Trecora Resources
Q4 2019 Earnings Call Transcript

Published: 10 Mar 2020

[Operator:]

Good day, and welcome to Trecora Resources Fourth Quarter and Full Year 2019 Earnings Conference Call. At this time all participants are in listen-only mode. Today's conference is being recorded.And at this time, I would like to turn the call over to Jason Finkelstein, from The Piacente Group, Inc. Please go ahead, Jason.

[Jason Finkelstein:]

Thank you, operator, and good morning, everyone. Welcome to the Trecora Resources fourth quarter and full year 2019 earnings conference call. The earnings release was distributed over the wire services after the close of the financial markets yesterday afternoon.Presenting on our call today will be Pat Quarles, President and Chief Executive Officer; in addition to 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, March 10, 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, 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, Jason, and good morning to all those participating in today's call. My remarks today will center around, what we've come to do best over the past year, execute with discipline and focus. With that simple but vital framework in mind today, I’ll first review our key operational and financial outcomes, achieved over this past year. Based on management commitments made in early 2019, I'll also discuss how our results are developing in the first quarter and introduce our expectations for growth both in 2020 and into the future.Our growth will be driven by the same disciplined focus on execution and accountability, that drove our performance in 2019. But before I do, I'd like to provide an update on the sale of our stake in AMAK, and address our planning for any impacts we anticipate from COVID-19.As background for new investors on the call today, Trecora entered into an amendment to the previously announced share sale and purchase agreement with Al Masane Al Kobra Mining Company or AMAK. And certain of AMAK’s other existing shareholders, whereby Trecora will sell its entire 33% equity interest in AMAK, a noncore asset.For the amendment, the date of the closing of the transaction was extended to March 31, 2020, allowing additional time to obtain approval from the newly established Ministry of Industry and Mineral Resources in Saudi Arabia and other government authorities. We have now received approval from the ministry for the completion of the sale of this noncore asset, a critical milestone. We're working on finalizing the remaining issues to closing. We delivered a notice to the buyers scheduling closing and believe the closing of the sale process is possible by the end of the quarter.Now, let me turn to COVID-19. First we want to acknowledge the tragedies this virus has caused to individuals and families, now broadly around the world. It is still spreading and the full impact to people and the economy are not fully known. As of today, the only direct business impact, we have seen, is insolvent demand into Southeast Asia, which is a very small part of our business. However, we do anticipate that the further spread of the virus could impact our North American markets, and we're already preparing for that potential.At Trecora Resources, our number one priority is the safety of our people, the communities in which we operate and the integrity of our assets. Building off of our hurricane preparedness plans, we have augmented our contingency plans, and drilled it both sides on how to preserve our ability to safely maintain our operations and protect our people. We've also put plans in place, which allow our people in particular those involved or associated with the supply chain, to work from home if necessary, and have plans in place to further protect our operating staff if needed.Friday, we instituted a flight travel ban for the organization and cancelled our participation in a number of events, including the GE Research Conference later this week, the ROTH Conference next week, and AFPM, a Petrochemical Conference at the end of this month. We will continue to take prudent steps consistent with recommendations from the CDC and World Health Organization, as well as local authorities as this situation develops.Now let me turn back to the successes of 2019, and how that positions us for the future. At the beginning of 2019, we set our priorities and launched a disciplined process for driving shareholder value. Our focus was on improving our safety performance, enhancing the reliability of our operations, capturing productivity improvements and driving commercial excellence. It's important to briefly highlight some examples of our accomplishments here. We experienced one minor injury across our company last year, this compares to five injuries in 2018. This 80% improvement in safety is the foundation for delivering on our priorities across the company, as it is the leading indicator of our ability to control our execution.Our Advanced Reformer ran with higher reliability, allowing for the capture and improved byproduct values in the market. We've realized the savings on the re-organization in our Silsbee plant at the end of 2018, and captured further savings related to rail storage and railcar fleet reduction. These actions more than offset the cost and inflation, and significantly contributed to gross margin improvements.We