TPC Group CEO Discusses F1Q2010 Results - Earnings Call Transcript

| About: TPC Group (TPCG)

TPC Group Inc. (NASDAQ:TPCG)

F1Q2010 Earnings Call

November 2, 2010 10:00 am ET

Executives

Bob Whitlow - VP of Finance

Charlie Shaver - President & CEO

Miguel Desdin - SVP & CFO

Analysts

Edward Yang - Oppenheimer

Roger Spitz - Merrill Lynch

Edward Yang - Oppenheimer & Co.

Operator

Good day ladies and gentlemen. Thank you for standing by. Welcome to the TPC Group first quarter 2010 earnings conference call. During today’s presentation all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today Tuesday, November 2, 2010. I’d now like to turn the conference over to Bob Whitlow, Vice President of Finance. Please go ahead sir.

Bob Whitlow

Thank you operator and welcome to TPC Group’s 2010 transition period first quarter conference call. My name is Bob Whitlow, Vice President of Finance. With me today are Charlie Shaver, President and Chief Executive Officer and Miguel Desdin, Senior Vice President and Chief Financial Officer.

As usual we are making this call available to investors and the media via webcast. An archive of the webcast will be available for replay on our website shortly after the call. Around 5 am this morning, November 2nd, our earnings release went out and has been posted on the internet on TPC’s website www.tpcgrp.com.

As you know, some of our comments today may include statements about our expectations for the future. Those expectations involve risks and uncertainties. We can’t guarantee the accuracy of any forecast or estimate and we don’t plan to update any forward-looking statements during the quarter. Please note that information reported on this call speaks only as of today, November 2, 2010. And therefore you are advised that time-sensitive information may no longer be accurate at the time of any replay.

In addition, some of our comments may reference non-GAAP financial measures, reconciliations to the most directly comparable GAAP financial measures and other associated disclosures are contained in our earnings release on our website. Our earnings release and our annual reports are available on the internet at www.tpcgrp.com in the Investor Relations section.

I would now like to introduce Charlie Shaver.

Charlie Shaver

Good morning everyone on the call. I’d like to second Bob’s comment and welcome you to our TPC Investor Call for the first quarter of a six month transition period. As you’re probably aware, we announced earlier we are changing our fiscal year to a calendar year, so we will be reporting the September and the December quarters on a abbreviated transition period, and starting in January 2011, we’ll be on a regular calendar year reporting schedule.

The first quarter of this transition period, I am pleased to report that our businesses continue to perform very well. Despite a very challenging economic backdrop that continues and from many segments of our domestic and global economies, we continue to do well. Our favorable fundamentals have driven our business over the past several quarters have remained intact and we did not currently anticipate any change in those fundamentals. Revenue in earnings in both our major segments C4 processing and performance products delivered good results when compared to the prior year quarter. These businesses combined an EBITDA in access of $33 million which were driven by favorable volumes and improved pricing; all this underpinned a strong demand for all of our products.

From an operating perspective our facilities ran well in the quarter, we continue to exhibit excellent safety environmental performance and continue to execute on our plan with respect to our capital spending. At the end of the quarter we put in place a new seven-year $350 million offering, 8.25% senior secured notes. I am really pleased about this. This new facility which replaced our $230 million term loan gives the company excellent additional future and financial flexibility in addition to providing us stability to execute on a variety of return possibilities for our shareholders.

This facility combined with the $175 million revolving credit facility has put TPC in a great position from overall capitalization perspective. We are currently undrawn on our revolver and as of today we’ve got an excess of $120 million of cash available on the balance sheet as well. The company’s positive earnings and strong cash flow enabled this successful placement. Furthermore, our credit rating was affirmed by Moody’s at B-1 and we actually have a new rating from S&P at B+.

As I previously highlighted, our Board of Directors are reviewing various options to enhance the value and liquidity for our shareholders, but we are not in position at this time to announce exactly what form this will take. However, I can assure you we are working diligently to get this completed on a timely basis. With that said I would like to make a few comments on the business segment performance and then turn the call over to Miguel to review our financial results.

Starting out with the C4 processing this business segment that includes our Butadiene, Butene-1, mixed butylenes or as we call them (inaudible) in our MTBE businesses. I’d like to remind you that while we produce a small amount of MTB as a core product, it’s not a large part of our sales or earnings at this time. We did see volumes taper off slightly around 9% from prior quarter but improved from the prior year period, compared to last quarter volumes in this business segment were principally impacted by a slowdown in our fuels related business which is our mixed butylenes MTBE due to an outage of one of our major refinery customers.

