Trecora Resources
Q1 2017 Earnings Call Transcript

Published: 5 May 2017

[Operator:]

Good day and welcome to the Trecora Resources First Quarter 2017 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Laurie Little. Please go ahead, madam.

[Laurie Little:]

Thank you very much and good afternoon, everyone. Welcome to Trecora's first quarter 2017 earnings conference call. The earnings release was distributed over the wire services after the close of the financial markets earlier today. Presenting on our call today will be Simon Upfill-Brown, President and Chief Executive Officer; and Sami Ahmad, Chief Financial Officer; Connie Cook, Vice President of Accounting and Compliance will be available during the Q&A session. Following management's prepared remarks, there will be a question-and-answer session. Before we get started, I would like to review the Safe Harbor statement, which is found on slide 2. 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 on management's beliefs and expectations only as of the date of this conference call, May 4, 2017. 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 Annual Report on the Form 10-K for the year ended December 31, 2016. This webcast is accompanied by a slide presentation that is available on the company's website at www.trecora.com. At this time, I'd like to turn the call over to Trecora's President and CEO, Simon Upfill-Brown.

[Simon Upfill-Brown:]

Thanks Laurie, and thanks to everyone joining the call this afternoon. Slide 3, provides a quick overview. We are off to a solid start in 2017 highlighted by year-over-year revenue growth, record quarterly wax sales of Trecora Chemical, and continued progress on our transformational capital projects. We continue to make significant strides in preparing the company for long-term growth and profitability and to enable us to fully participate in the resurgence of the North American chemical industry. During the first quarter, total revenues increased 6.4% compared to the first quarter of last year, as a result of higher petrochemical prices and strong revenue growth of TC. Prime product sales were impacted by lower volumes from our Canadian oil sands customers but excluding the impact on volume from that particular customer, our prime product volume grew a healthy 7.6% year-over-year. The rest of our 10-K market is showing positive sign. Additionally, the advance reformer which will produce a significantly higher value byproduct stream compared with our existing reformer is slated to start up in the fourth quarter. At Trecora Chemical, we achieved yet another quarter of record wax sales and volume while maintaining the highest quality and purity standards in the industry. The increased capabilities provided by B plant continue to support the growth of TC in generating new revenues for custom processing. We continue to make progress on ramping up our hydrogenation distillation unit which will improve our capabilities, capacity, and overall profitability; and we have already begun to generate revenues from the distillation towers. I'll provide a more detailed update on the progress of our capital project shortly. Finally, with AMAK zinc and copper plant having restarted its processing operations at the end of 2016 after a full year of extensive renovation work, the new team is fully occupied in ramping up production and improving recoveries. Operations are performing well and on-schedule and the process plant is showing a steadily improving trend. Slide 4 shows a quarterly breakdown of total prime and byproduct volumes along with deferred sales of Southampton resources. Sami will discuss this in more detail but you will note that produced offtake from our Canadian oil sands customer impacted both prime and international sales volumes. Prime product volume is to roll our other customers were up over 7%. Just a point to note on our large Canadian oil sands customer, we now expect 2017 volumes to be down 49% from 2015 levels which were already 18% lower than 2014 numbers. We expect a major North American polyethylene customer to start up their large expansion in the third quarter and the second Canadian oil sands customer to start up in nearly 2018. We are shipping the final set of ISO containers to the Asian polyethylene customer for their first fill order. The total volume will be over 800,000 gallons. We continue to work on completing a long-term contract with this new customer. Petrochemical capacity utilization was 41% compared with 56% in the first quarter of 2016 and 43% in the fourth quarter of 2016. That's the utilization as you know is based on 11,000 barrels per day of fresh feed pressure for both years. To be able to generate over $8 million of EBITDA at 41% asset utilization bodes well for the future, given the operating leverage of the plant. Turning to slide 5 for a little bit, we had no major refurbishment in the first quarter. A&C training were both completed in 2016. The extra D train capacity provides significant flexibility to operations and A Train continues to be used for trials and the production of new products. We are sold 80,000 gallons of the first of the these so far this year and believe we can make this very high margin product even more cost effective throughout Also on A train, we have good potential for orders for this product from other North American customers and are working with two Asian customers one of wish has requested a sample and the