AE - Adams Resources & Energy Inc (AE) Q1 2023 Earnings Call Transcript
2023-05-15 11:12:09 ET
Adams Resources & Energy, Inc (AE)
Q1 2023 Earnings Conference Call
May 10, 2023 09:00 ET
Company Participants
Steven Hooser - Investor Relations
Kevin Roycraft - President and Chief Executive Officer
Tracy Ohmart - Executive Vice President and Chief Financial Officer
Greg Mills - President, GulfMark Asset Holdings
Wade Harrison - President, Service Transport Company
Conference Call Participants
Liam Burke - B. Riley FBR
Chris Sakai - Singular Research
Mitchell Sacks - Grand Slam
Presentation
Operator
Good day and welcome to Adam Resources & Energy Incorporated First Quarter 2023 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] Please note that this event is being recorded. I’d like to turn the conference over to Mr. Steven Hooser from Three Part Advisors. Please go ahead.
Steven Hooser
Thank you and good morning, everyone. We appreciate you joining us for the Adam’s Resources & Energy, Inc. conference call to review first quarter 2023 results. Joining me on the call today are Adams Resources & Energy President and CEO, Kevin Roycraft and the company’s Executive Vice President and CFO, Tracy Ohmart. Additionally, Greg Mills, President of GulfMark Asset Holdings and Wade Harrison, President of Service Transport Company will be joining us for the Q&A session at the end of the call. This call is being webcast and can be accessed through the audio link on the Investor Relations page at adamsresources.com. Today’s call including the Q&A session will be recorded. Please be advised that any time-sensitive information may no longer be accurate as of the date of the any replay or transcript reading.
I would also like to remind you that statements made in today’s discussions that are not historical facts, including statements or expectations of future events or future financial performance are forward-looking statements and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements by their nature are uncertain and outside of the company’s control. Actual results may differ materially from those expressed or implied. Please refer to the earnings press release that was issued yesterday for our disclosures on forward-looking statements. These factors and other risks and uncertainties are described in detail in the company’s filings with the Securities and Exchange Commission.
Adams Resources & Energy assumes no obligation to publicly update the revisions of any forward-looking statements. Management will refer to non-GAAP measures, including adjusted EBITDA, free cash flow, return on an adjusted net income and earnings per share. Reconciliations to the nearest GAAP measures can be found at the end of the earnings release. Finally, the earnings press release was issued yesterday is posted on the Investor Relations section of our website, adamsresources.com. A copy of the release has also been included in the 8-K submitted with the SEC.
And now with that, I would now like to turn the call over to the company’s President and CEO, Kevin Roycraft. Kevin?
Kevin Roycraft
Thank you, Steven. Good morning, all and thank you for your interest in Adams Resources. I’m delighted to be hosting our first ever conference call as we continue to create further transparency and understanding of our business to current and future shareholders. I will start today’s call with some color on the quarter and then I will turn the call over to Tracy to run through the financials.
Finally, I will return to provide additional color on outlook and the future ahead of us. For Q1 2023, while top line results and earnings were negatively affected by lower oil prices, Adams saw significant quarter-over-quarter and quarter over prior year quarter improvement, driven primarily by the improved performance of our GulfMark Energy division and by the contributions of our recently acquired Phoenix Oil and Firebird Bulk Carriers entities. Adjusted cash flow for Q1 2023 improved by 17% over Q1 2022 and by 38% over Q4 2022.
Adams’ unrestricted cash balance improved from $20.5 million at the end of Q4 2022 to $42.1 million at Q1 2023 close. This growth was achieved despite the ongoing economic challenges in today’s marketplace, including continued supply chain disruptions, tractor and trailer manufacturing backlogs, inflation concerns, declining crude oil prices, and a slower chemical production market. While we did not achieve all of our Q1 goals, I am pleased with the efforts of our team, including our overall ability to deliver improved cash flow in a challenging environment.
As I mentioned previously, GulfMark Energy’s performance was a significant contributing factor to the improved quarter. GulfMark’s volumes for the quarter were 94,030 barrels per day versus 90,385 barrels per day in the first quarter of 2022. Though GulfMark showed quarterly improvement, we still face headwinds as inflation and increasing costs are currently outpacing our ability to increase margins. To bring margins back in line with historical levels, GulfMark’s focus moving forward will be on cost-cutting, improving crude by sell contracts and volume growth.
