Trecora Resources
Q1 2019 Earnings Call Transcript

Published: 12 May 2019

[Operator:]

Good day and welcome to the Trecora Resources First Quarter 2019 Earnings Conference Call. Today’s conference is being recorded. And at this time, I would like to turn the conference over to Jean Young from the Piacente Group Inc. Please go ahead.

[Jean Young:]

Thank you, Josh and good morning everyone. Welcome to the Trecora Resources first quarter 2019 earnings conference call. The earnings release was distributed over the wire services after the close of this financial markets yesterday afternoon. Presenting on our call today will be Pat Quarles, President and Chief Executive Officer as well as Sami Ahmad, Chief Financial Officer. Chris Groves, our Corporate Controller will also be available for the question-and-answer session which follows management’s prepared remarks. Before we get started, I would like to review the Safe Harbor statement. Statements in this presentation that 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, May 7, 2019. 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, management 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 company’s website www.trecora.com. At this time, I’d like to turn the call over to Trecora’s President and CEO, Pat Quarles.

[Pat Quarles:]

Thank you, Jean and thank you to all those participating in this morning’s call. As discussed on our fourth quarter year end call, we are focused on taking steps to meaningfully improve our performance. We have already seen some of those steps show material results. Our Q1 performance demonstrates our earnings power and we are operating according to plan. While we still have further improvements to make in our financial performance, I am proud of the advances we have made thus far in 2019. For example, Q1 saw company-wide adjusted EBITDA of $8.4 million, a $6.4 million improvement over Q4 of ‘18. This represents a Q1 margin of 13% compared with a 10% margin in Q1 of ‘18 and a 2.6% margin in Q4 of ‘18. The key drivers to our first quarter improvements were as follows. We maintained our safety performance with zero significant safety incidents across the company. We ran our assets reliably, delivering on productivity initiatives and executing on key projects according to plan. For example, the Advanced Reformer ran with near 100% reliability for the full quarter. We sold no depentanised naphtha. This created a $0.35 per gallon byproduct margin expansion versus the fourth quarter. We also saw the benefits of feed margin expansion as we consumed lower cost inventories in the specialty petrochemicals business while maintaining market price levels. Finally, we had successful maintenance turnarounds in Pasadena and Silsbee. Aside from these drivers that improved financial results, Trecora also continued to strengthen both our Board of Directors and leadership team. In Q1, we appointed Karen Twitchell as Chair of the Board and added Janet Roemer and Adam Peakes as independent directors to the Board. Joe Tanner joined as Senior Vice President, Commercial and a great addition to my leadership team. During our Q4 and year end call in March, we touched on some of the near-term priorities that can improve our performance. These priorities provide shareholders a consistent way to track Trecora’s progress; number one, operating assets safely and reliably; number two, capturing productivity opportunities; and finally, driving commercial excellence. Trecora is committed to promoting a culture where safety is a core value. We have completed two consecutive quarters now with no significant safety incidents across our company. The diligence required to maintain our safety culture is the foundation for our execution. When Dick Townsend joined last June as Executive Vice President and Chief Manufacturing Officer, he merely defined and implemented a transformation plan for our sites. This plan has shown measurable results. Trecora continues to implement further training in the field, remains focused on improving planning; is leveraging outside resources when appropriate, and is utilizing its enhanced process monitoring and control capabilities. Overall, we are seeing solid improvement in our ability to successfully identify and resolve issues proactively and gain more visibility and