other has ordered a knife to contain a load. We are waiting to hear from a customer in commercial use of the second product which they try out extremely successfully we continue to strive to find an economic pathway to make the third product. Fortunately, option still remains. We are optimistic about our advanced reform unit starting up in the fourth quarter. As you know this project will significantly enhance the value of our byproduct stream, as well as provide a secure and reliable source of hydrogen for Southampton's high purity pentad [ph] production and custom processing campaigns. This week we were given word on some potential delays on the critical part item; a specifically designed feed effluent heat exchanger. Our engineers are fully engaged to ensure we can mitigate the impact of this potential delay. We will keep you informed of our progress in this regard. On slide 6 you can see the progress on the advance reformer project here in Soulsby [ph]. All the heaters are in place and being painted and the six reactors are in place, although a little difficult to see behind the heaters. The motor control center which holds all the electrical gear is the white and blue building on the right hand side. The steel being erected towards the middle foreground is to hold the large feed effluent exchanger I just mentioned; as well as the thin fans for cooling. Ignoring progress since the last who we showed you two months ago. Slide 7 presents an early view of progress made at Trecora Chemical. TC generated another record of quarterly wax sells as this point business has been on an upward trajectory over recent quarters. First quarter revenue increased 19% year-over-year and 21% on a sequential basis. Excluding the final 1.7 million non-USP he earned in the first quarter of 2016, year-over-year revenue at TC was 30%. Our new wax products continue to be well received by the market. We ship quantities of our new product to new local customers and three others working on approval. Sales volume for the high margin, hot melted adhesives and PCV lubricants more than doubled sequentially in the quarter. Internationally, we continue to see strong whack sales in Europe and Latin America over one million pounds went to our European distributor in the quarter. Our custom pursing capabilities continue to generate significant entrants interest. We made 13 proposals for potential projects, held three successful trials, and signed four new contracts, all in the first quarter alone. We generated approximately one million of custom processing serving revenue from people out in the first quarter which is more than the 2,016 full year revenue from the facility. We continue to expect to add approximately $5 million in annual EBITDA from our people out assets during the 2018 timeframe. Turning to an update on our hydrogenation distillation unit, distillation is now online and generating revenue. As you would expect with each round we do, we find a few bugs but thus far these have all been easily corrected. The hydrogenation section is slated to begin commissioning later this quarter. Our total CapEx spent on this project is now expected to be around $23 million but all indications are that continues to hold up. We still anticipate this major expansion project will position us to generate approximately $7 million incremental EBITDA per year starting in 2018. Slide 8 shows on the right a photo taken this week of our hydrogenation distillation unit, great progress compared to the photo on the left taken 12 months ago. Two months ago when we showed you a similar photo to the one of the right, the reactors were lying on the ground; they are now in place and piping is being installed. Once installation is complete and all electrical hookups are made we will be able to start commissioning, catalyst loading, etcetera. One important part which I'm not sure we have mentioned before is that the structure has been set up so that additional reactors and another distillation tower can be easily installed without additional structural steel. This sets us well for inexpensive capacity expansions in the future. Turning to slide 9 for an update on AMAK. Since AMAK started this process operations in December 2016, the new team has continued work on improving operations. Although averaging about a third of targeted throughput for the mill in the quarter, production was on a solid upward trend. Most unplanned downtime to-date has been caused by processed water quality issues which now appear to have been fully corrected with additional enhancement plan. Although there were no copper or zinc concentrate sales in the period, some inventory was built to support and we expect concentrate sales in the second quarter. There were sales of gold and silver doré that were produced earlier. Guyan exploration results as well as exploration results extending the life of the copper and zinc mine assets are expected in coming quarters. Additional drilling is expected to start in the third quarter adjacent to Guyan which has a very similar geology. The precious metal circuit is starting up now with start commissioning also in progress and gold and silver smelting is planned for the third quarter. We continue to see significant value in opposition with AMAK and are pleased with the progress made since the restart. Now I'll turn the call over to our Chief Financial Officer, Sami Ahmad, for a more detailed update on the quarterly results.

