Trecora Resources
Q2 2017 Earnings Call Transcript

Published: 5 Aug 2017

[Operator:]

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

[Laurie Little:]

Thank you, Vicki, and good afternoon, everyone. Welcome to Trecora Resources Second Quarter 2017 Earnings Conference Call. The earnings release was distributed over the wire services after the close of financial market earlier today. Presenting on our call 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 for the Q&A session, which will follow management's prepared remarks. Before we get started, I'd like to review the Safe Harbor statement, which is found on Slide two. 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, August 3, 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 Form 10-K for the year ended December 31, 2016, and subsequent quarterly reports on Form 10-Q. This webcast is accompanied by a slide presentation and 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. We are pleased to report strong operational second quarter results driven by an increase in prime product volume, improved performance in Trecora Chemical and continued progress on our transformational capital projects. As we have been saying for some time, we expect 2017 to be a transition year, especially the first half of the year, but the progress we are making both with our base operations and the near completion of our capital projects will position the company for long term growth and profitability starting in 2018 and to enable us to fully participate in the resurgence of the North American chemical industry. During the second quarter, total revenues grew 27% compared to the second quarter of last year as a result of an increase in petrochemical product sales, higher petrochemical prices and strong revenue growth at TC. More importantly, while our reported EPS was $0.03 per diluted share, this was significantly impacted by an equity loss attributable to the AMAK operations of $3.3 million or $0.09 per diluted share. Excluding this impact, adjusted EPS was approximately $0.12 per diluted share for the second quarter, showing significant quarterly improvement over the first quarter of 2017. At South Hampton, we recorded solid prime product sales volumes up 20% year-over-year, demonstrating ample demand for our products and ahead of major new demand projects, including a second Canadian oil sands customer that is expected to start up in early 2018 and new polyethylene plants in North America. Additionally, the advanced Reformer, which will produce a significantly higher-value byproduct stream compared with our existing Reformer, is on track to start up production in the fourth quarter. Trecora Chemical continued to progress in the right direction. We achieved near record quarterly wax sales consistent with Q1 levels, 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 and waxes. Additionally, the distillation unit delivered $500,000 in revenues in the second quarter, and we are starting up our first project on the hydrogenation unit. We expect additional revenues from this expansion in the third and fourth quarters. Finally, AMAK continued to make improvements in the quarter as they made upgrades on personnel and improved operations. The mine shipped a significant increase in concentrate volumes to port from first quarter levels. I will provide a more thorough update on AMAK shortly, but overall, operations are performing well and on schedule, and the process plant is showing a steadily improving trend. Slide four shows the quarterly breakdown of total, prime and byproduct volumes along with deferred sales at South Hampton. As I noted earlier our earned revenue growth is driven primarily by an increase in quarterly prime product volume of 20% from the year-ago period. International sales volume in the first half were impacted by reduced offtake at our Canadian oil sands customer but were up slightly in the second quarter year-over-year. We continue to expect the second Canadian oil sands customer to start up in early 2018 and expect the major North American PE customer to start up their large expansion in the third quarter. Deferred sales, you will recall these are export sales that have shipped but not yet arrived at their destination, showed a significant jump in the quarter as a result of large volumes on their way to a customer in Asia. So these volumes, we have absorbed freight expenses but not yet recorded sales revenue. The plant is starting up now, and we are optimistic about follow-up orders in the near future. Another PE plant in Asia that has approved our product will start up a new unit using Metallocene [ph] catalyst in November of this year. We have potential to supply them as well. Petrochemical capacity utilization was 56% compared with 45% in the second quarter of 2016 and 41% in the first quarter of 2017. Capacity utilization is based on 11,000 barrels per day of fresh feed for both years. Operating leverage at South Hampton remains extremely positive, given our ability to generate nearly $9 million of EBITDA at relatively low asset utilization levels. Turning to Slide five for an additional update at South Hampton. The plant at Silsbee ran well throughout the quarter as the extra D Train capacity allowed for significant flexibility and reliability to operations. Meanwhile, A Train continues to be used for both trials and the production of new products. We sold 63,000 gallons of the first of these new products in the second quarter and 143,000 gallons so far this year and anticipate additional export interest both with trials underway at two customers in Asia. We have now proven we can make this product more cost effectively using raw materials that are available on site. We continue to move forward with the second and third products currently in development, while a fourth product is on hold for now. Our advanced Reformer unit remains on schedule for start up in the fourth quarter. This is a critical capital project that will significantly enhance the value of our byproduct stream and provide a secure and reliable source of hydrogen for South Hampton's high purity pentane production and custom processing campaigns. As a result of continued cost increases for large-diameter special metallurgy piping, significant labor cost increases and the new inclusion of capitalized interest; we now project total CapEx of $58 million on this project, $6 million above our previous estimate at the end of the first quarter. The skilled labor market is extremely tight in our area, and major companies are increasing rates by 20% or more. We are also being forced to make more use of subcontractors with a resultant additional overhead cost. We expect initial contribution of about $6 million to $7 million to annualized EBITDA in 2018, followed by an additional $6 million to $7 million in annualized EBITDA by 2022, with a total contribution of approximately $13 million of annualized EBITDA over this time frame. Slide six shows considerable progress on the advanced Reformer unit, and you can see what has occurred in the last three months. Foreground center, compressor grounds and heat exchangers have been installed. Foreground left, sometimes are in place, and as our guard base, in the background, behind the stabilizer column. All concrete has been poured. Turning to an update on Trecora Chemical on Slide seven. Trecora Chemical almost matched its record quarterly wax sales from the first quarter and, in total, had a 32% increase of total revenues compared to the year-ago period. We are pleased with the progress made at TC and anticipate future growth, particularly in custom processing as we continue to ramp up our capital