Trecora Resources
Q3 2017 Earnings Call Transcript

Published: 8 Nov 2017

[Operator:]

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

[Laurie Little:]

Thank you, operator, and good afternoon, everyone. Welcome to Trecora Resources' third 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 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; Trecora's new Corporate Controller, Paul [Indiscernible] will also be available during the Q&A session. Following management's prepared remarks, there will be Q&A session as I mentioned. Before we get started, I would 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, November 7th, 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 31st, 2016, and subsequent quarterly reports on Form 10-Q. 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. Before discussing details of the quarter, I wanted to thank the entire Trecora team for their terrific response to Hurricane Harvey. What our employees did was truly extraordinary, even with significant damage to their own homes. It made me really proud to be part of this company. Because of their significant efforts, we suffered minimal damage to our plants and equipment. In particular at SHR, where we are differentiated by service and reliability, we were able to meet the expectations of all of our customers. Nonetheless, the impact of Harvey reduced our third quarter EBITDA by roughly $1.5 million to $1.8 million or $0.04 to $0.05 per share on an after-tax basis. We will provide more details later in the call. We are pleased to report strong operational results for our third quarter with total revenue increasing 7.36% compared to last year's third quarter, reflecting a rise in petrochemical product sales and modestly higher petrochemical prices. At South Hampton, we recorded an increase of 5.5% in prime product sales volumes in the quarter, despite Harvey, a decline in Canadian oil sands and prior to the full start-up of major new demand projects. We continue to anticipate sizable new demand from projects in 2018, including a second Canadian oil sands customer that is expected to start-up in early 2018 and new polyethylene plant in North America and Asia. Unfortunately, our progress on the Advanced Reformer was slowed due to disruptions caused by Hurricane Harvey, as well as the receipt of flawed equipment from one of our suppliers. We now expect the start-up to occur in the first quarter of 2018. Although we continue to make improvements at TC, third quarter results were impacted by start-up problems with the new hydrogenation unit and, of course, Harvey, both of which caused a significant hit to revenues and costs. We still manage to report an 8% increase in revenue year-over-year, but were down sequentially. I'm pleased to report though that the hydrogenation unit is now fully on line and operating well. Reported income in the third quarter reflected equity and losses at both AMAK of $0.9 million or an estimated negative $0.02 per diluted share on after-tax basis. We are also pleased to report that AMAK shipped a further significant increase in concentrate volumes to the port in the quarter. We except [ph] for some time that we expect 2017 to be a transition year, but the progress we are making, though, in base day operations and the near-completion of our capital projects, will position the company for long-term growth and increase profitability in 2018. We're all well set-up to participate in the resurgence of the North American chemical industry. Slide four shows a quarterly breakdown of total, prime, and byproduct volumes along with deferred sales. As I noted earlier, and notwithstanding Harvey, our revenue growth was driven primarily by an increase in quarterly prime product volume a 5.5% from a year ago period and to a lesser extent modestly higher prices. International sales volumes in the first nine months of the year continue to be impacted by reduced offtake of our current Canadian oil sands customer, who is, for the first nine months of 2017, more than 25% below last year's volumes. Last quarter we mentioned a large shipment to our PE in Asia, that plant has now started up and we are working on contractual supply for the future. We shipped five containers to the new PE plant in the Middle East and are working on the supply of the 28 themes there as well. Two other Asian PE plants will likely stick with local suppliers. But we are hoping for some small volumes to try to shorten our supply time to that region. We continue to make sales for our one new product and we are now dully approved that a customer in Asia for that product and trying to get ongoing volume there. The second new product is showing considerable promise in lab trials. Petrochemical capacity utilization was 53% compared with 50% in the third quarter of 2016 and 26% in the second quarter of 2017. Of course, utilization rate in the third quarter was hampered by Harvey. Capacity utilization is based on a 11,000 barrels per day fresh feeds for both years. Slide five shows the considerable progress made in the last three months with the Advanced Reformer. The large heat exchanger is now in place. We have mentioned this as a critical item in the past and significant amounts of piping have been installed. If you look very carefully, you