Trecora Resources
Q2 2020 Earnings Call Transcript

Published: 8 Aug 2020

[Operator:]

Good day and welcome to Trecora Resources Second Quarter 2020 Earnings Conference Call. [Operator Instructions]. Today's conference is being recorded. And at this time, I would like to turn the call over to Patrick Quarles from Trecora Resources. Please go ahead, Patrick.

[Pat Quarles:]

Thank you, operator, and good morning, everyone. Welcome to the Trecora Resources Second Quarter 2020 Earnings Conference Call. The earnings release was distributed over the wire services after the close of the financial markets yesterday afternoon. In addition to myself, Sami Ahmad, our Chief Financial Officer; and Christopher Groves, our Corporate Controller, will also be available for question-and-answer session later, which follows our prepared remarks. Before we get started, I'd like to review the safe harbor statement. Statements in this presentation are not historical facts, are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon management's beliefs and expectations only as of the date of this teleconference, August 5, 2020. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected. These risks as well as others are discussed in greater detail in Trecora's filings with the SEC, including the company's most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q. During today's call, we will also discuss certain non-GAAP financial measures for comparison purposes only. For a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results, please see the earnings release issued after the close of the financial markets yesterday afternoon. This webcast is accompanied by a slide presentation that is available on the Investors section of the company's website at www.trecora.com. With that said, good morning, everyone, and thank you for joining us today. We hope you and your families are safe and healthy. Last quarter, I laid out our priorities for operating in this unprecedented environment, and I'm pleased to report that the early actions we took to protect our employees, ensure the safe operations of our sites, strengthen the financial position of the company and do our part to combat this pandemic, are working. Second quarter results were solid with very strong cash performance demonstrating the resiliency of our business and our executional focus, putting us on track to achieve a 0 net debt position by the end of the third quarter. Our cash flow from continuing operations of $16.5 million was a $12.1 million improvement over the first quarter of this year. We ended the second quarter with $78.2 million of bank debt, approximately $30 million of cash and 0 borrowings on our revolver. As Sami will discuss further, we ended the quarter with the lowest level of bank debt in the company since 2016, while still maintaining a very robust cash balance. Net loss from continuing operations in the second quarter was $1.9 million, while adjusted EBITDA from continuing operations was $4.2 million. COVID-19 adversely impacted our second quarter results due to its global impact on the economy. Demand for our specialty petrochemicals in the second quarter was over 20% lower than the first quarter, generally all in uses declined. This is a bit weaker than we anticipated. Within the quarter, demand began to fall in April, while May was the weakest month in demand during the quarter. It was actually the weakest month we've seen since early 2013. In June, we saw a nice bounce back in prime product sales. From an end-use perspective, we saw automotive demand and the collapse of crude pricing hit first, in addition, we had reduced demand to oil sands associated with their efficiency program, as we've discussed previously. That impacted sales to refining customers and those producing butyl rubber. The polyethylene and EPS end users held up better due to their participation in non durable markets such as packaging. Many construction projects also took a pause during the quarter, which is usually the strongest quarter of the year. Our demand into the polyiso market was essentially flat for the quarter. As May ended, demand significantly improved. We've seen the car manufacturers return to operation, driving demand to their suppliers, while EPS plants returned strongly in June with the resumption of both automotive and construction demand as did the polyethylene producers. Oil sands are improving a bit, but we don't expect it to return to prior levels. On balance, second quarter should be our weakest demand quarter for the year. Third quarter should see a significant improvement, although we don't expect demand to be back to pre-COVID levels. While demand was weak in the quarter, our margins opened up significantly. The lag in our inventory costs saw our feedstock prices bottom in June. Gross margin for the quarter was 15.2%. We'll see inventory costs begin to rise in the third quarter, which will be a tailwind for our earnings. Our Specialty Waxes business results were weak due to exposure to certain durable goods end users, which resulted in weaker wax sales and from lower custom processing revenues. Having said that, our plant operating improvement efforts have resulted in good structural progress on the cost side, which are sustainable moving forward. In addition, there were no material disruptions to feed supply or operations during the second quarter of 2020. Turning to our new growth initiative launched in the first quarter. We continue to work towards both delivering on identified projects and increasing the robustness of the projects in our current portfolio. At the end of the quarter, we had 26 active projects. We continue to evaluate our pipeline. And since the last quarterly update, we discontinued 4 projects and introduced 3 new ones. We also launched 4 this year and expect to launch 5 more within the coming 12 months. The current portfolio has 8 projects focused on delivering new products or entering new markets, 14 projects are focused on driving asset utilization with revenues that don't require significant capital and 4 projects are focused on improving productivity and reducing costs. While the pace of some projects has slowed due to the pandemic, we remain on track to achieve approximately $4 million of incremental EBITDA value creation. To be clear, we measure these projects on a go-forward run rate basis. So you should consider their value as contributing to our future earnings. As far as liquidity and debt, we announced last week the closing of 975,000 share portion of AMAK shares for approximately $2.6 million. While we've been working through the delays in closing the sale since first announced, all regulatory hurdles have been resolved. AMAK's operations have remained solid, and most of the metals markets are at or above prior year levels. The sale of this most recent portion of shares indicates the buyer's commitment to finalize our deal at the price originally negotiated. I'm very confident the remaining shares will be sold before the end of this quarter. On a pro forma basis between the cash anticipated for the AMAK's sales and the proceeds from our income tax refund, we expect to have negative net debt at the end of the third quarter. Despite this period of economic uncertainty, we are positioned to grow our business organically, prudently consider inorganic opportunities and continue to drive value creation for our shareholders. Now I'll turn the call over to Sami Ahmad, our Chief Financial Officer, for a more detailed discussion of our second quarter and first half results.