projects. We continue to see strong growth in wax sales both domestically and in export sales as polyethylene wax sales volumes increased by approximately 9%. We also continue to make substantial progress in our target market segments. Volumes to hot melt adhesives customers were 58% above first quarter 2017 numbers, and we signed an exclusivity agreement for two of our products with a large PVC lubricant supplier in the U.S. with significant potential annual volumes. In the coatings market, a new customer purchased eight truckloads of wax in the second quarter for use in road marking paint. Our European distributor had another record quarter, and we saw continued interest from customers in Asia. Our custom processing capability has also generated significant interest. We made 19 proposals for potential projects, held one successful trial and signed four new contracts during the second quarter. We produced approximately $2.2 million of revenue from B Plant in the first half of the year, including a 32% increase in quarterly custom processing revenues sequentially as we do process some wax product in B Plant. We continue to expect to add approximately $5 million per year in annual EBITDA from our B Plant assets by the end of 2018. Turning to an update on our hydrogenation and distillation unit. The distillation column came online smoothly and generated approximately $500,000 in custom processing revenues in the quarter. We have also been able to use the column to upgrade some TC byproducts, thereby allowing higher sales prices. The hydrogenation unit is starting up as we speak on the first custom processing project there. As mentioned earlier about the advanced Reformer, significant labor cost increases from additional stainless fittings and piping resulted in a $2 million increase of total CapEx spend from our prior prediction from this project, which is now expected to total $25 million. When this type of equipment has to be ran at pressures approaching 2,000 psi, that's 2,000 pounds per square inch, skillful welding capabilities in particular are required. We still anticipate that this major expansion project will position us to generate an annual run rate of approximately $7 million in incremental EBITDA by the end of 2018. Slide eight for an updated photo on hydrogenation/distillation unit. The photo on the left, from one year ago, shows steel rebar in place only. In just 12 months, foundations were completed, steel erected and all equipment installed, as shown on the right. The unit is now fully available to generate revenue. Turning to Slide nine for an update on AMAK. Although there were no sales in the quarter, AMAK continues to make significant progress. 54% more copper concentrate was shipped to the port in the second quarter 2017 than in the first quarter 2017, and zinc concentrate to the port was up 60% quarter-on-quarter. Although AMAK is not at target throughputs and not withstanding ongoing water quality and minor plant reliability issues, throughput rates, concentrate quality and recoveries continue to steadily improve. The large loss in the second quarter was driven primarily by no sales, higher-than-previous quarter amortization and depreciation due to higher production rates and inventory write-downs due to higher absorbed costs due to lower-than-budget throughput rates. Guyan exploration results and mineral resources update have been completed. Additional drilling is expected to start in the third quarter in Al Aqiq, adjacent to Guyan, which has very similar geology. Drilling to extend the life of the copper and zinc mine has been a little slow to start but has picked up and is now proceeding well. We expect results from this exploration effort in the fourth quarter. SART is running, and there is a possibility SART concentrate cake might be saleable as is. AMAK continue to work on optimizing the leeching process for precious metals, and gold and silver smelting is planned for the third quarter. Finally, a new Australian process plant manager started at the site during the second quarter as well as a new South African underground manager who came on board in July. AMAK now has an extremely talented leadership team in place. We look forward to showing solid financial results from the progress being made in the coming quarters. 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, everyone. Slide 10 provides a brief financial summary of our results. Net income for the second quarter was $0.8 million or $0.03 per diluted share compared with net income of $10.3 million or $0.41 per diluted share for the second quarter of 2016, a net income of $1.5 million or $0.06 per diluted share for the first quarter of 2017. Net income for the second quarter includes equity and losses of AMAK, with an estimated after-tax impact of $0.09 per diluted share. In the year-ago period, net income included a combination of bargain purchase gain on the acquisition of B Plant of $11.5 million and equity losses for AMAK of $1 million, resulting in an estimated after-tax impact of $0.28 per diluted share the second quarter of last year. Adjusted EPS for the second quarter of 2017 was $0.12 per share compared with $0.09 per share for the first quarter and $0.13 per share in the second quarter of 2016. As Simon mentioned earlier, adjusted EPS excludes the earnings impact of AMAK and also excludes the earnings impact of the bargain purchase gain in the second quarter of 2016. Based from the fact that our quarterly results can realize some volatility, we believe that looking at our results with a longer-term view is a more prudent way to measure progress. With that in mind, for the first half of 2017, adjusted EPS was $0.20 per share compared with $0.29 per share for the same period last year. The reconciliation of adjusted EPS is provided in the appendix in the back. Adjusted EBITDA, which excludes equity impact of AMAK and also excludes bargain purchase gain and share based compensation expense, was $8.4 million for the second quarter of 2017 or 13.5% of total revenues compared with $8.9 million in the second quarter of 2016 or 18.1% of total revenues and $7.4 million in the first quarter of 2017 or 13.3% of total revenues. Adjusted EBITDA margin declined from 17.8% for the first six months of last year to 13.4% for the first six months of 2017. Market compression at South Hampton Resources contributes to the decline in adjusted EBITDA margin in the first six months of this year compared to the first six months of last year. Our average feedstock costs were about 26% higher compared to last year, while our average selling price increased 14%. The increase in feedstock cost compressed margins for the spot or nonformula portion of our prime product sales. These are sales which don't have pricing formulas tied to feedstock cost, while about 50% to 60% of our prime product sales are formula based and tied to feedstock pricing. Margins in South Hampton were also negatively impacted by lower byproduct margins and higher operating cost. Operating cost increased 4.8% in the first half of 2017 compared to the same period last year, largely due to nearly 73% increase in fuel gas cost. We also saw an increase in transportation costs. This was partially offset by good cost control in other areas of operations, including labor, maintenance and supplies. Adjusted EBITDA margin was also impacted by lower EBITDA margin at Trecora Chemical, which you may recall benefited from $1.6 million of non-use fees in the first half of 2016. As of June 30, our total liquidity, which is cash plus availability under our revolver, was approximately $21 million compared with $38 million at December 31, 2016. Long-term