TPC Group's CEO Discusses Q4 2011 Results - Earnings Call Transcript

Mar. 9.12 | About: TPC Group (TPCG)


Q4 2011 Earnings Call

March 9, 2012 10:00 AM ET


Rishi Varma – General Counsel

Mike McDonnell – President and CEO

Miguel Desdin – Senior VP and CFO


Edward Yang – Oppenheimer

Fritz von Carp – Sage Asset Management

Gregg Goodnight – UBS

Andrew Gundlach – First Eagle


Good day, ladies and gentleman. And welcome to the TPC Group Quarterly Earnings Conference Call for Quarter Ended December 31, 2011 and Year End 2011. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. As a reminder, this conference is being recorded.

I would now like to introduce our host for today, Mr. Rishi Varma, General Counsel. Sir, please go ahead.

Rishi Varma

Thank you, Karen. Good morning, everyone. And welcome to today's conference call to discuss TPC Group’s fourth quarter and full year 2011 earnings results. With me today is Mike McDonnell, President and Chief Executive Officer; along with Miguel Desdin, Senior VP and CFO.

While management will not be referencing slides today, we have posted a presentation online that includes supplemental financial information about the quarter and full year. These slides along with other quarterly financial results can be found in the Investor Relations section on our website at

Please note the slide in the presentation which refers to the forward-looking statements and says that statements made during this call that refer to management’s expectations and/or future predictions are forward-looking statements intended to be covered by the Safe Harbor provisions of the Securities Act. As there are many factors which could cause the results to defer from our expectations.

We also do not plan to update any forward-looking statements during the quarter. Please note that information recorded on this call speaks only as of today March 9, 2012, therefore, you are advised that time sensitive information may no longer be accurate at the time of replay.

In addition, some of our comments may reference non-GAAP financial measures and reconciliations to the most directly comparable GAAP financial measures, and other associated disclosures are contained in our earnings release and on our website.

And with that, I’ll turn the call over to Mike.

Mike McDonnell

Thanks, Rishi. Good morning, everyone, and thank you for joining the call this morning. I’ll provide a clear, transparent explanation of the drivers behind our fourth quarter results, including the impact from our inherently stable fee-based business model and cost plus fee contracts, which generated solid underlying results when you remove the impact of the butadiene price changes.

I’ll also provide an update on current market conditions. I’m very pleased with our results for the full year 2011. Despite a very challenging fourth quarter, we generated a $130 million of EBITDA in 2011, a 21% increases versus 2010. This performance reflects the continued track record of successful execution as we implement our strategies and service fee expansion targeted volume growth and operational excellence.

As we anticipated and communicated to you on last quarters call, we were challenge in the fourth quarter by an abrupt and significant decline in end-use demand, inventory destocking on the part of our customers, and the negative impact of the supply/demand imbalance for butadiene, which drove a 42% decline in a contract price of butadiene between September and December.

While the reported EBITDA was $11 million lost in the fourth quarter, we experience a $36 million negative impact from the sharp decline in butadiene pricing due to the timing differences between purchases of butadiene in crude C4 at market price and sales of finished butadiene at market price.

Recall that we purchase butadiene in the crude C4 from ethylene crackers at market price and sale the finished butadiene to customers also at market price. Our stable underlying margin in BD consist of fixed per pound fees charged to suppliers and customers for the aggregation, processing, storage and logistic services that we provide. These fees are an addition to the market price.

Removing this $36 million impact, which doesn’t really reflect the quality of our underlying business performance, we generated $25 million of underlying EBITDA, up 11% from the underlying results of the prior year quarter, which included a $4 million negative butadiene price impact last year.

Despite the difficult conditions, we’ve generated $25 million of free cash flow in the quarter. This cash flow performance validates the stability of our business model.

We outperformed our expectations for the quarter, the guidance we provided for the quarter was reported EBITDA in the range of negative $23 million to $17 million, which included $30 million of negative impact due to the expected substantial declines in butadiene pricing. We anticipated our underlying EBITDA in the fourth quarter to be in the range of $7 million to $13 million.

Our actual results were significantly better than expectation for several reasons. We saw better than expected demand for Performance Products as destocking seem to be completed earlier than expected. Additionally, our Performance Products margins were favorably impacted by the contract lag between falling feedstock costs and product selling prices.