can see an [Indiscernible] flag flying at the top of the heat exchanger structure. We are very pleased for the new world check-ins [ph], especially as it took 35 years to get there. Advanced Reformer unit is now expected to be completed in the first quarter of 2018 due to a couple of week's loss time during Hurricane Harvey and recent discovery of defective welding in all six heaters, the units with black chimneys in the photograph. The vendor has accepted responsibility for this unfortunate issue and we are working together to minimize the delay. Worst case, start-up will be pushed back a few months. We do not expect the significant cost implications, but as you can imagine, our focus is to get the unit up and running as soon as possible. Turning to an update on Trecora Chemical on slide six. Trecora Chemical's quarterly revenue increased 8% year-over-year and nearly 20% year-to-date. Although revenue was down sequentially because of the impact from Hurricane Harvey and operational challenges in our customer processing business. Yesterday wax sales volumes increased 17% year-over-year, as we continue to see strong growth in wax sales, both domestically and in export. Polyethylene wax sales remained steady during the quarter. However, volumes of our traditional products were impacted by the storm due to outages in our wax feed suppliers. We continue to make progress in growing sales and our new products with hot melted adhesive and PVC lubricants markets. Each product characterized by generally higher margins and growth rates. Sales of these products were down from the second quarter, primarily due to summer slowdown of European customers and build is one of distributors. In third quarter 2016, sales for these products were in significant. First we've seen revenues decreased 7.6% during that third quarter 2017 from the third quarter 2016, primarily due to the impact of the hurricane. The entire block was down for a full week during the. And when you are selling time it means you're approaching close and seeing revenue for that week. Additionally we experienced start-up difficulties with the hydrogenation unit, resulting in negligible purchasing revenues from that plant. So, that faulty equipment and when are units and original plant closed in extended shut down, there is further loss of revenue. Next unit we'll be start-up again network and running on a value through the end of the year. The hydrogenation unit has been running well and designed rate since late October. We believe we're around the hump here week and $6 million to $8 million annually and EBITDA run rate from hydrogenation unit has been running well designed rate since late October. We believe we are over the year and still expect an additional 6 to 8 million annually and even our Emirates from hydrogenation distillation by the end of 2018. It is Important to note that we have significant business waiting in line for our TX custom processing assets from the Beecroft now totals $2.7 million for the year. And again we continue to expect this set of units to reach $4 million to $6 million in EBITDA run rate by the end of 2018. It is important to note that we have significant business waiting in line for our TC customer processing assets and extensive customer interest as we work our way through the operational issues. We remain optimistic that our TC will deliver the goods. I would also like to point out that notwithstanding Harvey and significant operational difficulties, our year-to-date custom processing revenues are up 32% over last year when adjusted for the non-used fee that occurred for the last time in the first quarter of 2016 Turning to slide seven for an update on AMAK. We're continuing to improving results from AMAK as they just generated significant revenue in the third quarter with over an 80,000 dry metric ton shipment. Even though middle content was below target and impurity levels were a little on the high side. The shipments contained for 4,300 BMT, the zinc concentrate. Production rates also continue to improve, resulting in 16% more copper and 40% more zinc being shipped to the port in the second quarter. Couple of categories and I'll are consistently about 80%. With the zinc recovery is hovering in the 63% to 68% range. We were also pleased with the initial exploration results in mineral resources uptake Guyan and is now complete as we announced on September 26th. With the positive results, we expect AMAK to commission Guyan gold production in early 2019. Drilling also continues in Guan and the surrounding areas that have similar geological purposes. Finally, we expect to receive a life of mine update for copper and zinc production by the end of the year. Turning to the precious metal circuit. The leeching process is proceeding well and smelting has now being reinitiated. We expect to see additional sales of gold and silver doorway in the first quarter of 2018. We believe the continued improvement of AMAK with the potential to return to profitability along with ongoing positive exploration results, further support our growth of potential monetization of our investment in the mine in the next year or so. Now, I'll turn the call over our Chief Financial Officer, Sami Ahmad, for a few more details on the quarterly financials.

