within the portfolio, we have a total of 31 active projects of these 13 or an execution face.

We were asked last quarter to provide some more insight on the status of these projects as you can see and slide nine of our earnings presentation. Today nine of those projects are commercially executed and four are in final trials.

During the third quarter, we had approximately $2.8 million a non-recurring expense associated with professional service and due diligence work related to a significant M&A opportunity.

We ultimately determined not to pursue this opportunity because we concluded that was unlikely to create shareholder value.

For the first nine months of 2021 nonrecurring expenses related to this opportunity where approximately $4 million.

This work sits within the larger framework with our board of continually evaluating all avenues to create shareholder value and expect that work will continue now.

Now, let me turn it over to Sami to discuss our quarterly results in more detail.

Thanks, Pat and good morning to everyone.

I'll start my comments with a discussion of our debt liquidity and cash flow and then I'll discuss our third corps performance in more detail.

Total banked at September 30th stood at $42.9 million.

Our third quarter leverage ratio under our bank covenants declined to 1.2 times from 134 times at June 30th.

We continue to remain well below or previously articulated target leverage of one and a half to two times.

As of September 30th or revolver remains undrawn and has availability of approximately $75 million.

And the third quarter, we received full forgiveness on the PPP alone for core chemical for $2.2 million.

Forgiveness is recognized as a gain on extinguishment of debt in the financial statements and excluded from adjusted EBITDA from continuing operations.

The remaining four 2 million dollar PPP loan for South Hampton remains outstanding we expect full forgiveness for this loan as well.

Cash on the balance sheet as of September 30th was approximately $44.4 million up sequentially from $39.1 million on June 30th.

Moving onto cash flow.

Hello from operations for nine months year to date was $9.3 million. This includes the benefit of the increase in payables associated with non-recurring professional services and due diligence work that Pat referenced.

Cash flow from operations also includes a significant negative impact of the Texas freeze event earlier in the year as well as use of cash of approximately $9.2 million for working capital, primarily driven by rising prices, particularly natural gasoline feedstuff.

Excuse me.

I apologize, but there will be.

Please hold on the conference.

Thank you for your patience.

Yeah.

And Tina have we rejoined.

Okay. Thank you apologies, everyone and we had a power bless her kicked us off the call go back to Sami.

Thank you Pat.

I may just repeat it a little bit here cash flow from operations includes the significant negative impact of the Texas freeze event earlier in the year as well as a use of cash of approximately $9.2 billion for working capital, primarily driven by rising prices, particularly natural gasoline.

Each doc with cost continuing decline.

Turning now to Capex we.

We continue to invest in a disciplined manner, focusing on play of health and maintenance as well as environment health and safety projects.

Year to date or Capex is approximately $12.3 million, which includes about 1.7 million related to repairs. Following the Q1 frees event.

Capex in the third quarter was 3.6 million, which includes 1.5 million for the maintenance and upkeep of the G. S. P. L feedstock pipeline.

For the full year 2021, we expect capex of approximately $14 million.

Free cash flow for the first nine months was negative 6.6 million, we define free cash flow as cash flow from operations less capex less mandatory debt payments.

Free cash flow was negatively impacted during the year by the freezer vet in Q1, along with working capital and the costs for the M&A activity that Pat referenced earlier.

Now, let's take a closer look at our third quarter performance.

We reported net income from continuing operations, a 1.9 million or eight cents per diluted share.

This compares to a net loss in the second quarter of 2021 of 2.3 million or nine cents per diluted share and net income of 1.1 million or four cents per diluted share in the third quarter of 2020.

Oh, just an EBITDA from continuing operations was $7.5 million for the third quarter compared with $8.9 million in the second quarter and 7.1 million in the third quarter of 2020.

Note that adjusted EBITDA excludes the gain on extinguishment of the P. P. P loan as well as one time professional services and other due diligence costs related to the business combination opportunity.

You May also recall that second quarter adjusted EBITDA benefited from a $1.4 million settlement with a utility provider for Southampton related to the February freeze event.