Our C4 Processing segment results benefited significantly from the excellent work by our employees to mitigate the imbalance between the stable supply and reduced demand of crude C4 components. For example, we developed additional demand opportunities in the quarter to help balance the market, in order to minimize the need to dispose of these valuable C4 by converting them into lower value product and uses.

Our underlying results while independent of butadiene crisis are sensitive to fluctuations in volume, gasoline price level and of course, the execution of our ongoing initiatives in service fee expansion, targeted volume growth and operational excellence. And I’ll now discuss each of these factors, starting with volume.

Volume in our C4 Processing segment was down 6% in the quarter versus prior year, butadiene and Butene-1 volumes were down as a result of customer destocking in response to global economic uncertainty and weaker end-use demand.

Volume in our Performance Products segment was down 16%, reflecting the impact of softer end-use demand and the substantial customer destocking that began late in the third quarter of last year. Volume stabilized and began to improve in this segment in the later part of the quarter as destocking came to an end.

Our earnings are also sensitive to gasoline price, marker in many of our commercial contracts. Gasoline prices grew 20% higher than the comparable prior year quarter, which favorably impacted selling prices and margins on our Butene-1 and raffinates. However, this impact was more than offset in this particular quarter by unfavorable customer mix in these products resulting from weaker demand.

During the fourth quarter, we continued our high standard safety performance and drove strong execution in all of the manufacturing and supply chain activity. Our plants ran well, although reduced operating rates.

The quarter benefited from the progress we’ve made in improving our service fees and other contract enhancements versus prior year. Our operational efficiency initiatives and high return capital projects continued their positive contributions to our bottom line through costs reductions, improve reliability and productivity, and enhanced logistics capabilities that provide greater value to our customers.

Now, I’d like to provide more color on butadiene market conditions during the fourth quarter and the impact on our reported earnings cash flow from the significant decline in butadiene contract price over the course of the quarter.

Butadiene supply and crude C4 in general in United States have been significantly reduced over the last year due to the broad base shift to lighter ethylene cracker feed slates, as ethylene crackers and producers capitalized on cost advantage natural gas liquids from shale plays. Now supply of butadiene is driven by ethylene cracker operating rates and the composition of the feed slates.

Demand for butadiene on the other hand is driven by end market demand synthetic rubber, nylon and other products that require butadiene. This combination of reduce -- constrained supply with growing demand experienced by butadiene is expected to be increasingly short.

However, there are weak periods like the fourth quarter and we went from the typically constrained supply situation for butadiene to an over supply condition, as cracker operating rates continued at consistent level with previous quarters of the year, while demand decline abruptly, as our customers adjusted their inventory levels to decline end-use demand.

This over supply situation resulted in a 42% decline in the price of butadiene over the course of the fourth quarter. And we call the price is the primary market clearing mechanism between supply and demand for butadiene because limited storage for the product exists.

BD price changes increase significant volatility in our earnings, here is an example of that work in the fourth quarter. In September, we paid $71 per pound for the butadiene contained in the crude C4 repurchased during the month. We process that crude C4 to produce butadiene and other products. We sold the portion of the finished butadiene in September the same month and so the reminder in October the next month.

The selling price of butadiene sold in September was based on September published contract price of $71 per pound, so on those pounds we earned our fixed fee-based margin. However, the selling price for the reminder of the pound purchased in September was based on the October contract price of $41 per pound, which had a substantial negative impact on our results for October.

As the same time, however, the decline in butadiene price had a positive impact on our cash flow, because it resulted in the reduce investment and working capital. This process was repeated in each of the three months in the fourth quarter.

Now, I’d like to give you an update on the current market conditions including the market for butadiene. As we had anticipated and communicated to you on last quarters call, we’ve seen clear signs that the fourth quarter downturn was a temporary condition and markets are coming back in the balance.

Demand in our core markets including synthetic rubber, nylon, polyethylene and fuel and lube additives appears to have stabilized and was expected to improve modestly on a sequential basis in the fourth quarter.

Tire and synthetic rubber customers reports that demand is improving but still remains relatively soft. Fuel and lube additives customers are seeing more positive demand growth based on improving end-use demand and restocking.