stability as a result. Reliability across our system was high in Q1 ‘19. Since the restart of the Advance Reformer in early January, the unit continues to run near 100% reliability, and according to design criteria. Over the long-term, a significant component of Dick’s turnaround plan to improve reliability is to drive scheduled and routine maintenance versus reactive maintenance, which is both more costly and less controlled. In 2019, we expect our safety and reliability efforts to drive $3 million to $4 million of EBITDA improvement and in Q1 we remained on track to achieve this. To be successful in this highly competitive industry, we must constantly focus on capturing productivity opportunities for our company by examining and continuously reviewing the competitiveness of our operations and the services we utilize. While logistics costs remain a headwind we are taking short-term actions to lower our costs. We subleased excess rail cars, avoided rail car storage costs by utilizing on-site track expansions at Silsbee, and recovered supply chain costs through revisions to some contracts that are renegotiated in the quarter. Even more impactful, we saw the expected benefits of the Q4 reorganization in our results this quarter and we continue to work to capture additional savings across our system. We’re on track to reach $3.5 million to $4.5 million of savings in 2019. The last of our priorities is to drive commercial excellence. As I mentioned earlier, Joe Tanner, SVP of Commercial, joined the team in mid-March and is leading this charge. Since his arrival, he has made early progress in transforming the culture and improving our commercial decision making with increased analytics and clear expectation to ensure we capture our fair value from the market. We have had some early successes in negotiating improved adders to our formula-based prices. We continue to make progress identifying the opportunities present in our commercial operations in an effort to drive profitable revenue growth and improve our results. We have more to do. But from what we’ve seen thus far I’m confident Joe will lead our commercial organization to find further opportunities to capture value. I expect we will add $1million to $2 million of EBITDA from our commercial actions this year. We remain on track to achieve this, and I expect to see improvement materialize in the second half of 2019. To summarize, we laid out a range of expected benefits from the various initiatives we’ve launched on an annual run rate basis. We’ve also included the known cost of planned maintenance activity in our plans during ‘19 and recognized volatility in our results due to external market drivers such as feedstock costs. Let me turn to AMAK now. I had the opportunity to visit the mine last month and came away impressed by both the operation and the rigor of their growth plans. After achieving profitability last year, the mine has thoughtfully implemented a resource development plan, resulting in the extension of the mine’s life to 9 years, effectively adding a year of mine life on top of the ore depletion of last quarter – for the last year, excuse me. We have also further identified probable resources to be developed into the future. In addition, we approved the development – or the AMAK Board approved the development of a gold and silver deposit on the site, the Guyan mine during the last Board meeting. This deposit is expected to be commercialized in 2020 and is estimated to contain 244,000 ounces of gold on indicated and inferred basis. Our process to monetize our ownership in AMAK continues to advance. We engaged a top tier bank to assist us with that process and are conducting preliminary valuation work and assembly of due diligence materials. We plan to launch our process in the coming weeks. By prioritizing the most meaningful outcomes and implementing needed changes, we believe Trecora will return to a level of high financial performance, yielding significant cash flow. We’ll use that cash to reduce debt. While we cannot predict with a 100% certainty where we’ll end up in 2019, we are committed to candor transparency and providing execution updates along the way. Now, I will turn it over to Sami Ahmad, our Chief Financial Officer for a more detailed discussion of our Q1 results.

[Sami Ahmad:]