also advanced commercially by renegotiating contracts with more favorable pricing, raised price escalators and improved supply terms. We also restructured our compensation program to directly align to our profit improvement priorities. We believe at the beginning of 2019, that with relentless focus and clear accountability, success along these priorities would dramatically improve our earnings, enhance our free cash flow and allow for a meaningful debt reduction. I'm pleased to say that we have delivered.Full year 2019, consolidated adjusted EBITDA from continuing operations reached the high end of our indicated range coming in at $31 million, a 50% increase over 2018. These improved year-over-year profit results translated into free cash flow growth of 100% when you exclude the benefit of the tax refund, we received in 2018. By yearend, we paid down approximately $19.2 million in debt.Results at Trecora Chemical were clearly a disappointment in 2019. This led to the write-down of a goodwill associated with that business. However, I'm pleased to report that we are now seeing performance improvement at TC. You will remember on this call last year, I reported that our Advanced Reformer in Silsbee had restarted in the first week of January, and had run reliably for the quarter. It continued to do so, throughout 2019, and does so today. Today I'm pleased to report that we operated our hydrogenation unit as TC reliably, and a maximum available rates since the first week of 2020.In our Specialty Petrochemicals products segment, which operates in Silsbee, solvents demand remained steady with growth markets helping to offset continued changes to oil sands. In December, we indicated the sales to the Canadian oil sands would most likely continue to see headwinds from the uncertainty, surrounding government mandated crude production curtailments and efficiency initiatives by our customers. While, we saw no impacts in Q1 demand from customer efficiency initiatives, we do continue to face this risk.We also provided an update in December on the impacts of the October storm event in Silsbee. The plant quickly returned to operation, however we did incur significant costs associated with the remediation of the damage. The vast majority of those costs are covered by our insurance program. Due to the safe and prompt work done on remediation, we were able to file our insurance claims prior to the end of the year. Our fourth quarter results reflect most of the benefit of our insurance coverage.As for the first quarter of 2020, the Specialty Petrochemicals demand remains solid. Results at TC, should improve significantly due both to the operation of the hydrogenation unit, and higher production in other custom processing activities. These benefits are likely going to be more than offset by maintenance spending and the pricing impacts of falling feedstock costs in the quarter, which Sami will discuss.We spent 2019, concentrating on execution within our business functions, a practice that lead to achieving key operational outcomes committed to earlier in the year. Our strategy will remain the same in 2020. We will continue focusing on improving our base businesses through exceptional execution. We can now extend this strategy into driving growth for the company.We have launched a new growth initiative that has identified meaningful opportunities to raise our profitability in both 2020, and into the future. We expressed this on Slide 9, in the presentation deck today. We have defined a portfolio of projects that touches every piece of our company. We identify growth as diversified opportunities to grow earnings in the company.We assess the value, risk, timing and necessary resources to deliver the value and the people responsible for delivering the result, we then prioritize those. As within the portfolio of projects, many will not proceed the execution. However, we believe we have line of sight to deliver approximately $4 million of value in 2020, and well over $15 million in the next two to four years.Our current opportunity portfolio spans 25 projects across South Hampton and Tricora Chemical. Each project falls into one of the following categories, new products and markets, asset an operational costs or productivity expansion. Let me give you an example of a growth initiative we've recently announced.We’ve recently signed a multiyear managed logistic service agreement with global logistics solution provider, Odyssey. Odyssey will provide us with benchmarking data on Trecora’s operations, distribution network, infrastructure and key metrics, such as total spend, vendor costs and productivity performance. Together with Odyssey, we aim to maintain our performance profile and lower costs by seamlessly integrating their technologies into our logistics infrastructure, without disruptions to service. We're anticipating 2020 run rate savings of approximately $2 million.Other projects focused on improving our feedstock supply economics, increasing the utilization of our existing manufacturing capabilities to provide new products into existing markets and driving productivity within our operations. We look forward to discussing these projects as they occur.Now, I'll turn the call over to Sami Ahmad, our Chief Financial Officer, for a more detailed discussion of our Q4 and full year results.

