TOR Minerals International Management Discusses Q4 2013 Results - Earnings Call Transcript

Feb.27.14 | About: TOR Minerals (TORM)

TOR Minerals International (NASDAQ:TORM)

Q4 2013 Earnings Call

February 27, 2014 5:00 pm ET

Executives

David M. Mossberg - Founder and Chief Executive Officer

Barbara Russell - Chief Financial Officer, Principal Accounting Officer, Controller, Treasurer and Secretary

Olaf Karasch - Chief Executive Officer, President, Director and Member of Executive Committee

Analysts

Conner McMahon - Sidoti & Company, LLC

Operator

Greetings, and welcome to the TOR Minerals Fourth Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to turn the conference over to your host, Mr. Dave Mossberg, Investor Relations for TOR Minerals. Thank you, Mr. Mossberg. You may begin.

David M. Mossberg

Thank you, Doug. Welcome everyone to the TOR Minerals Fourth Quarter 2013 Earnings Conference Call.

Before we begin, the statements made during this discussion may include forward-looking information as defined in the Private Securities Litigation Reform Act of 1995 and, therefore, are subject to certain risks and uncertainties.

There can be no assurance that the actual results, business conditions, business developments, losses and contingencies and local and foreign factors will not differ materially from those suggested in the forward-looking statements as a result of various factors, including market conditions, general economic conditions, including the risks of general business slowdown or recession; increasing cost of energy, raw materials and labor; competition; advances in technology; changes in foreign currency rates; freight price increases; commodity price increases; delays in delivery of required equipment and other factors.

These risks and other risk factors pertaining to our business that could cause the actual results to differ materially from those suggested in the forward-looking statements are available in our filings with the Securities and Exchange Commission, including our Form 10-K and our subsequent quarterly filings on Form 10-Q and other SEC filings.

Joining in the discussion on fourth quarter results are TOR CEO, Dr. Olaf Karasch; and CFO, Barbara Russell. First, Barbara will review the financials followed by Dr. Karasch's comments on the quarter. And I'll now turn the call over to Barbara.

Barbara Russell

Thanks, Dave. As previously announced, our fourth quarter and full year revenue and profitability were affected by the challenging conditions in the titanium dioxide market and the timing of large SR orders. During the fourth quarter, our revenue increased 32% year-over-year to $13 million. However, including the impact of a $1.3 million inventory write-down, we posted a net loss of $1.8 million for the fourth quarter of 2013 versus a profit of $236,000 for the fourth quarter last year.

On an EPS basis, the fourth quarter loss per share was $0.60 versus a profit of $0.07 per diluted share in the same quarter last year.

We typically break our revenue down into 3 main categories: specialty hydrated aluminum; titanium dioxide pigments; and barium sulfate and other products. Our first product group, specialty aluminas, represented about 39% of our fourth quarter sales, and includes our ALUPREM, HALTEX and OPTILOAD products. These products are primarily used as fire retardant fillers, engineered fillers and white pigment in plastic and rubber applications. Fourth quarter sales in this category increased 18% year-over-year to $5 million, and for the year, sales in this category increased 1%.

During the fourth quarter, specialty alumina sales in Europe continued a solid recovery, increasing 50% year-over-year. We added several new European customers during the quarter and saw improved business from our existing customers.

Our specialty alumina sales in the U.S. increased 9% during the fourth quarter, primarily related to the order pattern of a large U.S. customer. Orders from this customer, which has expanded the use of our specialty alumina products can vary significantly from quarter to quarter. The comparisons are better made over a longer period of time.

Our second product group, titanium dioxide color pigments, represented approximately 47% of our fourth quarter sales and includes our colors titanium dioxide pigment products, HITOX and TIOPREM, which are specialty TiO2 pigments used as value-added replacements for commodity TiO2 and other color pigments in traditional paint and plastic formulation.

In this product group, we also include third-party sales of synthetic rutile, which is the feedstock material used in making our specialty titanium dioxide pigments, as well as feedstock used by TiO2 and titanium metal producers. We also refer to synthetic rutile as SR.