Thanks, Pat and good morning to everyone. Our consolidated adjusted EBITDA was $8.4 million in Q1, 2019, a $6.4 million improvement over Q4 2018. In the first quarter, cash flow from operations was approximately $0.8 million. The use of cash was driven by working capital, including the payment for new catalyst for the Advanced Reformer catalyst tank change out, which was completed in December of 2018, payment for supplemental wax feed for Trecora Chemical, and severance payments. In aggregate, these payments amounted to approximately $5.5 million in the quarter. CapEx for the quarter was approximately $1.9 million. Total debt increased by approximately $1 million compared to year-end 2018 to $104 million. Outstanding revolver borrowings, was $20 million at the end of the first quarter with additional $25 million of availability. In April, we paid down $1.5 million of revolver debt, so that our current revolver borrowings stand at $18.5 million. Our expectation for annual CapEx spending is approximately $10 million to $11 million. Now, let me discuss Q1 results in some detail. Total revenue in Q1, 2019 was $65.1 million compared with $71.7 million in Q1, 2018, a decrease of 9.2%. Reported earnings per share on a diluted basis, was $0.07 per share for Q1 2019 compared with $0.09 per share in Q1 2018. Adjusted earnings per share on a diluted basis, was $0.07 compared with $0.08 in Q1 2018. Adjusted EBITDA, as I mentioned, for Q1 was $8.4 million, representing a 13% margin compared with adjusted EBITDA of $7.2 million or 10% margin in the same period 1 year ago. Our adjusted EBITDA margin in the first quarter is substantially improved relative to the past several quarters as a result of improved asset reliability, continued solid sales demand and effective cost management. Prime product sales volume was 17.6 million gallons in the first quarter compared with 18.7 million gallons in the fourth quarter. General and administrative or G&A expenses were $6.1 million in Q1 2019 and this compares with G&A of $6.3 million in Q1 2018. Interest expense was approximately $1.5 million in the first quarter compared to $0.9 million in Q1 2018. Our Q1 2019 effective tax rate was approximately 21% and we expect this for the full year as well. Now, let me walk you through some key metrics for our business segment, starting with Specialty Petrochemicals. Adjusted EBITDA for our Specialty Petrochemical segment was $11.4 million compared with $2 million in the fourth quarter of 2018. Adjusted EBITDA margin increased from 3.1% in the fourth quarter to 20% in the first quarter. As I mentioned earlier, prime product sales volume was 17.6 million gallons in the first quarter compared to 18.7 million gallons in the fourth quarter and 17.7 million gallons in the first quarter a year ago. The sales volume decline from the fourth quarter was largely due to weaker sales into the Canadian oil sands market, which was partially offset by stronger sales into other markets. Foreign sales volume as a percentage of total sales was approximately 25% and this is about the same as the full year 2018 average of approximately 26% and this is despite lower sales into the Canadian oil sands market in the first quarter. In the first quarter, prime product margins benefited from the timing effect of rising feedstock costs. This is because our cost of inventory lags or current feedstock pricing. Looking ahead, as feedstock cost stabilize, we don’t expect this margin benefit to continue. Byproduct sales volume was 4.8 million gallons in the quarter compared to 6.4 million gallons in the fourth quarter. The decline in by-product sales was largely due to processing all of our byproduct through the Advanced Reformer unit, which results in expected volume shrinking. However, byproduct margin in the quarter increased to $0.16 per gallon, compared to a negative $0.19 per gallon in Q4 2018. The improvement is due to the by-product margin uplift we get by running the Advanced Reformer unit. As you know, the unit returned to service in the first week of January, following the catalyst replacement outage in the fourth quarter. Moving on to specialty waxes, the specialty waxes segment had EBITDA of negative $0.9 million compared with positive $0.1 million in the fourth quarter and $0.4 million in Q1, 2018. A planned maintenance turnaround at our Pasadena facility along with outages at our wax feed suppliers constrained wax production and sales in the first quarter. Additionally, the maintenance turnaround at Trecora Chemical had a cost impact of approximately $0.5 million. Wax sales volume in the first quarter was 7.9 million pounds compared to 8.1 million pounds in the fourth quarter and 9.5 million pounds in Q1 2018. Average wax selling price in the quarter was about $0.76 per pound or 14% greater than Q1 a year ago and this reflects our marketing strategy to enhance pricing and improve sales mix by focusing on higher margin value added businesses. We also began to utilize additional wax feed supply in the quarter to supplement the base feed and grow sales volumes. Although, the supplemental feed is at a higher cost, it will enable the business to continue to grow in higher value-added market segments as we gain customer qualifications over the upcoming months. As far as custom processing, Q1 ‘19 processing revenues were about flat from the fourth quarter and declined nearly $1 million from Q1 ‘18. The focus in custom processing is to be selective in the businesses that we pursue and continue to work to resolve the operating issues with the hydrogenation distillation unit. Additionally, the focus at Trecora Chemical is to operate safely and efficiently, including a strong focus on managing operating costs, and to this end, the facility may progress in the first quarter. Now, moving on to AMAK, AMAK’s Q1 adjusted EBITDA was $7.1 million as the mine continues to make progress on production and metal recoveries and this compares to $7.4 million in Q1 2018 and $6 million in Q4 2018. Trecora reported equity losses of approximately $0.1 million in Q1 2019 compared to equity in earnings of approximately $0.2 million in Q4 2018. In connection with the 2018 AMAK share repurchase program, we received net proceeds of approximately $0.4 million during the 3 months ended March 31st, 2019. With that, this concludes our prepared remarks. And at this time, I would like to ask the operator to open the call up for questions and answers.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Jon Tanwanteng of CJS Securities. You may proceed with your question.