[Sami Ahmad:]

Thanks, Pat, and good morning to everyone. Let's take a closer look at fourth quarter and full year performance. Net loss from continuing operations in the fourth quarter was $18.7 million or $0.76 per diluted share, compared to net loss from continuing operations of $5.2 million or $0.21 per diluted share in the fourth quarter 2018. And net income from continuing operations of $1.6 million or $0.06 per diluted share in the third quarter of 2019.The net loss from continuing operations for the fourth quarter included a noncash impairment charge for goodwill and certain intangible assets of $24.2 million, in our Specialty Waxes segment, which is Trecora Chemical. For the full year 2019, the net loss from continuing operations was $12.9 million or $0.52 per diluted share. The impact of the impairment charge was $0.98 per diluted share for the fourth quarter and for the full year 2019.We evaluated our goodwill in Trecora Chemical for impairment during the fourth quarter of 2019, in connection with our annual review in accordance with ASC 350. As part of our review, we assessed 2019 operating performance and its impact on the operating cash flows of our Specialty Waxes reporting unit. We concluded based on this analysis combined with the historical underperformance of this business, that the fair value of our Specialty Waxes reporting unit was lower than its book value, including goodwill.As a result, we recorded a noncash impairment charge of $21.8 million in the fourth quarter, representing all of the goodwill allocated to this reporting unit. In addition, we also determined based on this analysis, that certain intangible assets were also impaired. Thus, we’ve recorded a noncash impairment charge of $2.4 million in the fourth quarter. These two charges combined represent the $24.2 million charge related to Trecora Chemical.Gross profit in the fourth quarter 2019 was $8.3 million, or a gross profit margin of 13.5% of total revenues. This compares to gross profit margin of 15.3% in the third quarter, and 3.6% in the fourth quarter of 2018. Compared to the third quarter, gross margin declined in the fourth quarter due to lower margins for both prime products and byproducts at South Hampton, in our Specialty Petrochemical segment.Additionally, fourth quarter results were negatively impacted by spending related to the October weather event. The total cost of the event was approximately $2 million, we received insurance proceeds of approximately $0.3 million in December, and recorded an insurance receivable of $1.1 million for anticipated additional insurance proceeds to be received in 2020.Gross profit for full year 2019 was $38.5 million, or 14.9% of total revenues compared to $27.8 million, or 9.7% of total revenues for 2018. The improved gross margins were primarily driven by lower feedstock costs, which resulted in better prime product margins, significantly higher byproduct margins, primarily due to more reliable operation of the Advanced Reformer unit, and lower labor costs as a result of the cost reduction program implemented at the Silsbee facility, in December 2018. Improved gross profit was partially offset by lower full year performance in our Specialty Waxes segment.Consolidated adjusted EBITDA from continuing operations for the fourth quarter 2019 was $6.4 million, this compared with adjusted EBITDA from continuing operations of $6.9 million for the third quarter, and $1.8 million for the fourth quarter of 2018. 2019, full year adjusted EBITDA from continuing operations was $31 million, compared with $20.2 million for 2018.Moving on to cash flow, cash flow from continuing operations for 2019 was approximately $25.6 million, as compared to $19.7 million in 2018. The increase in operating cash flow reflects substantially improved operating performance, as well as working capital management. Also, it should be noted that 2018 operating cash flow included $5.4 million in tax refunds.CapEx for 2019 was approximately $10 million compared with $25.3 million in 2018. 2019 CapEx for Specialty Petrochemical segment was $7 million and $3.1 million for the Specialty Waxes segment. For 2020, we expect total CapEx for the company to be in the $13 million to $14 million range. This increase is mainly due to spending on feedstock pipeline maintenance, as well as other infrastructure improvements.G&A expenses for the fourth quarter were $5.9 million compared to $6.4 million in the third quarter, and $5.3 million in the fourth quarter of 2018. For the full year 2019, G&A expenses were $24.4 million or about 8% higher than 2018. However, recall the 2018 G&A expense benefited from a $1.5 million reversal of certain post-retirement benefits for a former executive.Interest expense for the fourth quarter was approximately $1 million. For the full year 2019, interest expense was $5.1 million compared to $4.1 million for 2018. The increase in interest expense was mainly because we had approximately $0.7 million of capitalized interest in 2018, related to the funding for the Advanced Reformer unit construction. Our effective interest rate for the full year 2019 was 4.6%.We've reduced total consolidated debt by $19 million in 2019. In the fourth quarter alone, we reduced debt by approximately $6 million. Our yearend debt was $83 million compared to $103 million at yearend 2018. Our revolver balance was $3 million as of December 31, with availability of approximately $50 million. Consolidated cash balance was $6.1 million as of December 31.Our consolidated leverage ratio under our bank agreement was 2.20 times. From a capital allocation standpoint, our priority continues to be debt reduction, both utilizing free cash flow, as well as a portion of future proceeds from closing the AMAK sale. Our objective is to maintain a strong balance sheet with a leverage ratio in the 1.5 times to 2 times range. Our fourth quarter and 2019 effective tax rate was approximately 21%, which we expect to continue in 2020.Now, let me walk you through our business segments, starting with Specialty Petrochemicals. Specialty Petrochemicals adjusted EBITDA was $8 million for the fourth quarter of 2019, compared with $9.9 million in the third quarter. Specialty Petrochemicals volume in the fourth quarter was 20.3 million gallons, compared to 20.5 million gallons in the third quarter, and 25.1 million gallons in the fourth quarter of 2018.Prime product sales volume in the fourth quarter was 16.3 million gallons, roughly flat to the third quarter and compares to 18.7 million gallons in the fourth quarter 2019. Byproduct sales volume was 4 billion gallons in the fourth quarter, also roughly flat from the third quarter.Byproduct margins in the fourth quarter were impacted by rising feedstock costs compared to the third quarter. Benchmark natural gasoline pricing increased steadily during the course of the quarter, from $1.06 per gallon in the third quarter to $1.19 per gallon in the fourth. Margins for byproducts declined from the third quarter due to higher feedstock costs, and lower selling prices for byproducts. The selling prices for byproduct declined from the third quarter due to lower market prices for the aromatics components, that are in our byproduct stream.For the full year 2019, prime product sales volume declined approximately 1.9% from 69.4 million gallons in 2018 to 68.1 million gallons. Excluding sales to the volatile Canadian oil sands market, prime product sales increased about 4% year-over-year. Byproduct volume decreased 17.6% year-over-year to 16.7 million gallons. The improved operation of the Advanced Reformer unit, resulted in expected volumetric yield loss leading to lower volumes.Moving on to Specialty Waxes, the Specialty Waxes segment which is based at Trecora Chemical or TC facility in Pasadena, had adjusted EBITDA of $0.2 million, compared to negative adjusted EBITDA of $0.2 million in the third quarter. Specialty Waxes generated revenues of approximately $8.9 million in the fourth quarter, an 8% increase from the prior quarter. This increase was despite lower wax sales volume, which declined to £7.9 million from £8.6 million in the third quarter.Wax sales volumes were impacted by seasonal softness in demand and supply interruptions from a wax feed supplier. Wax sales demand remains solid. Custom processing revenues increased from $2.4 million in the third quarter to $2.9 million in the fourth.Looking ahead to the first quarter of 2020. Business conditions have remained consistent with the fourth quarter. However, the downward volatility in feedstock costs are likely to negatively impact our earnings by $3 million to $4 million, due both to inventory costing and price lags in our contracts. We also have higher plant maintenance expenses versus the fourth quarter of approximately $700,000. We expect to partially offset these impacts by approximately $1.5 million from improved operations at TC on the hydrogenation unit, other custom processing revenues and the absence of spending on the weather event that weren't covered by our insurance claim.Now we'd like to open the line for a question-answer-session.

