Q4 2021 Trecora Resources Earnings Call

Good day, and thank you for standing by and welcome to the <unk> resources fourth quarter 2021 results conference call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer.

Session to ask a question during the session you will need to press Star wondering your telephone please be advised that today's conference is being recorded.

Any further assistance. Please press star Zero I would now like to hand, the conference over to Jeremy Hellman with the equity group. Please go ahead.

Thank you operator, and good morning, everyone.

Welcome to the <unk> resources fourth quarter and full year 2021 earnings conference call presenting on our call today will be Pat <unk>, President and Chief Executive Officer, Sami Ahmad Chief Financial Officer, Christopher Groves, Our corporate controller will also be available for the question and answer session, which follows management's prepared remarks.

Before we get started I would like to review the Safe Harbor statement.

Statements in this presentation that are not historical facts are forward looking statements as defined in the private Securities Litigation Reform Act of $19 95.

Looking statements are based upon management's beliefs and expectations only as of the date of this teleconference March nine 2022.

Forward looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected these risks as well as others are discussed in greater detail in <unk> filings with the SEC, including the company's most recent annual report on Form 10-K , and subsequent quarterly reports on Form 10-Q .

During today's call management will also discuss certain non-GAAP financial measures for comparison purposes, only for a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results. Please see the earnings release issued after the close of the financial markets yesterday afternoon. This webcast is accompanied by a slide presentation that is available.

And the investors section of the company's website www Dot <unk> dot com at this time I would like to turn the call over to core as president and CEO Pat Quarles.

Thank you Jeremy and good morning, everyone and thank you for joining.

We're pleased with our fourth quarter and full year results, which set the stage for continued growth in 2022 and beyond overall.

Overall demand continues to be strong for both our specialty petrochemicals and our specialty waxes and we expect it to remain so through 2022.

Custom processing services are also benefiting from the favorable demand picture, allowing us to utilize more of our productive capacity is.

The strong demand environment is allowing us to command favorable pricing from our customers.

By the end of December we realized $1 five per gallon of prime product price increases versus 94 cents per gallon of natural gasoline cost increases for the year.

Taxes, we achieved 23 cents per pound of increases by the end of December .

The warrant Ukraine is tragic and we're feeling the impacts on our cost inputs and the first quarter. Our greatest exposure is on natural gasoline pricing, where we have seen prices rise from $2.15 a gallon at the end of February to $2 69 per gallon as of this past Tuesday at <unk> 54 per <unk>.

<unk> increase.

We've implemented a 20 <unk> per pound increase at the beginning of March and have announced a further 55 cent per gallon increase effective mid March we expect to stay ahead of this price spike given the strong demand we see in the market.

We've been successful in our organic growth initiatives and expect further revenue and profit growth in 2022.

Our growth projects contributed $7 million of EBITDA in 2021.

By the end of January of this year, we converted an additional four projects to commercial business, which will contribute to EBITDA in 2022 with.

With more projects advancing through the development process. Our current total project count is up to 38.

As youll see in our guidance our growth program is expected to contribute profit improvement in 2022.

Lastly, we are winning in the market.

We've captured 95% of all new demand for our prime products required by the polyethylene plants, starting up in 'twenty, one and 'twenty two.

And 95% as a prime product demand to new poly ISO plants, starting up in 2022 in North America.

We're already shipping two of these new facilities have orders on the books for a third and expect orders to the remaining two by mid year.

Our commercial successes paired with our strong balance sheet enabled our commitment to return capital to shareholders. We purchased over $11 million of shares during 2021, $6 $5 million of which was in the fourth quarter.

As of today, we have just under $9 million remaining on our repurchase program, which expires in June of 2023.

We think our shares offer a very attractive return at current levels and intend to continue repurchasing shares under the program subject to market conditions.

I'll pass the call over to Sami now.

Thank you Pat and good morning to everyone.

Let me start with a brief overview of our full year 2021 results starting with our consolidated results.

Our full year 2021, adjusted EBITDA was $21 6 million.

Or $25 1 million after adjusting for the impact of the previously disclosed Texas freeze event.

This compares to 2020, adjusted EBITDA of $22 2 million.

Note that 2021, adjusted EBITDA excludes cost for professional services and due diligence work related to a terminated M&A initiative, we previously disclosed.

For the full year these costs totaled approximately $4 $5 million.

No additional costs are expected for this activity.

Adjusted EBITDA for 2021 also excludes a $6 $1 million gain from the extinguishment of debt related to the PPP loans.

We achieved full forgiveness for the two PPP loans that we had received.

The reconciliation schedule to get to adjusted EBITDA is included in our earnings release.

Let me touch on a few other points related to our consolidated results and then I'll briefly review the two business segments.