[Sami Ahmad:]

Thanks, Pat, and good morning to everyone. Let me start with a discussion on liquidity, debt and cash flow, and then I'll discuss our second quarter and first half performance in some more detail. As Pat mentioned, we took a number of measures in the first half of 2020 to strengthen our balance sheet and ensure sufficient liquidity as we progress through this downturn. We reduced our bank debt from approximately $102 million at March 31 to $78 million at June 30. We fully repaid the revolver balance of $23 million, which included $20 million borrowing that you may recall, we did to put cash on the balance sheet out of an abundance of caution. Our leverage ratio under our bank credit agreement declined to 2.6x at June 30 of this year compared to 2.9x at March 31 and 3.1x at the end of June 30, 2019. Our cash balance at June 30 was $29.9 million, which included proceeds of approximately $6.1 million from loans that we received under the Paycheck Protection Program as part of the CARES Act. Our strong liquidity and balance sheet position enabled us to maintain safe operations at our plants and preserve our workforce levels, including compensation and benefits. In addition to proceeds from the AMAK share sale, we also expect to receive a total of approximately $16.5 million, in federal income tax refund as a result of the Cares Act in the second half of this year. Cash flow from continuing operations in the second quarter was $16.5 million, while CapEx spending in the second quarter was $5.7 million. Free cash flow, which is cash flow from operations, less CapEx, less mandatory debt service was $9.7 million compared with $1.1 million in the first quarter. CapEx in the second quarter increased from the first quarter due to maintenance spending from the Gulf states pipeline at South Hampton. Recall that this is part of a multiyear capital plan to rehabilitate and upgrade our feedstock pipeline. In the current environment, we continue to manage working capital and cash flow in a disciplined manner. In addition to managing all of our discretionary expenses, we're closely -- we are closely monitoring the aging of our trade receivables and assessing customer credit exposures. Now let's take a closer look at our Q2 and first half operational performance. We reported second quarter 2020 net loss of $1.9 million or diluted losses per share of $0.07, down from net income of $2.4 million or earnings per share of $0.10 from the -- for the same period in 2019. Looking at the first half of this year, net income was $8.9 million or $0.35 per diluted share, and this compares to net income of $4.2 million or $0.16 per diluted share for the same period last year. Gross profit in the second quarter was $6.2 million or a gross profit margin of 15.2% compared to gross profit margin of 13% in the first quarter and 15.2% in the second quarter of last year. Gross profit for the first half of this year was $14.2 million or 13.9% gross profit margin compared with $20.6 million or 15.3% gross profit margin in the same period 2019. Adjusted EBITDA from continuing operations was $4.2 million for the second quarter compared with $5.5 million in the first quarter and $9.3 million in the same period last year. Adjusted EBITDA from continuing operations for the first half of this year was $9.7 million compared with $17.7 million in the same period last year. At a high level, in comparing our second quarter results with the first quarter, the key drivers for the approximately 1.9 -- $1.3 million decline in adjusted EBITDA was the 19% or 3.1 million gallon decline in prime product sales at Southampton, which was partially offset by improved prime products margins, due to lower feedstock costs and a smaller negative impact of the lag in inventory costing. General and administrative expenses for the second quarter were $6.3 million compared to $6.7 million in the first quarter and $6 million in the second quarter of last year. For the first half, G&A expenses were $12.9 million compared to $12.1 million in the same period last year. Interest expense for the second quarter was approximately $0.7 million compared with $1.4 million in the second quarter last year. First half interest expense was approximately $1.7 million compared to $2.9 million in the same period last year. The $1.3 million reduction in interest expense for the first half of this year compared with the same period last year was due to continued debt reduction, combined with lower interest rates. Note that there is a $4.8 million tax benefit that we recorded on our income statement for the first half of this year. This is primarily due to tax benefits from changes to the tax laws as a result of CARES Act. The laws -- the law allows for deferral of income and social security tax payments, a 