Butadiene and B-1 volumes were up marginally compared to an unusually strong June quarter, but we are on plan and consistent with our expectations. Demand for Butadiene and Butene-1 remained strong throughout the calendar year with the continued light feed-tracking that we see with the majority of our crude C4 feedstock suppliers that they are currently utilizing. This has resulted in both higher and stable operating rates for their ethylene and derivative plastics operations. As noted in many company earnings reports over the past couple of weeks, the light feedstock cracking is providing major boost in profitability for many of these ethylene producers. This in turn provides us with a solid feedstock position and also strong demand for Butene-1 which is used as a co-monomer in many of their polyethylene operations. We expect this to continue into the next several years.

Our contract feedstock suppliers continue to deliver at our planned volumes and we haven’t seen any issue in procuring spot volumes for one of them who takes a planned outage. Pricing the margins in the C4 business segment continue their favorable trend. Compared to the prior year quarter we experienced increases of over 40% in pricing and over 20% for gross margin.

Taking a look at the performance products business segment that includes our isobutylene, polybutylenes and propolyene derivatives, this business segment also continue to perform well, both from a sales volume and gross profit perspective. This segment provides products to the fuel new additives, plasticizers, surfactants and specialty rubbers markets. All these markets have shown improving strength as we move through the calendar year and our customers are all dramatically improved results as well.

We realized higher sales volumes compared to both the prior year quarter, as well as the immediately preceding quarter. As compared with the prior year pricings and margins were up significantly over 28% and 72% respectively, and we also experienced higher demand in all of our isobutylene related businesses compared with both the prior quarter as well as last year's quarter.

I am pleased with the execution of our business plan in this business segment and particularly in regard to ramping up the sales from our expanded polyisobutylene, or PIB as we call it, plant. I continue to be pleased with that expansion and we are on track to continue to grow the sales from that unit as we move into 2011.

Our operations and commercials group continue to make positive strides to achieve the goals related to our operational excellence initiatives that we started over two years ago. We expect these areas to make even more contributions to the company's profitability as we move forward.

And over the past several months we’ve actually restructured our operations in supply chain organizations in addition to adding several key resources to be in a position to build on our service based business model as we move into 2011 and beyond. We have seen conservable price pressure in the past year in our logistics area and we’ve been able to encounter that with cost reductions in certain areas. We do expect this price pressure to continue going forward however and one would be ready to anticipate that in operations.

During the quarter, we’ve continued to be disciplined in executing our capital plan. For the quarter our capital expenditures amounted to just over 2 million and for the transition period we expect our total capital expense to be in the 10 to $12 million range. With that I will turn the call over to Miguel to review the quarterly financial results and then I will come back with a few closing comments before we open it up for questions.

Miguel Desdin

Thank you Charlie and good morning everyone. As we have done in the past and facilitate the discussion of our September quarter results, we have posted supplemental slides on our website. These slides provide additional industry and company information that maybe helpful with your analysis of the quarter. The main message in this quarter is the same as the last time. The demand in pricing that we experience for our products over the first six months of the calendar quarter of the calendar year continued through the quarter. The strong demand for Butadiene, Butene-1 and performance products was consistent with our expectations.

Turning to the supplemental slides on page 3 you can see the average Butadiene price for the quarter was significantly higher than the comparable quarter last year, turn slightly higher sequentially. As expected the Butadiene price has moderated in the current quarter as some BD consumers take advantages and carefully manage their inventories as we get to the year end. The average unleaded regular gasoline price is likewise substantially higher than the prior year quarter but is down sequentially which is not a typical coming out of the summer. The upward trended ethylene plant utilization rate over the last few quarters partly reflects higher output by ethane fed crackers as a result of the downward trend in ethane cost.

I will now turn to our first quarter operating results. First quarter revenues of $499 million were up 47% from last year, but down 6% sequentially. The significant year-over-year increase was due primarily to average selling prices which were 44% higher. The 6% decline from the fourth quarter which has historically been our strongest quarter of the year was due to the impact of 7% lower sales volume as average selling prices were in line.