Over the last three months butadiene prices have risen sharply from $0.98 per pound in December to a $1.46 per pound in March. This rapid increase in pricing is driven more by supply constrained right now the demand improvement at this point in time, exuberating the normal supply constrained is the unusually high number of U.S. ethylene cracker scheduled for extended turnarounds during the first half of 2012.

This abnormal one-time supply situation is expected to continue for the first half of the year before normalized supply conditions resume. Demand for butadiene has improved sequentially from the fourth quarter, but it’s still relatively weak and below prior year levels.

Additionally several large butadiene customers are planning outages in the March, April timeframe to take advantage of this time period while supplies abnormally constrained and less available. We believe this unusual high number of cracker outages will impact our year unfavorably by approximately $10 million, due to the lower than normal supply in crude C4s available during the first six months of the year.

As we look forward, we continued expect our performance to track with $150 million EBITDA guidance for 2012 that we provided in early 2010, but in this case adjusted downward by this approximately $10 million one-time impact for lower crude C4 availability. While it is early days yet in the year and we are opt to a good start, and we’re very excited about the many opportunities ahead.

And, with that, I’ll now turn the call over to Miguel to discuss our financial results for the quarter.

Miguel Desdin

Thank you, Mike. I’d like to spend a few minutes going through the financials for the quarter and then touch on the two reporting segments. As we reported in our press release, fourth quarter revenue was $575 million, which was up 18% compared to the fourth quarter of 2010. The revenue was driven by higher selling prices, which were partially offset by lower sales volumes across all of our product line.

The overall average unit selling price was up 29% from year ago driven by higher commodity prices. Sales volume of $678 million pounds was down 8% year-over-year and down 175% compared to the seasonally strong third quarter. Our fourth quarter sales volume reflected softening demand as our customers adjusted their inventory levels in the response to global economic uncertainty and declines in end-use demand.

Gross profit was $32 million in the fourth quarter of 2011, compared to $59 million in the fourth quarter of 2010. The $27 million decrease reflected lower margin in the C4 Processing segment and lower volumes partially offset by better margins in our Performance Products segment.

Gross profit in the current year quarter compared to the prior year reflected a $32 million negative impact from a downward movement in the price of butadiene. As a result of the imbalance between supply and demand, the North American contract price of butadiene decline 42% over the course of the fourth quarter, compared to an 8% decline in the prior year.

Adjusted EBITDA for Q4 was negative $11 million, including the $36 million negative impact from the decline in the butadiene price. That compares to $19 million of EBITDA in the prior year quarter, which included the negative butadiene price impact of $4 million. Adjusting for negative impact of the butadiene price changes in both periods result in an underlying EBITDA of $25 million in the current year quarter versus $22 million to the prior year.

As a result of these items previously discussed, the company experienced a net loss in the fourth quarter of $18 million or $1.18 per diluted share versus a net loss of $1 million or $0.04 per diluted share a year ago.

Net income for the full year was $36.7 million or $2.28 per diluted share, compared to net income of $31 million or $1.68 per diluted share in 2010. The year-over-year increase in net income reflected higher gross profit of $36 million, partially offset by higher operating and general and admin expenses, and $12.0 million increase in interest expense due to the Senior Secured Notes which were issued October 2010.

Diluted earnings per share for the quarter and year compared to the prior year period reflected the positive impact of reduce number of shares outstanding, the company has repurchased approximately $2.8 million shares since December of 2010.

Turning to the balance sheet. At the end of 2011, we had total debt of $348 million and the cash balance was $108 million, resulting in net debt of $240 million. At December 31st, the company's net debt to capital ratio was approximately 45% and net debt to trailing 12 months adjusted EBITDA was approximately 1.9 times.

Cash increased $25 million in the fourth quarter consistent cash generated from operating activity of $44 million plus the offset by capital expenditures of $19 million. Net cash from operations was driven by a $62 reduction in trade working capital, which was partially offset by the net loss of $18 million in the period.

Capital expenditures for the quarter and full year were $19 million and $52 million, respectively. Fourth quarter capital expenditures included $10 million for engineering on a strategic project and $2 million for high return discretionary project.

From the liquidity perspective, in addition to the $108 million of cash, we also had full availability under our $175 million revolving credit facility at the end of December.