[Operator:]

[Operator Instructions] Our first question comes from the line of Jon Tanwanteng from CJS Securities. Your line is now open.

[Jon Tanwanteng:]

Good morning, guys. Thank you for taking my questions and nice quarter considering.

[Sami Ahmad:]

Thank you, Jon.

[Pat Quarles:]

Thank you, Jon. Good morning.

[Jon Tanwanteng:]

Good morning. I wanted to start with the damage from the weather event. Did you get the tank back up and running as of the start of Q1? And was that cost that net difference between the insurance and what you paid reflected in the P&L or was that CapEx? And how was it adjusted out of EBITDA? Thank you.

[Pat Quarles:]

A lot of questions there, Jon. So, let me just start with the first one. So, our situation at South Hampton is we had two tanks in service for feed. They're connected through a pipeline down to the Beaumont area where we connect into our suppliers tank, and then ultimately back into the natural gasoline supply network. As of now, we haven't decided to bring the impacted tank back into service for a variety of reasons, and we've been operating just fine since October in that mode. So, right now, we do not have plans to bring it back in service.

[Sami Ahmad:]

With regard to your other questions on that, Jon, so this is not capital, it's all expenses. And the way it flowed through our fourth quarter results, where there were two pieces. So, as I mentioned, the total cost of the event was about $2 million. We got in the quarter roughly $300,000 of reimbursement related to the loss of stock the inventory. And then we also after submitting claims to the insurance company and having discussions with them, booked $1.1 million of insurance receivable.Now recognize that, there were deductibles associated with this event and that's roughly $275,000 of total deductibles. We expect to get additional proceeds sometime, hopefully, in the first-half of this year on that collect and collect on that receivable that we booked.

[Jon Tanwanteng:]

Okay. So, I'm getting the net cost to you guys that hit in Q4 was, call it 600,000?

[Sami Ahmad:]

Yes, that's approximately. Yes.

[Jon Tanwanteng:]

Okay. And that was on the income statement. Okay. And did you back that out of EBITDA was the question?

[Sami Ahmad:]

No. No, it's included in the EBITDA.

[Jon Tanwanteng:]

Okay, got it. So, kind of ex those costs you would have been $7 million roughly?

[Sami Ahmad:]

Fair.

[Jon Tanwanteng:]

Okay. Understood. Just in terms of the hydrogenation plant Pat, that sounded like you made good progress there. The max rate though, it doesn't mean max margins, I assume, where can that go eventually? What improvements need to be done there still?

[Pat Quarles:]

So, we're very disappointed in the reliability of that unit last year, obviously, it was a catalyst for the action we took on goodwill. But as we work through it, throughout the year, really, I'd say the second-half of the year with the change in both the leader and the leadership team at TC, we've been talking about how that has been coming together well, we are starting to see indications of them performing well as a team and working through, kind of fundamental improvement of operability and operations. And that’s finally coming together for that unit at the beginning of this year.And I chose my words carefully, because I guess it available maximum available capacity. Listen, we've got that -- that units got a lot of capability, both volumetrically and as we build either our own use of the unit to support our product business, or make it available for custom processing activities. I think we'll see more contribution going forward, but things came together well for us in the first quarter.In the Wax market, there have been other supply disruptions and not in the polyethylene wax, more in the FT wax market. That presented particularly strong opportunity for us to capture a lot of volume, and that's what we did. We expect that volume to continue for us as we go into 2Q, but we'll see how market conditions and opportunities with customers play out, but we feel a lot better about it.

[Jon Tanwanteng:]

Okay, great. And just a general, macro, I guess question for you guys. I know you mentioned COVID-19. But what are your customers saying right now in terms of their volume needs, in light of potential for full-blown recession heading forwards? Have they said anything to you, especially in light of the Saudi decision yesterday? And what that means for both your customer and markets and your supply chains going forward?