[Sami Ahmad:]

Thank you Simon, and good afternoon to everyone. If I could get your attention to slide number 10, financial overview, this slide provides a brief financial overview of the first quarter of 2017. The total revenue in the first quarter was $55.5 million, 6.4% increase year-over-year. Revenue at Southampton increased approximately 4.1% primarily due to increase in the average sales price of 23% offset by a decrease in volume of 14.9%. Comp product sales volumes Southampton resources were down slightly compared to the fourth quarter due lower volumes to the major Canadian oil sands customer as Simon mentioned earlier. Revenue at Trecora Chemical was record high $9.7 million representing an increase of 18.8% year-over-year, primarily driven by a 43% growth in wax sales. Compared to the fourth quarter, TCs revenues increased $1.6 million or 20% due to stronger custom processing and wax revenue. Net income for the first quarter was $1.5 million or $0.06 per diluted share compared with net income of $7.2 million or $0.29 per diluted share for the first quarter of 2016 and then net loss of $0.8 million or $0.03 per diluted share for the fourth quarter of 2016. The net income for the first quarter includes equity losses of AMAK with an estimated after-tax impact of $0.03 per diluted share compared to equity and earnings of $0.14 per diluted share in the first quarter of last year which if you recall benefited from a gain on settlement with the former operator. Adjusted EBITDA which excludes equity in impact of AMAK in share-based compensation was $7.4 million for the first quarter of 2017 or a 13.3% of total revenues compared with $9.2 million in the first quarter of 2016 or 17.6% of total revenues and $5.7 million in the fourth quarter of 2016 or 10.6% of total revenues. Moving to slide 11 which is petrochemical revenue and volume summary. This slide illustrates petrochemical revenue and sales volume summary by quarter over the last several years broken out by prime product volumes and byproduct volumes. In the first quarter prime products volumes decreased by about 5% year-over-year and by about 4% from the fourth quarter. Prime products volume was 13.9 million gallons in the first quarter compared with 14.6 million gallons in first quarter of 2016 and 14.4 million gallons in fourth quarter of 2016. Byproduct volumes were down about 40% year-over-year and 13% sequentially. Byproduct volume was 3.4 million gallons in the first quarter compared with 3.9 million gallons in the fourth quarter and 5.6 million gallons a year ago. In the first quarter of this year average sales prices for byproducts increased 56% year-over-year and 16% sequentially. In the first quarter byproducts had a positive margin above feed of approximately $0.08 per gallon, recall that in the fourth quarter byproducts had a negative margin of about $0.07 per gallon resulting in a favorable margin sequential swing of $0.15 per gallon. This increase in byproduct margin along with generally lower maintenance expenses at Southampton contributed to EBITDA margin expansion from the fourth quarter. As we've said before and Simon mentioned earlier we anticipate a significant margin uplift for the byproducts once our new advance reformer unit comes online in the fourth quarter. We move onto slide number 12, petrochemical feed cost summary. Petrochemical feedstock prices were higher than fourth quarter and were also significantly higher in first quarter of 2016. As you know, our feedstock at Southampton resources is natural gasoline from Mount Bellevue. In this chart we show the market price for natural gasoline and/or delivered cost of feedstock on a relative basis over the past two years. The spread reflects the delivery cost from our suppliers. Average feedstock cost per gallon increase 34.1% compared to the first quarter of 2016 and 6% compared to the fourth quarter of 2016. During the first quarter of 2017 feedstock costs were generally stable. As you know, about 60% of our prime product sales is based on formula pricing tied to the prior month average feedstock price. Margins in the first quarter were negatively impacted by financial penalties that we incurred due to feedstock purchases below minimal amounts as prescribed by our agreement with our suppliers. Moving to slide 13, TC wax volumes and revenues. Trecora Chemical continue to generate strong and steady volume revenue growth, especially wax during the first quarter of 2017. Wax revenue in the first quarter was up about 43% from a year ago and higher by approximately 13% sequentially. We achieved another record quarterly wax sales volumes of approximately £10.7 million, up more than 50% compared to the year ago period. Sales mix of wax products also continues to improve at TC as we sell more premium margin hot adhesive and PVC lubricant products as Simon discussed earlier. We had record sales volumes lines of these products in the first quarter. Moving to slide 14, custom processing overview. Slide 14 presents an overview of our custom processing revenues at Southampton and at TC. Custom processing at Southampton was $1.5 million The decline in custom processing revenue from the fourth quarter is due to the completion of the construction of the Anellotech project at the end of last year. Custom processing at TC was $3.2 million, a decrease of about 12% compared to the first quarter of 2016 but up 38% sequentially. Recall in the first quarter of 2016, custom processing fees included a final $1.7 million payment for non-used fees. Excluding this payment, custom processing revenues at TC were up 50% year-over-year. Custom processing growth at TC is attributable to a broad set of customers including the benefit of the B-plant acquisition which added nearly $1 million of revenues in the first quarter. Finally a few additional comments on the financial position of the company. As of March 31, 2017, our total equality which is cash plus availability under our revolver was approximately $30 million compared with $38 million at year end. Long-term debt including the current portion but executing loan fees was $84.8 million as of March 31 compared to $84 million at year and. During the first quarter we also executed an amendment to our credit agreement that relaxes some of the financial covenants for a one year period. This amendment gives us additional flexibility as we complete our capital projects and they become revenue generating later in 2017 and into 2018. Capital expenditures for the quarter were $13.9 million and depreciation and amortization for the quarter was $2.6 million. Finally, a summary of our capital projects is provided for you in the appendix including the our capital estimate and also the estimated annual EBITDA impact. This concludes the financial review and with that I'll turn the call back over to Simon.

[Simon Upfill-Brown:]

Thanks Sami. To recap on slide 15, we are pleased with the progress made in the first quarter of 2017. As evidenced by prime product sales growth, excluding Canadian oil sands, record quarterly sales at Trecora Chemical and nearing completion of the last two transformational capital projects. With a foundation in place for growth, we are optimistic regarding our future prospects which are reinforced by expanding petrochemical production capacity in the Gulf Coast including stronger demand from polyethylene manufacturers starting in the second half of 2017 and beyond. Looking ahead, there still remains much work to be done. The advance reformer unit is expected to start up in late 2017, and once operational, we'll significantly increase the value of our byproduct. We expect the hydrogenation unit at Trecora Chemical to ramp up later this quarter, and combined with the distillation unit which is already started to generate revenues, we believe the expanded custom purchasing work from this capital project will add approximately $7 million to EBITDA levels on an annualized basis starting in 2018. Finally at AMAK, with a new team working on upgrading operations, we now expect copper and zinc concentrate sales in the second quarter and continued improvement in both mill throughput, recoveries, and the precious metal circuit. We remain focused on opportunistically monetizing our investment in 2018 in order to maximize value for our shareholders. I would like to conclude my prepared remarks by thanking our employees for their hard work and dedication. We have great people working for this company. A big thank you too to our shareholders for their continued support. This concludes our prepared remarks. At this time I'd like to ask Isaac [ph] to open a call for Q&A.