Turning to our operating segment, the C4 Processing segment revenue was up 21%, driven by a 29% increase in the average unit selling price, partially offset by the effect of 6% lower volume. The average selling price reflects higher prices for the commodity to which both our selling prices and raw material costs are linked. The lower sales volume reflects the imbalance between supply and demand for butadiene and generally soft market conditions for the other products during the quarter.

Both gross profit and EBITDA for the segment were down $29 million, reflecting the negative impact on margins of the decrease in price of butadiene during the quarter, as well as the impact of lower volume.

The Performance Products segment revenues were up 5% versus the prior year quarter due to a 25% increase in average unit selling price, partially offset by 17% lower sales volume. The higher average selling price in the current year quarter reflected higher commodity prices, the lower sales volume is due to the customer inventory destocking in response to the weakening end-use demand.

Gross profit and EBITDA for the segment were each up $2 million, compared to the prior year, as better margins more than offset the impact of the lower sales volume.

I’ll now turn the call back to Mike.

Mike McDonnell

Thanks Miguel. We are also making good progress in developing our strategies to drive step change growth in the future. Our strategy is capitalized on three key industry dynamics that are in our favor over the long-term.

Attractive long-term market fundamentals in our core market driven by the global megatrend of mobility, structural payments in crude C4s as a result of the shift to righter cracking resulting increasing value of butadiene a mission critical product, as well as other C4s. In the anticipated favorable economics of natural gas liquids providing cost advantage butadiene feedstock for our future.

We will continue also the path to leverage our idled assets namely our dehydro units and associated infrastructure, as well as our proprietary technologies and decades of operating experience. We are making good progress in the development of the two previously announced game changing projects to drive our strategy.

The restart of one of our idled dehydro units to produce isobutylene from cost advantaged natural gas liquids. To be used as an additional feedstock for our growing Performance Products and Fuel Products business. This project will allow us to capture the favorable economics of the isobutene to isobutylene spread. We’ve made significant recent progress in developing this project. Our IRR remains firmly in the 18% to 22% range.

The capital estimate is trending is higher and the preliminary estimate we provided last year, as we’ve decided to spend somewhat more capital to refurbish existing equipment to a higher level. On the other hand, we’ve improved the project operating costs and the liability of the plant such that we are able to maintain the same return on investment.

We have agreements now in principle for feedstock supply and transportation, the developing costs estimates that are now based on firm quotations rather than factored estimates of the preliminary economics. We are actively preparing for the construction phase and we expect to have the project ready for funding approval by the middle of the year.

The second project is the restart of our other idled dehydrogenation unit and the use of our proprietary Oxo-D technology and decades of prior operating experience to produce butadiene on purpose from cost advantaged natural gas liquids. This project will allow us to enhance our operating model as we would be able to capture a substantial portion of the butane to butadiene margin on the butadiene we produce from this project.

The project will provide our customers with long-term security of supply in favorable economics on the mission critical product, and their feedback continues to be very positive. The project is expected to produce up to 600 million pounds of butadiene with the capability to expand as needed through additional phases as the market grows.

In August, we initiated a preliminary feasibility study on this project. We funded a regular single client study of the butadiene marketplace, which validated the long-term attractiveness of this market and determine that the supply demand gap for butadiene is expected to be 1.7 billion pounds globally in 2016.

We confirmed that our Oxo-D technology is the most cost effective technology available to produce butadiene on-purpose. Feedstock studies showed that sufficient feedstocks will be available to supply this project. And the capacity in our existing supply logistics is also sufficient for this project. We're now engaged in detailed discussions on the long-term offtake agreements with customers that will ultimately determine actual capacities and economics of the project.

In parallel we've initiated preliminary engineering on a range of options to meet the supply and economic requirements of our customers at the most efficient capital expenditure level. Overall our inherently stable margin structure from of course the 60s and cost plus pricing combined with our near term strategies and proposed longer term opportunities provide a strong foundation for sustainable earnings growth consisting cash flows increasing the terms on invested capital.

And we're happy to take your questions.

Question-And-Answer Session


(Operator Instructions) Our first question comes from the line of Edward Yang from Oppenheimer.