[Pat Quarles:]

Yes, fair. I think as you'd appreciate it, we're trying to stay very close to customers over the last several weeks. And the bit of the bombshell that came on Saturday with respect to oil, it's still playing its way through our customers, businesses and what that might mean downstream. And of course, it's early days to get that feedback. What I would say is, to-date, no one is citing a change in their demand that they attribute to COVID-19.So, I mentioned earlier, we did see in Asia, and in Asia, because that's where this thing started. Supply chains and really economics of things like polyethylene were getting upset early. Basically, as the market came out of the Chinese New Year and was expecting to ramp up production to meet the return to the economy, of course, that didn't happen. Polyethylene values got really distressed. And one or more of our customers in that region as a result turned down their production, so that was the one demand impact we can put our finger on.Yes, the truth is, at this point, I think we're all monitoring it and I wouldn't be surprised by volatility and impacts on demand, but we just haven't seen it yet. And so it's really more about planning and contingencies at this point for us. I can tell you, if I reflect back on this issue, the nearest thing related to, I guess, is the financial crisis of '08-'09. Operationally, our industry does things a lot differently than we did back then. We don't carry inventories like we used to.So, I recall back then units were just getting shut down because, people just start working out their inventories. I don't think we're in that kind of a mode these days, but, we're going to monitor it.

[Jon Tanwanteng:]

Okay, fair enough. And just on the supply side for you. I know the natural gasoline prices are usually correlated to crude. Have you seen that impact yet in the input costs? And where that take you in light of Sami’s comments on the lagging effect?

[Pat Quarles:]

Yes. No, absolutely. Yesterday, we saw natural gasoline non-TET closed at about $0.68 a gallon.

[Sami Ahmad:]

Yes, $0.67-$0.68 a gallon.

[Pat Quarles:]

So he walked you through kind of what the pricing was previously through the first quarter. So we do have EBITDA risk on those pricing impacts as they flow through. I'll remind you its cash positive, right? Effectively, we take cash off the balance sheet when prices come down and underlying margin over time is preserved. But yes, we do face EBITDA risk with this...

[Jon Tanwanteng:]

Right, but that should normalize over Q2, right, as it goes through.

[Pat Quarles:]

That's right.

[Jon Tanwanteng:]

Okay, got it. Excuse me. Just wanted to walk through the value you expect to realize both from growth projects and cost savings in 2020. Am I reading that correctly, you are expecting a $6 million improvement overall in terms of new projects and in terms of the agreement with Odyssey?

[Pat Quarles:]

So, Odyssey is part of that growth program, I used that as an example. So, that's part of the $4 million.

[Jon Tanwanteng:]

Okay. And is that aside from any growth expectations you have? Or is that the sum total of EBITDA improvement you're expecting over the year?

[Pat Quarles:]

No. So, what we're saying is across a variety of projects that we have line of sight to, we think this year we'll be able to add $4 million of profit value, through the contribution from those projects. And Odyssey is the one that we've announced, right? And we've executed that contract. So, I wanted to speak about that one.

[Jon Tanwanteng:]

Okay. And these are specific projects, not the normal course of growth in the existing business? Or is it inclusive of everything?

[Pat Quarles:]

Yes, that's right. So, to the extent, like say, polyiso end use, which is growing very nicely, I think last year over 6%. That's just, we put that as part of our base business. But effectively, the way we're approaching Jon is, if it requires us to identify it, resource it and do something different, then that's a project for us. And then we test it, can it add value and is it worth the resource in order to deliver it.

[Jon Tanwanteng:]

Okay, got it. So, we should think of this as the way you phrase it last year, you had an EBIT upgrade from year-to-year. And then you gave a range of what you expected from improvements in certain areas. So this would be the plus $4 million and the market would be plus or minus on top of that, I guess. Is that the correct way to put it?

[Pat Quarles:]

That's right.

[Jon Tanwanteng:]

Okay. Great. No, that's very helpful. Thank you. And then just, Sami or Pat, what is the expected final closing date for a AMAK?

[Sami Ahmad:]

So, what I said was, we've got the ministry approval now, we're going through certain other closed processes. We think it's reasonable to expect us to close by the end of the quarter. We have to recognize with all the turmoil in the markets right now. I never say it's without risk. But, we're focused on closing by the end of the quarter.

[Jon Tanwanteng:]

Okay, great. Thank you guys for the color.

[Sami Ahmad:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Joseph Reagor from ROTH Capital Partners. Your line is now open.

[Joseph Reagor:]

Hi, guys. Thanks for taking the questions.

[Pat Quarles:]

Hey, Joe.

[Sami Ahmad:]

Good morning, Joe.

[Joseph Reagor:]

So, a lot of things that got touched on probably by the last caller. But we used to get these updates about potential new customers in the polyethylene space, et cetera. Do you guys have any expectations of adding new customers in the next 12 to 24 months?