[Operator:]

Absolutely, thank you. [Operator Instructions] And we'll take our first question from John [ph] with CJS Securities. Please go ahead.

[Unidentified Analyst:]

Good afternoon, gentlemen. Thank you for taking my questions. As we think about the ramps and volume as newer existing customers start to take more products this year; are you going to be able to overcome the volume penalties from your supplier? And if so, what kind of impact would that have?

[Simon Upfill-Brown:]

Well, the volume penalties are sort of under confidentiality with our agreements with our suppliers but as volumes grow, obviously the penalties are reduced. And we're working very hard to find ways with our suppliers to minimize the impact of these penalties. So I think impact will decline over the next rest of this year and next year John, but I can't give you an exact indication of what those will be.

[Unidentified Analyst:]

Okay, fair enough. And the decline in the oil sands expectations this year, is that any different from the expectations you had when you were reported Q4?

[Simon Upfill-Brown:]

Perhaps a little bit more than we were expecting but they've continued to improve efficiencies, they're running a little bit slower this year than last year. They're not running at full capacity this year, that's what they are indicating to us. And they have also announced a reduction in inventories which obviously delays some shipments in the short-term, so maybe it's a little bit exacerbated from what we were thinking in the fourth quarter.

[Unidentified Analyst:]

Got it, that's helpful. And then just finally on the volume front; as [indiscernible] contracts; do you expect to see a step down in volume for this customers? I would assume that a long-term contract wouldn't have as much as the first.

[Simon Upfill-Brown:]

Well, I mean I think annual demand could be as much as that; you know, we never really know for sure, it could be more, could be a little bit less. But you know, it all depends on how quickly they get started and how fast things ramp up and all that; and they've got to agree to giving us a long-term contract. But because this is a fairly long pipeline to get the product there; the sales to that customer -- at least a bulk of them have not actually shown up in sales because they are -- they will be interfered sales because we can only recognize revenue or export sales when it is actually delivered to the customer.

[Unidentified Analyst:]

Got it. And most of those will show up in Q2.

[Simon Upfill-Brown:]

Yes.

[Unidentified Analyst:]

Got it. Okay, and a question for Sami; SG&A had a step-up from Q4 -- what went into that and how should we think of that run rate going forward?

[Sami Ahmad:]

So in Q4 the numbers there were impacted by a reversal of bonus accrual and that's the biggest change; single item change from Q4 to Q1. I think the way to think about going forward on a run rate basis is to use the Q1 number.

[Unidentified Analyst:]

Okay, perfect. And then finally, just any update on the potential for an AMAK IPO or divestiture or exit next year; how are you thinking about that either in terms of likelihood or timing?

[Sami Ahmad:]

I think all indications are that 2018 is the best time to do this John because we will have at least a couple of quarters we're optimistic about profitability from AMAK, we'll have all the exploration work done, metal prices are expected to stay good through 2018, at least copper and zinc. So you know, I think 2018 is an optimal time for both and IPO for all AMAK shareholders; and also the potential for us to find somebody else who might want to buy us out.

[Unidentified Analyst:]

Great, that's helpful. Thank you very much.

[Operator:]

And we'll take our next question from Joseph Reagor with ROTH Capital Partners. Please go ahead.

[Joseph Reagor:]

Good afternoon guys and thanks for taking questions. Couple of items; I guess the first one, can you remind us the magnitude impact -- rough volume level impact of the polyethylene customer in Q3 and the Q1 oil sands 2018 customer add-on; like -- what are we thinking about maybe in a percentage basis impact here; is it a 5% bump, is it 10% from those two combined?

[Sami Ahmad:]

These things are always very, very hard to predict, John. A large polyethylene customer just started - these guys used anything from 600,000 gallons a year to 1.2 million gallons a year. So we would expect the new polyethylene guide to be somewhere around in that order. I think we've described what can impact the demand for polyethylene. It's the catalyst system they're using, it's the [indiscernible] system, it's the ambiance temperature where the plant is located, it's the efficiency of their solvent recovery system - all those things can impact demand. But that's what we believe should be coming out of this particular facility and we're expecting to get well above our total market share volumes from that facility. The Canadian oil sands customer, our existing customers started with very high consumption rates while they debugged their system and called an operating property and all that kind of things. These volumes could be as high as our existing Canadian oil sands customer. We think we'll start with the same kind of market share. We got out of the first guy, but we certainly believe we will get a significant chunk of that volume. That's about I think as about as much as I can say.