Revenues for the C4 processing and performance products segment improved 49 and 39% respectively year-over-year and declined 6 and 5% respectively sequentially. First quarter adjusted EBITDA was $33.1 million compared to $20 million last year and $35.5 million in immediately preceding quarter. The year-over-year improvement was driven by 20% higher average unit margins plus sequential softening primarily reflects 7% lower volume partially offset by lower plan operating and general admin expenses.

Net income for the quarter was $12.8 million or $0.70 per diluted share compared to net income of $3.7 million or $0.21 per diluted share last year and net income of $14.4 million or $0.80 per diluted share in the fourth quarter.

Regarding liquidity at the end of the first quarter we had approximately $35 million of cash and no borrowing under $175 million revolver. First quarter net cash flow was a negative $80 million consisting primarily a operating cash flow of a negative $77 million.

After adjusting for the unwinding of the $65 million aggressive collection efforts highlighted for you last quarter, the first quarter cash flow would have been a negative $15 million that was driven by a $21 million increase in inventory which reflects a combined effect of 17% higher inventory volume and 4% higher average cost per pound.

As Charles mentioned earlier this month we successfully refinanced the term loan with the seven year $350 million senior secured notes placement. The transaction offer several benefits including extending the debt maturity for 2017 and accessing loan from capital during the favorable interest rate environment. It also allows TPC to return the capital to shareholders at a time when the company is benefiting from the returns of recent capital investments is generating positive free cash flow and is not engaged in the significant expansionary capital projects.

Stay tuned as we will share more information on this with you in the near future as plans are finalized. With that, I’d like to turn the call back to Charles for some closing remarks.

Charles Shaver

Yes, thanks Miguel. I would like to highlight a couple of things around the fundamentals of our business and comment as we begin to look at 2011. As I mentioned in my open remarks, the fundamentals of our businesses continue to be very positive. If you look at from the standpoint of feedstocks by business, the abundance of natural gas and new developments of the shale gas which contains significant ethane, it’s a very positive factor for the North American ethylene industry, low natural gas prices continue to favorably impact those feedstock costs and they keep our extraction energy cost at attractive levels.

If you look ethane as a feedstock in North America US steam crackers is almost up to 60% of the total feed at this point. The highest usage in the industry seen in certainly over 20 years and the comparatively low price of those NGLs and the economic advantages of cracking of live materials will continue to result in lower crude C4 availability; we serve to keep it general butadiene market in types of proposition.

We think that will continue, that coupled with natural prices that have continued to push up the high levels globally will continue to elevate butadiene and synthetic rubber prices, as well as keep tight supply around the world. As global economies recover over the next several years we believe that separate pricing pressure will escalate even more. In addition, most new global ethylene capacity is being added, has come on slower than expected at adding to the types of five olefins. This along with the tendency of latter feeds globally is making C4 supply even more limiting. At the same time, we continue to procure our crude C4 success by both from our contract and spot basis and we believe in the near term that we will continue to be able to source success with our business.

Our business model, the changes we have initiated the marketplace with our facilities, have established a more stable economic platform for our TPC Group. We believe that the rationalization of unused extraction, the allocation of our resources, expansion of our product lines and the things such as knowing propylene tied to an additional [polyethylene] capacity and our push for value pricing has positioned us even better as we go into coming year. Our suppliers and consumers are continuing to increase and they recognize the value of our services and products, and we believe both these business segments are favorably positioned to execute on our business plans, become even more of a service oriented reliable supplier of C4s and performance products.

One example of that commitment to our growth and to our customer has been our recent announcement in the ground breaking on our new R&D tech center for the company which is located next to the Houston operation facility. We are excited to provide that resource such as (inaudible) that help service and grow those relationships with our customers and suppliers. Admission previously just have been re-completed in June of 2011 and will fit well with the plan that we have got for several of our product lines over the following years.

As I look in the calendar year 2011, we anticipate capital spending to be in the $25 million which will include our maintenance reinvestment, small dollar, high return projects and the bulk of text in our investment next year. Management and the board will continue to seek low risk-high projects and involve growing those existing platforms and we are pleased to have a number than that we are currently reviewing.

So just to ramp up my comments, we believe we are well positioned to re-move into 2011 with our company and the industry that fundamentals are in place. Given the nature of our global customers and markets, they will always continue to be evident play within the value change for the majority of our leading indicators of our business lines are all positive at this point. We put in place, what we believe is interactive capital structure and have a host of opportunities that we will be looking at over the next couple of quarters for the company.

