Adams Resources & Energy, Inc. (AMEX:AE) Q1 2023 Earnings Call Transcript May 15, 2023

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?

Q&A Session

Operator: Thank you. [Operator Instructions] First question will be from Liam Burke, B. Riley FBR. Please go ahead, sir.

Operator: Thank you. And the next question will be from Chris Sakai of Singular Research. Please go on.

Operator: [Operator Instructions] Next question will be from Mitchell Sacks of Grand Slam. Please go ahead.

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.