Additionally, the quarter saw construction wrap up on our portion of the VEX pipeline connection to the Max Midstream system. The pipeline continued its steady performance delivering an average of 10,088 barrels per day to our barge loading location in Victoria, Texas and providing efficiencies to GulfMark by allowing those barrels to move by pipe instead of trucks. After a slow post-acquisition start in the latter part of 2020, Phoenix Oil and Firebird Bulk Carriers have begun to find their footing by contributing $1.4 million in cash flow for the quarter. Crude oil hauling volumes for Firebird remained steady at around 25,000 barrels per day and first quarter volumes and margins for Phoenix improved over our first full quarter and Q4 2022.
In the quarter, we started benefit from synergies that exist between the divisions. These benefits include reducing dependence on third-parties by beginning to bring maintenance and overflow load sharing in-house. Additionally, cross customer selling is starting to have a positive effect by bringing new opportunities to expand our offering to all the different entities.
Turning to our Chemical Transport division, Service Transport Company, Service Transport performed well in the quarter considering the macroeconomic challenges facing both the chemical and transportation industries that struggled to maintain the upward cash flow trajectory it has seen over the past 5 years. Overcoming the market headwinds, Service Transport produced positive cash flow of $2.5 million for the quarter. Throughout the quarter, Service Transport and the industry overall saw pricing pressures due to chemical shipment volume drops, causing temporary excess hauling capacity in the market. Despite these pressures, Service Transport has been able to capitalize on shippers’ rate shopping by winning new business and adding new lanes to our recently expanded footprint. This should set service transfer up for a strong performance as the chemical markets rebound.
Overall, we believe Adams is well positioned for any potential challenges that lie ahead in 2023. Currently, there was a lot of positive activity surrounding our assets, especially around the VEX pipeline, and the potential synergies yet to be captured with our Phoenix and Firebird acquisitions. I will touch on this later in the call.
With that, I would like to turn it over to Tracy to cover the financials in more detail.
Tracy Ohmart
Thank you, Kevin and good morning everyone. I am still working through some health issues with my voice. So please bear with me. Total revenue for the first quarter of 2023 was $650.2 million compared to $774.2 million in the prior year quarter. The decline was primarily driven by low revenues in our crude marketing oil segment which revenue for this segment, is directly tied to the price of oil and were partially offset by revenues related to our acquisition of Phoenix Oil and Firebird Bulk Carriers last August.
Looking at the quarter by individual segments, first quarter revenue for our marketing segment was $608.5 million compared to $747.6 million in the prior year quarter. The decrease is primarily due to 21% decrease in the price of crude oil over the past year partially offset by higher volumes. Operating income for the quarter for the marketing segment was $1.9 million compared to $10.1 million in the first quarter of 2022. The decrease is due to an inventory valuation loss of $1 million in this year’s first quarter versus an inventory liquidation gain of $8.7 million in the first quarter of last year as well as higher operating expenses reflecting cost pressures across the business. Adjusting out the inventory valuation loss in liquidation gain, the marketing segment had operating earnings of $2.9 million in 2023 versus operating earnings of $1.4 million in 2022.
Our transportation segment reported $26.4 million of revenue in the first quarter compared to $26.7 million in the prior year quarter. Operating income was $0.9 million versus $2.9 million for the first quarter of 2022. The decrease is primarily due to higher depreciation and maintenance expenses. Our logistics and repurposing segment which consist of Firebird, Phoenix that were acquired August of 2022 added $15.2 million in revenue for the first quarter of 2023 and $0.5 million of operating income.
General and administrative expenses increased by $0.8 million from the first quarter of 2022 to $4.8 million this quarter. The increase is related to hire personnel and outside service costs, as well as higher audit fees. Interest expense increased $0.5 million this year versus $0.1 million in last year's first quarter, due to the term loan that we put in place as part of the repurchase of approximately $1.9 million shares of our stock from KSA last year.