[Sami Ahmad:]

Thank you Simon, and good afternoon, everyone. Slide eight provides a brief financial summary including the third quarter of 2017. Net income for the third quarter was $1.7 million or $0.07 per diluted share compared with net income of $2.8 million or $0.11 per diluted share for the third quarter of 2016. Net income for the third quarter includes equity in losses of AMAK with an estimated after-tax impact of negative $0.02 per diluted share. Excluding equity and losses of any macro, we call adjusted EPS with $0.09 per share. In the year ago period, net income included a combination of equity and losses for AMAK $2.1 million and a gain of $3.2 million from an additional issuance by AMAK, resulting in an estimated after-tax gain of $0.03 per diluted share. For the first nine months of 2017, adjusted EPS was $0.29 per share compared with $0.37 per share for the same period last year. The reconciliation of adjusted EPS is provided has provided in the appendix of the slide deck. Adjusted EBITDA in the quarter which excludes equity impact of AMAK was 7.5 million dollars, representing at 12.2% margin compared to just need of seven point two billion dollars representing its 4.7% percent margin for the same period a year ago. Adjusted EBITDA for the first nine months of 2017 was $23.2 million compared with $25.3 million for the first nine months of 2016. Adjusted EBITDA margin declined from 16% for the first nine months of last year to 13% for the first nine months of 2017. The in decline was primarily attributable to decline an EBITDA at TC, the impact of Hurricane Harvey, and higher feedstock cost at South Hampton. The financial impact of Hurricane Harvey, as Simon mention was very significant in the quarter. While our facilities did not suffer any significant damage, it affected operations at both South Hampton and Trecora Chemicals. We estimate the total negative impact at EBITDA was approximately $1.5 million to $1.8 million or approximately or $0.04 to $0.05 per share assuming an effective tax rate of 33 percent. The total impact includes expenses such as generator rentals, over time labor, and maintenance repairs of approximately $0.7 million. The balance of the impact was the result of lost sales at both South Hampton and TC, primarily due to outages of customer and supplier facilities across the Texas and Louisiana Gulf Coast. For example according to HIS, approximately 25% of U.S. polyethylene production was down in September, which affected our prime products sales. Many of these customers continued at reduced operating rates due to constraints such as co-monomer supply. At TC, wax sales were impacted due to outages at our wax feed suppliers resulting in inventory drawdown and we lost custom processing revenues and lost hours on the equipment cannot be recovered. Gross margin in the quarter was 16% and increased modestly year-over-year. They declined sequentially compared to the second quarter of 2017. The sequential decline was primarily due to the impact on Harvey and higher feedstock cost at South Hampton. Year-to-date gross margins were 17.6% compared to 20.4% a year ago. Our G&A expenses were higher in the quarter compared to 2016, mainly due to higher executive bonus accrual. Recall that the executive bonus accrual was reversed in 2016 when it was determined that they would not be awarded. Additionally, G&A expenses were higher because of higher property tax accrual due to the expiration of certain tax abatement benefits, as well as higher group health insurance cost. On a year-to-date basis, G&A expenses increased about $2 million. Year-to-date G&A expenses as a percent of revenues were about 10.2%, roughly the same as 2016. As of September 30th, 2017, our total liquidity which is cash plus availability under our revolver was approximately $35 million compared with $38 million at December 31st, 2016. Long-term debt including the current portion, but excluding loan fees was $89.7 million as of September 30th compared to $84 million at year and 2016. Revolver borrowings increased to $23 million from $9 million at year end 2016. CapEx for the quarter was $11.5 million and $39.3 million year-to-date. We have about $20 million to $25 million remaining to be spent on Paramax which will be funded with a combination of operating cash flow and revolver balance. As we discussed in the second quarter conference call, we increased the size of our revolving facility from $40 million to $60 million. Slide nine represents a summary of our quarterly petrochemical revenue and sales volumes broken out by prime products and byproduct lines. Petrochemical product sales for the third quarter were $52.34 million compared to $47.3 million for the same quarter a year ago. Prime product volumes were 16.7 million in third quarter compared to 15.8 million gallons in the third quarter of 2016 and 16.3 million gallons in Q2 of 2017. Prime product volumes increased in the third quarter by approximately 5.5% year-over-year and about 2.4% from the second quarter. Prime product volumes for the first nine months of 2017 increased by approximately 6.5% compared to the same period a year ago. As Simon mentioned -- despite as Simon mentioned, lower lines to the Canadian oil sands compared to a year ago and the impact of Harvey. We saw good growth for our prime products in many of our key markets including polyethylene, polyurethanes, and polystyrene. Byproduct volumes for the third quarter were 5.7 million gallons which were 24.9% higher sequentially and 17% higher year-on-year. Due to higher prices, margins for byproducts were higher both sequentially and compared to the same quarter last year. In the third quarter, byproduct margin above feed were approximately $0.046 per gallon in the quarter compared with essentially zero in the second quarter. As we've said before, we anticipate a significant margin uplift for the byproducts once our new Advanced Reformer unit comes online in 2018, as the new unit will increase substantially, hence creation of higher value aromatics components. Turning to slide 10, petrochemical feedstock prices were slightly higher in the third quarter 2017 as compared to third quarter 2016. In this chart, we show the market price of natural gasoline and our process cost of feedstock on a relative basis. The spread reflects the delivery cost from our suppliers. Average feedstock cost per gallon increased 3.2% compared to the third quarter of 2016. Importantly, feedstock costs spiked up towards the end of the third quarter, which tends to compress prime product margins due to the lag effect formula customers. The impact of penalty payments to our suppliers for purchases of feedstock below the contractual minimum was not material in the third quarter 2017. Moving to slide 11. Wax revenues to Trecora Chemical were up 14.9% year-over-year, but down 14.1% sequentially. Wax sales volumes are approximately 8 million pounds, declined approximately 2.6% compared to the same period a year ago. Volume decline in the quarter was attributable to upgrading sales mix, so that we're selling less of the lower margin waxes as well as wax feed supply constraints due to Hurricane Harvey. Average selling price in the third quarter increased approximately 18% compared to a year ago. Sales volumes were up approximately 17% in the nine months of 2017 compared to the same period a year ago, while wax revenue grew 28%. Slide 12 presents over overview of our custom processing revenues at South Hampton and TC. Custom processing at South Hampton was $1.5 million compared with $2.9 million in the year ago period. The decrease in custom processing revenue was due to a decrease of capital reimbursements from a processing customer. Custom processing at TC was $2 million, a slight decrease year-over-year compared to the third quarter of 2016. Revenue generated by the B Plant in the quarter was approximately $0.4 million. This concludes the financial review and with, that I will turn the call back over to Simon.