[Joseph Reagor:]

Okay, fair enough. You mentioned that you were informed of a potential delay on the key item, I believe the reformer briefly. It sounded like maybe this is something that you just found out about. Any additional color you can give us as far as if there is a delay, what could it mean for you guys? I know you're still targeting Q4. Are we talking a week or two delay, are we talking a six-month delay? What's the magnitude of potential impact?

[Simon Upfill-Brown:]

I don't think it's anything near your later number. It's probably after order of a month or so. We don't know if there will be any delay either. You're absolutely right. We heard about that this week from the guy who's fabricating the unit for us. We're actually going to go see them tomorrow to see what the real course is here and what they can do to help us. We don't really know that yet, but worst case, we're not expecting it to push the startup beyond the fourth quarter of this year.

[Joseph Reagor:]

Okay.

[Simon Upfill-Brown:]

It's a little bit later in the fourth quarter, but I don't think it's going to be too major. But it's brand spanking new news. We have to really find out what the issues are. If there's a way that we can actually start up without this heat exchange and debug and get catalyst loaded and all those kind of things. In which case, the delay would be minimum.

[Joseph Reagor:]

Okay, fair enough. And then maybe lastly at the mine, you mentioned 61,000 tons, about third of expectation. Was that due to just normal fine-tuning of things as you start [indiscernible]? And have you guys reached normal run rates now?

[Simon Upfill-Brown:]

We've certainly hit normal run rates at times. It hasn't been consistent, but it's getting better every day, Joe. The initial really for most of the first quarter, we were experiencing - as I mentioned - process water quality issues. We have to obviously recycle water in Saudi just because there isn't a lot of it around and our water purification system was not working properly. That issue is now being fixed and as I mentioned, we're putting in some other additional safe cards both building an additional settling on various other things to ensure that we get the lumps out of the water. Because if you recycle lumps in the system, you blind filters and you get all those kind of issues. It was a real battle for the guys during the first quarter. But certainly, our target for this facility from the beginning has been roughly 700,000 or more a year and you can see why we're saying we're about less than a third of that rate. We have run at 2,000 tons a day. We think we can get to that number on a consistent basis over the next few months.

[Joseph Reagor:]

Okay. And just following up on that, have you seen the improvement in cost that you expected with the new operators from Turkey?

[Simon Upfill-Brown:]

Yes. Those certainly seem to be realistic.

[Joseph Reagor:]

Okay. Thanks. I'll turn it over.

[Sami Ahmad:]

Thank you, Joe.

[Operator:]

And we'll take our next question from Sarkis Sherbetchyan with B. Riley & Company. Please go ahead.

[Sarkis Sherbetchyan:]

Good afternoon. First question here on the by-product volumes and margins during the quarter. Can you maybe provide some commentary on the current environment for both the by-product volumes and what you're seeing from those margins and then just your thoughts going forward?

[Simon Upfill-Brown:]

I think our guys have been running the plant on a very economic basis focused on meeting pentane supply, not running too hard on pentane volumes, building inventories and as a result, having to sell some excess hexanes and things like that. I think our plant guys have been able and a lot of this is driven by the fact that we have so much capacity and flexibility in operations. We can minimize the production of the by-product volumes. The pricing was helped because we do currently produce some benzene and benzene prices have been good. We were able to sell the by-products at better prices than we have more recently. And the high benzene prices build well for us when the advanced reformer starts up because we make much more benzene when that's happening. It's a very good indication as far as we're concerned. It's very hard to tell until we have the advanced reformer, I think we're going to always see this swingness in positive feed margin for by-products and negative feed margin for by-products.

[Sarkis Sherbetchyan:]

Understood. I guess to your comments, going into the peak selling season here in the summer months, do you expect maybe to be able to manage that how your guys are running the plants for the by-products? Or do you think that just given the volumes that you would potentially need to produce, you get some of the negative effect of it?

[Simon Upfill-Brown:]

I think our by-product percentages as a percentage of total volume have been particularly low. I doubt we'll be able to maintain that kind of level in the second and third quarters, Sarkis.

[Sarkis Sherbetchyan:]

Okay. That's helpful. Moving onto TC. It looks like the sales growth again pretty good from the wax side of the business and then obviously once you adjust out for last years, one-time payment, pretty good also from the custom processing side of TC. Despite the nice growth and the revenues year-over-year, it looks like your EBITDA from that piece was off. Can you maybe talk about why that is? Maybe there are some costing build up on that side and maybe if you can help us understand what those costs are?

[Simon Upfill-Brown:]

Yes. Certainly. I think we've spoken about this before. We have done paid account to be ready for the startup of all this additional equipment. There have been additional training costs associated with the hydrogenation and distillation starting up. And we have to do a lot of that stuff on overtime. Overtime is expensive as you well-know. I think there has been a cost issue as well as the fact that we're not quite over the hump on the distillation and hydrogenation project and we're not fully up to what we think we can get out of B plant. But everything is heading so well in the right direction. I really think that's a short-term issue as wax margin improve and custom processing revenues get better.