Net cash generated from operating activities for 2021 was $4 4 million.

Working capital was a significant use of cash in 2021. This was primarily due to the sharp increase in natural gas natural gasoline feedstock costs.

The market price history of natural gasoline is shown on slide 21 of our deck.

Which is available on our website.

Additionally, we built inventory in 2021 at South Hampton in preparation for the scheduled plant turnaround outage planned for March 2022.

In total full year 2021 use of cash for working capital was about $19 million with $12 million in the fourth quarter.

For this purpose working capital is defined as accounts receivables plus inventory less accounts payable.

Capital expenditures for 2021 were $14 2 million compared to $13 4 million in 2020.

Major items included $4 million for the multiyear upgrade of our natural gasoline feedstock pipeline, an approximately $2 million for repairs at both plants following the freeze last year.

The remainder was split spent on plant maintenance and compliance work.

General and administrative expenses for 2021 were approximately $26 1 million compared to $24 3 million in 2020, but.

The G&A expense expenses include both plant level G&A as well as corporate overhead.

The main driver for the nearly $2 million increase was higher cost of insurance, especially property insurance, which increased more than 20% year on year.

Insurance cost seems to have stabilized and we just completed a renewal where we were able to maintain roughly flat premiums for the 2022 23 renewal period.

Cash balance at year end was $35 million, while our $75 million.

<unk> remained undrawn.

Debt at year end was $41 $9 million.

As Pat mentioned, we completed share repurchases of $1 4 million shares at a cost of $11 $5 million, resulting in an average share repurchase price of approximately $8 20.

Per share.

Finally, we further simplified our corporate structure through the sale of the inactive mining assets.

Eli Valley mines in Nevada.

For net proceeds of about $5 million.

We dissolved the.

VM legal entity in February 2022.

I will now move to a brief review of each of our business segments, starting with specialty petrochemicals.

Business segment performance summary, as laid out on slide 20.

Our specialty petrochemicals business had relatively strong performance in 2021 with adjusted EBITDA of $25 $9 million.

Prime product sales volumes grew five 5% or $3 4 million gallons compared to 2020.

We saw robust growth in polyethylene.

<unk> polystyrene and poly ISO end use markets, which more than offset a nearly $3 5 million $3 5 million gallon decline in sales to the Canadian oil sands.

Total export sales of prime products, excluding oil sands were approximately $12 5 billion gallons in 2021, a 5% increase compared to 2020.

2020 adjusted EBITDA.

For specialty Petrochemicals segment was $26 4 million.

It is important to point out that the relatively strong performance in 2021 was despite the impact of the freeze.

The run up in feedstock costs, as well as higher fuel gas and logistic costs.

On the margin side, we play catch up on pricing to offset sharp increases in feedstock costs as well as fuel gas costs.

Byproduct spreads for the year was <unk> 40 per gallon compared to breakeven.

In 2020.

In the fourth quarter as a byproduct spread was about 23 per gallon.

Thus far through the first quarter of 2022.

Demand for Prime products remained strong and we continue to drive price increases in the face of rising feedstock costs.

The reduced feedstock purchases in the first quarter as we draw down inventory built for the turnaround should help mitigate somewhat the effect of rising feedstock costs.

We estimate the cost of the turnaround itself to be approximately $1 4 million.

Specialty waxes or truck or a chemical.

<unk> solid 2021 results with adjusted EBITDA of $3 $1 million.

Driven by strong wax revenues.

This compares to $2 million of adjusted EBITDA in 2020.

Results improved despite the impact of the freeze to both the wax and custom processing businesses as well as significantly higher utility costs compared to 2020.

Cost control at <unk> chemical was very successful as the business was able to offset inflationary and other cost pressures through efficiency.

Especially works Waxes segment had revenues of $38 $6 million during the full year 2021, a six 4% increase from 2020.

Revenues included $29 $2 million of wax product sales and $9 4 million of processing fees.

<unk> revenues increased 15, 5% in 2021 compared to 2020 as average selling prices.

Increased more than 17%.

<unk> revenues and sales volumes are shown on slide 22.

Let me pass the call back to Pat.

Thanks Amy.

I'll spend a few minutes discussing the drivers we see for our future growth and then I'll review, our 2022 financial guidance before closing with some comments on our long term growth potential.

Also I'll just remind everyone that we have an updated presentation available on our website, which I'll refer to at times in my comments to follow.

<unk> profit growth will be driven by three distinct drivers and underpinned by continued discipline around cost control.

First demand growth.

Our products are essential in a high growth end uses of our economy today.

Helene or P/e is the largest end use market our solvents go into the USP industry.

As in a period of significant asset expansion due to their advantage cost position globally.