[Simon Upfill Brown:]

Thanks Sami. To recap on slide 13, while we made solid progress in third quarter of 2017, highlighted by prime product sales volume increases at South Hampton, revenue growth at Trecora Chemical, and positive momentum at AMAK, we also experienced significant interruptions from Hurricane Harvey, and faced certain challenges with our capital projects. 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 and from the second Canadian oil sands plant through our solid operations and enhanced production capabilities. We see numerous catalysts that will drive growth in 2018. The Advanced Reformer unit is nearing completion, which will increase the value of our byproducts. The hydrogenation distillation unit is now fully online in TC and we continue to overcome operational issues there. With a positive MR report, ongoing exploration, and improving AMAK operations supporting the potential for an economically viable project, we remain optimistic about our ability to monetize our investment in the mine in the future. This concludes my prepared remarks. At this time, I'd like to ask the operator to open the calls for Q&A.

[Operator:]

Thank you. Ladies and gentlemen, the question-and-answer session will be conducted electronically. [Operator Instructions] Your first question will come from Jon Tanwanteng with CJS Securities.

[Jonathan Tanwanteng:]

Good afternoon gentlemen. Thank you for taking my questions.

[Simon Upfill Brown:]

Hey Jon.

[Sami Ahmad:]

Hi Jon.

[Jonathan Tanwanteng:]

How is it going? What are the lingering effects, if any, from Harvey on input prices and availability of raw materials heading to Q4?

[Simon Upfill Brown:]

I think we're mostly okay certainly on the bulk of our wax supply at TC. There's one facility that is still struggling to start out where we think feed and do some work with it and sell it that we're not getting and we might not get through the end of the year. There is some ongoing tolling issues from a product -- for a plant that's still down where we do some chemical reactions for that customer and settle [ph] back to them, that's probably going to continue for the rest of the year. There are a couple of lingering issues with railcar supply and things like that from some of our custom processing customers, but I think we're over the worst of at TV and I think we're certainly over the worst of it at South Hampton, provided, of course, that all the polyethylene guys can get the co-monomer that they need to be able to run flat out. And that probably tell us at this point that we don't really know that, but it looks good overall.

[Jonathan Tanwanteng:]

Got it. That's helpful. And Sami how much of a step down in margins from Q2 was input costs versus hurricane-related expenses and then loss of sales?

[Sami Ahmad:]

Yes, I mean we did have the input cost impact on margin because of that spike you see in the chart in the last 30 days or so. But we won't break out dollar-wise, but most of it was Harvey impact. I mean just expenses alone as we disclosed were just north of $700,000.

[Jonathan Tanwanteng:]

Okay. And how should we think of the spread between inputs and your selling prices as we head in Q4?

[Sami Ahmad:]

I think one of the big issues that because we're in the increasing market for feed -- for our feedstock, we are impacted by that -- by the lag. And one of the areas where we get a little bit bitten is on the stock pricing where obviously we need to move as aggressively as we can to get price increases. We gone for one product price increase already and we'll likely go for another one as soon as we can. But it's -- we're reasonably well-protected with the contract business, but where we're not -- the formula pricing -- but where we're not under that regime, we can be a little bit hurt during these times of rapidly increasing feedstock cost, because recall that the competition -- the competitor is not exposed to this feedstock. And so the alternative value for that competitor is different and so we'd have competitive pressure on the stock side.

[Jonathan Tanwanteng:]

Got it. That's helpful. Just on the Advanced Reformer, I understand the delays from the storm and I guess the contractor issues, what caused the market for the byproducts that you were actually upgrading or refined to higher standard, has that helped stable -- I haven't looked at that recently?