We are looking forward to sharing them with you at the appropriate juncture and with that I will turn the call back over to the operator to answer any questions that you may have.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question is from the line of Edward Yang with Oppenheimer. Please go ahead.

Edward Yang - Oppenheimer

You did mention some in your prepared remarks price pressures on the logistic side and I was wondering does that mean it's appropriate for you to start valuating some additional fees to recoup some of those higher costs?

Charlie Shaver

Definitely, I think it's an ongoing part of the process that we will continue to look at our overall logistics car services. As you are aware pipelines and barges and ships and everything we are seeing freight rates go up, we’ve seen pipeline fees go up, transportation overall there is pressure on that. So I think where we can, we work for customers on recovering that investment and I think we will just have to continue to stay ahead of it.

At the same time our customers expect that we will continue to work to reduce cost where we can and we have several good examples over the past year where our team's been able to go in and actually reduce cost to offset either for us or the customers the impact of that. So I think we will continue to look at where there are assets recovering at investment and where we can’t work with the customer whether it’s a third-party or to either find alternate merger transportation or ways to alleviate some of that cost pressure.

Edward Yang - Oppenheimer

You also talked about some of the nice secular trends that have been developing your favor and you expect those continue. But this is the first time that I heard you reference natural rubber prices and that’s would be in the news and how does that affect your business?

Charlie Shaver

Some of you are probably aware, we’ve seen natural rubber prices out in Asia of over $3,000 a ton, that’s actually putting upward pressure even on synthetic rubber and ultimately on tire prices around the world. We think that will continue. We think that that will be, although substitution is sometimes very limited in fitting all kind of tires people are making, or what some of the applications are for rubber. We believe as it shows very tight fundamentals around rubber going forward and we expect that pressures. Certainly the economy continues strengthening going into next year and I think it’s a view shared by a lot of our customers if that pressure will discontinue to be upward. Again, I think we will see times where there is ebbs and flows in our widows that open up, different parts of the globe that overall the pressure is certainly generally upward and we will continue to work with our customers and make sure they get what they need

Edward Yang - Oppenheimer

And I don’t think your customers in particular have a lot of room to maneuver in terms of substituting between natural and synthetic rubber, but I would think that the competitors in those of your customers particularly more on the commodity tire side they have a lot more discretion in terms of the different materials that they can use and we think again because natural rubber prices are still relatively very high compared the dying prices from the take that they have more discretion, would that be the case?

Charlie Shaver

Yes, I mean that’s true and I think you can look in the past month Asia Butadiene price went for up $1,600 to over $2,000 a ton very quickly as people began to do some of that with high natural rubber they will sort of get more flexibility than some of the higher end technology tires for substitutions limited

Edward Yang - Oppenheimer

Okay and performance product it’s been having very strong performance but it does look like it moderated during this quarter and you know what was driving that?

Miguel Desdin

Hey Ed this is Miguel all of the product was in our performance product segment were actually the even or better events the prior quarter on a unit margin basis with the exception of the propylene derivatives products. There unit margin was down roughly in a half and that’s all attributable really to a pricing lag.

During the June quarter the main raw material for that business which is refinery grade propylene, the prices fell each and every month during that quarter but in the September quarter unfortunately the prices rose each and every month so, it’s just a matter of catching up on the contract for this product.

Edward Yang - Oppenheimer

As we expect to get that back in the December or March quarter?

Miguel Desdin

Yes, assuming prices stabilize, yes well they will.

Edward Yang - Oppenheimer

Okay and then just a final question from me and thanks for being generous with your time here, on the options on your cash, you called that out exclusively in the last press release and talked a bit about it in your prepared remarks but just flushing that out in the creative bit of detail, what's your current line of thinking in terms of the use of those cash that you’ve raised and what's the timing and I would think that because your board also has a very strong vested interest in terms of the stock ownership position, how confident are you that you put in fairly robust processes to make sure that all shareowners are treated equitably while you evaluate these strategic options.

Miguel Desdin

Yeah, at this chart I’ll take couple of quick comments on that. We just closed on the transaction here in early October, really only about 30 days ago.