debt, including current portion but excluding loan fees, was $89.8 million as of June 30 compared to $84 million at year-end. Revolver borrowings increased $21 million -- increased to $21 million from $9 million at year-end 2016, although we were able to fund most of our CapEx with cash from operations. Subsequent to the quarter end, we executed amendment to our credit agreement that increase the revolving facility from $40 million to $60 million. Should it be required, this additional capacity will ensure that we have sufficient liquidity to help fund the remaining CapEx as well as any other working capital needs. Slide 11 illustrates petrochemical revenue and sales volume summary by quarter broken out by prime product volumes and product -- and byproduct lines. In the second quarter, prime product volumes increased by about 20% year-over-year and about 17% from the first quarter. Prime product volumes were 16.3 million gallons in Q2 compared with 13.6 million gallons in the second quarter of 2016 and 13.9 million gallons in the first quarter of 2017. For the first half of 2017, prime product volumes were up a good 7% compared to same period a year ago despite, as Simon mentioned lower volumes to a Canadian oil sands customer compared to a year ago. We saw good growth across various industrial markets, including polyethylene, expandable polystyrene and polyurethane foams. Due to the need to produce additional prime products to support the increase in sales, our byproduct volumes increased 32.9% year-over-year and 32.4% sequentially. Byproduct volume was 4.5 million gallons in the second quarter compared with 3.4 million gallons in the first quarter and 3.4 million gallons a year ago. In the second quarter, byproduct margin above feed declined to essentially zero compared with the first quarter when margin was about $0.08 per gallon positive. The decline was due to a combination of lower average sales price for byproducts and higher feed cost. As we've said before, we anticipate significant margin uplift for the byproducts once our new advanced Reformer unit comes online in the fourth quarter. Turning to Slide 12. Petrochemical feedstock prices were significantly higher in the second quarter of 2017 as compared to second quarter of 2016. In this chart, we show the market price of natural gasoline and the processed feedstock cost on a relative basis. The spread reflects the delivery cost from our suppliers. Average feedstock cost per gallon increased 18.2% compared to second quarter of 2016 and declined about 4% compared to the first quarter of 2017. The impact of penalty payments to our supplier for purchases below the contractual minimum was not material in the second quarter of 2017. Moving to Slide 13. Wax revenues at Trecora Chemical were up 26% year-over-year and flat on a sequential basis. Wax sales volumes of approximately 9.6 million pounds were up 9% compared to the year-ago period. Sales volumes were up about 27% in the first half of 2017 compared to the same period a year ago, while wax revenue grew 34%. We continue to see strong growth in wax sales both domestically and export sales to Latin America and Europe and made substantial progress in our target market segments. Wax volumes -- wax sales volumes declined in Q2 compared with Q1 as we continue to improve our sales mix and sold less of the lower-priced waxes. This improved our average selling price by about 10%. Slide 14 presents an overview of our custom processing revenues at both South Hampton and TC. Custom processing at South Hampton was $2.1 million compared with $2.4 million in the year-ago period. The decrease in custom processing revenue was due to a decrease in capital reimbursements from our processing customer. Excluding these reimbursements, custom processing revenues at South Hampton were up 14.7% from the second quarter of 2016. Custom processing at TC was $3 million, an increase of about 46% compared to the same period a year ago. Custom processing growth at TC was primarily due to revenue generated by feed plant of approximately $1 million and contributions of $0.5 million from the new distillation unit. 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, solid progress in the second quarter of 2017 was highlighted by strong growth in prime product sales volumes, solid sales levels for our wax products at Trecora Chemical, steadily improving operations at AMAK and the near completion of our transformational capital projects. On a sequential basis, adjusted EBITDA trended in the positive direction, up $1 million from the first quarter levels. Moving forward, we believe there are numerous opportunities within the industry and catalysts within the company to continue to fuel future growth. We expect to capitalize on the expanding petrochemical production capacity on the Gulf Coast and stronger demand from polyethylene manufacturers starting in the second half of 2017 and beyond through our solid operations and enhanced production capabilities. We also look forward to the startup of the second Canadian oil sands mining customer in early 2018. At SHR, as a result of the D Train expansion, we now have sufficient pentane capacity to really maintain our share of market growth and build on these opportunities for the foreseeable future. The advanced Reformer unit, which is expected to start up in late 2017 will significantly increase the value of our byproducts and be a catalyst for both revenue and gross margin growth. With the startup of our hydrogenation unit at TC and a full pipeline of custom processing projects, we anticipate additional contributions from custom processing during the second half of the year. Altogether, the hydrogenation/distillation unit will add an additional run rate of approximately $7 million to our EBITDA levels by the end of 2018 through the expanded custom processing capability. With the finish line of our capital projects now on sight, we will remain focused on optimizing our operational performance while achieving competitive advantageous through our high-quality products and outstanding customer service and responsiveness. Finally, at AMAK, throughput rates, concentrate quality and recoveries continue to steadily improve. The third and fourth quarters will demonstrate that these improvements can be transformed into financial results. Shipments are expected in the first quarter, and our goal remains to opportunistically monetize our investment in AMAK in 2018 or early 2019. I would like to conclude my prepared remarks by thanking our employees for their hard work and dedication. We have an exceptional team. Sadly, the South Hampton family experienced a tragedy yesterday as our longest-term employee, Jay Hinkie, was killed by a car as he was assisting with the management of a traffic accident scene on FM 4118 [ph] not far from the plant. Jay was a pillar of the company and has been with us since he was 18, giving us 43 years of service. Some of you might well have met him as he was often involved with plant tours. He has played many roles at SHR over the years, having served as maintenance supervisor and operations supervisor to name a few. He knew every nook and cranny of the plant and was a trusted friend, adviser and mentor to many. Jay also served the community and was assistant fire chief in the Silsbee Volunteer Fire Department and hence, his presence at the scene of the accident. Jay could always be counted on to lead the response in the case of an incident or emergency, and he died doing what he loved, serving others. Jay will be sorely missed. This concludes my prepared remarks. At this time, I'd like to ask the operator to open the call for Q&A.