Net loss for the quarter was $2 million or $0.79 per share, compared to net income of $6.1 million, or $1.39 per diluted share. On an adjusted basis, net loss was $1.4 million, or loss of $0.54 per share, compared to a net loss of $1 million, or loss of $0.24 per share for the prior year quarter. For the quarter, cash flow from operations was $23.7 million, and capital expenditures for the quarter totaled $1.9 million. Our available cash and cash equivalents as of March 31, 2023, totaled $42.1 million compared to $20.5 million on December 31, 2022. The increase is primarily related to timing of receipts in early payments from crude oil customers. Total liquidity as of March 31, was $81.7 million, which includes $39.6 million available under our $60 million credit agreement.
Now turn the call back over to Kevin for some final comments. Kevin?
Kevin Roycraft
Thank you, Tracy. I wanted to provide a little more color around our outlook for Q2 and beyond. Along with some comments on the activity surrounding the VEX pipeline, and the Phoenix and Firebird acquisitions. VEX pipeline connection with Max Midstream system is nearly complete. Max has had some delays on this project due to weather and repairs that are being made to their own system. But we expect barrels to begin following through this connection in Q3. So a new customer introduction from our newly acquired Phoenix Oil in April of this year, we started storing our first third party barrels on the VEX, GMT system. We expect internal GulfMark barrels on the VEX pipeline to remain steady, while consistently increasing third party barrels through Max and other customers for the remainder of the year.
For Phoenix and Firebird, we will continue to capitalize on synergies between the divisions, both focusing largely on facility IT and back office integrations. We plan to also focus on load sharing between divisions and reduction of third-party maintenance expense. On May 4, we announced the purchase of land in Dayton, Texas that will be the future home of Phoenix and Firebird. This new location is strategically located to move the company closer to its customer base, and will be capable on-site railcar transloading and storage. Having on-site rail capabilities is expected to improve our efficiency, reduce our dependence on third party rail transloading sites and allow for more robust service offerings to our customers. We intend to begin construction on our rail spur this summer and expect to have the Spur complete an operational before the end of the year. We are excited for what the future holds for both Phoenix and Firebird. The GulfMark and Service Transport, we expect to see a challenging environment at least for Q2, GulfMark needs time to realize the benefit of their cost cutting efforts and the work to improve margins.
For Service Transport projections from our customers lean towards a stronger second half of 2023. Through our recent expansion and acquisitions, Service Transport has positioned itself to successfully navigate the slower markets with an eye towards coming out of this in a stronger position when the environment improves. As we look forward to Q2 and the remainder of 2023 there are many unknowns in the macroeconomic environment that can cloud our vision of the future. However, Adams has been built on a solid foundation. We have a growing cash position and our fundamentals remain strong. The acquisitions, we have added to this organization are highly complementary, and we will allow us to drive further success even in challenging markets. We expect improved performance as the year progresses, especially in the second half of 2023.
With that, I would like to open the line for questions. Operator?
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] First question will be from Liam Burke, B. Riley FBR. Please go ahead, sir.
Liam Burke
Good Morning, Kevin. Good morning, Tracy.
Kevin Roycraft
Good morning, Liam.
Tracy Ohmart
Good morning, Liam.
Liam Burke
Your costs at GulfMark sequentially improved from fourth quarter of ‘22. They are not quite, where they were a year ago. But can you give us a sense as to what you can do on the cost side to improve those margins?
Kevin Roycraft
Yes. I can start with that. And we have Greg in the room too, I can let him comment as well. I mean, we have been meeting really pulling, going back as the economy softens, going back to our vendors starting there, and seeing where we can capitalize on getting some rate reductions or cost improvements from there. I do think, looking at every aspect of our spending, going back and negotiating fuel. Fuel is one of our largest expenses, going back and renegotiating contracts for third-party maintenance, those are huge opportunities for us, challenging to get in some environments, because especially on the maintenance side, the labor is still driving higher prices. Fuel, I think we are in the process of negotiating a slightly better fuel discount how bringing in the Phoenix and Firebird barrels because they usually require more volume to discount their fuel more. But Greg, I don't know, if you have any other things, we will be working on from a GulfMark perspective, from a cost side.
Greg Mills
I would say a better level of focus down to the district level, utilizing some tools that we put together to allow our district supervisors to look into the P&L for their district, see where they are on each line item of expense, to help us manage it, across the whole company, not just here from the downtown with the office here. So really just a lot more eyes on and a lot more focus in terms of where we need to be on the OpEx side.