[Simon Upfill Brown:]

Yes, I think those prices have been pretty good. We make a little bit of those products now and Sami mention that our byproduct prices were a little bit up from the third quarter versus the second quarter even without the extra aromatics that we get out of the Advanced Reformer unit. Those prices look pretty solid and that forecast to remain good. So, our uplift that we've been expecting, we expect to be able hit and maybe some more.

[Jonathan Tanwanteng:]

Okay. Got it. And the delay, should we expect that to come by mid-Q1, early, late, any sense of timing?

[Simon Upfill Brown:]

It's really tough to evaluate at this point because of repair issue that we're working on. I'm glad to say that all the parts are out and back in the vendor's shop being repaired and expected to start coming back to us next week. So, the guys are working very, very hard to minimize the impact. But my guess is that it's going to be around about the middle of the quarter, but it's really tough to predict, Jon.

[Jonathan Tanwanteng:]

Okay, fair enough. If I recall correctly, shipments in Q3 at AMAK include a production from Q2, are we actually going to see a step-down in revenue from AMAK in Q4? And kind of how does that impact the profitability there?

[Simon Upfill Brown:]

No, I don't think so because we've been shipping, as I mentioned in the notes, and last call, we've been shipping more and more products to the ports. So, our expectation is that there should be significantly better shipment in the fourth quarter.

[Jonathan Tanwanteng:]

Great. And then any update on the potential IPO process or how you would exit before that if the opportunities in itself?

[Simon Upfill Brown:]

Yes. Well, we continue to pursue all of the above options there and the slowest one is likely to be the IPO. If we can we can report at the -- by the end of the year a good life of mine number, that would be very helpful. And if we continue to work on feasibility studies and engineering on Guyan, we get more and more of those recalls under our belt, more gold in Guyan and surrounding areas, we have a better story to sell. So, I think the results -- financial results in the fourth quarter and under exploration number are going to really help us get that thing done. That's why we're feeling so optimistic about it Jon.

[Jonathan Tanwanteng:]

Got it. Thank you very much.

[Simon Upfill Brown:]

Thank you.

[Sami Ahmad:]

Thanks.

[Operator:]

From Roth Capital Partners, we'll go to Joseph Reagor.

[Joseph Reagor:]

Hey guys. Thanks for taking my questions.

[Simon Upfill Brown:]

Hey Joe.

[Sami Ahmad:]

Hi Joe.

[Joseph Reagor:]

So, Jon touched on a couple of things already one and two, but two kind of additional questions, I guess. First on the Reformer, if this issue were to cause you guys let's say two months of a delay, the equipment issue. Would you guys get any kind of compensation from the contractor for the issue? Is there some kind of insurance you guys have that loss time insurance that might pay something out. Like if anything we can expect there or is it just it is what it is?

[Simon Upfill Brown:]

I think it's a little bit of is what it is. Most of these contracts that you can get from these vendors don't allow consequential damages. The -- we do have business interruption insurance. It will be a very big argument with the insurance company about whether a unit that hasn't started up can have business interruption. So, I think it has to be a little bit of it is what it is Jon, which -- Jon I mean which is why our focus is so much on getting it done. This is very, very frustrating setback which we found during pretreatment of the internals of this heater and you do this with nitric acid because we have to put a coating on the inside of these of these tubes and we found nitric acid leaking out through this piping and it was a devastating find, but all I can say is thank goodness we found it now because if we found this during start-up, it would have -- it could have been a catastrophic incident. So, there is a really big silver lining to this cloud, but it's still a big cloud and obviously, we need to get that thing up and running as soon as possible. And the important thing is that the vendor is not -- we're not in an argument with the vendor, they have accepted their responsibility. They know what happened. It was an error with the tech wells and it's very obvious what of course that and they are doing their utmost to get it fixed as quickly as possible and we're minimizing the impact of the delays wherever we can elsewhere.

[Joseph Reagor:]

Okay. And with that in mind, maybe for Sami, what's the remaining CapEx to be spent there and maybe break down from Q4 and Q1?

[Sami Ahmad:]

Yes, so the remaining CapEx as I mentioned Joe is about $20 million to %25 million that's remained to be spent on Paramax [ph], that's total to complete it. In terms of breakdown between Q4 and Q1, probably one-third, two-thirds of that will be some of the invoices come later. So, 10 or 15 probably good way for you to model it.

[Joseph Reagor:]

Okay. And then you guys briefly mentioned there were some issues with the start-up of the hydrogenation and distillation unit. Can you give us more color there of what the situation is you're dealing with on startups were? And what the potential impact of that was?