Edward Yang – Oppenheimer

Hi. Good morning.

Mike McDonnell

Hi, Ed.

Edward Yang – Oppenheimer

Mike thanks for that very lucid description of the favorable supply demand dynamics around butadiene and I this was the first time that you've kind of quantified the global supply deficit, you mentioned 1.7 billion pounds by 2016, why aren't you moving more aggressively on the de-hydro II and the on-purpose BD plant and that's only about 600 million pound. Are there producers that also looking at that on-purpose plants as well?

Mike McDonnell

Look it's a very attractive market now, well known and widely accepted observation that the market is going to be in a critically short in the future, so I'm sure there are others looking at it. But we are moving as rapidly and as aggressively as we can. It's a very complicated project, it requires time to do it right. And you know so there's a permitting process in there, that's really how to define at this point in time in terms of the timings, could be one year could be two years, so that's also affecting our timeline but then – the short answer to your question is we're moving as aggressive as we can, we really are very very positive about this opportunity.

Edward Yang – Oppenheimer

And what's TPC Group's relative advantages against other producers that would be booking at on purpose capacity?

Mike McDonnell

I think the first thing is the technology we have and we validated that as I just mentioned in my remarks that it is the most cost effective technology available for producing butadiene on purpose, that's clearly one. Secondly, you know we have an operating history of lending on purpose butadiene decades ago. And so that's very much to our advantage. Our process is proprietary so we have a leg up in that regard as well.

We have existing underutilized infrastructure for the extraction, the downstream crude C4 that's produced – in Butadiene through butadiene that's produced in the project. So in a number of advantages that we feel very positive about so we're staying very focused on our project and we continue to execute well as you'd expect.

Edward Yang – Oppenheimer

And the other project dehydro one which is further along the process maybe an update there, is that still slated for sort of an '14 type of a startup, the volume increase would be somewhere around 650 million pounds per year and your expectations of when that volume would get sold out?

Mike McDonnell

Yeah. You're right on those facts, go ahead, Miguel.

Miguel Desdin

Yeah, Ed. Our expectations haven't changed around that project, we're very bullish on that one, it's a very good project. We expect as Mike said in his comments to be approaching the board on co-funding final funding approval mid-year this year. And so we're very excited, we're moving forward that's still a very viable project.

Edward Yang – Oppenheimer

And the cracker outages, how much should we think about that? I mean that affects your supply, you said and I think I believe in the first half – does that push it out, I mean, can you – is there any possibility that you can make up that supply in the second half or does that provide a lift in 2013 for example if the crackers don't have to have these frequent outages?

Miguel Desdin

The crackers are running at very very high operating rates due to the cost effectiveness of the ethane feedstocks from the NGL plays. So it's unlikely that we're going to make that up. I think that because of the lack of availability of the product, our customers would probably want to run harder when more is available. But I don't think we're going to be able to make up that supply deficit, we're not planning on it.

Edward Yang – Oppenheimer

Okay. And just finally on Performance Products, that was an area where you were affected by the de-stocking, but margins actually went up sequentially by quite a bit. Probably the best margins you've seen in that business for over a year. You know what drove that performance and expectations for margins in that business in 2012 and next year as well?

Mike McDonnell

You know, this is a great business for us and you know we have much or most of that business in contracts that are indexed to you know raw materials cost, variable cost. And in the quarter we really benefited from favorably this time from lags – between falling raw material cost and lagged selling price impact. So that drove a lot of that favorability, which again goes to the stability of our model that.

And Ed, answering the second part of your question, we think the margins for that business went – they trend back that down once prices stabilized to the kind of margins that you saw, in the part of last year or so – and in the $0.12 – $0.13 per pound range.

Edward Yang – Oppenheimer

Okay. Thank you very much.

Mike McDonnell

Thanks, Ed.


Thank you. And our next question comes from the line of Fritz von Carp from Sage Asset Management.

Fritz von Carp – Sage Asset Management

Yeah, good morning. I was just wondering if you could give me a feel for you mentioned that there were some supply constraints related to downtime in United States and also, you know that there's some – and tell me if I wrong, I think I know that there's some supply constraints so crude C4 coming out of Europe because their – low utilization of their crackers just because they lack demand for their end products. If you look around the world of all the factors that are creating a relatively tight market for crude C4, how would you sort of rank them, I mean what are the relative sizes to each other and how big a pieces is purely temporary turnarounds on the gulf coast?