Kevin Roycraft
And I will jump on that too. Because I think its important point Greg brought up as some of our IT upgrades that we have done over the last year and a half have allowed the district or terminal managers that GulfMark to actually see P&L center at their own cost center. Historically, GulfMark had not driven down to that level of detail. And our new system that we have moved to allows that to happen. This is really the first year that we are holding individual managers accountable to their own district P&L.
Liam Burke
And maybe I guess, from your prepared comments or your press release, this is a second half of that. So you are going to need second quarter to work through a lot of these details now, right?
Kevin Roycraft
Yes. I believe that is mostly right, we do expect, we expect to see slight improvements over Q1. We do not know that factually at this point. But just the way it is shaping up at this point. But I think largely, we need some of the work that we are doing both from a cost reduction effort, trying to improve the volume from GulfMark, capitalizing some of the synergies of Phoenix and Firebird. And really what we hear from the Service Transport side that the chemical markets will certainly be a little depressed through Q2, we sort of see the second half of the year being more bullish than the Q2. Thank you one for that Laim.
Liam Burke
Okay. And then just one final one on VEX, is it been rather quiet, and now it looks like it's picking up with the connection of Max Midstream. Should we expect revenue to be realized in third quarter or would that be more of a fourth quarter event?
Kevin Roycraft
Wade, you want to take that?
Wade Harrison
Well, we with respect to the Max Midstream joint tariff that we have going I would expect some activity in the third quarter. We will have some second quarter revenue as we picked up some customers on the terminalling side and we are staging somebody to begin working as another VEX shipper on that system as well. So some of that business started in April on the terminalling side, we have got some more going this month on terminalling side. So you will see some GMT revenue. And then I believe that our other shipper will start in June. So we will see some volume – tariff volume.
Kevin Roycraft
Yes. Liam, I think you will see light revenue starting in Q2 and then ramping up through the course of the year.
Liam Burke
Great. Thank you.
Kevin Roycraft
Thank you. Appreciate the interest.
Operator
Thank you. And the next question will be from Chris Sakai of Singular Research. Please go on.
Chris Sakai
Hi, good morning.
Kevin Roycraft
Good morning, Chris.
Tracy Ohmart
Good morning, Chris.
Chris Sakai
Wanted to get an idea about this new processing facility that was purchased for feet Phoenix Oil, what are the costs there for this new facility?
Kevin Roycraft
Greg, you want to take that?
Greg Mills
Sure. For that one, we – of course, we have purchased the property itself for $1.8 million closed on that week or so ago. And so we actually just began working on kind of an interim step to get the some initial usage out of the rail siding and some tanks in there, we expect to have use of the transload facility and some tanks by the end of this year. And then our project spin will take place over 2 to 3 years in the $7 million type range when we are done. But we expect it will take to have the full facility running, we are probably talking about late next year to the year after that 2025 at the longest, but we are just trying to spin the money as we see fit with respect to how the business is going and, and make that transition from Humboldt to Dayton, over the next 3 years.
Kevin Roycraft
Yes. And I will just add that, the first priority is getting that rail spur belt in the tanks laid down. So we can eliminate the use of the third-party rail spur that Phoenix currently uses today. So that will be our goal for 2023 is to get back in place up and running, and then eliminate that cost of the third-party rail spur.
Chris Sakai
Okay. Thanks. Sounds good. And do you have any sort of forecasts or idea for capital expenditures for the remainder of the year?
Kevin Roycraft
Greg, you want to take that?
Greg Mills
Yes. We are working with the manufacturers, because one of the things that is happening we are seeing is other trucking companies are backing out some of their orders. I do not have a real good number at the moment. We are working through that trying to figure out timing and schedules, but I think we are going to see, a good $10 million or so yet to be spent just on maintenance on our tractors and trailers, which is separate from any money that we spend on the date and project for the rail spur, or any, stuff on the VEX, on the connect – any connection or is anything like that. So from a maintenance, I am going to kind of looking around the $10 million range is what I am looking at.