5-year carryback provision for net operating losses and other changes. For the second half of this year, we expect our effective tax rate to be about 21%. Now let me walk you through our business segments, starting with specialty petrochemicals. Adjusted EBITDA from continuing operations for specialty petrochemicals in the second quarter was $5 million compared to $6.5 million in the first quarter of this year and $10.4 million in the second quarter last year. Specialty Petrochemicals volumes in the second quarter were 15.3 million gallons, and this compares to 19.7 million gallons in the first quarter and 21.4 million gallons in the second quarter of last year. For the first 6 months of 2020, specialty petrochemicals volume -- volumes were down approximately 8.8 million gallons or 20% compared to the same period last year. Let's talk about prime products. Prime product sales volume, which is a key driver of our profitability was 13.1 million gallons in the second quarter compared to 16.2 million gallons in the first quarter and 17.7 million gallons in the second quarter of last year. For the first 6 months of 2020, prime product sales volumes were down approximately 6.1 million gallons or 17% compared to the same period a year ago. Prime product volume was down due to lower demand from Canadian oil sands customers and lower sales to polyethylene producers. Sales to other end-use markets were also generally weaker compared to the same period last year. Margins for prime products improved significantly from the first quarter due to a 55% decline in natural gasoline feedstock costs. The business benefited both from a margin expansion in our non formula portfolio as well as the lag effect of inventory costing. Benchmark natural gasoline feedstock prices declined from $0.93 per gallon in the first quarter to $0.42 per gallon in the second quarter. The trend in market pricing of natural gasoline feedstock is shown on Slide 8 of our second quarter 2020 earnings deck that is posted on our website. Recall that in first quarter, the sharp decline in feedstock prices had a negative impact of approximately $4.5 million due to the consumption of higher cost inventory throughout the quarter. In Q2, the negative impact of this lag effect was approximately $1 million or roughly $3.5 million improvement as feedstock costs bottomed out in the quarter. Late in the second quarter and into July, feedstock prices started to increase. July's average natural gasoline price stood at $0.68 per gallon. Now moving on to the byproducts. Byproduct sales volume was approximately 2.3 million gallons in the second quarter compared to 3.5 million gallons in the first and 3.7 million gallons in the second quarter of last year. Byproduct sales declined primarily due to lower prime product production and sales. Byproduct margins, declined to about negative $0.29 per gallon in the second quarter from $0.08 per gallon in the first. The sharp decline in byproduct margin was driven by product prices as a result of lower benzene prices combined with the inability to take full advantage of the product upgrade capability of the advanced reformer unit due to production rates being below the minimum threshold required for its operation. Let's move on to Specialty Waxes. The Specialty Waxes segment had adjusted EBITDA from continuing operations of $0.9 million in the second quarter compared to $1.1 million in the first and $0.7 million in the second quarter last year. Specialty Waxes generated revenues of approximately $8.3 million in the second quarter, a 2.3 -- $2.1 million decrease from $10.4 million in the first and $1 million decrease from the second quarter of last year. Revenue included $5.5 million of wax product sales in the second quarter. Wax sales volumes decreased approximately 16% or nearly 1.6 million pounds from the second quarter of last year. In the second quarter of 2020, wax sales were depressed due to the impact on our customers from the COVID-19 pandemic. Many of our customers, especially in the automotive furniture and construction end markets had significant decline in sales demand due to the pandemic. There were no material disruptions to our wax feed supply, however, during the second quarter. Processing revenues, which were $2.8 million in the second quarter decreased 23% from Q1, but increased approximately 12% or $0.3 million from Q2 of last year. Wrapping up as we progress through this period of economic uncertainty and business downturn, we have ample liquidity, a strong balance sheet, with no near-term debt maturities, and we maintain a keen focus on cash on cost management. Now operator, we'd like to open the line for your -- for people's questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Sarkis Sherbetchyan from B. Riley.