This has resulted in three new polyethylene plants being constructed in North America in the near term.

Cora Cora is contractually captured 95% of all the new demand in polyethylene, which use our solvents.

The first of those plants started up in the third quarter of 2021.

We have been consistently delivering to this new facility since that time the.

The second facility is an expansion of an existing sites. They placed their first fill orders, which we will begin delivering in the second quarter of 2022.

The third facility is a world scale plant starting up at mid year, we expect to receive first fill orders for that plant in the coming few weeks.

Together, we expect these plants to consume more than 3 million gallons per year when fully operational.

The next two largest end uses for our solvents for poly ISO foam production using flat roof applications and EPS and Xps polystyrene also used in construction installation.

Our products are an essential element, enabling insulation systems to achieve their highest value supporting maximum energy efficiency.

As you can see on slide 13, construction is expected to grow well beyond GDP in the coming years, even more notable is the installation used in construction is expected to grow even faster as the market prioritizes energy efficiency.

For poly ISO we already have a significant market share of that end use we have captured 95% of the solvent demand required by two new facilities being constructed in the U S. In 2022.

For polystyrene demand is significantly ramping up driving higher utilization of existing capacity in the market.

Our sales to these customers jumped in the fourth quarter 'twenty, one and we see continued growth into 'twenty two.

This demand growth gives us good visibility into our expectations for this year and gives us confidence in further growth as our customers continue to be cost advantaged and motivated to debottleneck, the existing capacity and announced new capacity in the years to come.

Similarly, the importance of energy efficiency.

<unk> the demand growth, we see in 'twenty, two and we believe that trend will be sustainable for years to come.

The second primary drivers margin expansion.

By the end of last year, we successfully implemented energy surcharges to almost all of our solvent wax and custom processing customers. We also implemented price increases to our freely negotiated solving customers.

On March one of this year, we implemented a 20 <unk> per gallon market increase for solvents and announced a further 55 per gallon increase for March 18th.

As you see on slide 10, the formula component of our solid contract portfolio, which is about two thirds of the settlements. We sell has provided protection in the face of cost increases.

We have had over the past year and a half.

With access with success in our current round of increases we will more than offset the current level of cost increases we have seen and expect to continue to maintain our margin in the face of these higher costs.

For waxes, we announced a <unk> <unk> per pound increase effective April one of this year.

As a result of these steps as a result of the steps we've taken we expect the solvents and wax margins to improve versus 2021.

Our third driver is our growth program.

During 2021, we successfully converted for growth projects in the new business.

We've seen a resurgence resurgence in demand for both the legacy custom processing, we've been doing for our customers as well as further interest in new projects on slide 17, Youll see the total number of our projects has expanded to 38 as of the end of January 2022.

The number of commercialized projects has also increased to 12.

This gives us significant confidence in our ability to increase custom processing revenues at 22 as well as in the following years.

Although not a standalone driver per se a focus on productivity underpins all we do and has now been built into our basic operations, we have metrics and accountability at both our facilities to identify resource and deliver on cost improvements.

As you see on slide 15, these programs helped to significantly offset inflation within our operations.

Given the confidence we have in our businesses, we are introducing financial guidance for 2022.

As indicated on slide 18, we expect to achieve between $27 million and $31 million of EBITDA in 2022.

You can see the components outlined bill.

Building from our adjusted EBITDA of $21 million in 'twenty. One you see we're adding back the impacts from last year's freeze event.

From there, we layer and expected benefits from the demand growth tied to new solvent demand <unk>.

Contribution from our growth programs and increased wax margins.

We will also have the full year impacts to our costs that began increasing last fall as.

As you can appreciate there's always uncertainty in our forecast the biggest risk we see today relate to the worn Ukraine and its potential impacts on further hydrocarbon increases and demand restructuring destruction generally in the economy.

Extending the growth trends, we discussed for our key end users successfully returning our solvent margins to 2019 levels and continuing to deliver on the momentum we achieved in our growth programs, we're very capable of raising our EBIT north of $40 million over a three to four year timeframe.

Let me speak to Capex regarding Capex, we expect to spend between $12 million to $14 million this year.

This includes about $5 5 million for the multi year feedstock pipeline upgrade work.

Our growth programs, our focus on driving utilization of our existing assets, we don't expect any meaningful capex this year to support.

Our growth.

Lastly, let me touch on capital allocation.

As you saw in the fourth quarter last year. After we put down the potential M&A project, we purchased the sizable block of stock you should expect us to continue to prioritize our return of capital to shareholders. This year.

And with that I'd now like to turn the call back over to the operator and open the phone line to questions.

Thank you.

As a reminder to ask a question you will need to press star one on your telephone to withdraw.