[Sarkis Sherbetchyan:]

Assuming that the distillation and hydrogenation towers are set up and running, I think you mentioned for 2018 an incremental $7 million at the midpoint in EBITDA. That's kind of inclusive of the cost that you've been realizing for that piece of the business. Right?

[Simon Upfill-Brown:]

Yes.

[Sami Ahmad:]

Yes.

[Sarkis Sherbetchyan:]

Okay. So with respect to B Plant, it sounds like it's about a million a quarter run rate. Is that the right way to think about it today?

[Simon Upfill-Brown:]

Oh, I think we can do better than that on B Plant.

[Sami Ahmad:]

Our guidance on B Plant is four to six with a mid-0.5...

[Simon Upfill-Brown:]

EBITDA.

[Sami Ahmad:]

Yes, EBITDA.

[Simon Upfill-Brown:]

You got costs behind that.

[Sami Ahmad:]

Yes, you get cost.

[Sarkis Sherbetchyan:]

Yes. So, what I'm really trying to get to is despite you thinking that volumes for call to petrochemicals out of the business, maybe starting to take up towards the back half of '17 and then beyond, we should really start to see Trecora chemical deliver given all the capital projects. Is that the right way to think about it?

[Simon Upfill-Brown:]

Yes.

[Sami Ahmad:]

That's our expectation. Yes.

[Simon Upfill-Brown:]

That's what we're expecting.

[Sarkis Sherbetchyan:]

Fair enough. And then just thinking about the G&A cost, Sami, I think you mentioned for the other caller the $6 million change run rate. Is that kind of the right level to think about here on a go-forward basis?

[Sami Ahmad:]

The first quarter is roughly $6.2 million?

[Sarkis Sherbetchyan:]

Yes.

[Sami Ahmad:]

Yes. I think that's probably a reasonable number, Connie?

[Connie Cook:]

I would agree.

[Sami Ahmad:]

Yes.

[Simon Upfill-Brown:]

Sami has joined us since last year. Most of it, Sami, as far as I'm concerned.

[Sami Ahmad:]

I wish that would [indiscernible].

[Sarkis Sherbetchyan:]

Good. And then just thinking about the potential for the 2018 monetization. Whether it's a sale of some sorts, or is there an IPO process. Two questions on that front. Have you thought about a tax optimized way of proceeding with the potential windfall there? And then next, would you be able to potentially reduce some of the debt on the balance sheet? Or your plans for capital allocation if that pulls there?

[Simon Upfill-Brown:]

We've been looking at the tax implications on time. I don't know if you have some comment on that, Sami. You're the most recent...

[Sami Ahmad:]

Yes. We've had very preliminary conversations with tax consultants. We're going to take our base case assumption is that there is going to be a U.S. tax on it. The mount, the rate and whether we can credit against any Saudi tax. That's TBD, but as a base case assumption, you ought to assume a U.S. tax. And in terms of the future use of cash flow, I think Simon, you've been pretty clear as sort of all of the above?

[Simon Upfill-Brown:]

Yes. It's certainly some debt pay down that's potential, some payment to shareholders perhaps and then there's also the consideration provided we can do it right of additional acquisitions `. We'll always look to believe that no acquisition is better than the bad one.

[Sarkis Sherbetchyan:]

Fair enough. Thanks for taking the questions, guys and good luck.

[Simon Upfill-Brown:]

Thanks, Sarkis.

[Sami Ahmad:]

Thank you.

[Simon Upfill-Brown:]

Thank you.

[Operator:]

And we'll take our next question from Greg Eisen with Singular Research. Please go ahead.

[Greg Eisen:]

Thanks. Good afternoon.

[Simon Upfill-Brown:]

Hi, Greg.

[Greg Eisen:]

I've used your comments unfortunately during the presentation about the cost you incurred this quarter. I guess the other purchases of your product on the take-a-pay cost that you incurred this quarter. Could you repeat what you said about that?

[Sami Ahmad:]

If you're referring to the penalties related to feedstock supply in Southampton, we didn't disclose a number. That agreement is confidential, but we did have penalties in the first quarter. Our expectation is volumes recover that penalty amount of those penalties will get reduced in second quarter and subsequent quarter.

[Simon Upfill-Brown:]

And we're working on ways to try to mitigate how we have to pay those penalties and all those kind of things, Greg.

[Sami Ahmad:]

Yes. We're working with the supplier.

[Simon Upfill-Brown:]

We can't say much more than that.

[Greg Eisen:]

Actually, one last question about the feedstock purchase requirements. How long of period of time are you committed to this level of feedstock purchases from the supplier and when would you be ready to I guess negotiate a new feedstock purchase contract?