[Jon Tanwanteng:]

Good morning, gentlemen. Thank you for taking the questions.

[Pat Quarles:]

Good morning.

[Jon Tanwanteng:]

Can you tell us a little bit about how much the timing of the feedstock costs in your lower cost inventory impacted the quarter and how much of a moderation it will be in Q2?

[Pat Quarles:]

Sure, Jon. I don’t want to quantify too much in terms of the impact, it’s – but basically, as you saw in our slide deck, we have got a feedstock pricing chart and what you saw in the first quarter is the feedstock pricing sharply rising and roughly it takes about 60 days for us because of transit time of inventory to customers and that results in the feedstock costs reflecting prices from 60 days ago relative to when it’s sold. Currently, we have seen feedstock price more or less stabilize and that’s why we have indicated that we don’t expect that benefit to continue.

[Jon Tanwanteng:]

Okay, great. Thank you. And then, sorry, go on.

[Pat Quarles:]

Yes, I mean roughly it’s in the order of a couple of million – $1 million, $2 million, if you want to be specific to the amount of the benefits.

[Jon Tanwanteng:]

Great. Thank you. And then I see you have a planned maintenance outage in Q2, you do broke out the cost, is there going to be a revenue or volume impact…?

[Pat Quarles:]

No, we don’t think so. I think we talked about two turnarounds in the first quarter. The turnaround in second quarter at Silsbee is very similar to the turnaround we had in the first quarter at Silsbee and neither of those impacted the sell side.

[Jon Tanwanteng:]

Okay, great. Can you also break out how much your non-oil sands hydrocarbons volume grew year-over-year?

[Sami Ahmad:]

We don’t really break it out that way, Jon. And other than what I have said in my remarks, it was down. You saw what I indicated was oil sands was down and volume was still pretty reasonably strong. We continue to see that level of strength. I am reluctant to break it out into the way you described.

[Pat Quarles:]

But generally the same trends hold that we have been talking about, right. So the investment in the U.S. Gulf Coast in polyethylene expansions had created opportunities for higher sales this year. There is one more project hanging out there. They are probably delayed like most, but that’s something that could come in late this year as well. So those general trends are holding.

[Jon Tanwanteng:]

Okay. Thank you. And then Sami finally, what are the cash taxes you are expecting to pay this year?

[Sami Ahmad:]

At a Federal level, we expect to pay minimal taxes because of the NOLs that we are carrying as deferred tax assets as a result of the capital program, so you won’t see material Federal cash taxes. We will have local taxes related to property, franchise taxes, but no federal income tax.

[Jon Tanwanteng:]

Okay. Thank you.

[Sami Ahmad:]

You’re welcome.

[Operator:]

Thank you. And our next question comes from Joseph Reagor of ROTH Capital. You may proceed with your question.

[Joseph Reagor:]

Good morning guys. Thanks for taking the questions.

[Pat Quarles:]

Hi Joe.

[Sami Ahmad:]

Hi Joe.

