TOR Minerals International, Inc. (NASDAQ:TORM) Q2 2016 Results Earnings Conference Call August 4, 2016 5:00 PM ET
Dave Mossberg - IR
Barbara Russell - CFO
Olaf Karasch - CEO
Greetings and welcome to the TOR Minerals Fiscal 2016 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Mr. Dave Mossberg. Sir, you may begin.
Thank you, Kathleen and thank everyone for joining us. Well, welcome to TOR Minerals second quarter 2016 earnings conference call. Before we begin, I want to remind everybody that 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 a general business slowdown or recession, the increase in cost of energy, raw materials and labor, competition, advances in technology, changes in foreign currency rates, freight price increases, commodity price increases, delays in the delivery of required equipment and other factors.
These risks and other risk factors pertaining to our business that could cause 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 filings on Form 10-K and other subsequent quarterly reporting on Form 10-Q and other SEC filings.
Throughout today’s call, we may be referring to both GAAP and non-GAAP financial results, including the term adjusted EBITDA, which is a non-GAAP term. We believe non-GAAP term is useful financial measure for our company primarily because of the significant non-cash charges in operating statement and there is a reconciliation of non-GAAP results on the earnings release.
Joining the discussion of the second quarter results are CEO, Dr. Olaf Karasch; and CFO, Barbara Russell. First, Barbara will review the financials followed by Dr. Karasch's comments on the quarter. This call is being recorded and will be available for replay for 30 days in the Investors section of the company’s website.
And with that, I’ll turn the call over to Barbara.
Thanks, Dave. I will now review the revenue and earnings comparisons for the second quarter as well as the balance sheet and cash flow. We review our results based on three geographic operating segments and typically break our revenue down into three main categories, specialty hydrated alumina, barium sulfate and other products and titanium dioxide pigments. Our first product group, specialty aluminas, represented 52% of our second quarter sales and includes our ALUPREM, HALTEX and OPTILOAD products.
These products are primarily used as fire retardant fillers, engineered fillers, white pigment in plastics and rubber applications as well as for use in catalyst applications. Second quarter sales in this category increased 18% which was ahead of our expectations. Our specialty alumina business was strong showed strong growth in both Europe and the US. ALUPREM sales increased 22% a double-digit increase in volume was offset by lower average selling price due to a mix shift.
HALTEX and OPTILOAD sales increased 6% due to growth with both new and existing customers. While we expect double-digit growth for specialty alumina sales for the full year, we anticipate quarterly performance will be inconsistent as the order patterns of a large customer can vary significantly from quarter-to-quarter. Our second product group is barium sulfate and other specialty minerals, which represented 22% of our second quarter revenue and mainly consists of barium sulfate products which are used as an extender filler in plastic and paint applications.
During the first quarter, we had a significant barium sulfate customer in the Americas that reformulated their process, reducing the use of one of our products. The loss of this revenue has caused a bit of a headwind in this category from the second quarter. Barium sulfate volumes in Europe were also week in the second quarter declining 4% year-over-year. However we do have several new customers for barium sulfate which we expect to ship large-volume later this year.
Our third product group is titanium dioxide colored pigments which represented the remaining 26% of our second quarter's revenue and includes our colored TiO2 pigment products, HITOX and TIOPREM, which are specialty titanium dioxide pigments used as value-added replacements for commodity TiO2 and other colored pigments in traditional paint and plastics formulations. Titanium dioxide colored pigment sales decreased 21% for the second quarter. Both the volumes and pricing for these products continue to be negatively affected by pressure from Chinese imports.
Moving on to profitability during the second quarter gross margin improved 230 basis points to 11.9% of sales. The improvement in gross margins is primarily related to increased plant utilization and improved operating efficiencies as well as the elimination of idle plant costs related to the SR plant. Late last year, we ceased SR production at our Malaysian plant as we determined it was more cost effective to continue purchasing feedstock material from alternate sources.
During the second quarter, operating expenses were $1.1 million relatively unchanged from the prior year. Second quarter net income was $87,000 or $0.03 per diluted share as compared to a net loss of $107,000 or a loss of $0.04 per share last year.
Moving on to the balance sheet and cash flows, cash flows from operations was $1.4 million during the second quarter and $3.3 million for the first half of the year. The bulk of the increase in cash flows was related to the continued reduction in our inventory levels which were at $11.2 million at the end of the quarter versus $14 million at the end of 2015. Due to the changes we have made at our SR plant in Malaysia, we expect to continue to reduce inventory levels which will be a positive cash flow source for assets in 2016.
Our accounts receivable balance at the end of the quarter was $4.9 million which equates to days sale outstanding of 44 days well below our targeted goal of 50 to 60 days. CapEx during the quarter was $562,000. Our CapEx spending is significantly lower than it was last year this is because we invested in a significant plant expansion at our ALUPREM plant in the Netherlands as well as the project to expand and improve the efficiencies of our barium sulfate production at our US plant.
This year we expect our normal CapEx budget to be approximately $2 million which is mostly related to maintenance spending. At the beginning of the quarter, we received approximately $1.4 million in cash proceeds from the exercise of warrants that were issued in May of 2009. The warrant converted into 528,000 shares of common stock at an average price of $2.65 per share. Cash at the end of the quarter was $3.4 million versus $800,000 at the beginning of the year. Total debt was $5.2 million down approximately $1.3 million from the beginning of the year.