[Operator:]

[Operator Instructions] And we will take our first question today from Jon Tanwanteng with CJS Securities. Please go ahead.

[Jon Tanwanteng:]

Good afternoon. Thank you for taking my questions and my condolences to the people involved.

[Simon Upfill-Brown:]

Thanks, Jon.

[Jonathan Tanwanteng:]

First one, nice quarter, and it's nice to see the volumes ramping. How should we think about the volume ramp for the prime business in the back half of the year? You have one major polyethylene customer coming online with the first sale, more being delivered to Asia and a couple of new products. What are the other puts and takes that we should be thinking about when we model growth in the future?

[Simon Upfill-Brown:]

This is always a very tough question for us because it's kind of almost like asking us to give a little bit of guidance which, obviously, we don't like to do. The second and third quarters are generally the strong ones for us, and we certainly saw that this quarter and -- the growth in volume was pretty much across all the markets. So it's difficult to really predict. I mean the big unknown for us is always our existing Canadian oil sands customer. As you know, they've been all over the place and generally, in steady decline in volumes since 2014. So that is always a potential take, Jon. But I think we should have a fair amount of optimism about volumes in the second half of the year.

[Jonathan Tanwanteng:]

Okay, great. And then I think I heard that you've been able to overcome the minimum volume penalties in supply agreement. Is that expected to continue? Or do you think it would go back down to where that could hurt you again?

[Simon Upfill-Brown:]

Well, we were able to negotiate certainly a partial delay in some of the penalties. But the penalties depend very much on what our volume is. If we can keep volumes up, then those penalties should be relatively trivial.

[Jonathan Tanwanteng:]

Okay, got it. Input price is obviously way above you're selling prices. Remind us again how much of this you can eventually pass through to your customers and if you can recover that spread going forward.

[Simon Upfill-Brown:]

Well, the contract pricing generally is a wash. I mean we do get hurt a little bit while prices are in the increasing mode, feedstock prices in increasing mode. We benefit best like we did in 2015 where there was just all year long a steady decline in feedstock prices. It's sort of -- the stock pricing, which is often difficult the nonformula pricing, particularly when our competitor is very, very long on gasoline, and gasoline prices while they have shown a bit of an improvement recently, gasoline prices have been pretty low. So that's certainly what waxed us a little bit on those. And future stock pricing will depend on what's happening in that market, but we've lost what we lost in the first quarter -- first half of the year.

[Jonathan Tanwanteng:]

Okay, got it. And then just on the AMAK operation. I know you said you expect to deliver financial results. Does that include profitability from what you make out of there?

[Simon Upfill-Brown:]

I think for some time ago we said that third and fourth quarters don't really look too much at AMAK until the third or fourth quarters. And I think there is certainly good possibility of profitability in the fourth quarter. Might still be flat in the third quarter while we're still ramping up throughput rates and things, but I'm optimistic that in the fourth quarter, we should be able to show some profitability, Jon.

[Jonathan Tanwanteng:]

Okay, great. And then any reason why sales didn't occur in the quarter that you just reported?

[Simon Upfill-Brown:]

Yes. One of the big reasons that sales are so lumpy at the mine is you want to build a sufficiently large cargo to minimize freight costs. And so we were just sort of building enough concentrate to load up the ship. That's really what that's about. And so we have sufficient concentrate now to do that, that's why we're relatively comfortable to say that there will be a shipment in the third quarter.

[Jonathan Tanwanteng:]

Got it. That’s helpful. Thank you very much gentlemen.

[Simon Upfill-Brown:]

Thanks, Jon.

[Operator:]

Next is Joseph Reagor with Roth Capital Partners.

[Joseph Reagor:]

Afternoon, guys, and my condolences as well.

[Simon Upfill-Brown:]

Thank you, Joe. There are a lot of sad faces around at South Hampton today, I can assure you. This guy was unbelievably well loved by his South Hampton family and the whole community. He is really a big part of the whole region in many ways.

[Joseph Reagor:]

Yes, that's sad. But on a more positive note, the quarter was a bit stronger than expected on the volume side, and I know you guys don't like to talk about forward, but backwards thinking here, what drove the volume increase in the quarter? Last year, prime gallons were actually down Q2 to -- from Q1, this quarter, they were up significantly. Could you speak to what was the difference there?

[Simon Upfill-Brown:]

Well, if you go back a few years, normally, Q2 is above Q1. I think last year was a little bit of an anomaly, Q2 volumes were down a little bit. A lot of our volume swings over the last, I don't know, four, six quarters since beating our buddies up in Canada, and when those guys go down, the volumes swing. And so I think we said we were down a little bit on the half in Canada, and in the second quarter, our volumes were up a tiny bit for Canada versus the second quarter of last year. So -- and then as Sami mentioned, we had pretty good -- the foam business, we're expecting some growth. The polyethylene business, second quarter is normally up because of temperatures, and they need a little bit more of our product. We saw some good volume growth there, and even EPS volumes picked up a bit. We got a little bit more volume from our friends down south of the border, so all those things helped us.

[Sami Ahmad:]

Volumes grew 7% six months to six months when you look at the comparison, and it was pretty broad-based, as Simon mentioned. So it's not just one single customer or market. So that is -- we're hopeful about that.

[Joseph Reagor:]

Okay. And then on the capital front, understand the cost have been arising in that region. What do you guys -- how much confidence do you have in the revised capital budget numbers? Are these locked-in costs? Or are they still exposed to further fluctuations in the cost of labor and such?

