TPC Group Inc. (TPCG)

Q3 2011 Earnings Call

November 11, 2011 10:00 a.m. ET


Rishi Varma - Vice President and General Counsel

Michael McDonnell - President and Chief Executive Officer

Miguel Desdin - Senior Vice President and Chief Financial Officer


Edward Yang - Oppenheimer

Kevin Casey - Casey Capital

Wilson Jaeggli - Southwell Partners

Gregg Goodnight - UBS

Barry Haimes - Sage Asset Management

Ron Silverton - ALJ Capital



Good day, ladies and gentleman, and welcome to your TPC Group Quarterly Earnings Conference Call for quarter ended September 30, 2011. At this time all participants are in a listen only mode, later we will conduct a question-and-answer session and instructions will follow at that time. (Operator instructions) As a reminder today's conference call is being recorded.

I would now like to introduce your host for today's conference call, Mr. Rishi Varma. You may begin.

Rishi Varma

Thank you, Kevin. Good morning, everyone, and welcome to today's conference call to discuss TPC Group’s third quarter 2011 earnings results. With me today is Mike McDonnell, President and Chief Executive Officer, along with Miguel Desdin, Senior Vice President and Chief Financial Officer.

While management will not be referencing slides today, we have posted a presentation online that includes supplemental financial information about the quarter. These slides along with other quarterly financial results can be found in the Investor Relations section on our website. 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 November 11, 2011, and therefore, you are advised that time sensitive information may no longer be accurate at the time of any replay. In addition, some of our comments may reference non-GAAP financial measures, 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 will turn the call over to Mike.

Michael McDonnell

Thanks, Rishi. Good morning, everyone and thank you for joining the call this morning. I will provide a clear, transparent explanation of the profit drivers behind our third quarter results, the inherent underlying stability of our margins and results, and an update on current market conditions and guidance for the fourth quarter, including the recent abrupt, and we believe temporary changes in market dynamics for butadiene, and the direct and indirect impact we expect to see from these.

We achieved solid results in the third quarter, generating $34 million of EBITDA, including the impact of the lower of cost or market charge of $10 million, and the positive impact of the increase in butadiene price of $15 million. Now excluding these impacts from the butadiene price volatility that we experienced, that is if you take the $34 million reported, add the $10 million back, and subtract the $15 million from the price impact, the underlying result is $29 million. And this $29 million is largely generated from stable margins, consisting of contractually fixed percentage for per pound processing and service fees, and cost plus pricing contracts.

This underlying margin stability is a real strength of our business model and is completely independent of the absolute level of butadiene price. This $29 million is sensitive to volume, gasoline price level, and the execution of our initiatives and margin expansion, volume growth and operational excellence. I will discuss each of these factors in turn, starting with volume.

We receive crude C4 feedstock from ethylene crackers. We provide services to store, aggregate and process these streams, separate the components, purify them, and distribute them to our customers through our assets, infrastructure and logistics network. Our crude C4 feedstock volume in the quarter was relatively consistent with the prior year quarter. The U.S. ethylene cracker industry operating rate was strong in July and August, and then backed off a bit in September due to some planned turnarounds in several units.

Cracker feed slates continue to favor light cracking, driven by the cost advantage of ethane. On the demand side, strong demand butadiene and other finished C4 products continued for most of the quarter before beginning to soften in the late September. Our volume growth in the quarter was largely driven by stronger seasonal demand for our lower margin fuel products. This volume growth was partially offset by slower end market demand for fuel and lube additives, rubber chemicals and surfactants, and significant inventory destocking by our customers in or performance products businesses.

We think we have seen the majority of the impact of this destocking in performance products in Q3, but we have allowed for a bit more in our Q4 guidance. The hydro-unleaded regular gasoline price has a favorable impact on our margins in certain C4 products. Many of these products including Butene-1 and raffinates, have a cost basis as a fixed percentage of gasoline and a selling price basis as a higher fixed percentage of gasoline.

Earnings from our fuel products compared to the prior year quarter were enhanced by higher gasoline prices and substantially higher sales volumes due to a much stronger summer driving season. During the summer driving season, when demand and price for gasoline trend upward, we tend to sell more fuel products at higher prices and higher margins. Finally, we continue the high standard of execution in our overall manufacturing and supply chain activities, and in our initiatives to improve margins in our C4 processing segment by expanding our fees and enhancing our contracts.

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