[Joseph Reagor:]

So first one, on your slide that shows like the plan to drive improvements with the kind of the flow chart of positives and negatives, it kind of implies – let’s call an EBITDA run rate in the mid to high-20s by year end, but after the strong Q1, is it fair to say that for this year it’s possible to be above that just because Q1 was so much better than expected?

[Pat Quarles:]

Yes. I would say that. Our results in Q1 certainly give us some confidence that we are on the right path in terms of focusing on our execution that’s going to drive those kinds of results. But I will remind – and we remind ourselves every day that one quarter does not make a trend. We have a history here of having challenges over time on execution. So we are going to remain very focused on our execution and should that continue, then that’s probably a reasonable expectation, but we have got to post the numbers.

[Joseph Reagor:]

Okay, fair enough. And then on AMAK, with this new – with the new JORC report you guys completed, are you guys going to post that to your website at some point, the full report so we can better model the mine?

[Pat Quarles:]

We will post the report Joe. I think we will report on the outcomes and you understand well the methodologies to get – getting to those kinds of numbers. Now certainly, as part of our mine monetization effort, that will be part of the data room and anyone who participates in that process will be getting insights into the ore body and its definition and development and monetization. But I don’t think that’s the type of thing that as Trecora we will post for ourselves.

[Joseph Reagor:]

Okay, alright. I will turn it over. Thanks.

[Pat Quarles:]

Thanks Joe.

[Operator:]

Thank you. And our next question comes from Sarkis Sherbetchyan of B. Riley FBR. You may proceed with your question.

[Aman Gulani:]

Hi guys, this is Aman, I am jumping in for Sarkis. So my first question, I believe you mentioned that margin uplift from the Advanced Reformer was $0.16, if that’s correct, do you expect similar margin rates for the Advanced Reformer going forward?

[Pat Quarles:]

So, one of the things we want to do is kind of reset our conversation around the Advanced Reformer with respect to margins. So actually the numbers that you are talking about there reflects the actual realized margins, excuse me, of our by-products. So from the transition of selling depentanized naphtha, these are very hard couple of words to get on my mouth right now. In the fourth quarter to selling Aromax say in the first quarter was an – was an actual $0.35 per gallon upgrade of that margin, okay. Now in the past, we have talked about uplift and really uplift is a measurement of our – kind of on our project performance basis because it was intended to demonstrate the premium that we are getting through the Advanced Reformer versus the old reformer setup. So it’s a bit of a theoretical. And Sami can talk to you in a minute as to what that number was. But the one caution – not caution I want to give you, the guidance, I want to give you guys is that I think going forward, it’s going to make more sense for us to focus on the actual margin realized because it puts back to our P&L, it’s consistent with real costs and real performance of the asset not against kind of a theoretical history, which I think over time can – it just gets old over time because you may lose relevance. So we want to get back to real numbers that we are posting.

[Sami Ahmad:]

That’s correct, Pat. What we – the new reformer, the Advanced Reformer, what that allows us to do is concentrate those valuable chemical components in the by-product stream like benzene and toluene to higher level and that’s really the source of quote uplift and that’s in comparison to the way we operate it. What we are showing in our current results is the actual margin benefit that’s flowing through our P&L. So as you mentioned in the first quarter, we had a margin relative to the raw material of $0.16 per gallon. Currently, based on what we see in terms of aromatics pricing benzene specifically, we expect that to hold up. It’s really a function of BTX margins or BTX pricing and the content, the concentration levels in the Aromax [indiscernible].

[Pat Quarles:]

But the uplift in the first quarter would have been 20 – on the old basis is $0.29.

[Sami Ahmad:]

Yes. It would have been $0.29.

[Pat Quarles:]

So the comparable that people were used to looking at was $0.29. And that’s improving as we go into the first quarter for the reasons that Sami talked about.

[Aman Gulani:]

Okay, got it. That’s helpful. Just one more question for me, how do you view prime products volume growth as the year progresses?