The board is moving quickly through all of those alternatives reflecting that also looking at 2011 look at the company’s projections, I would say that we are looking to wide range of all of those options looking at specifically the fact that return to our shareholders in some form of fashion is the appropriate, I think the board will move quickly on that unfortunately we just cant share with you what's those are going to be. And to your question timing though I would expect they have something done by the end of December.

Operator

(Operator Instructions). The next question is from the line of Roger Spitz with Merrill Lynch. Please go ahead.

Roger Spitz - Merrill Lynch

Pro forma for the bond transaction which was of course you asked in the quarter could you provide your pro forma September cash in revolver balances for that period.

Miguel Desdin

If I understand the question correctly Roger, we finished with cash at 35 million at the end of September, are you asking for kind of today where we stand on the cash balance?

Roger Spitz - Merrill Lynch

You can give that too and what I was looking for I just want to pro forma in the 1 September, pro forma in the cash and revolver balance even as of September although.

Miguel Desdin

We had nothing wrong on the revolver at the end of the September and we have $35 million of cash.

Roger Spitz - Merrill Lynch

When your performance for the bond deal because you raised more cash because you did 350 or bonds, (Multiple Speakers). And that additional 68 of cash was always no revolver joining on a pro forma basis?

Miguel Desdin

Correct, that’s absolutely right. So net of the term loan and the fees that we pay we have about roughly $70 million of excess cash.

Operator

(Operator Instructions) we do have a follow up question from the line of Edward Yang Oppenheimer & Co. please go ahead.

Edward Yang - Oppenheimer & Co.

Okay hi thank you and one of your competitors during the quarter with customers on allocation was wondering of that how to results it on this quarter

Charlie Shaver

No not really Ed when you look at our overall Butadiene demand and our sales, we are pretty much fully contacted up clearly I mean I guess I could result in a little output pressure on US Butadiene pricing but lot of that was already in place. We are already sale those dynamics little bit ahead of that but certainly it didn’t hurt

Edward Yang - Oppenheimer & Co.

Okay and Miguel pro forma for the bond offering what do you think the appropriate level of corporate quarterly interest expense should be? (Multiple Speakers) $7.5 million a quarter

Miguel Desdin

That’s about right Ed I think we are going to project call it $30 million when you look at the bonds and the amortized fees

Edward Yang - Oppenheimer & Co.

Okay and just on the guidance just seem like the guidance was a bit more broad than you provided in the prior quarter was it bit of a narrow range is there anything to read into that or is it just some variability around the holiday

Charlie Shaver

That’s really what it is clearly the second quarter wont be as strong s the first quarter we just presented we do expect major improvements over the second quarter of last year but there are lots of variable that as you say heading in to the year end which makes it difficult to be very precise. How well customers come back up from turnarounds and discussions they have about running during holidays all those things make it difficult to predict

Edward Yang - Oppenheimer & Co.

Okay.

Operator

And now it's showing that there are no further questions at this time. I will turn it back over to management for any closing remarks.

Charlie Shaver

Thanks operator. I always appreciate your interest in the company, I think that the couple of things noteworthy, I’ll second Miguel's comments about the quarter. We continue to see good demand, stable pricing in our products, although [BD] has come off a little bit in the past two months but again we see upward pressure on it as we head towards the end of the year. So we don’t see any fundamental changes.

As Miguel highlighted it is the season where people do adjust for inventories and you kind of give their best guess but you never know till you get there. But the dollar fundamentals remain the same, demand is good in all our product lines, and then we really begin to turn our heads towards 2011 and as I mentioned earlier we see a lot of favorable indicators.

Across the whole broad chemical industry and certainly in ours, so we are pleased to look at that and see that and pick our plans that matches up with that well. We do also recognize that as we become a public company we are seeing a large new group of investors. We are pleased with that; we have been out to meet some of you already. Look forward doing that over the next couple of months.

We will be adding a new full-time Director of Investor Relations that we hope to announce here in the next couple of weeks. Have that person on-board in December and I think that that will help us be timely on information request in setting up Miguel and I spending more time with you.

And as always we'll try to provide more information on the company recognizing that we do have brought new our investor base in some cases are as familiar with our industry as in our business system have you been. So look forward to during those couple of months and as always reach out to us if you have questions. And with that thanks for your interest in the company and we appreciate it and look forward to our call in next turnaround. Thank you.

Operator

Ladies and gentlemen this concludes the TPC group first quarter 2010 earnings conference call. Thank you for using ACT conferencing.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!