[Pat Quarles:]

We do and we are. So, we've talked about kind of the way we communicated in the past. It was important to me that for these purposes, we demonstrate how we're approaching it, the breadth of what we're approaching, and the likely value we can get out of it. So we've got notionally 25 projects that we're working today. We'll go through prioritization of those projects, resource them appropriately, set accountability for those projects, and then talk about their results as they're delivered.So, Odyssey is done with respect to the contract that we signed in the transition to that 3PL. We have other projects that do include penetration of new markets, production of new products and so forth. But, we'll talk about those really as they come to market.

[Joseph Reagor:]

Okay. And then just trying to get a little bit more clarity on some of the comments, Sami. How would that -- he was talking about some impact due to pricing adjustments. Was Sami speaking just to Q1? Was that supposed to be, Q1, Q2 kind of overlap since we're already in March? How do I basically space that out in the model?

[Sami Ahmad:]

Yes. I mean, I was speaking, really to Q1, because that's where we are almost at the end of Q1. We don't have a whole lot of visibility in terms of feedstock trends into Q2. And the point that I was making Joe was really, when you see this volatility, there is a hit to earnings, as Pat said, when it's downward, trending like it has been over the last number of weeks. It's good for cash flow, working capital, but it's a hit to earnings. And I tried to frame that out with the $3 million to $4 million impact. And the reasons behind it.

[Pat Quarles:]

Yes. If you think about it, we entered the year with feedstock at a $1.15, no, one of those was it, sorry. $1.21 -- no. $1.25?

[Sami Ahmad:]

Yes.

[Pat Quarles:]

And we're down to 68 today. So, I mean, it's almost a 50% reduction in feed costs. That's the kind of volatility that we're facing as we exit the quarter.

[Sami Ahmad:]

And it's also the slope of that curve, Joe. It hasn't been steady, where you can kind of smooth it out, it's been very sharp and that has an impact as well.

[Joseph Reagor:]

Okay. All right. Thanks. Everything else was already touched on.

[Sami Ahmad:]

Okay, thank you.

[Pat Quarles:]

Thanks, Joe. Sorry about Roth conference, we're not attending.

[Joseph Reagor:]

No problem.

[Operator:]

Thank you. Our next question comes from the line of Sarkis Sherbetchyan from Grand Slam -- I mean, from B. Riley FBR. Your line is now open.

[Sarkis Sherbetchyan:]

Thank you. This is Sarkis from B. Riley FBR.

[Sami Ahmad:]

Good morning, Sarkis.

[Sarkis Sherbetchyan:]

Good morning. I just want to touch on Trecora Chemical, you know it looks like for the year, the business did about, call it mid-30s $30 million to almost $40 million in topline and that's if I annualize the 4Q number. And EBITDA is really just barely kind of eking out to the positive side. Like, what does it take to turn this business around? And what are the plans your team has put in place to drive a more meaningful EBITDA contribution from that segment?

[Pat Quarles:]

Yes, I'd say it's three or four things. So, on the Wax business, we had and we've mentioned this throughout the quarters. We had supplier issues that disrupted our feedstock. We're tied to just a few suppliers of this byproduct, that was disappointing. So, we've put in place -- frankly, these are very big companies, we sit and review with them, the impacts on us and there are opportunities to improve it.We think we have seen their improvement plans where that reliability should be better. It has been better in the first quarter, so that helps. A little bit, out of our control, but that's what we're doing there. We mostly focus on what we can control.So in our, what I'd call, our legacy custom processing activities, where we've had ongoing relationships with key customers for many years. We did an assessment of the profitability of those against really what threshold profitability needs to be, to continue those activities. We negotiated and agreed on increases across that portfolio that range anywhere from 20% to over 50% increases.If you look at that business, status quo across 2020 based on those improvements, that's about $500,000 of profit improvement, that we would expect to those renegotiations, all things being equal. We also have operability, reliability plans in place where even those existing customers, we believe they can bring us more business, if we improve our reliability, and we have those plans in place.And then on the new assets that haven't run well at all, obviously, we talked a lot about hydrogenation. We've really been methodical in bringing up our capabilities to run that unit in a reliable way and we were very frustrated by the successes of that last year. But as I said earlier, I think we're starting to get our arms around it. We brought the unit up in the beginning of January for the production of product that feeds our wax business, and did that successfully through January.And then in February, turned over to a custom processing project and have run as hard as we can run through today, and would expect to continue, certainly through the end of the first quarter on that project. And that's reasonable profitability. I'll never say, it's the profitability we want. Our customers say it's ample, but we're always in those discussions. But, I think we'll see a nice step up from TC, as we get into 2020 now.

[Sami Ahmad:]

As well as cost management.

[Pat Quarles:]

As well as cost management, that's right. We've got a variety of productivity programs there just in overall cost to the site.