[Pat Quarles:]

Yes. I think it’s really similar to what we said a few months ago and that is the underlying use in Polyolefins or polyethylene market, blowing agents in polyisocyanurate and so forth. I think those continued to be solid. We are actually returning into more of a seasonal – typical seasonal up-tick in demand for some of those end uses that touch construction. But the overhang there remains the inherent volatility in oil sands business. And I think that volatility remains. And some of the risks of that demand remains as we look to the rest of the year. So it continues to be a question mark for us.

[Aman Gulani:]

Got it. Thank you. I will pass it on.

[Pat Quarles:]

Thank you.

[Operator:]

Thank you. And our next question comes from Joseph Catania of G-Research. You may proceed with your question.

[Joseph Catania:]

Good morning. Thanks for taking my question. Just a quick question on AMAK, revenue growth here of about 47%, which is really encouraging, but EBITDA declined 9% and that’s not very encouraging, so is this increase in SG&A that you called out permanent or is that just something temporary to try to deal with this mine life study and expands the operations there or is that just something that’s going to last?

[Pat Quarles:]

Yes. So I think, well we can talk to some of those specific elements on G&A, but I think the way you should start thinking about the mine is really that first quarter last year was – effectively the first quarter, they had good steady operations. It’s our understanding that if they were able to sell some ore inventory or concentrate rather inventory, probably ahead of their actual production that quarter. That may have been a bit overstated. And if you look over the last few quarters, I think that’s more reflective of their current run rate of performance. And then based on their track record recently, we expect they will continue to modestly improve that as they further optimize both quality of the concentrates, some throughput through mine operations and get the benefit of some gold capture and gold sales.

[Sami Ahmad:]

What I would add to that is, as you know metal prices a year ago were higher as well compared to where they are today. So more – given the current metal price environment, a better comparison is versus Q4 to Q1. And you can also see in the slides that we have posted what’s going on with both process/plant performance in terms of copper and zinc metal recoveries over the last several quarters, I mean, they’ve been on a very positive trend. And then also in terms of both the underground production and mill throughput, which is – both of these are metrics for production and how they’ve ramped up. So, the basic trend there financially speaking is good.

[Joseph Catania:]

Okay, thanks. Can you also give us a little bit more insight into how other end-market demand is looking outside of Canadian oilsands, more specifics in terms of which end-markets are showing strength and relative weakness comparatively? Thank you.

[Pat Quarles:]

Sure. Well, in the solvents area, I think maybe is what you’re focused on. As I said a second ago, I think we see general, I guess, I’d just say, consistent trends with the path that we’ve been on there. So, polyethylene continues to grow well as new assets come online and we of course maintain the positions that we’ve held previously so far. The other end uses like polyisocyanurate where it’s simply used as a blowing agent, those have some seasonal components to them that we don’t anticipate any significant change in that, which typically remains stronger 2Q, 3Q than 4Q,1Q. So, I think we’ll see that. So, no real change in direction on underlying expectations of consumption. This is all predicated on the belief that I think most all of us hold is that U.S. economy continues to do well and we’re not facing any real inflection point in terms of external drivers.

[Joseph Catania:]

Great, thanks. I’ll cede. Thank you.

[Operator:]

Thank you. And our next question comes from Mitch Sacks of Grand Slam Asset Management. You may proceed with your question.

[Mitch Sacks:]

Hey guys, I have a few questions.

[Pat Quarles:]

Hi, Mitch.

[Mitch Sacks:]

With respect to looking at by-products volume, does the new way that you’re producing these chemicals and the by-products change the resulting volumes versus the way that you used to do it, because I assume there’s some sort of loss factor as you refine it into its elements?

[Pat Quarles:]

Yes, I think you need to – so the difference is not that the process is different, is that the scale of our process is different. So, we’re processing all of our products now through Advanced Reformer and there is the densification that occurs. So, this is this like 25% reduction that you’ve heard Sami talk about last quarter. It’s not a loss of molecules. It’s the densification of the streams, so the stream volumes are different.