Kevin Roycraft
And Chris, I will add that, we are going through the process of both with Wade at Service Transport and Greg at GulfMark to relook at our budgets that we put together towards the end of 2022 from a CapEx spend just to make sure number one that we have, what we need going forward, and just make should be in August double check that all the items that we earmarked in November as being necessary or still necessary for 2023. Especially considering the supply chain issues, we may have to prioritize what we need to buy and what we can actually get this year.
Chris Sakai
Okay. Great. You mentioned supply chain issues, can you comment on that, or how are things there?
Kevin Roycraft
It has been a pretty steady issue for us over the last 2 years is that the trailer and the tractor manufacturing – manufacturers are struggling to meet their quotas, cutting back our orders of the order, number of trucks they won’t be able to fill all those – all the slots. Like Tracy commented, we have seen some slots open up both on the trailers and the tractor building side because of cancellations. And we have been able to fill in and get some equipment on that side. But we have just received and I believe we have done receiving orders some of our 2021 orders. The 2022 orders are still coming in right now. And the 2023’s were being told or pushed into late Q3, Q4 this year. So, if I sense they will be able to stick to those timelines now, which is probably an encouraging sign for the future, but there is certainly still a backlog.
Chris Sakai
Okay, Greg. Thanks for the answers.
Kevin Roycraft
Thank you, Chris. Appreciate it.
Operator
[Operator Instructions] Next question will be from Mitchell Sacks of Grand Slam. Please go ahead.
Mitchell Sacks
With respect to the G&A, I think you had mentioned three things personnel costs, audit and outside services. Are some of those costs are going to continue there or just some of those go away over time?
Kevin Roycraft
Yes. I was very unfortunately, the audit costs are what basically we are spreading those out equally over the full year. So, the audit of the ‘23 financials, we have recognized basically 112 per month. And with the addition of Phoenix and Firebird that has increased what our audit costs are going to be. So, that is not a huge amount, but it is, unfortunately, the auditors aren’t cheap. Some of the personnel costs, I think we probably go back on the kind of true and up some of the bonuses a bit for the year, the executive bonuses are paid out, really kind of after year end is complete. And so I think there was just a slight uptick, compared to what we had anticipated that, from where we stood at the end of the year. And then outside services, again, what we are doing with them is kind of reassessing all of our vendors. I mean from our legal counsel of SEC Counsel to, just various suppliers of different services we use, trying to see what kind of opportunities there are, if we still need those particular services, if we can do more in-house. But just really kind of go through an evaluation across the board. I do not have a good answer on whether that will trend. There is choppiness to that because of the, with the assistance for the Sarbanes-Oxley compliance, January and February, we tend to spend more money, with consultants helping us particularly on IT side, that then we will kind of go back to a lower level, because we are not working on that particular project at that time. So, it’s a little bit of mix, but we are going to be really focusing on what is necessary, or how can we minimize costs, or does it make some sense to do things internally and put less reliance on third-parties.
Greg Mills
I will say that we have sort of gotten over the hump on some of the outside services with using contractors for accounting services. We brought in some third-parties to help us through the year-end close, do some challenges in hiring in the accounting roles. But I believe this week we will have filled our last spot from the accounting side. So, we should see less dependence on bringing in contractors from the outside to help us with those, because we should be fully staffed on the accounting side. So, I see that piece coming down.
Mitchell Sacks
And with respect to GulfMark, any synergies with Firebird, can you talk a little bit about the third-party carriage that you are doing prior to the merger or the acquisition? And then what kind of opportunity from a whether dollar cost perspective, do you see on that particular business?
Kevin Roycraft
Yes. Greg and I can both comment on that. I think from my perspective, I do not know if I want to get into the dollar amount exactly right now. But I can tell you, as we went through our March close here recently, and looking just at Firebird and who their customers are GulfMark was in their top 15, 15 to be exactly right about that. So, I think we can do better. So, we have just started, having the right communications to get Firebird and GulfMark hauling, Firebird hauling for GulfMark. They made some progress on that not enough. I think Greg has some initiatives to increase the usage of Firebird as we turn more to third-party carriers for overflow once you contact…
Greg Mills
Yes. Sure, when we actually – before we purchased Firebird and then Phoenix, we put a map together that shows all the locations across Texas that Firebird has trucks and mechanic shops, and it just overlays where we have GulfMark stations as well and shops. And so one of the things we are doing is, we are going to merge those together and make, I think we can eliminate one to two of our district locations, and then utilize Firebird shops for maintenance of our equipment. And so that’s the big part of it. It is just taking the time to get leases moved and move people and move trucks. And then another thing related to that is we are looking at where can Firebird better help us based on where we are paying larger third-party carrier bills, and can we migrate some of the Firebird drivers and equipment to those locations, so that we can utilize Firebird for GulfMark’s transportation overflow needs. And then one other location we are looking at is the Cuero terminal feeds the VEX pipeline, when we bring barrels in by truck to ship on the VEX pipeline. And we are working with Firebird to typically stage trucks at Cuero terminal and make Cuero a new home for Firebird folks, so that we can do two things both help GulfMark and help feed the VEX pipeline with some additional products.