[Simon Upfill-Brown:]

Well, we're pretty much done with the hydrogenation/distillation project. So sure enough, apart from a few little startup costs and things like that, not much more can happen on that project. We still -- if you looked at the photograph that we showed you on advanced Reformer, there's still a lot of piping work. There's a lot of equipment in place, but there's still a lot of piping that needs to be installed. And that's why there are some risks involved, but we spent quite a lot of time preparing for this call trying to make sure we captured everything, Joe. There are a few areas where there are some unknowns.

[Sami Ahmad:]

And labor is very tight.

[Simon Upfill-Brown:]

Yes, labor is tight. But I mean, I think we put in what we think we might need for labor. So when we did this three months ago, we were optimistic that we had it nailed. So I'm not sure how believable I'm going to be, but I think we're going to be very, very close to our latest number. I'd be surprised if we went over that number in any significant way, Joe.

[Sami Ahmad:]

And also, Joe, note that $1.5 million of that was related to the capitalized interest.

[Simon Upfill-Brown:]

Which we have not been including.

[Sami Ahmad:]

We've not been including, so you ought to adjust for that.

[Joseph Reagor:]

Okay.

[Simon Upfill-Brown:]

And that's a miss on our part. We should have been...

[Sami Ahmad:]

Miss on our part.

[Simon Upfill-Brown:]

We should have been including it, and we weren't.

[Joseph Reagor:]

Okay. One final thing on the capital, Sami, do you know what the remaining to be spent is over the last two quarters for the Reformer unit?

[Sami Ahmad:]

Yes, we're estimating, Joe, through -- so we're estimating about $30 million that's going to be remaining to be spent based on CapEx through June 30. So roughly, based on how we've been funding this over the number of quarters, most of it is going to be funded from cash flow from operations, but we do expect more borrowings on the revolver in the next few months.

[Joseph Reagor:]

Okay. I’ll turn it over. Thanks guys.

[Simon Upfill-Brown:]

Thank you, Joe.

[Operator:]

We'll go to Sarkis Sherbetchyan with B. Riley & Company.

[Sarkis Sherbetchyan:]

Hey, good afternoon. My condolences as well.

[Simon Upfill-Brown:]

Thank you, Sarkis.

[Sarkis Sherbetchyan:]

So just kind of continuing on the capital budget question. So the $30 million that remains to be spent, is that for the advanced Reformer only? Or is that the all-in balance of 2H 2017 CapEx?

[Sami Ahmad:]

That's advanced Reformer, which is...

[Sarkis Sherbetchyan:]

What would you...

[Sami Ahmad:]

Which is the bulk of it...

[Simon Upfill-Brown:]

Not much else.

[Sami Ahmad:]

There's not much else.

[Simon Upfill-Brown:]

If there's $1 million elsewhere, I mean, we've got a little bit of pipeline refurbishment we're able to do and a couple of other things. For all other projects, there's no more than $1 million, Sarkis.

[Sarkis Sherbetchyan:]

Okay understood. And do you expect that to be fairly kind of, I guess, loaded in Q3, given that you expect it to start in Q4? Or how do we think about the distribution of that?

[Simon Upfill-Brown:]

I'd be surprised if it's not fairly evenly spread across the quarters because you’re often settling up with people as things are completed. You have 30 days or something like that to pay, and those kinds of things. So I think best guess for now...

[Sami Ahmad:]

I will just do half and half. And maybe there might be a little bit that spills over into January but that wouldn't be much.

[Sarkis Sherbetchyan:]

Okay. And then how much of that little bit do you think would spill into January? I mean just kind of looking at our normalized kind of run rate CapEx, assuming all your projects are completed, I would imagine something like $10 million capital budget would be the right ballpark number, unless you guys are planning something differently?

[Simon Upfill-Brown:]

You mean for 2018?

[Sarkis Sherbetchyan:]

That's correct, for 2018.

[Sami Ahmad:]

That's probably at the high end.

[Simon Upfill-Brown:]

That's high, yes. We've been talking about six to eight.

[Sami Ahmad:]

Yes, and so I can't predict how much might slip over, but $1 million or $2 million maybe might slip over. So I think $10 million is at the high end, Sarkis.

[Sarkis Sherbetchyan:]

Okay, so if we pencil in $10 million for fiscal 2018, that would be a conservative number, you'd say?

[Sami Ahmad:]

Yes.

[Sarkis Sherbetchyan:]

Okay. Perfect.

[Sami Ahmad:]

We don't have any major projects planned for 2018. It's all maintenance, caretaker...

[Simon Upfill-Brown:]

A little bit of railcar stuff.

[Sami Ahmad:]

Railcar stuff, that's about it.

[Simon Upfill-Brown:]

Not railcar -- rail track.

[Sami Ahmad:]

No rail -- yes.

[Sarkis Sherbetchyan:]

That's very helpful. And then, Sami, you mentioned you guys have been obviously funding some of this from the operating cash flows. Do you mind disclosing what the operating cash flow was for Q2 here?

[Simon Upfill-Brown:]

Yes. So, we will be filing the Q, Connie, next Tuesday.

[Connie Cook:]

Tuesday [ph].

[Sami Ahmad:]

And so you'll get all of the gory details. But for the first 6 months of 2017, our cash from operations was $15.5 million, and that compares to $13.3 million a year ago. So we had healthy cash flow.

[Sarkis Sherbetchyan:]

Good. And then how should we take about any working capital adjustments kind of going forward here as you obviously build and sell additional volume? Anything with regards to inventory or any thoughts like that?

[Sami Ahmad:]

Well, I mean, the key working capital from a Trecora Resources standpoint is, as Simon and we've all mentioned in the past, is working down inventory at TC. And that's an ongoing process. We're making very good progress on that. In terms of more working capital at South Hampton, I don't think we're going to need much.