[Sami Ahmad:]

So, on a mass basis, pounds or – on a mass basis, it won’t change, gallons basis, volumetric basis, we get that yield loss and these products are sold on a dollar per gallon basis.

[Mitch Sacks:]

So, is it – about 25% change is what you’re saying, correct?

[Pat Quarles:]

Yes.

[Sami Ahmad:]

Yes.

[Mitch Sacks:]

Okay.

[Pat Quarles:]

Yes. But there is an upgrade in value, because it’s still the same molecules, right?

[Mitch Sacks:]

Sure. And then in terms of the bridge that you have in your slide deck, a plan to drive improved results, the running of the Reformer now at more normal volumes, where does that fit in that bridge?

[Pat Quarles:]

Reliable operations.

[Mitch Sacks:]

Okay. And then final question, with respect to wax volumes, the planned shutdown, do you have a sense of how many pounds of wax that eliminated from the quarter?

[Pat Quarles:]

We probably won’t go to that level of detail. What I’d tell you, Mitch, about kind of what’s going on in the wax business, we haven’t talked much about it yet is – as we have said, we like the direction the wax business continues to go. We have been successful over the last – and this is multiple quarters to develop upgraded products, realize higher margins and grow that demand. And we’ve had few – and we’ve had a few headwinds, some of which have been self-inflicted. So, one was, we have two principal suppliers and we were constrained last year on the volume, we’re able to get from those two suppliers. In the first quarter as we headed into our planned turnaround, we actually had actual disruptions during the quarter that shorted our supply. So, while we were planning for continuity of supply across the turnaround through inventories, we were shorted supply, so that did impact sales. And the other thing to be candid, we talked about bringing in alternative feeds to allow us to further grow our business and we started that process last year. We have gone through product development, have introduced products integrating these new feeds that does require qualification like any wax and we are – we were behind and frankly, still are behind on getting that product qualified. So, that did curtail our ability to sell more volume in the first quarter and it’s going to constrain our ability in the second quarter as well. It’s probably one of Joe Tanner’s number 1 priorities, is to get us back on track on getting our qualifications completed, so we can continue to meet the demand that we see out there.

[Mitch Sacks:]

Okay. And then the final question, I guess, with respect to the hydrogenation/distillation unit, I think you mentioned in the slides that you are at some sort of a base volume. Can you kind of give me a little more definition around that?

[Pat Quarles:]

Yes, I would say that we’re – I was asked last time kind of my assessment of where we are at Trecora and kind of go through the businesses. The comment I made last quarter was that with respect to Silsbee, it’s a quality business, good business model and we’ve obviously been struggling with operations. You see the benefit when we can run of that contribution during the first quarter. When we turn over to Pasadena, you got the – you got the wax business and you had the custom processing, which of course is largely from the – what’s new is the hydrogenation/distillation. We’re taking a very hard look at that. I talked last time about a slower ramp of revenue against that asset and I think we’d set the market up to expect before and I think that’s absolutely where we are right now. I like the progression on the wax side. I think we are finding that the custom processing model is a challenging model for us. There is an R&D component when you bring in these new projects to load your assets and we’re not demonstrating every competency we need to execute that as quickly as we like. So, I think frankly, Mitch, it’s something we’re spending a lot of time on working right now to set the right expectation for ourselves and for you guys as to what to expect out of custom processing.

[Mitch Sacks:]

Okay. Thank you.

[Operator:]

Thank you. And our next question comes from Bill Dezellem of Tieton. You may proceed with your question.

[Bill Dezellem:]

Thank you. I have a group of questions. The first one is just to make sure that I heard correctly on the by-products front, due to the Advanced Reformer and the high grading of that stream, you had the full benefit of that this quarter. There wasn’t any sort of a lag where you sold some by-product at a loss. Is that correct?

[Pat Quarles:]

That’s correct.