Mike McDonnell

I can start you know with the comments just saying that this impact on the gulf coast is really a very significant one, certainly for North America but also for the world because the markets are very tightly connected, across the world. I can't give you an exact numbers in terms of relative impacts of these things but this is a known schedule instead planned outages in the U.S., in the cracker industry that are – going to add any particular time here in months during the first six months going to take out between 10% to 12%, of the U.S. ethylene capacity and therefore crude C4 availability. So you know it's a very very significant factor.

You know the others are at – the other factors that you mentioned, such as the European – operating rates and so forth, are – I mean they fluctuate, and already this – I've seen recently and I've been talking to some folks over there that those operating rates are starting to improve a bit more with the high level of butadiene pricing that currently exists around the world. So I think you're going to see, you know volatility have changed there as those crackers may operated a little bit more strongly, in over the next months but you know it's hard to tell.

But there are a number of factors you know involved in this supply-demand balance, I think we tend to look at this market during in the long-term and the short-term, since short term is always going to be volatile. I mean it will continue to be even – over the next few months – but longer term we're looking at a market that – that's balanced and we'll properly tight. And we expect to see further price appreciation in the long term here. And that's a way we have to look at it.

Fritz von Carp – Sage Asset Management

Thank you.


Thank you. And our next question comes from the line of Gregg Goodnight from UBS.

Gregg Goodnight – UBS

Good morning, gentlemen.

Mike McDonnell

Hi, Gregg.

Miguel Desdin

Good morning, Gregg.

Gregg Goodnight – UBS

Hey, I was – inventory effect of your – FIFO effect was a headwind in the fourth quarter, it looks like it's going to turn around and be tailwind for you, is there any advice you could give us on sizing that potential tailwind in the Q1?

Miguel Desdin

Hey, Gregg, just a clarification, we're not on FIFO, we're not actually on LIFO either, we're on average costing method.

Gregg Goodnight – UBS

Okay. I appreciate that.

Miguel Desdin

But in the first quarter, I think there's some guidance rule of thumb that's out there that says for every cent of butadiene price you know, increase or decrease we're – our EBITDA is affected roughly by about $500,000. So as a rule of thumb that would be probably something to get you in the neighborhood. We can't give you a specific number because we have no idea where the butadiene price is going to wind up for the quarter. But that will give you an approximation based on whatever the numbers winds up being.

Gregg Goodnight – UBS

Okay, great. Currently your gasoline prices are up, butane prices are up, propylene prices are up, how – you know I know some of you – your pricing is factored off of say butane and gasoline, could you help us size the impact, any potential impact to your margins either in performance products or in the C4 area that these prices are going to impact your margins?

Miguel Desdin

It's hard to tell right now without knowing what the prices are ultimately going to do, we don't really have a rule of thumb, because some of the other variables are intertwined like butane so, there isn't something that I could point you to, like I did with butadiene where I could just tell you that it would change relative to the pricing change of that commodity, so we'll I don't have a good answer for it.

Gregg Goodnight – UBS

Okay. Qualitatively…

Mike McDonnell

Gregg, I can just add that – you know the majority probably over 80% of our gross profit is protected in the sense that it's indexed to cost indices that that link or product prices with our feedstock cost in some ways so. If there are movements they tend to be temporary and we have lag effects and come to more stabilized level pretty quickly.

Gregg Goodnight – UBS

Okay, so your contracts are such that the price increases will be all set and you maintain margins?

Mike McDonnell

That's generally the case, yeah. With gasoline some of our contracts have us buying at a certain percent of gasoline, and then selling at a higher percent of gasoline, so any improvement in gasoline is going to be a net positive improvement on margins. But the other factors that you mentioned butane et cetera those tend to be more indexed to the product prices or those margins are safe.

Gregg Goodnight – UBS

Okay, so thanks for the help. One more question if I could, sort of in the line of what Ed was asking about. In your knowledge are there any other demonstrated processes for first-intent butadiene by demonstrate I mean units that are commercially operating out in the industry.