Your question. Please press the pound Keith please standby, while we compile the Q&A roster.

Our first question comes from Rosemarie <unk> Gabelli with Gabelli <unk> Company. Your line is open.

Good morning, everyone. Good morning, Rosemarie good morning Rosemarie.

Doug you mentioned that you are benefiting from the new polyethylene plants coming on stream and I understand that those.

Manufacturing process is also working in using less solvent. So could you touch on.

What you expect the contribution to be and what would it have been without any improvement in their operation and can they continue to lower the amount of outside Sullivan.

Sure. Thanks for your question.

So a couple of comments I had mentioned when these the current new units, which there are three of them when they're up and running and then I have to get through their startup process. We would expect them to be consuming about 3 million gallons a year a year on top of the base demand that we had previously.

We're not really seeing from a polyethylene perspective.

Real impacts from higher efficiency or a reduced use of solvent in the environment that we're in with U S, particularly U S polyethylene producers being so advantaged.

From a cost perspective due to their ethane position they are driving for maximum capacity utilization and that means they run in a condensing mode as they say, which actually drives higher solvent consumption.

As long as we see.

The cost curves reflect their advantage position globally and reasonable demand in the market, we don't anticipate efficiencies.

Reducing the demand growth that we're seeing in and Thats really been proved out really since.

Early last decade once the ethane advantage came to the U S. All of these units have been running extraordinary high rates and the only impact we see from time to time due to their own reliability incidents.

Great that is very helpful. And then I was wondering if you could touch on.

On the potential Inc.

Increasing demand.

I am not to go ahead to places.

The demand from the Canadian oil sand has declined and with the situation in Ukraine, and the sanctions not buying any more oil from Russia et cetera.

Ken that situation changed and can you see the demand from the Canadian oil sands.

<unk>.

Initial level.

So short answer is candidly as no what we've been what we've seen in oil sands really to began probably a 19 is our principal customer. There. This is an area where they have been driving efficiency.

And we've seen that trend continue consistently as I said beginning in 19, so the loss of our demand is less about their production rates of oil.

More about the consumption of solvent and they're in their process. So I don't anticipate that reversing I mean, it's unfortunate but.

We just don't really see that happening.

Okay, and then if I may ask one last question when you cover there.

There was an enormous amount of excess capacity.

Two to build that.

New plants, which will not actually working properly by Yoplait assess it what is your capacity utilization.

So we're still running in the 50% to 60% range.

We're seeing good growth are key key end users that we've talked about polyethylene.

Insulation markets for poly ISO and for EPS are styrene.

But of course, you had the headwind of the loss of oil sands. So primarily what we've been focused on doing is applying that capacity in markets that don't impact our core prime products. We've had we've established access into other kind of fuel blending type markets, it's lower value for sure.

But given the excess capacity it makes sense for us to bring that in those.

Those volumes have exceeded that from time to time over 1 million gallons a year.

With with crude returning to the values that it's returning to I think with the focus on providing more hydrocarbons outside the U S from shale oil and shale gas.

I think the differentials or the spreads if you will between the cost structure in the U S and the global market should be providing us more opportunity for volume.

And we're working on that we're trying to move it to where it's been fairly.

Opportunistic I would say because we have to follow the relative trading prices between.

The sales price of our product and our input cost of course, and those have been volatile, but we're trying to find more structural solutions to that so that we can both have reliable demand, but also increasing demand.

It's not in our base plans right now to grow significantly, but I think given how dynamic hydrocarbon pricing is in the world today, It's something we're clearly focused on and are more optimistic about.

Thanks appreciate it.

We look forward, we look forward to speaking with you tomorrow will be will be at the G research.

Mr Show Tomorrow, Thanks, Okay, well now call, giving any funds.

Oh I'm sorry.

Yes, good morning.

So in your budget.

See you tomorrow, Okay. Thanks, Pat.

You.

And again, ladies and gentlemen to ask a question Thats Star one.

And at this time Im showing no further questions in the queue I would like to hand, the conference back over to Mr. <unk> for any final remarks.

Thank you very much. Thank you all for your question Rosemarie and everyone's interest into Cora I always like to conclude my remarks by acknowledging my appreciation for our employees in recognition of their success as I reflect back on 'twenty, one I couldnt be more proud of our organization despite the ever present impacts of Covid.

They promptly repaired our operations after the freeze event and we're ready to meet the needs of our customers even before most of our customers are ready for our products.

That.

Recovery quickly turned into into our supply chain crisis across our economy. They moved quickly to add new trucks and drivers to our solvent sleep to meet our customers' demand and began what has become a daily battle to secure both supplies into Tc and access to deliveries to our customers from both our sites.

Thank them for their tireless work and with that again. Thank you for your participation today.

This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.

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