Kevin Roycraft
One of the challenges we had on that Mitch was, really driver counsel, when we brought the Firebird onboard, I think they were around 89, 88 drivers somewhere around there. And they were doing around 25,000 barrels a day. So, they are pretty – their capacity was pretty much utilized. We have been successful adding drivers at Firebird, I think we are up to 102 or 103 today. And their volumes have remained steady or picked up a little bit. So, getting – we really do not want to have Firebird walk away from their customer base to service GulfMark, but the goal is to try to fill the empty seats at Firebird, so they can provide a little additional capacity to GulfMark without having a walk away from their core business.
Mitchell Sacks
And then the last question is around the VEX pipeline. So, I think you said, you are going to start to have barrels moving through it to the Max Midstream in Q3. Can you talk a little bit what kind of pre-sales you have done from a volume perspective and what you think the capacity utilization or the capacity could be on the VEX pipeline once you are really connected there and starting to sell that the new connection?
Kevin Roycraft
Our pre-sale, we haven’t technically pre-sold, but we expect to see up to 10,000 barrels a day of additional volumes by the end of the year. That would come from several different parties, some of which or one of which that was attracted to VEX pipeline with the Max connection, but effectively going to be primarily a VEX customer rather than VEX Max customer. But the interest has picked up quite a bit just with getting the word out there that VEX and Max are connecting Max’ spent a lot of money if we come up to build a market there. The VEX pipeline provides that conduit and so we are just seeing a lot more attractive activity and deal flow opportunities right now. So, again, I think 10 is a good incremental target for VEX by the end of the year and of course, we are already moving 10 – 2,000 barrels a day today.
Mitchell Sacks
Greg, could you touch on a little bit what the new customers that’s filling tanks, what their process is right now, where they are, when they should start…?
Greg Mills
Sure. So, we have signed a – we have signed a deal with this new customer. Initially, what they are doing is filling the tanks at the Victoria terminal, where the Barge terminal is connected to VEX. Once we get that those tanks ready and filled, we will move them up to the Cuero terminal at the mouth of the VEX system and get that tank going. And then by June, we should have enough volume for them to be in shipping on the pipeline. So, it is not going to start out as a very large volume customer, but steady business for us and get the Barge terminal working again.
Kevin Roycraft
Yes. And I would like, go-ahead Mitch.
Mitchell Sacks
I was going to ask, so the connection helped GulfMark in terms of getting better realized prices for the oil that it owns or is it not part of that transaction?
Greg Mills
I do not know that it helps – I do not know that it helps GulfMark from the marketing, crude oil marketing business, other than the more value we can create with VEX makes the VEX pipeline more valuable to GulfMark in general. But I don’t know that from a market perspective that the activity that we are doing on the VEX pipeline really impacts one way or the other what GulfMark Energy’s crude oil business does.
Mitchell Sacks
Thanks.
Kevin Roycraft
Thank you, Mitch.
Operator
Thank you. This concludes our question-and-answer session. I like to turn the call back over to Kevin Roycraft for closing remarks.
Kevin Roycraft
Thank you, operator and thank you for your continued interest in the company. We will be participating in the B. Riley Institutional Investor Conference in Los Angeles on May 24th and May 25th. The Three Part Advisors Virtual Ideas Conference on June 21st and the Singular Conference in New York City on June 22nd. We look forward to providing an update of our progress from route, when we report the second quarter results in August. Thank you for joining us.
Operator
Conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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Adams Resources & Energy, Inc (AE) Q1 2023 Earnings Call Transcript