[Simon Upfill Brown:]

Well, I think we mentioned that we had almost zero revenue from the hydrogenation unit in the third quarter. We got a little bit from the distillation unit. But the primary issues were some temperature and some pressure excursions within the hydrogenation reactor. These are not unusual when you're starting up a complex piece of equipment that it resulted in catalyst becoming crushed and a number of other issues that we had to deal with. So, really it shut us down for a fairly extended amount of time. There was no real significant equipment damage, but we realized it was temperature indicators and various other control mechanisms that we did not have properly set up. So, we had to replace the catalyst. We had to do all that fixed work and started up again in -- as I mentioned I think in my piece of the presentation in late October. And that unit is now running extremely well. We have a very high margin project that we're running on it now and it's going extremely well. But the unit was down for fairly extended period of time. And then we had another unit where some of faulty equipment resulted in the entire unit -- and so the original plant blocked in with a gooey mess that shut us down for an extended period of time there as well. That project is now just starting up again next week and that will run on that high value project through the end of the year as well. So, I mean these were these were significant setbacks Joe. And we were optimistic that things were turning the corner very well at TC and with a very disappointing quarter for us to get through after we were so optimistic. But not unusual as you start out these really complex high margin projects. We've learned a lot. We've upgraded a number of our people there and spent a lot of time training. And the fact that the hydrogenation unit is running and the other one will start up again next week I think is a good indication for the remaining two months of this year and then for next year.

[Joseph Reagor:]

Okay. And then one final thing on the mine, how close do you feel you guys are to turning that corner and having it be a positive contributor on both earnings and cash flow front?

[Simon Upfill Brown:]

Well, we had been -- we were positive on a cash flow basis even with our Chinese contractor. Metal prices are significantly better now. Operations are not quite where they want to be. We still have some water purity problems. We still have result of some rather poor mining techniques by the Chinese, a lot of waste rock in the ore. With those things will be eliminated, I think we have a good chance of being profitable in the fourth quarter. I think a lot depends on how the last few months go, but I think we have a shot at it Joe. Any foreseen circumstances I think we have a really good chance of having positive net income from the mine in the fourth quarter.

[Joseph Reagor:]

Okay, that's good to hear. I'll turn it over. Thanks.

[Simon Upfill Brown:]

Thanks Joe.

[Sami Ahmad:]

Thanks Joe.

[Operator:]

From B. Riley-FBR, we'll hear from Sarkis Sherbetchyan.

[Sarkis Sherbetchyan:]

Yes, thanks for taking my questions here.

[Simon Upfill Brown:]

Hi Sarkis.

[Sarkis Sherbetchyan:]

Hi. Just wanted to get a sense for what's driving the prime product increases despite the Canadian oil sands customer probably not up taking what they usually take. Maybe give some more granular detail on that if you get?

[Simon Upfill Brown:]

Well, I think Sami mentioned in his notes that we saw some pretty strong demand across a number of the markets. The polyethylene guys seem to be running fairly hard, the -- we got -- we recognized the revenue for the big shipment that we made in the second quarter to Asia. So, that was a fairly chuck -- a large volume in the third quarter. The EPS guys as well, we're running fairly strong. So, it seems like we were pretty much across the work. Some of the markets -- synthetic rubber and a couple of the others were a little bit slow.

[Sami Ahmad:]

But we're pretty very broad based -- wasn't one single customer driving it as Simon mentioned across the markets and it's probably reflective of the strength of the economy as well.

[Simon Upfill Brown:]

And the superior sales team Sarkis.

[Sami Ahmad:]

Yes.

[Sarkis Sherbetchyan:]

No, that's helpful. I guess I was pleasantly surprised given just kind of the supply chain constraints that we were reading about in the region. So, certainly good to see that ahead of the big projects coming online here.

[Simon Upfill Brown:]

Right. And also you mentioned the supply chain constraints. If you're talking about Harvey, I mean part of that $1.5 million to $1.8 million number that we talk about also includes loss sales and brand products, so we could potentially have sold more.

[Sarkis Sherbetchyan:]

Got it. That's helpful. Moving on to the wax sales. I think in the prepared remarks you mentioned that you were selling higher value products. Was that simply a function of having reduced wax feed supply or was this just a fact that maybe you worked through some of the lower value inventory? Maybe you can share more color on that.

[Simon Upfill Brown:]

I mean we are seeing an increase in higher value products. We are moving more of those products, but we also because we were a little bit constrained with supply, we did not need to sell some of the low margin wax. So, it was sort of a combination of things Sarkis, I think. We're obviously working very hard to try and get Wax prices out and by focusing on the two new products were hot melt adhesives and for PVC lubricants that we are obliged to take all of the volumes that our suppliers will give us and if we can't get enough volume out of those markets and some of the other more conventional markets than we do need to sell some of the cheap stuff, which as you know we do lift processing on and we still make a part of that margin on, but obviously reduces the average pricing significantly.