[Unidentified Analyst:]

This is actually Aman. I'm jumping in for Sarkis. So my first question is, what are your expectations for margins in 3Q and 4Q given the volatility of feedstock prices?

[Pat Quarles:]

Yes. So as I mentioned briefly in in our remarks with feedstocks bottoming in the market in June. And as that costing flushes through our inventory, we see the inventory effects as being a tailwind as we get through the third quarter. So we had about 15.2% gross margin in the second quarter, we should be north of that as we get into the third quarter. Frankly, as we get in the fourth quarter, just have to be pretty candid. Our visibility further out just remains very murky. We're all watching the headlines and what's going on with COVID. And how that may play through. So it remains a question mark as to how the year is going to end. We've been very encouraged by the demand that we've seen bounce back, as I mentioned, starting in June and getting stronger as we get into the third quarter. I don't really have any reason why that shouldn't continue into later this year, but we'll really have to just see how the market unfolds.

[Unidentified Analyst:]

Understandable. And how is demand trending in prime products, aromatics, waxes and chemical processing when looking at customers' orders in July and August relative to what you saw in the second quarter?

[Pat Quarles:]

Yes. So May was weak. The way I kind of characterize it is kind of every bit of news that we had coming in from customers during May, basically was negative news. So we continue to increment down. As I noted, we actually had demand lower than we actually anticipated, and we talked about on the last call. Really, since that time, it's been kind of the exact opposite. We've seen a good really kind of broad based in a variety of end users, particularly in the durables goods side. Production come back. It started with the big 3 automotive in North America, which drives then subsequently demand for rubber -- butyl rubber, and EPS and polyethylene. We've seen -- there was a period in time in the second quarter where some polyethylene units in North America actually were disadvantaged globally because of the fall in crude. Now that situation has reversed as well. So we're really seeing all end uses begin to tick up. Some more strongly than others, mostly reflecting how weak they were in May. As we get into August, normally, you'd see softness in a lot of these markets. I think we're actually seeing the return of production run through August. I think the automotive guys, for instance, what they would normally be doing late in the summer, they did during their quiet period. So that demand actually remains pretty strong, and we see a nice step-up currently in August, even from the June and July levels. That's really the driver for prime products. I think wax is somewhat of a similar story. I mean, we have exposure to durables in our wax business that goes into applications like furniture and automotive as well. So those were soft in the second quarter, and we are now seeing the resumption of wax orders as we get into August. So that's going in the right direction also. I think on custom processing, it's going to be a little bit slower climb back, primarily because given that we are weaker on the margin, some of our customers will not utilize custom processing versus in-house production. So that's going to slow, I think, the ramp of revenue growth in the second half of the year. What's encouraging is, and we mentioned it when I talked about growth as we've reengaged the market, as we get our operations at TC lined out early this year, we've seen a lot of activity on the project side to drive new opportunities for us through custom processing. That's a bit of a long sale cycle. So I don't anticipate significant benefit from these projects this year. But we have a number of trials scheduled and committed with new customers in the second half of the year. And I'm getting actually more optimistic that we'll see a nice step-up as those projects, we expect to be successful on many of them. And we'll continue -- we'll then start driving revenue as we exit the year.

[Unidentified Analyst:]

Okay. And what were your byproduct margins for the second quarter? And how do you anticipate byproducts margins evolving in the second half of 2020?

[Pat Quarles:]

So Sami will speak to some of the numbers in a second, but make some comments on kind of what else has been going on in byproducts. It's been really reflective of all the volatility going on in the energy sector. We're leveraged, if you will, to aromatics pricing, so benzene and toluene. And as I have discussed before, benzene market is generally usually structurally short in the U.S. and we export benzene from Asia. We saw demand fall so far early in the second quarter that, that actually reversed. We were long benzene in the U.S. We saw benzene pricing all as a result with prices trading well below $1 a gallon. That has turned as we've seen things like styrene demand return to growth as our EPS, for instance, comes back. So the U.S. has gone short benzene again. There have been some constraints on production of benzene in the U.S. that kind of further exacerbated that problem. And as a result, we've seen benzine pricing respond. So August benzene price, I believe, settled at $1.52 per gallon. So it's up over 50% from its lows. And what we see in the market would suggest that should continue as we continue on to the second half of the year. So very negative margins, as you saw in our byproducts, particularly early in the second quarter, but we'll see that turn here in the third quarter.