[Simon Upfill-Brown:]

One of the issues we have, Sarkis, is we don't have tanks. So it's quite hard for us to put more pentanes and hexanes into inventory. We do have a little bit of room, but we try to manage that. It's normally this time of the year when we increase inventories a bit just for hurricane security. But we can't really put too much more into inventory just because there isn't space available.

[Sami Ahmad:]

Right. And the third point is, for the custom processing growth, again, back at TC, that's working capital-neutral because there is really no working capital involved. So I don't think you'll see huge increases in working capital requirement.

[Sarkis Sherbetchyan:]

Okay. That's very helpful. Thanks for that. And then one more from me, and I'll hop back in queue. With regards to the sales mix for your specialty wax products, I think you mentioned you sold lower -- I guess, of the low-margin kind of volume product, and you improved your ASP by 10%. Can you maybe give us a little bit more color on kind of the dynamics there and what we should expect going forward?

[Simon Upfill-Brown:]

Yes, I mean, I think we've spoken before about part of this inventory reduction program, we were selling a wax quality that was significantly lower than our normal products. And so we had less of those sales. That product requires a little bit of -- a whole lot less processing, so I mean, it's still positive-margin stuff, but the price is significantly below. And we sold less of that in the quarter. And obviously, depending on how much wax we're producing, how much feedstock we're getting from our suppliers, all those kinds of things, that as we grow the higher value-added waxes, we will try more and more to sell less of the lower-quality product, and a little bit of that happened in the second quarter, Sarkis.

[Sarkis Sherbetchyan:]

Okay. And then how do we think about...

[Simon Upfill-Brown:]

That's been our sort of goal. We didn't want to keep putting stock into inventory, so we started selling these lower-quality wax to various places; Turkey, Latin America, some to Asia. But the long-term aim ultimately is to sell none of that, right? We only want to sell the high-quality stuff.

[Sarkis Sherbetchyan:]

No, no, understood. And then I guess kind of along the lines of thinking, how do we think about the maybe gross margin profile or EBITDA margin profile as you work through that inventory and obviously you go to the higher-margin wax product? Do you guys have a framework for that?

[Sami Ahmad:]

Yes, we do. So you're talking about TC. I mean that margin profile will increase as we get more into the HMA business and PVC lubricants business and other value-added because those pricings are higher and the cost change in terms of additional processing is not incrementally greater. So we would expect margin improvement.

[Sarkis Sherbetchyan:]

Right. But as far as kind of like a goalpost, is there anything to kind of comment on to help us think about modeling that? I mean, would it be like 10% EBITDA margins? Would it be 15%? Just kind of help us frame that?

[Simon Upfill-Brown:]

Probably, low teens

[Sami Ahmad:]

Yes.

[Simon Upfill-Brown:]

Yes. I mean, just we haven't really disclosed in a fulsome way specific margins around the wax business, but as a guidepost, that may be helpful.

[Sarkis Sherbetchyan:]

Perfect. Thank you.

[Operator:]

And we'll now go to Greg Eisen with Singular Research.

[Greg Eisen:]

Thank you. Good afternoon, Simon and Sami, and allow me also to extend my condolences for your loss.

[Simon Upfill-Brown:]

Thanks you, Greg. Thank you.

[Greg Eisen:]

With the new Canadian customer coming online in 2018, is it possible for your sales, international sales, decline back to the dollar level previously realized, I guess, at the prior peak, call that 2014?

[Simon Upfill-Brown:]

Yes, I think we've got a chance. I mean, in 2014, we sold a huge volume to our Canadian oil sands customer. It was a really, really, really big, big number and also was still pretty strong [ph] in 2015. So I think we've got a good chance of that and especially with some of the other Asian export work we're doing, Greg. I think we have a good chance we'll get back up to those numbers.

[Greg Eisen:]

Okay, that's good. Yes, I realized the additional Asian customer base changes the equation for international sales, but that's a positive. Look, going back to the quarter just ended, you had strong demand in prime products, and you said it was across the board in your end markets. Is there something -- is this something in the economy? Is this reflective of inventory levels of customers? Or is there anything you could hang your hat on as to why this would actually be happening?

[Simon Upfill-Brown:]

Yes, I think there's a bit of that, right? I mean, the urethane -- the polyurethane foam guys have been growing at about 6% anyway, and it looks like they're maintaining that kind of growth, and that's driven by energy efficiency regulations and new construction building. So I think there's a little bit of that. There's some, what do we call it, seasonal growth in the polyethylene business. Some of the polyethylene guys seem to be running maybe harder than they were running. I think there's a bit of jostling going on, as new polyethylene capacity is due to come online, people are trying to maybe grab export market share and things like that. So I think there are a number of things happening there, Greg, but it certainly seems like the polyethylene guys are trying to push out volume a little bit.

[Greg Eisen:]

Sure. Okay, good, good. I'll take that. Turning to AMAK, you didn't have -- they didn't -- AMAK did not recognize any sales revenue, but it produced product which has essentially gone to port. So it's essentially on AMAK's balance sheet. Is the value of that -- is actually inventory on the balance sheet a number that you're able to release?

[Simon Upfill-Brown:]

We don't normally release that number.

[Greg Eisen:]

Notice how I ended the question?

[Simon Upfill-Brown:]

Yes, I don't think we have...

[Greg Eisen:]

I understand the problem.

[Simon Upfill-Brown:]

I don't think we've done that. But I will say that I mentioned in the text that we were budgeting to produce more than we produced. So our standard costs were a little bit low, so that's another part of the big loss as we did have to take a little bit of an inventory write-down so...

[Greg Eisen:]

But that was based upon standard costing, not based upon market collapsing?

[Simon Upfill-Brown:]

Yes, exactly.

[Greg Eisen:]

Understood, understood. Going back to the gross margin and then the pricing issue. For non-formula pricing, which is, call it, 40% of your product, are you able to pass through pretty much in tandem with the change in your feedstock costs -- the additional feedstock costs when you sell on a non-formula basis? Does it pass through instantaneously?