General administrative expenses for the third quarter were $8.9 million compared to 5.8 million in third quarter of 2020.

G&A includes plant level general administrative expenses as well as corporate expenses. The increase was primarily due to the non expert non-recurring expensive 2.8 million in the third quarter related to the costs for the M&A opportunity.

For the first nine months of 2021, Gona was $23.9 million compared to $18.7 million last year. They increase over the nine month period was also primarily due to the non-recurring M&A related expenses, which totaled approximately 4 billion for the full nine month period.

Interest expense for the third quarter was zero point $3 million compared with zero point $5 million in the third quarter of last year.

The reduction in interest expenses due to debt reduction combined with lower interest rates.

Income tax benefit for the quarter was approximately 0.2 million and for the first nine months. The income tax benefit was approximately zero point $5 million.

The benefit was primarily due to a foreign tax credit carryover from 2019 related to a Mac.

Which offsets our current tactics expense and is included in our taxes receivable of zero point $9 million on the balance sheet as of 930.

We filed for the refunding connection with our 2020 income tax return in October.

Now, let me walk you through our business segment, starting with specialty petrochemicals.

Adjusted EBITDA for especially petrochemicals of the third quarter was 7.2 million compared to $9.7 million in the second quarter of 2021, and eight and a half million in the third quarter of 2020.

As I mentioned previously the second quarter of 2021 results for especially petrochemicals include a 1.4 million utility settlement.

While the improving economic environment continues to drive solid demand and revenue growth in this segment, the sharp and rapid increases in feedstock in natural gas prices, along with higher freight costs negatively impacted margins in the third quarter.

Especially petrochemicals total sales volumes in the third quarter was approximately 29 million gallons compared to 20 million gallons in the second quarter and 17.9 million gallons the third quarter of last year.

Prime product sales volume.

Third quarter was 17.2 million gallons, an increase of approximately 242.4 million gallons or 16.6% from Q3 2020.

Nine months year to date Prime product sales were 48.7 million gallons, a 10% increase from the same period last year.

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Benchmark natural gasoline feedstock prices have followed a trend of continued increases since body bottoming out at 42 cents per gallon the summer of 2020.

Since that point natural gasoline prices have continued to steady increase.

Average third quarter pricing was $1.62 per gallon with September price at a Buck 70 per gallon.

Prices have continued to sharp upward March with October closing at $1.92 per gallon as you can see and slide seven of the third quarter earnings deck that is posted on our website.

Now moving on to byproducts.

Byproduct sales volume improved 18.3% to three 7 million gallons in Q3 from 3.1 million gallons in queue to as.

As a reminder, byproducts are produced as a result of prime product production and their margins are significantly lower margins for our prime products.

Byproduct spread was 38 cents per gallon in the third quarter compared with 62 cents per gallon in queue, too, but still well above Q3 last year when margins work 10 cents per gallon.

As of now we expect spreads to continue to narrow into the fourth quarter.

Moving on to specialty waxes segment.

Especially waxes segment had adjusted EBITDA of $2 million in the third quarter compared to $1.3 million and Q2, and 0.1 3 million in Q3 of last year.

This is the best financial quarter for specially waxes since the first quarter of 2016.

Especially waxes segment generated revenues approximately 11.3 million in Q3, 2021 compared to nine $6 million in queue to an eight and a half million dollars in Q3 2020.

Revenue in Q3 included eight 5 million of wax product sales, an increase of 41.6% compared to Q3 of last year.

We continue to be sold out on wax products.

Average selling price of our wax is increased approximately 28% compared to Q3 of 2020.

Processing fees, which were approximately $2.8 million in the third quarter increased 10.4% from third quarter of last year.

This concludes the financial summary, and I'll turn I'll now turn the call back over to Pat.

Sami, let me end by saying how positive I feel about the direction of our business today.

Fight the supply chain challenges, which persists, we see our business growing in 2021 and are confident that will continue into 2022.