Miguel Desdin

We know of the intent to start up a unit in China and it's hard to say from here exactly if that's going to occur or not going to occur but there – like there is a stated intent of a small unit, I think it's was on (inaudible) of a 100,000 metric tons,

Mike McDonnell

100 million pounds.

Miguel Desdin

200 million pounds, it's you start up here at the end of 2012 and there were a few other small plans similar to that first one in China as well. That are 2013, 2014 kind of start up. Those quantities relative to the demand over the next few years are a drop in a bucket of water so it's not going to be material to the dynamics of the butadiene market. But we are – those are the only three announcements that we've heard of of people intending to start small butadiene on-purpose butadiene units.

Gregg Goodnight – UBS

Do you know if that is Lummus technology or other technology?

Miguel Desdin

We do not believe it's Lummus technology, it's technology from a Chinese firm, and we're not exactly sure what that came from.

Gregg Goodnight – UBS

Okay, great thanks for…

Mike McDonnell

But it's yet not commercially viable so, I think that's the – when we look at this market we realize that – what's most important is the market's going to be critically sure there's – the best outcome for the industry is that butadiene in the future is balanced tight. And that's going to require a lot of on-purpose capacity in the future, given the number I just gave you earlier the 1.7 billion pounds short by 2016. And so you know I think it's good for the industry to have a number of on-purpose units, so it's critical to us, is that we have lowest cost on-purpose units. And we have – the (inaudible) in the U.S. we're there's a net imports going into the U.S. which are essentially setting the price because of the transport cost and so forth going to be U.S. And we don't plan at this – all that import you know volume, so I think we're in a good position here, you know from the cost of manufacturing standpoint on the on-purpose side on the incremental, relative to the market price. And that's what's important to us, having the right technology to come to market – and the operating experience.

Gregg Goodnight – UBS

Okay, excellent, thanks for your help.

Mike McDonnell

Thanks, Gregg.


Thank you. And our next question comes from the line of Andrew Gundlach from First Eagle.

Andrew Gundlach – First Eagle

Good morning, just a couple of kind of quick questions on – kind of following on to that last comments. Enterprise as talked about getting into the butadiene market, I believe that's the de-butinize or I'm not quite sure, I'm curious, how that affects that $1.7 number and the pricing to get there?

Second thing is that as the mid-stream providers, some of their NGL, prices come under threat with the supply, I would guess that they would, I'm not thinking about butane, specifically in that mix. I would think that, and they've just talked about this they've building more ISO units, so they can use it as a blend stock and get highest price for that and so that obviously reduce the amount of butane available.

And the last think on the import question, a lot of the docks down in Houston are starting focus more on exports and imports, and I don't know if that's meaningful enough to affect the import prices. But when we think about all these three things that are moving around or is it big enough to? How does that potentially affect your business, your pricing, Enterprise, the ISO units and the changing around in the export import facilities down in Houston?

Miguel Desdin

Yeah. We can't really comment on other companies and their intents and so forth as, I said it's an attractive market there's going to be on purpose and we're going to make sure that we're advantaged from a cost standpoint in terms of the cost of production.

In our view on butane can be just very positive, for the longer term and with respect to docks and so forth we own docks in Houston and Port Neches and our facilities and we have so many facilities and that's a important part of our service model. So we are feeling, we're in a good shape with respect to those factors.

Andrew Gundlach – First Eagle

So, just a quick follow-up, on -- not talking necessarily specifically better price, but it's the debutanizer technology in effect with using is that higher cost than you're on purposes that's correct?

Mike McDonnell


Andrew Gundlach – First Eagle

It is. Great. Thank you so much.


Thank you. And that concludes our question-and-answer session for today. I'd like to turn the conference back to Mike McDonnell for any final remarks.

Mike McDonnell

We remained very focused on disciplined execution of our plans to expand our fee-based services, achieve targeted volume growth in certain Performance Products markets, and drive operational efficiency. We're committed to the long-term growth and development of TPC Group and we're excited about our many near and longer term opportunities ahead. In closing, I'd like to recognize and thank our dedicated employees for their ingenuity and hard work, and delivering better than expected results in the quarter and thank you all for joining the call this morning.


Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. And you may now disconnect. Everyone have a good day.

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 All other use is prohibited.


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