[Simon Upfill-Brown:]

The issue with the non-formula basis is you kind of pricing by order, by purchase order, and a lot depends on what our friendly competitor's doing. And as I mentioned in the -- earlier that they have been -- gasoline prices have been fairly low because gasoline inventories have been very long, and so they've been pricing pretty competitively based on what gasoline prices have been. And so that's -- we've decided we would prefer not to give up volumes. So if we have been hit with a competitive situation there, we not exactly match but we have to come down a little bit. And that's what washed out our feed margins a little bit in the quarter.

[Sami Ahmad:]

And one way to think about that is gasoline pricing, but -- and it's also the spread between gasoline and natural gasoline, which is our feedstock. And when you think about that spread over time, when that spread is wide, then there's less competitive intensity with the competition. When it starts narrowing, then that spot business becomes more competitive.

[Simon Upfill-Brown:]

Yes, exactly.

[Greg Eisen:]

So when the spread between nat gas and gasoline narrows, it's more competitive for you?

[Simon Upfill-Brown:]

Natural gasoline.

[Sami Ahmad:]

Not nat gas.

[Simon Upfill-Brown:]

Natural gasoline and unleaded gasoline.

[Sami Ahmad:]

Yes. So take a look at that spread, and that'll give you some guidance.

[Greg Eisen:]

Got it, got it. Okay. And one last question, just briefly, you talked about labor cost for getting the plant finished, the Reformer finished, and that there's been some price issues there on labor cost. Are you guys -- the 56% capacity utilization, and I understand labor is running tight in a lot of manufacturing areas around the country, as you grow your utilization of that plant over time, are you labor-sensitive to increased utilization? Or is it essentially that labor is like a non-factor for going from 56 to 80?

[Simon Upfill-Brown:]

I think on the pentane and hexane production, I think that's reasonably true. As we add this big new Reformer, we might need a little bit of additional labor. We had that in our original cost estimates, but it's a matter of how many control panels you need to be able to manage the whole facility. So that's what sort of drives the labor that you need in the control room and those kinds of things, Greg. So, I think we can -- in the pentane and hexane production, I think we could readily get to 80% asset utilization without needing any more people. The big question is, which we're still working our way through, is how many more people we'll need when we add additional custom processing projects and when we add the big advanced Reformer unit because I think you saw on the photo, there's fixed reactors in series and it's a fairly complicated process to run. So we might need some additional labor there.

[Greg Eisen:]

Understood. Okay. I’ll stop there. Thanks.

[Simon Upfill-Brown:]

Thank you, Greg.

[Operator:]

And we'll go to Tom Harenburg with Carl M. Hennig Incorporated.

[Tom Harenburg:]

Accept my condolences as well for the entire Trecora team.

[Simon Upfill-Brown:]

Thank you, Tom.

[Tom Harenburg:]

On AMAK, will this first shipment be zinc? Or will that be copper?

[Simon Upfill-Brown:]

I think we're planning to combine them.

[Tom Harenburg:]

Okay.

[Simon Upfill-Brown:]

Because we'll get good freight rates that way, Tom.

[Tom Harenburg:]

Okay. And looking out to 2018, on average, how many shipments a quarter do you think you'll have in 2018? Or what -- let me rephrase that, what is the projected number of shipments in 2018, assuming that the mine is functioning the way it is now?

[Simon Upfill-Brown:]

If it's running smoothly, well, my guess is that if we ship in roughly 10,000 tons, we should have seven or eight shipments during the course of the year.

[Tom Harenburg:]

Okay. So that's roughly two shipments a quarter.

[Simon Upfill-Brown:]

Roughly, yes.

[Tom Harenburg:]

How -- have the AMAK management had any discussions, how did they feel about the new crown prince, is that -- do they view that as a positive or a negative?

[Simon Upfill-Brown:]

Well, I think most of the management of the mine -- well, the CEO is Turkish. We've got, as I mentioned, a good Australian miner and a good South African miner and the top financial guy is Pakistani, so we've got the United Nations there. But our fellow shareholders are -- I think they're all Saudi pretty much, apart from the Arab Mining Company guys. They're all fairly optimistic, I think, Tom. Obviously, the jury is still out, right? It's quite a big change, so -- but generally, I think folks are excited.

[Tom Harenburg:]

Okay. And in Guyan, now that is the area where you're more optimistic on gold, is that correct?

[Simon Upfill-Brown:]

Yes, that's right. That's the piece of the mining license that we were given in November of 2015, and it's part of a bigger 70 square kilometer exploration license we were given. So this is a -- we have a license to mine this area, and there's a lot of gold there. And what we are hoping -- as I mentioned, the work was done. What I was hoping is that we could publish those results really soon. We just got to get fellow shareholder approval, and then we're happy to make those public, Tom.

[Tom Harenburg:]

That was kind of leading up to my question, because I had thought that you expected by the end of June that you would have those results?

[Simon Upfill-Brown:]

No, it's done. And I just can't say anything yet because we need sort of the whole shareholder group to say it's the right thing to do to make that public.

[Tom Harenburg:]

Okay. And in the...

[Simon Upfill-Brown:]

I don't see any reason why we shouldn't, Tom.

[Tom Harenburg:]

Okay. And going forward on AMAK and the public offering there, it seems like this is getting extended out again and again and again and again. Now you're talking maybe early 2019?

[Simon Upfill-Brown:]

Well, I don't know. I mean, if we can do it in 2018, obviously, we'd like to do it in 2018, Tom. And what, we have mentioned a couple of times, is that maybe Trecora doesn't have to wait for the IPO. If the mine is running sufficiently well and the exploration results are sufficiently good, somebody might be prepared to buy us out ahead of the IPO, and we would be prepared to forego some of the IPO upside should that happen.

[Tom Harenburg:]

Okay, okay. We’ll certainly look forward to that. Okay. Thank you. Those were my questions.