Titanium dioxide color pigment sales increased $2.5 million or 69% to $6.1 million for the fourth quarter. For the year 2013, TiO2 colored pigment sales decreased 37% to $19.3 million.

Fourth quarter results included a $3.4 million sale of SR to a third party. We make sales to third parties on an infrequent basis, which can make our year-over-year comparison difficult. Excluding the sale during the fourth quarter, titanium dioxide related product sales decreased 26%, which more accurately reflects the difficult market conditions of the TiO2 industry.

Fourth quarter HITOX sales decreased 24% or $2.5 million due to a decrease in our average selling price and volumes.

The third product group, other specialty minerals, represented the remaining 14% of our sales and mainly consists of barium sulfate products which are used as extender fillers in paint and plastics applications. Sales in this product category decreased 4% for the quarter to $1.8 million and increased 6% for the full year 2013.

This product group also includes our recently introduced BARYPREM products, which is used in high cost [ph] cooking applications and is increasingly gaining market acceptance with new and existing customers.

Moving on to profitability. As we said in the press release, our average cost per metric ton of titanium dioxide related products increased significantly during 2013. This was a result of multiple factors, including the increasing cost of ilmenite ore, which is the raw material we use to make our products. In addition, due to lower sales volumes, our Malaysian plant ran at approximately 60% of capacity during 2013, which also negatively impacted our average cost per ton.

As a result of increased costs, we recorded a $1.3 million write-down in inventory during the fourth quarter. In addition to increased costs, lower average selling prices for our titanium dioxide business also negatively impacted gross margins.

The challenges faced in the profitability of our TiO2 products were partially offset by profitability of our specialty alumina product line.

Moving on to the balance sheet and cash flow. During 2013, we generated $860,000 in cash flow from operating activities, which was primarily related to changes in working capital. Our inventories were at $20.8 million at the end of the fourth quarter, a $2.1 million reduction compared to the end of 2012, but still elevated relative to our current revenue run rate. Elevated inventory levels at the end of the quarter are primarily related to the increased cost of raw materials as discussed earlier.

We are looking to reduce our inventory levels, particularly at our facility in Malaysia. Overall, we expect the inventory levels during the course of the year to be reduced by approximately 30% to 40%, which should be primarily the driver of cash flows for the next year. We will use the cash generated primarily to pay down debt.

Our accounts receivable balance at the end of the fourth quarter was $4.5 million, which equates to day sales outstanding of 43 days, which is below our targeted goal of 50 to 60 days. We spent approximately $4.2 million on capital projects during 2013. About half of this spending was related to our work at the Malaysian SR plant, and the rest was related to normal maintenance CapEx in the U.S. and Europe. Our CapEx plans for 2014 call for normal CapEx maintenance activity, roughly in line with our depreciation expense last year.

Total debt increased to $9.3 million versus $6 million at the end of 2012. We ended the year with $2.9 million in cash versus $2.8 million at the end of 2012.

I'll now turn the floor over to Olaf.

Olaf Karasch

Thank you, Barbara. Thank you for your interest in TOR Minerals and for joining us on the conference call today. As expected, our fourth quarter continued to face headwinds in the TiO2 pigment industry. Pricing in this area has been weak across the industry, and the North American and European markets have faced a trending competitive environment from an increase in cheap Chinese TiO2 imports.

As a result, we have lowered our prices during the first quarter and expect negative pricing comparison for our TiO2 product throughout the balance of the year. As we look at profitability for 2014, and going forward, we continue to expect growth in profitability for our specialty alumina business, which should help partially offset the difficult conditions we face in the TiO2 segment of our business.

To offset these conditions we are proactively addressing the cost pressure, we have reduced our global headcount by more than 20% and have the opportunity for additional reduction, if necessary, subject to market condition. We have also improved our efficiency in making synthetic rutile, reducing our production cost by 1/3. So far in the first quarter, our efforts have produced a slight profit during the month of January, and we are optimistic that we can maintain breakeven level through the balance of the year.