[Simon Upfill-Brown:]

Our feedstock contract is fairly long term. Once again, it's confidential, but the reason it was long term is that the customer had to install a pipeline in order to hook up to our pipeline. In order to keep the cost recovery on that investment to a minimum, we signed a fairly long term contract. But expectations are that our volumes will get us above where the penalties kick in in the not too distant future and there are some other potential savings on how we get material into the supplier's line and so on that will also reduce the impact of these penalties. We don't think that they will be too significant too long, but they are painful in the short term.

[Greg Eisen:]

Yes. That's Southampton resources.

[Simon Upfill-Brown:]

Yes.

[Greg Eisen:]

Is it fair to say that if you eliminated all these penalties because of greater volumes, it would be material to your gross profit margin percentage?

[Sami Ahmad:]

Yes.

[Greg Eisen:]

Okay. It would be material. Okay, it answers that. I guess my only other question right now is you mentioned the overhead number. First quarter run rate is being a reasonable number to use going forward for the rest of the year as a range within that range. But just looking at that, if I annualize that, it seems to be a pretty significant mid-teens percentage increase over last year. Could you run by me again what the components of that increase, what categories of expenses make up that increase?

[Connie Cook:]

Yes. We've heard the significant increase at both facilities for property taxes. At Southampton, we had some ` on the D Train construction that are expiring. Probably taxes are going up on that and then over at TC, we also had fairly significant increase because of the B Plant acquisition. Property taxes are up, we're expecting officer compensation to be up because of the accrual for the annual bonus. Those are the two big things. Last year and even in the first quarter, we had quite a few accounting fee expenses because of the restatements that we made, so our accounting fees were up. We don't expect that to continue, but property taxes and officer compensation will continue throughout the year.

[Greg Eisen:]

And when you talk about accruals or bonusing, is the accrual made on a quarterly basis and updated each quarter?

[Connie Cook:]

Yes.

[Greg Eisen:]

Okay. So it's true at the end of each quarter for these [indiscernible].

[Connie Cook:]

I assume that we're going to get it until about the middle of the year and then we take a really good look at it and make it a termination then.

[Greg Eisen:]

Got it. Got it.

[Connie Cook:]

So whether we need to keep accruing or we need to start reversing.

[Greg Eisen:]

Okay.

[Simon Upfill-Brown:]

And last year we've actually stopped accruing and reversed. That's why it was quite a lot low in the second half of the year.

[Greg Eisen:]

Understood. Okay, thanks for answering my question.

[Simon Upfill-Brown:]

Thank you, Greg.

[Operator:]

And we'll take our next question from Bill Dezellem with Tieton Capital Management. Please go ahead.

[Bill Dezellem:]

Thank you. I'd actually like to take the reverse of Greg's question, relative to the $1.7 million of non-used fee revenue that you receive which I presume is similar to a take-your-pay and then hoping you could discuss that favorable fee if you would, please.

[Simon Upfill-Brown:]

Bill, this is a payment that we had from a customer that we invested some capital. Actually the previous owners at TC invested some capital in the facility in order to do some custom processing for them. Very intelligently when they invested this capital, they insisted that if the customer did not run at the facility, they would pay a fee and that fee was roughly $1.7 million a year. And so at the end of the contract year, each year, we would recognize $1.6 million, $1.7 million revenue for the non-used fees. And that occurred in the first quarter of 2015, we got that that payment from the customer; in fact they paid throughout the year but because it was subject to what volume could be produced in the contract year we really only recognized it from accounting purposes in the final -- as a final quota of the contract which happen to be March 31. So in the first quarter of 2015 and in the first quarter of 2016, the two years we've earned at TC we recognized that $1.7 million revenue. That contract ended, the final year of that contract was March 31, 2016. So we did not get that $1.7 million this year. Now we're actually working with those customer to do some more telling for them this year and so it could be the relationship continues to be a pretty good one but that arrangement no longer exists.

[Bill Dezellem:]

Simon, I have to apologize for being asleep at the wheel because I thought you did receive that in this quarter. So…

[Simon Upfill-Brown:]

No, no, no; it was -- our point was that if we took it out of the first quarter of last year the revenue improvements were much better than we were actually stating, so we're probably confused here a little bit there.

[Bill Dezellem:]

Clearly my mistake, but let's continue down this path. Have you improved your relationship with that customer or has that customer changed their formulation or had more success with their sales, whatever is relevant to them picking up their volume with you specific to that equipment or what's the prognosis or a future opportunity there?

[Simon Upfill-Brown:]

Well, what happened I don't know four years ago, five years ago, whenever the customer had some fairly significant operational difficulties in their own facility and their customers said to them, look if you want to continue to supply us, you need to have an alternate production source. And that's when they came to you to [indiscernible] and said, okay, can you guys make this stuff, we will invest a little bit of money and show me how to do it and so that's how the relationship started. Then the customer was able to fix the production issues, debottleneck their production and they no longer needed our services. Now as it turns out, they are having a little bit more trouble in production and volumes of growth and that kind of thing, and so they are coming back to us now. So we're optimistic that we will be -- I mean, we've always maintained a very good relationship with them, that's been always totally transparent. I mean they didn't like paying us for not using us but it was part of the deal and so you know, they did it because they had their own capacity and we're able to -- obviously, it helps them to run their own capacity flat out because the incremental cost of extra pounds are pretty low. So they paid us very happily and we've maintained a very strong relationship with them and now it turns out they're living a little bit hand-to-mouth with customers and so they're coming back to us. So that's really how the relationship has gone.