[Simon Upfill-Brown:]

Thank you very much.

[Operator:]

We'll go to Matt Dhane with Tieton Capital Management.

[Matt Dhane:]

Thank you. I wanted to say how sorry I was to hear about the loss as well.

[Simon Upfill-Brown:]

Thank you, Simon.

[Matt Dhane:]

I wanted to keep asking some more questions around the mine there in Saudi. I'm curious, the mine ramp going forward, how long until the copper and zinc production is normalized? I know you said Q4 should be profitable, but how long until it's fully ramped to a more normalized run rate?

[Simon Upfill-Brown:]

I think it should be by then.

[Matt Dhane:]

Okay. So Q4 that should be stable right then?

[Simon Upfill-Brown:]

Yes, June -- end of June, they were running pretty well. They had a little bit of an unexpected breakdown, but the throughput rates were pretty good.

[Matt Dhane:]

Okay.

[Simon Upfill-Brown:]

So we should be able to get full throughput rates and everything by the end of the year, Matt. That's the view.

[Matt Dhane:]

Okay, okay. Shifting to South Hampton and the new products. The first product, new product number one, can you discuss the uptake that you've seen relative to expectations? And how long it may be before that becomes a real contributor? And yes, if we could start there, that'd be great.

[Simon Upfill-Brown:]

Well, I think it's already starting to become a contributor. I mean, we're -- I think we're expecting full year -- I don't think we'd give an exact volume, but much higher than what we've had thus far.

[Sami Ahmad:]

And importantly, it's a very high margin.

[Simon Upfill-Brown:]

Yes, it's a very high margin, very high priced product, much higher than anything else we sell. So it's already adding value not quite fully up to what we are expecting on a quarterly basis. The big customer that we had still had some existing supply, which is working down, so...

[Sami Ahmad:]

And the other key development, as Simon mentioned earlier, is that we're able to produce it with our...

[Simon Upfill-Brown:]

Raw materials we have.

[Sami Ahmad:]

With raw materials we have versus the previous approach, which was buying those raw materials, and they were very expensive.

[Matt Dhane:]

And that's just giving further margin lift, I assume?

[Sami Ahmad:]

Yes.

[Simon Upfill-Brown:]

Yes.

[Matt Dhane:]

And so longer term, looking out for the ultimate potential of this product, walk me through how significant it could become and how long it may take to become the levels that you believe it should.

[Simon Upfill-Brown:]

Well, we think that by 2018 we should be getting somewhere between $1 million and $2 million of additional EBITDA from that product.

[Matt Dhane:]

Okay. And products number two and three, shifting to those, are those less significant than product number one? And how confident are you that you'll be able to actually produce those and make those viable?

[Simon Upfill-Brown:]

Well, I think we've made the one, and -- but that's the one where -- so one customer partner at this stage, and we're waiting for that customer to start buying. They haven't yet. I mean, they were excited about it. They were very pleased with the results. It worked, but they haven't started buying it yet. The other one, we're still working on in terms of getting the actual process done. That work continues. I mean, it's looking good, but we're not there yet fully. So that's why we said it's still under development, Matt, and -- potentially, a similar sort of additional EBITDA return from that product as we're getting from product number one.

[Matt Dhane:]

Okay, great. Thank you all.

[Simon Upfill-Brown:]

Thank you, Matt. Appreciate the interest.

[Operator:]

We'll go to Colin Lee with Luzich Partners.

[Simon Upfill-Brown:]

And I think Vicki, this should be the last question.

[Operator:]

All right. Thank you.

[Colin Lee:]

Hi, good afternoon. Thank you for taking my question and my condolences as well.

[Simon Upfill-Brown:]

Thank you.

[Colin Lee:]

I guess, my question is, I guess, on the line item on the B Plant, you talked about revenue in H1 2017 and EBITDA potential for 2018. Curious what that H1 2017 revenue, what that meant for EBITDA, just trying to get that margin there?

[Sami Ahmad:]

Would you mind just repeat...

[Simon Upfill-Brown:]

So he's saying about the EBITDA, a certain amount of revenue from B Plant, how much EBITDA that they’ll create. And it's really tough to separate it out, Colin. At this point, we haven't really yet. I mean, we were a little bit slow in A Plant in the second quarter. And that was due to nothing other than a few delayed projects, delayed into the third and fourth quarter. So, it's a little bit -- we lost some there, and we gained the B Plant stuff. But the important thing for us is to be able, at this point, is showing that B Plant can generate the revenue.

[Sami Ahmad:]

And most of the revenue was custom processing revenue, which where we have a lot of operating leverage in that the incremental dollar revenue doesn't have costs associated. So as it scales up, profitability will increase disproportionately.

[Colin Lee:]

Got you. Okay, that makes sense. And then, I guess, on the new custom processing contracts, it says you guys signed four in this quarter. Is that on top of the four that was announced in the Q1 call?

[Simon Upfill-Brown:]

Yes.

[Colin Lee:]

Yes. So you have signed eight in the first half of 2017.

[Simon Upfill-Brown:]

Yes.

[Colin Lee:]

Okay. That’s good news. Okay. That’s it from me.

[Simon Upfill-Brown:]

Thank Colin. Thank you for initiate there.

[Operator:]

And that will conclude our question-and-answer session. I'd like to turn it back to Trecora management for any additional or closing remarks.

[Simon Upfill-Brown:]

Thank you, Vicki. Thank you all for listening in today. We greatly appreciate your interest. We would like to also thank our shareholders for their continued support of our company, and we were very much look forward to updating you on our progress in the coming months. And just to mention that, Sami still has a few openings at the Jefferies conference on Monday in New York, if anybody would like to meet Sami face-to-face there. Thank you all very much.

[Sami Ahmad:]

Thank you.

[Operator:]

And thank you very much. That does conclude our conference for today. I'd like to thank everyone for your participation.