Next, I will update you on the progress of our new products. We have a successful track record of bringing new products to market. For example, in the past several years, we have successfully become the leading provider of UltraWhite and high purity fire retardant fillers all across Europe. We are currently working with several new and existing customers to develop applications for our specialty hydrated alumina products for use at fire retardant fillers, as well as application in total new areas.

We saw the resumption of growth in our European business during the second half of 2013 and expect to see double-digit growth for the next several years as order activity continues to pick up, and we return to more normalized order patterns from our large alumina customers.

We also had success in the development of our barium sulfate business. This product grew 49% during 2012 and rose up 6% during 2013. Our BARTEX products have a well-established reputation as a leading quality propanes and coatings in the North America market, and continue to grow with new and existing customers.

In Europe, we introduced a few years ago, a premium grade product called BARYPREM, which is also growing in demand. BARYPREM offers very high performance for primers, powder coatings and other applications, where high opacity and glows [ph] are required. We expect this group will continue to grow during 2014 and longer term, at a robust pace. Over time, it is capable of representing an even more meaningful portion of our overall revenue, perhaps as much as 20%.

We have come a long way in the past several years, and I am proud of the job our team has done to diversify our revenue base, lower our cost structure and position the company to deliver breakeven results for 2014, despite what are difficult headwinds in the TiO2 industry.

While we will continue to face price and cost pressure for the next couple of quarters, the work we are doing at our Malaysian plant will lower our production costs. In addition, we believe that TiO2 is stabilizing and are cautiously optimistic we will see a market recovery in 2014, not -- in 2015, not in 2014. Also, we continue to bring high value-added specialty industrial minerals products to market, which should help us outperform on the top line.

In summary, while market conditions may not permit growth and profitability in all aspects of our business this year, the geographic product and end market diversification of our business, combined with focus on product innovation and cost reduction, give us many levers to pull in order to drive improvement in top and bottom line growth.

Overall, we feel very confident that we have put the right strategy in place that will allow us to continue to weather the downturn in the TiO2 industry, and position us for the resumption of the profitability growth when the industry conditions improve. I look forward to keep you current in our progress. And operator, please open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Conner McMahon from Sidoti & Company.

Conner McMahon - Sidoti & Company, LLC

Do you think the company sees profitability in the next 2 quarters? Or do you think it's going to take a little more time to get back there, maybe fourth quarter 2014?

Olaf Karasch

It's a good question. I think, I already mentioned that January looks very good and the incoming order looks in for all 3 facilities, very promising. It's a little bit early to say that we immediately changed from the loss to a profit, good profit, but I'm quite optimistic that we see some good recovery during the next couple of months and maybe the next couple of quarters.

Conner McMahon - Sidoti & Company, LLC

Okay. And you think the utilization rate in the SR facility will increase significantly as well?

Olaf Karasch

We have, I think, 2 strategies. One key point is that we cover our own demand so that we will run the SR facility for a number of months. Depending on the recovery of the SR markets, we can start any time to produce additional synthetic rutile. It really depends on how the synthetic rutile price will be developed in the next 2 quarters.

Conner McMahon - Sidoti & Company, LLC

Okay. Barbara, could you possibly break down the margins in the specialty alumina segment and the barium sulfate segment?

Barbara Russell

No, I'm sorry. That's typically not something that we break out for our business is so small, and we have such small competition. Our customers would love to have the information, and we typically don't provide that.

Conner McMahon - Sidoti & Company, LLC

Yes, okay. It's no problem. Did the share count drop this quarter significantly?

Barbara Russell

No, it didn't just because of the loss for the quarter. If we count as fully diluted, it would have been anti-dilutive. So basic share count.

Operator

There are no further questions. I'd like to hand the call back over to management for closing comments.

David M. Mossberg

This is Dave Mossberg, thanks, everyone for joining us on the call, and feel free to give me a call if you have any more questions, and thank you for your interest in TOR Minerals.

Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.

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