Highly contracted for new and used demand in both polyethylene and Polly ISO phones and the next year.

Based on current feedstock costs pricing initiatives for our solvents business should catch up to the feedstock costs by the end of the year. We also believe we can further increase our waxed prices due to the current market dynamics.

We see our our organic growth portfolio, providing new custom processing opportunities several several of which have already become commercial and should provide growth next year. In addition relief of the supply chain disruption in the next year should reduce pressure on certain in use markets that have continued to struggle such as automotive.

Now I'd like to turn the call back to the operator and open up the phone line to questions.

As a reminder to ask a question press star one on your telephone keypad again that is star one to ask a question. Our first question comes from Tom hearing back with Carl.

Yes, good morning tell us Pat how many shares did you repurchased in the most recent quarter.

We purchased nine in the third quarter.

You know.

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Feel of the mine.

Which generated 60 million net to the company.

100% of that originally was going to go to the shareholders than it was down to 50%.

Lettuce was it you're gonna buy 20 million, it's down to 40%.

You know.

We're getting screwed.

Quite frankly.

And and here Yep Yep his away for a million dollars on an acquisition. How you can spend that much money before you find that it isn't a good fit that $4 million with a bought another 500000 shares any at $8 a share.

And it would have been a hell of a lot more accretive to whether shareholders than than an ill fated potential acquisition, we're still suffering from last acquisition.

You make that comment in 2016 with the specialty labs business. You are now finally, starting to show some improvements like your comments on that.

Sure and thanks for your feedback.

Hey, listen we're as disappointed as you are and kind of how how are working M&A transaction went as we said.

Been saying for some time, our focus has been.

Anything we look at it needs to be very aligned with our core businesses, which is really the profitability driven by solvents and it needs to be cash flow and earnings accretive and we certainly went into the into the activity, having those expectations and listens went through to work and it was quite a bit of work ultimately ultimately we determined we weren't.

Satisfied then a risk adjusted basis, it was going to meet our criteria. So so we set that down.

Yes, we're disappointed we have to continue to focus on the plan that we have we've got.

Encouraging expectations as I mentioned on health solvent growth is expected to grow next year.

Contracted and the new plants that are coming both or pie ISO as well as pie ethylene.

On the wax side I think the benefits we talked about how supply demand is shaping up in the U S being able to drive margins. There is very encouraging and finally getting as you said a return on the wax side and of course for T. C. There to really performed the level it needs to perform we've got a load at those assets I think the growth portfolio that we have.

Which is largely focused on custom processing, which means really T C.

We're very encouraged that that's going to continue to grow as we go into next year. So.

I said to him I liked the direction of the business is going right now and as it relates to capital allocation. We will continue to do what we've always done.

Active discussions with the board on really.

Where we should apply that capital you would appreciate while we're involved in those activities during the third quarter, we couldn't be in the market Bancshares. So that's why they had to come to an end.

And we will continue to work with the board on all of these capital allocation decisions.

So have you purchased Indian shares since the end of the third quarter.

I can't really comment on that time, we report that is you know at the end of the quarter and our.

And our financial reports.

Okay.

Well I am extremely disappointed and they think you've got that that message loud and clear.

Appreciate that time.

As a reminder, crestar wanted to ask a question again that is star one.

To ask a question.

So at this time teen I'll wrap up.

It was I want to thank all you guys first questions and Tom I appreciate your feedback as I said.

I always like to conclude my remarks however.

Acknowledging my appreciation for our employees in recognition of their success in the third quarter, we had to contend with widespread supply chain and logistical issues as we fought hard to maintain exceptional service level. We have are solvent customers and meet the strong demand of our wax customers as a result of their hard work, we achieved 2 million.

Of adjusted EBITDA, Tc that a quarter and grew solvents volumes versus the prior quarter that was due to exceptional commitment by those at Tc and Southampton to meet our customers needs.

At this point I'd like to thank you all for your participation.

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

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