I will now turn the floor over to Olaf.
Yes, thank you, Barbara. This is Olaf Karasch. Thank you for your interest in TOR Minerals and for joining us on the conference call today. During the second quarter, we saw better than expected growth in our specialty hydrated alumina business and continued improvement in our financial results. Two key strategic moves that we made in the past year contributed to our improved profitability and position us well to resume both topline and bottom-line growth. So first strategic initiative was to invest in the expand of our plant in the Netherlands which is where we produce the majority of our specialty hydrated alumina products.
Early into the second quarter, we commissioned new equipment which expanded the plant capacity by approximately 50% and gives us some runway for growth during the next couple of years. The timing could not have been better as we produce record volume in the month of June levels we could not have reached without the added capacity. Our hydrated alumina business is hitting on all cylinders. Our core composite business in Europe showed continue growth and we continue to do more business with existing customers as well as adding new ones.
We have added new customers for OPTILOAD and HALTEX in United States with several other large potential -- involved in production files. We have also resumed roles with our largest hydrated alumina customer which had higher than expected demand in the second quarter. Our relationship with this customer is solid and appears to be on the continued growth trajectory. We have been very busy with new customers recently and have increased our marketing and sales assets, which has bought in a lot of new interest of our product.
We are attending more industry tradeshows than we ever have before and have brought a new distribution partners. In addition for the past several quarters, we have been working with several large multinational customers to develop new large-volume application for our specialty hydrated alumina products. Test and pilot production runs a promising and we expect that several of these large-volume applications would be moving into production in the next year. As these applications become part of our mix in addition to driving growth, they will also further diversify our end business. We have far less exposure to the significant volatility that to the – sorry -- business market as well as customer concentration.
Overall our hydrated alumina business is clearly back on track to show double-digit growth during 2016 and for several years to follow. The second major strategic move that is rising improved financial performance is over decision late last year to shut-down our synthetic rutile production methods and begun using third-party sources of synthetic rutile as the feedstock material for our TiO2 pigments. Given the persistent industry pressure from Chinese suppliers' high energy input cost and low level of utilization it became clear that it’s not -- no longer make sense to produce synthetic rutile feedstock of our sales.
As a result of over decision, we have significantly lowered our breakeven point in terms of titanium oxide production levels, improved margins as well as lowered required investment in CapEx and working capital. This was evident in the first half year result in which our titanium oxide business was a profitable contributor despite more than 20% increase in revenue. In addition, we have reduced overall inventories by 30%. With the change we have made we can continue to be a niche supplier of value-added titanium oxide pigments product to our customer.
But now we have far less exposure to significant volatility that the titanium oxide industry has faced over the past decade and over time we have a business that can produce an adequate return on investment. Based on the report of a major titanium oxide commodity producers and other industry sources it appears that the pricing environment has stabilized and some industry participants are instituting price increases in commodity titanium oxide through the balance of year.
As a substitute of commodity titanium oxide pricing and sales trends of our specialty titanium colored pigment do not always directly correlate with the change in the broader market. While we have decreased price somewhat for the most part we have maintained pricing discipline over the last several quarters. As a result the spread between our lower price product and so commodity product has narrowed which in some cases has made the cost savings benefit of our titanium oxide pigment less favorable and negatively affected our volume.
However if prices increase our value proposition increases which should provide more favorable comparison to our titanium oxide pigment sales going forward. I think it is important to note that over the last 10 years, TOR Minerals has become a more diversified specialty mineral company and while our titanium oxide product and customers will continue to be important to us. Titanium oxide sales represent about one quarter of our overall sales and with significant growth in our alumina and barium sulfate business. We have far less exposure to significant volatility at the time oxide industry has over the past decade.
Regardless of micro conditions, we feel confident that our titanium oxide business is well-positioned to provide a positive contribution in 2016 and more consistent return profile over the next several years. We expect our barium sulfate related products will also be a contributor to growth this year and overtime we believe this segment will continue to become a more meaningful portion of our business. We have commissioned some new production equipment in Corpus Christi which increases our production capacity of barium sulfate products by approximately 20%.
While this is generally is a commodity business our new equipment will help to improve margins by improving the efficiency of our production as well as allow us to make and sell greater quantities of premium rates which have greater margin contribution. This year we faced a bit of a headwind as we had a significant barium sulfate customer in the America to reformulate the use of less our product. We expect to more than compensate for this with new customers and expect our barium sulfate business will continue to grow in North America and overseas market with new and existing customers in paints, coatings and plastics.
We have made several strategic moves to diversify our revenue base, positions the company for growth, lower our cost structure and improve returns. We believe our specialty hydrated mineral products are well positioned to continue to attract new business and there are strategies we are implementing will help us deliver attractive returns for our shareholders. I look forward to a strong year of profitability growth in 2016 and keeping you current on our progress.
Operator, can you please now open the call for questions.
Okay, great this is Dave Mossberg. Please, thank you all for joining us on the call today. And if you have any questions feel free to follow-up with me. And my number is in the press release. Thank you all.
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