[Bill Dezellem:]

And then, I’d like to shift to the mine next. The – you said you’d hired a banker, so I guess who is that? And what’s your current view of when a sale would be announced and then closed?

[Pat Quarles:]

So, we haven’t named the banker. It’s a top bracket banker. We wanted to go with someone with kind of a global profile, because this is not – this is a bit of a unique asset, so we needed someone with the breadth to ensure that we had full coverage of marketing, when we are ready to bring this out. With respect to timing, maybe a couple of reminders here on what this thing looks like. So, we’re effectively a 33% owner in this joint stock company. Geographically the mine is located roughly 100 kilometers from the Yemeni border and it’s in development, right. So, this is – effectively went through a restart 2 years ago. So that is not the cleanest kind of asset to bring to the market and while we’re seeing – we’re really encouraged by the operational improvements and the financial results to follow, we are yet to see what the uptake is going to be for this process, but we’re going to – we’ll get it launched, I’m confident this summer and look forward to seeing kind of the types of interest we get. And frankly, it could range anywhere from single strategic to a portfolio of people interested, because it is a joint stock and we just need to let that process unfold. So, it’s hard at this point to give you a lot of clarity on exact timing, we’re running – we’re driving the process, but once we get into the marketing elements and of course we’re going to be subject to the level of interest we have in the market.

[Bill Dezellem:]

Thank you. And then you had mentioned the Guyan Gold expansion, would you please talk about the implications of that and what that could do for mine profitability in 2020?

[Pat Quarles:]

Sure. So, I think I’ve spoken in my comments, just a roughly – from here forward, it’s about $30 million of – $30 million of investment that they think they should be able to commercialize during 2020, and it has a very good IRR return expectation on it based on demonstrated minerals and the plan that they have in place to go and capture those minerals, gold and to some extent, silver. So, I would think of a project return basis north of the teens probably low-20s kind of range is what they would expect.

[Bill Dezellem:]

Great. Thank you.

[Operator:]

Thank you. And our next question comes from Chris Sakai of Singular Research. You may proceed with your question.

[Chris Sakai:]

Hi, good morning. Can you please discuss as to the reduction in capital expenditures from – in the specialty petrochemicals division and what’s normalized – going forward, what sort of capital expenditures do you plan for that division for the rest of the year?

[Sami Ahmad:]

Sure, this is Sami. So, over the last several years, we’ve been on a major capital expansion. So, when you look at last year that CapEx spending reflects really the spending on the Advanced Reformer unit. Going forward, in terms of 2019, our guidance has been CapEx of around $10 million for the year and that’s really our guidance going forward at this time.

[Pat Quarles:]

At the top level, total corporate.

[Sami Ahmad:]

Yes, not just specialty petrochemicals, but TREC consolidated.

[Chris Sakai:]

Okay, thanks, and you guys won’t break that out?

[Sami Ahmad:]

We do break it out, if you look at the – both in the earnings release and also you will see in the Q, it’s broken between the specialty petrochemicals and specialty waxes, not on a prospective basis, obviously, this is historical financials on a historical basis.

[Chris Sakai:]

Right, okay.

[Operator:]

Thank you. And I’m not showing any further questions at this time. I would now like to turn the call over to Pat Quarles for any further remarks.

[Pat Quarles:]

Thank you. Hey, thanks everybody for listening today. We greatly appreciate your patience as we strive to improve operational and financial performance. I want to thank the management team and all of our employees for their sustained efforts, which has been the key to our improved performance, especially, everyone’s commitment to safety. And on behalf of your families, I thank you guys specifically. Our goal is to continue improving our execution and deliver positive free cash flow and reduce our debt. We look forward to updating you on our progress in the coming months and we do urge you to vote your proxy in advance of our upcoming shareholder meeting on May 15. Thank you. And operator, this concludes our remarks.

[Operator:]

Thank you. Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. And you may all disconnect. Everyone have a wonderful day.