[Sami Ahmad:]

Yes. In terms of the numbers for byproduct margins, you had asked. So in the second quarter, it was a negative $0.29 per gallon, and that compares to $0.08 per gallon positive in the first quarter. And in addition to the factors that Pat described in terms of what was going on, on the aromatics side, which then depressed the -- our own byproduct prices. We also, during the quarter, were not able to fully run the AIRMAX unit, the advanced reformer unit, mainly because our production rates were below what was needed for minimum threshold operation for that unit. Now why is that important? Well, we don't run the advanced reformer unit, we run another unit whereby we don't achieve the level of aromatics concentration. So the amount of the high -- the good stuff, the benzene and toluene in those byproducts. So that depresses further the product pricing for byproducts. The unit is -- AIRMAX is up and running again, and it wasn't reliability, it was just due to demand rate.

[Unidentified Analyst:]

Got it. And then last question for me. What makes the team confident in completing the sale of the remaining shares of AMAK by the end of the third quarter?

[Pat Quarles:]

Yes. So this most recent sale that we talked about, the funds in which we received a week ago. What that really reflects is -- and I think should be interpreted as now the buyers are seeing -- we've got all the regulatory issues behind us. I think we've got most of the disruptions associated with the close that were impacted by COVID behind us and you got to look to the fundamental value that these guys are apprising for the mine. And the mine actually has continued to advance very well. On year-over-year basis, the production is at or above prior levels. We've been successful in extending the mine life. And we've seen actually metal prices recover dramatically really for copper. And then of course, as we're all watching, gold prices are hitting an all-time high, and the mine will be starting up their new gold mine here in the second half of the year. So all that to me just indicates that the buyers see value at the 10 SAR price that was negotiated. We've had one of the smaller buyers come in and close. And we anticipate further closings as we get to the end of the quarter, and I think we'll be complete by the end of the quarter.

[Operator:]

[Operator Instructions] Our next question comes from the line of Bill Dezellem from Tieton Capital.

[Bill Dezellem:]

I'd actually like to follow up on that last question. I don't believe that I have clarity on why the sale has been delayed the degree to which it has. Would you talk through kind of what those delays are? And why those roadblocks are now out of the way?

[Pat Quarles:]

Sure. So we had -- the first delay was really driven by the regulatory hurdles of getting approval from government bodies, probably not least of which is SIDF who has guaranteed loans into the mine. So we had to receive that government approval, which we didn't receive until kind of the middle of the first quarter of this year. And then, frankly, then we rolled immediately into the COVID crisis and all travel and kind of transactions were shut down. At that period, not knowing how long this is going to last. What we agreed to do was to negotiate and extend -- last extension, which carries us to September 28 of this year. So that's the amendment or long stop date. That is currently agreed with the buyers, and they have until that date to complete the close. So we saw -- and for that extension, if they didn't close prior to the end of March, they lost 50% of their deposits. So what you saw was ARMICO, who had really already positioned funds for their closing outside of Saudi. They were able to close at the end of March. But the other buyers were not. So really, if you think about what the responsibilities or obligations are for the buyers at this point, they have until September 28 to close, there's no incentive for them to close earlier. So we were pleased to get this money in prior to September 28. I think we're going to -- we'll see some more come in prior to September 28, but that is really their responsibility and obligation at this point.

[Bill Dezellem:]

That's helpful, Pat. And then you had a pretax loss, but you also ended up showing taxes of $958,000 that's a negative tax rate. So can you talk through the whole idea of paying taxes with a pretax loss?

[Sami Ahmad:]

Yes. So when you look at the second quarter, what's not shown there clearly is there were also $1.3 million return -- accrual to return or book to return differences for a range of reasons. Non -- they were noncash related. With the exhaustion of the NOLs, recall that under the CARES Act, we've been able to monetize all of our NOLs, and we're expecting those proceeds from the IRS to come in on the second half, we will be a cash taxpayer. So in the -- in July, for example, we made estimated tax payments of $3 million for the balance of the year, our book -- effective book rate should be back to 21%.