[Sarkis Sherbetchyan:]

Yes and so kind of looking forward, do you expect a similar kind of wax bills mix in contribution. Or would you expect to see the lower value volumes to pick up?

[Simon Upfill Brown:]

We might get a little bit of a lower volume, but obviously we try very hard to minimize that. We it's still benefit [ph] the lower value stuff and build inventory. So, we do our best to sell all of it if we can at higher prices. Excuse me -- but if we do have to sell some of the low value stuff, we will. And that's hard to tell. It looks like our wax supply is now fully up to speed. So, we'll see how we do with the higher value stuff over the next few quarters. But ultimately the plan is to not sell the cheap stuff.

[Sarkis Sherbetchyan:]

Got it. Got it. So, we'll be on the lookout for that. And then if I just kind of move on to maybe more of the custom chemical processing side. I mean I understand that due to the disruptions both from the storm as well some of the start-up issues, we had some potentially lost revenues that obviously with time and materials can be made up. But it sounds like you've pretty much worked through those issues for the most part. I mean any indication on maybe incremental projects that are lined up here. I think the prepared comments suggested that it's strong and the customers are waiting, so it's kind of want to get a sense for timelines and perhaps what that looks like going forward?

[Simon Upfill Brown:]

Well, certainly, we don't have a demand problem in custom processing. What we've experienced as being implementation and operational problems. Faulty equipment which we could argue we should have found ahead of time on the original plant and then some of these start-up issues which are really tough to see ahead of time. But you always make the argument that we could have maybe spotted it beforehand, but it's one of those lessons that you kind of had to go through in many cases. We're optimistic about the fourth quarter and next year, but we've got to stop having the operational issues and operate on a flawless basis which we haven't been able to do up to now. It's certainly getting better. It's certainly improving, but we've got to show that for an extended period of time, we can do it without having these setbacks. And that's going to take us through the end of next year, I think to prove that we can do that.

[Sarkis Sherbetchyan:]

Got it. And so it sounds like the balance of the capital spend, I think you mentioned, Sami, $20 million to $25 million would be broken down over the next two quarters here. After that, do you pretty much return to more of your baseline CapEx rates?

[Sami Ahmad:]

Yes, we do, Sarkis and that $20 million, $25 million is really all for the Advanced Reformer, the CapEx for hydrogenation and distillation is completed. And then post the Advanced Reformer, we expect to go back down to the maintenance caretaker EHS kind of routine $8 million kind of an annual run rate, $6 million to $8 million. We don't have any major projects planned at this time. So, you'll see plenty of free cash flow.

[Sarkis Sherbetchyan:]

Good. That's all for me. Thanks.

[Sami Ahmad:]

Yes, thanks Sarkis.

[Operator:]

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

[Matt Dhane:]

Great. Thank you. I was curious looking at the Advanced Reformer, I know you called out, you expected to probably be done in the middle of the first quarter. So, once it is fully operational, is it going to be immediately fully contributing or is there a ramp up process that's involved with that?

[Simon Upfill Brown:]

Well, there's a ramp-up process, I mean it will contribute at the rate of roughly $6 million to $8 million I think we were telling?

[Sami Ahmad:]

Yes, $6 million to $8 million.

[Simon Upfill Brown:]

On our current volumes of byproducts, Matt.

[Matt Dhane:]

Okay.

[Simon Upfill Brown:]

Then to get to the $12 million to $14 million, we need to go through the ramp-up of the [Indiscernible] sales over the next two years to get to optimal EBITDA generated by that unit.

[Matt Dhane:]

[Indiscernible] immediate step-up for that $6 million to $8 million, it doesn’t take a quarter or two to get up to that level that once its operating, it pretty much goes immediately to those levels, basically that is the way to think about it?

[Simon Upfill Brown:]

Yes, because that's just driven by the margin increase on -- as a result of concentrating those components and then the volume uplift will come, as Sami mentioned, contains growth.

[Sami Ahmad:]

I don't want to -- what's the word I'm looking for. But with this project -- just assuming we don't have any startup problems with it as well right. We'll have the technology provided with that during start -up we'll be working very hard at foreseeing any potential start-up issues, but we don't expect to have problems, but for us to generate the EBITDA, are got to start-up well.

[Matt Dhane:]

Fair enough. Also wanted to ask about the new products that you've been working to introduce. There wasn't any talk that that I heard on the call about that what. What's the update on those and the production successes as well as customer adoption What can you tell us from that?