[Bill Dezellem:]

Thank you. And then I would like to dive into the issue of the low byproducts as a percentage of your volume. Is that as a result of higher BGU content or higher value content of your feedstock stream? And as a result, you're ending up with less byproduct or is there something else going on in that makes that an unsustainable phenomenon?

[Simon Upfill-Brown:]

Well, there are a number of things that drive our byproduct volumes. It is one of the feed -- how the feed is made up; although over the last year or two years that hasn't changed much. So the way the feed is, it consists of pentanes and hexanes, obviously that can drive by product. It's how efficiently we're able to run the plant with -- you know, if we spike having to make suddenly very large volumes of pentane and then at the same time we make some extra hexane which we cannot sell; we have to sell those as byproducts and so on and so on. So there is a whole lot of things that impacted the byproduct volume production. What we have been able to do you particularly in the most recent quarter is run very efficiently on our pentane production, not make a lot of excess hexanes and as a result our byproducts are down. But I think depending on what happens with pentane volumes, spikes in demand and all that kind of thing because we don't have space for a lot of inventory here, that could change. So that's why we were saying that we don't think that the very low rates of byproduct production that we achieved in the first quarter are likely to be sustainable in the second and third quarter.

[Bill Dezellem:]

Thank you.

[Operator:]

And we'll take our next question from [indiscernible]. Please go ahead.

[Unidentified Analyst:]

Good afternoon. Was the Asian customer discussed last quarter and this quarter's results?

[Simon Upfill-Brown:]

Pardon?

[Unidentified Analyst:]

The Asian customer that you guys talked about…

[Simon Upfill-Brown:]

Yes, we mentioned it last quarter, we mentioned supplying the first portions of their first full order, and we're just shipping this month actually, the final I think containers of that first full order.

[Unidentified Analyst:]

Got you. So Q1 volumes incorporate the first portion of that?

[Simon Upfill-Brown:]

Actually not, I don't think there are any sales there yet. Might there be Connie?

[Connie Cook:]

I think we shipped [indiscernible] at the end of the year?

[Simon Upfill-Brown:]

No, not at the end of the year. It all was shipping in March.

[Unidentified Analyst:]

Got you. So excluded.

[Simon Upfill-Brown:]

No, it wouldn't have got there yet.

[Unidentified Analyst:]

Okay. And congrats on the custom processing new contracts; are those going to start in Q2 in this year?

[Simon Upfill-Brown:]

Yes. I mean I think we might have actually got a little bit of revenue from a couple of them in the first quarter but you know, most of the volume should come in the second quarter.

[Unidentified Analyst:]

And in terms of the magnitude, is it similar to your historical custom processing contracts?

[Simon Upfill-Brown:]

You know, these things vary so much in size and fees per pound, you know what -- when you're selling time, your focus is on the revenue generated per hour. So it can vary a lot, some of them are relatively small and some of them are very significant and multi-year; so they are all over the place, all over the place.

[Unidentified Analyst:]

Got you. And in terms of distillation-hydrogenation, I understand the combined unit would generate $6 million to $8 million of EBITDA in 2018 but not at the distillation unit is online by itself. Can there be applicable EBITDA number to the distillation unit by itself or it's kind of one of those binary things where you need both?

[Simon Upfill-Brown:]

No, we can. We can run them individually but I think the way we sort of guided on this is as a combination. I think that the unit combined really comes into its own with both sides of that hydrogenation-distillation unit all running. And so we should get some benefit from that in 2017 but what we are saying is it will take us to 2018 to get the full $6 million to $8 million of additionally EBITDA.

[Unidentified Analyst:]

Got you. But we should still incorporate some benefit and I guess it's upto us to incorporate that percentage or what amount?

[Simon Upfill-Brown:]

Correct. And then you know, we should have the hydrogenation at least ramping up during the second half of this year too.

[Unidentified Analyst:]

Okay. Got you. Alright, great. Thank you for answering my questions.

[Simon Upfill-Brown:]

Thank you very much.

[Operator:]

And this concludes today's question-and-answer session. Simon, I'll turn the conference back to you for any additional or closing remarks.

[Simon Upfill-Brown:]

Thank you, Isaac. And thank you all for listening in today. We always greatly appreciate your interest. We look forward to updating you on progress in the coming months and I hope to see some of you at the B.Riley conference and other conferences later in the next this month and following months. Thank you all very much.

[Operator:]

And this concludes today's call. Thank you for your participation. You may now disconnect.