[Bill Dezellem:]

And so if you made an estimated tax payment of $3 million, the implication to us on the outside is that you should -- you are planning on meaningful profits in the second half?

[Sami Ahmad:]

On the tax basis, yes, because we don't have the NOLs anymore. They've been monetized.

[Bill Dezellem:]

Right. And how does that relate to GAAP reporting basis?

[Sami Ahmad:]

I mean -- the monetization of the NOLs?

[Bill Dezellem:]

No, the profit you said that would be on a tax basis and to what degree is there a correlation or not with GAAP reporting?

[Sami Ahmad:]

Right. So the way our tax advisers work that is they -- according to IRS guidelines, they take first quarter and they annualize it for the year. And that's how they estimate the tax payments. So they took the first quarter results in terms of taxable income, annualize that. And then, again, they will revisit it in what the third quarter -- in the third quarter, they will revisit it based on second quarter performance and then our expectation during the third quarter and to see if there are any more payments required.

[Pat Quarles:]

So that means it doesn't reflect an estimate on our part as to second half earnings. It's really backwards looking.

[Bill Dezellem:]

Right. Okay. Great. And then lastly, with the disruption that the virus created and the significant reduction in volumes. Did that create any sort of an opportunity for prospective customers to reevaluate how they were -- chemical compositions and whether there was an opportunity to work with you all and because they were slower, that they evaluated their business in a different way? I'm trying to find a silver lining here to the crisis and just to see if there's something that you have to share there.

[Pat Quarles:]

Sure. Well, I think on the base prime products, I think my takeaway from kind of going through this during the second quarter is, listen, we will go up and down with these near-term drivers of demand that flow through the industry. But what we didn't see was some kind of -- as you were kind of asking some reevaluation of kind of the market dynamics and what it means from a value of our products and so forth. Actually, we were successful during the quarter to renegotiate several contracts that brought us greater security going forward on our business at good value. Similar values to the past. So we didn't see a sacrifice of values, but we're able to extend, and in some cases, get security of growth with certain customers. So I think the structure and value of the prime product business has weathered the storm very well. I think we look a lot to the custom processing assets and frankly, the excess capacity that we have, given the capital plan wave that this company had several years ago as opportunistic capacity. We -- as I mentioned during my prepared remarks, we have the 26 projects that we're driving. Some of these have been slowed down as people took a pause during the quarter. We have seen actually companies now reengage on some of these projects. I think people are starting to now look forward, again, having kind of satisfied themselves that they're positioned to weather the storm. And we've continued to have good engagement on kind of the growth projects against Trecora Chemical, against the Pasadena asset for new projects that we've been working on there. So I've been encouraged really by the continued engagement by the market for opportunities to bring more and new revenue really to both sites. So we probably lost a little bit of time during the quarter as people took a breath. But really nothing negative coming out of that. I think kind of the next piece of your question is, is this creating new opportunities for us? Maybe a bit, but I don't want to suggest something really dramatically improved is going to happen as a result of it. I think everyone always looks at kind of the assets, how their assets are going to be utilized going forward. And whether or not maybe better use of our assets is custom processing versus theirs. We are having some of those conversations, but they're not advanced enough yet to suggest we'll see something coming from it.

[Operator:]

Our next question comes from the line of Kurt Caramanidis from Carl M. Henning, Inc.

[Kurt Caramanidis:]

I know you have a number of EBITDA improvement projects in the short run, medium run, long run. And I'm trying to figure out what kind of a baseline annual EBITDA rate should we -- run rate should we be using to figure out what those improvements are? You did about $10 million in the first half of this year and $18 million in the first half of last year. I mean do we pick something in between there? Or what's kind of -- how do you look at that?