[Simon Upfill Brown:]

Well, I think we touched on it briefly. The first product we continue to sell, Matt, we got in a new approval in Asia for that product. So, we're trying to get some value from there. There are a couple of other customers that we're still chasing in the U.S. for that product. It's not quite the way we were expecting this to be by now, but it's still growing. And the second product I mentioned in my remarks that the last trials that we've been doing are looking pretty good. So, we're optimistic that we'll be able to get that one up and running over the next year or so. The third one that we've spoken about before, the customer ran trials, they really like it, but they have not implemented it commercially yet. And the fourth one, it unfortunately looks like the economics don't actually work for that. But we haven't completely given up. We've got a few other ideas on the full plan, but it looks pretty tough at this point.

[Matt Dhane:]

Okay.

[Simon Upfill Brown:]

But I did only mention the first two products in the prepared remarks, Matt.

[Matt Dhane:]

Okay. I'm must have -- gone -- mixed up with the other South Hampton products. But looking at the second new product, do you have customers lined up for that if lab trial or if everything continues to go as planned?

[Simon Upfill Brown:]

Yes. We have one customer in particular who is very interested in that product.

[Matt Dhane:]

Okay, great. Well, thank you.

[Simon Upfill Brown:]

Thank you.

[Sami Ahmad:]

Thanks.

[Operator:]

[Operator Instructions] From Singular Research, we'll hear from Greg Eisen.

[Greg Eisen:]

Thanks. Good afternoon Simon and Sami.

[Simon Upfill Brown:]

Hey Greg.

[Sami Ahmad:]

Good afternoon.

[Greg Eisen:]

I realize what you said earlier -- I understand what you said earlier that loss production is loss production due to the time that you're out of commission.

[Simon Upfill Brown:]

That applies very much to custom processing, Greg. As you can imagine if you have a product, you had some in inventory, you're able to sell from inventory and get back up and running again and the rebuild inventory. But when you're selling time on equipment, there's no way to store it. So, if you don't have any revenue because the down for Hurricane Harvey and you don't have any revenue because it shut down because you screwed it up, you just don't get any revenue. So, -- and that's what really wacked us at TC during the quarter.

[Greg Eisen:]

Right. My question, though, really was [Indiscernible], is there any pent-up demand that could be seen in the December quarter due to Hurricane Harvey in any part of the company?

[Simon Upfill Brown:]

There are a couple of little things that we've been able to sell in the last month or so with TC because of lack of availability of some other product that it's not really significant, Greg.

[Greg Eisen:]

Okay.

[Simon Upfill Brown:]

I don't think there will be -- I mean we have -- as I mentioned on the call, we have a lot of people wanting to run in our equipment to TC, but I don't think that's as a result of Harvey. I think that's the result of just the resurgence in the chemical industry and the fact that we've been chasing projects there for some time.

[Greg Eisen:]

Okay. And I guess I was confused at one point I'd like to follow-up on slide six in the presentation. It shows for the hydrogenation and distillation units expecting another $6 million to $8 million EBITDA run rate at the end of 2018. I guess when you spoke I was confused I thought you said $6 million to $8 million hydrogenation, plus $4 million to $6 million from the distillation, not the B Plant itself, but you're saying that the B Plant on a standalone basis, is the $4 million to $6 million--?

[Simon Upfill Brown:]

We talk about $6 million to $8 million from hydrogenation distillation. I could've easily -- I could have easily made that up. Or -- and then another $4 million to $5 million from the B Plant.

[Sami Ahmad:]

$4 million to $6 million.

[Simon Upfill Brown:]

$4 million to $6 million

[Greg Eisen:]

Okay. I see. Okay. I thought that was within the distillations side, but that's from B Plant. Okay, that answers my question. And I think all my other questions have been asked already. We had -- got a lot today. So, I'll let someone else go. Thanks.

[Simon Upfill Brown:]

Well ,thank you. thank you very much Greg.

[Operator:]

[Operator Instructions] And at this time, there are no other questions. I'd like to turn the call back over to management for any additional or concluding remarks.

[Simon Upfill Brown:]

Thank you. Thank you very much operator. Thank you all for listening in today. We greatly appreciate your interest. We would like to, especially, thank our shareholders for their continued support of our company. And once again a special word of thanks to all our employees who went above and beyond during and after Harvey. Thank you all so much. We have four conferences we're presenting at between now and the end of the year and we look forward to updating you on our progress in the coming months. Thanks a lot.

[Operator:]

Ladies and gentlemen, that does conclude today's presentation. We do thank everyone for your participation. And you may now disconnect.