[Sarkis Sherbetchyan:]

Got it. Thanks for that. And if I can kind of speak to some of the projects like, are these kind of one-time in nature? Do you think there's kind of more base business to be built? And then as you layer on more revenues, the incremental margin should be much better just kind of help us think about that.

[Pat Quarles:]

Yes. So we have one customer, they have brought us a project last year relatively complicated, frankly. And we were able to produce it, but we weren't able to produce it efficiently. And it's a great example of what we can do when we identify something that's structural, important to both sides and we can work together on it. And basically with this customer, our approach has been kind of open book, if you will. We've actually invited one of their engineers into our site to help drive improved operability, as well as put our own teams on improved operability. I guess, we've probably more than doubled the cycle time on that particular piece of business.

[Sami Ahmad:]

Reduced the cycle time.

[Pat Quarles:]

Reduced the cycle time, right. Yes, doubled our productivity. For that particular project, this is a Specialty Chemical for the customer that is part of their long-term, kind of core growth plan. So we think it's something that can be with us for a long time. And we still see further volumetric growth opportunities. We're under contract multiyear. And then, can we drive more value on a unit basis, perhaps that'll be a conversation with the customer. But, I get a lot of encouragement from it, because we're building our credibility with them, while we're improving kind of underlying financial sustainability of the site.That's really the model that we want to have, as we approach these projects. We don't jump for kind of a one off project. It just takes too much work and resource just to do something for a short-term opportunity. So, the nature of custom processing is that, you have a fair amount of commitment to resource upfront, and whether we pay for it or the customer pays for it, it's expensive. So you need it to be more sustainable and that's typically the nature of what we have in there.

[Sarkis Sherbetchyan:]

Good, thanks for that. And I agree. I'll hop back into the queue.

[Sami Ahmad:]

Okay, thanks Sarkis.

[Operator:]

Thank you. Our next question comes from the line of Mitch Sacks from Grand Slam. Your line is now open.

[Mitch Sacks:]

Hey guys, I have some questions around the TC. So you talked a bit about wax sales picking up in the first quarter, and I know you've been supply constrained. Can you give us a little more framework around wax volume that that you can produce and where you see demand going?

[Pat Quarles:]

So, I always characterize our wax business is not really demand constrained, and what I mean by that is, the nature of our cost position, our feed puts us in a kind of unique mix or niche rather, where we push on the performance side of the on purpose producers, but our cost position is differential. So we're basically, to the extent we get supply, we're going to be able to sell it and make reasonable margin. But, that's a limited supply base, we've been talking about that for a long time.So last year, we started the development of the purchase of -- on purpose feedstocks, that can allow us to augment that supply. It's higher cost, so we do expect margins to be diluted, yet cash contribution to go up as we continue to grow. We were talking last year about qualifications. So all the qualifications are complete now. We are aligned with kind of the major hot melt adhesive buyers as customers, and are conducting business with them today. So, I think that's going in the right direction.

[Sami Ahmad:]

Yes, that's right.

[Mitch Sacks:]

Okay. And so just to characterize that then. In terms of the on purpose supply of feedstock, assuming that with these new quality controlled customers, you should be able to increase volumes, I would assume markedly at that point then?

[Pat Quarles:]

So we see -- and this isn't for 100% of our wax portfolio, but where we're selling in the hot melts, which is the biggest piece, biggest end use. We're seeing our ability to augment that supply by 15% to 25% depending on the product.

[Mitch Sacks:]

Okay. And then with respect to the hydrogenation distillation unit, previous management team when they had done the original CapEx, it's spent over $20 million, and there was an estimate of potential EBITDA increase of $6 million to $8 million. Do you still feel that that asset can contribute that type of cash flow and if so, when do we think as a management team that that we can get to those levels?

[Pat Quarles:]

Yes. I don't have line of sight to $6 million to $8 million today, Mitch. It's kind of early days now that we can credibly go to the market and say this is something we can do. And to be clear, hydrogenation distillation are two different units right? So what we're doing, what we're talking about now is hydrogenation, that's the one that's fully loaded. It's going to be a nice step up in contribution, as I said, beginning in first quarter and continue on. And this is not a few hundred thousand dollars, I mean, I'm talking about something in million plus range of step up.And then we have other projects, and it's part of our growth plan to begin to load the distillation unit as well. So I can't declare yet on that old basis, if we're going to get to $6 million to $8 million. I'm kind of turning, we'll start talking about is how we think we'll be able to provide profitability through our overall growth program, and that's kind of the $4 million that we're talking about this year.

[Mitch Sacks:]

And final question has to do with the polyethylene customers, it was a question earlier about adding new customers. The major polyethylene plants, they're still under construction here in North America. When do you -- are any of those expected to come online this year? And if so, do you expect that plant to be a customer?

[Pat Quarles:]

They're not any coming on this year. So we're kind of getting ready for the second wave of investment on the Gulf Coast or in North America, I guess, more specifically. So, I think the next significant plant is Shale.