[Pat Quarles:]

Sure. Well, as we've been talking about, right, we have a lot of leverage -- operating leverage to kind of downstream demand in these core end uses. So -- and that's driven this dramatic fluctuation from last year, and of course, in the first quarter. I tend to think of it as the underlying sustainable profitability from a margin perspective is solid. And as you probably know, 2/3 of our prime product contracts are on effectively fixed margin as they're formula based. And so as demand returns, which we anticipate it doing, we'll get the benefit of that. So I would view last year's performance is more indicative of what our baseline performance should be for South Hampton once we get recovery from the pandemic. And then I would anticipate our growth program contributing both to South Hampton as well as our chemical TC, the Specialty Waxes segment. Because in both instances, we have -- we've identified and are working cost reduction opportunities. We're driving custom processing opportunities that touch on asset utilization. And in the case of TC, a few new products or new markets to enter as well. And those actually all continue to progress pretty well. So I would put it against -- if you -- if we can -- if we're aligned on kind of a return to the kind of the pre-COVID demand levels, I think last year's South Hampton performance is a fair representation of the baseline.

[Kurt Caramanidis:]

Great. And how many buyers have to square up with you for AMAK by the end of September. This person apparently had a smaller amount. Are there another 10 people that have to come in or 2? Or what's kind of the load down there?

[Pat Quarles:]

It's 5. And of the 5, 1 is AMAK, the company itself, they're buying a portion of their shares back.

[Operator:]

Our next question comes from the line of Tom Harenburg from Carl M Henning, Inc.

[Tom Harenburg:]

I'm impressed with the progress you're making on your financial statements and cutting down at debt. As far as the mine is concerned, this is the dragging on for probably a year. Copper prices are up probably 20% from when the agreement was made, silver up substantially, gold hitting record levels. Are there any penalties that we can get if this is not completed by the end of September?

[Pat Quarles:]

Great question, Tom. So yes, listen, I think the calculus that we're running is in the event that they do not close by the end of the quarter, then we have the right not to close in the future, right? So our option would be to preserve those shares. As the mine -- as I mentioned earlier, the mine is improving, not just operationally, but with their new CEO coming in, I guess, 2.5 years ago now, they will be posting and have posted earnings, which sets them up for an IPO no sooner than 2 years after their first positive earnings. So what that means is they could have an IPO as early as next year. And they are working towards that. So our alternative has always been holding on to the shares and then monetizing them when they go -- at some point after they go public. It's not our preferred case. Our focus is on monetizing these shares and moving on with our priorities and strategy. But as you say, it's arguable that the value of the mine continues to improve. And it's not that big a downside were we not to close. But to be clear, I want the cash.

[Sami Ahmad:]

Yes. We want the cash and we want to exit out. The other point I would make to what Pat said, is recall that they are going to start up the Guyan project in the fourth quarter?

[Pat Quarles:]

Second half, yes.

[Sami Ahmad:]

Second half, sometime. And given where gold prices are, that should help them in their IPO process whenever that starts up.

[Pat Quarles:]

And Tom, that's why you hear me -- and frankly, that's why you hear my tone changing on why I'm very confident we'll get this thing closed. I think they see value in the mine. We see it from the metrics that we watch. I think they're going to be interested in closing, and we're going to be interested in moving on.

[Tom Harenburg:]

Having been an investor in 1968 in the company to spun this off at $0.25 a share. And looking back with George Rucker and Preston Peak and Jack Crichton, who basically found this and put it together, there's sure got to be a lot of disappointment with the way this line is ultimately turned out. So I just hope you can get this thing done. And if not, I think that -- we've heard, I think, back in 2014 that they were going to have a public offering. So that has dragged on and on for an awful long time here.

[Pat Quarles:]

Yes. As you know, well, kind of how the mine has been operated over the years. I think until they took control of their operations themselves. Hired Savas Sahin as their CEO. And Savas brought in his own operating team rather than having it contracted out. Only then do they actually start making progress. They've made tremendous progress, but yes, it's a long time in coming. I'm happy to see improvements Savas has made and it certainly benefited us as well. And we wish them the best, but we also look forward to kind of moving on after the third quarter.

[Operator:]

At this time, I'm showing no further questions. I would like to turn the call back over to Pat Quarles for closing remarks.

[Pat Quarles:]

Thank you, operator. Thank you for your questions, interest in Trecora and participating on the call today. I want to close by thanking our people. At the onset of the pandemic, we instituted new protocols at our sites to protect our team and those that come on to our sites from the virus. Many of our people began working from home for both their safety and the safety of those that remain at our facilities while continuing their duties. It's been a lot of change, and I appreciate it hasn't been easy. I'm proud of how the organization has taken on these challenges, and I really want to thank everyone for their diligence and their commitment. And with that, again, I'll thank everyone, and we'll sign off.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.