[Sami Ahmad:]

2022.

[Pat Quarles:]

2022.

[Sami Ahmad:]

Yes. So, this year, next year there are no major start-ups.

[Pat Quarles:]

Yes, not in North America.

[Mitch Sacks:]

Okay. Thank you.

[Sami Ahmad:]

Thank you, Mitch.

[Pat Quarles:]

Thanks Mitch.

[Operator:]

Thank you. Our next question comes from the line of Kurt Caramanidis from Carl M Hennig Inc. Your line is now open.

[Kurt Caramanidis:]

Hi, guys. Any way you can lock in this historically low feedstock costs or is there a risk in doing that, thinking it's going to go lower?

[Pat Quarles:]

We’re not going to hedge feedstocks, just to be clear. It's a very risky game. We don't have the kind of balance sheet, that'd be appropriate for us to take positions on hydrocarbon. If you think about the way our business is structured, we manage earnings risk through essentially two-thirds of our portfolio being tied to feedstock on a formula basis. And so while we have near-term volatility on earnings, we manage the sustainability of earnings through that sales contract portfolio. And that's really how we manage risk and we're not going to take positions on feedstock.

[Kurt Caramanidis:]

Okay, fair enough. What could happen to not close the AMAK sale? What are the variables out there now that they've agreed to it?

[Pat Quarles:]

Yes. I don't want to kind of speculate on what could get into the way. But I think, listen, at the end of the day, we know that markets are in turmoil right now because of the fears and so forth associated COVID-19. We're focused on the process, the next step in that process was communicating and establish closing date, which we've done now with the buyers. And, we're pushing towards close by the end of the quarter.

[Kurt Caramanidis:]

Okay, great. Thank you.

[Sami Ahmad:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Jon Tanwanteng from CJS. Your line is now open.

[Pat Quarles:]

Jon, you're back.

[Jon Tanwanteng:]

Yes, just a quick follow-up. I wanted to ask about the oil sands, just remind us relatively what magnitude of business you did in 2019. And I think you mentioned that they didn't pursue efficiency upgrades as you thought they might have. So I'm wondering, if that's in line for this year? And also, given where crude prices are, if they're going to cut production, or is there a mandate that helps them do otherwise?

[Pat Quarles:]

Yes. So oil sands last year about 8% of our prime product sales volume. And just to be clear, what I said was, we've been aware of these efficiency projects over a year ago, I mean, in this call last year, I had mentioned that this is something we were aware of. We thought they were more imminent at the end of the year, heading into this year. I'd mentioned them when I spoke to investors in early December.What I'll tell you is that, we haven't had the impact of those yet. But I'm not telling you that we don't think they're still pursuing them. I think we're monitoring it really month-by-month at this point. But as of today, no impacts.

[Jon Tanwanteng:]

Okay. And on the production side?

[Pat Quarles:]

I'm sorry, I missed the production question.

[Jon Tanwanteng:]

Just, how you think that trends given the shock to crude.

[Pat Quarles:]

Oh, boy, I don't know. I think, we all know the oil sands it's a hard -- those are hard units to ramp up and down because of -- they need to sustain the heat and the production rate out of those tar sands. So, as developed, they don't typically move them up and down too much. So I don't know, if we'll see a short-term change or not. But listen, there's no doubt, the economics of all this is challenged if Saudi is going to pump what 12.3 million barrels a day in April. So that's still yet to play through.

[Jon Tanwanteng:]

Is it -- and this is getting into conjunction, but is it safe to assume that if prices go down enough, it just makes sense to take them offline and do the efficiency projects at the same time. And how are you planning for that?

[Pat Quarles:]

Well, I mean, no, I don't think that's the reality. Our customers are the big guys, it's not the smaller producers up there. I think but it's going to kind of sustain their production through these periods, I think it would be our customers. And with respect to these efficiency projects, I almost view them as independent. It's just candidly, it's good business for them, right? They need just like we do. They run productivity plans. And if they can identify an opportunity to save some money they should do that. And we think that's their intention, they just haven't done it yet.

[Jon Tanwanteng:]

Okay. Thank you.

[Operator:]

Thank you. 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, Gigi. Just, I want to thank all of you for your interest in Trecora and participating on the call today. While we're proud of the improvements we accomplished in '19, and confident in our ability to further improve in 2020. We're clearly entering a period of tremendous uncertainty due to the outbreak of COVID-19. We enter it today with a significantly strengthened balance sheet and ample liquidity to deal with the volatility, which is likely to continue.Our priority will be the safety of our people and the communities in which we work, and the integrity of our assets. I believe we've taken the appropriate steps to-date to protect each, and we'll be managing our continuity plans daily, as circumstances develop. And again, let me thank you for your participation. Thanks, operator. We're done.

[Sami Ahmad:]

Thank you.

[Operator:]

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