Trecora Resources
Q1 2018 Earnings Call Transcript

Published: 2 May 2018

[Operator:]

Good day, and welcome to the Trecora Resources First Quarter 2018 Earnings Conference Call. Today’s conference is being recorded. And at this time, I would like to turn the conference over to Jean Young, Piacente Group Inc. Please go ahead.

[Jean Young:]

Thank you, Ruth and good morning, everyone. Welcome to the Trecora Resources first quarter 2018 earnings conference call. The earnings release was distributed over the wire services after the close of the financial markets yesterday afternoon. Presenting on our call today will be Simon Upfill-Brown, President and Chief Executive Officer; and Sami Ahmad, Chief Financial Officer. Connie Cook, Vice President of Accounting and Compliance; and Chris Groves, our new Corporate Controller will be available for the Q&A session. Following management’s prepared remarks, there will be a Q&A session. Before we get started, I would like to review the safe harbor statement, which is found on Slide 2. Statements in this presentation that are not historical facts are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon management’s beliefs and expectations only as of the date of this teleconference, May 2, 2018. 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, 2017 and subsequent quarterly reports on Form 10-Q. This webcast is accompanied by a slide presentation that’s available on the company’s website, www.trecora.com. At this time, I’d like to turn the call over to Trecora’s President and CEO, Simon Upfill-Brown.

[Simon Upfill-Brown:]

Thanks, Jean and thanks to everyone joining the call this morning. We are pleased to report solid financial results for our first quarter with total revenue increasing 29.2% compared to the same period last year, reflecting continued growth of prime product volume at SHR and encouraging trends at TC. Sami will cover the financials in detail later. Now to the overview of the quarter in Slide 3. At South Hampton, we recorded an increase of 27.1% in prime product sales volumes in the quarter and delivered a company record 17.7 million gallons in the period. We saw robust demand across many end markets especially in polyethylene. We continue to anticipate sizable new demand from projects in 2018 including a piece of a second Canadian oil sands customer and a new polyethylene plant in North America. Work progresses on the advanced reformer project and we continue to anticipate the commissioning of the reformer in Q3. As for TC, we saw a sustained high demand for custom processing. We recorded modest revenue growth year-over-year but we are encouraged by the sequential trend from Q4 as production improves. We are also pleased to report that AMAK contributed $0.2 million in equity in earnings in the quarter and operating improvements continue to take hold. We will complete our remaining capital project in 2018 and expect our investments to drive significant increases in EBITDA. We are positioned to participate in the resurgence of the North American chemical industry. This is an exciting time to be in chemicals in the U.S. Slide 4, shows a quarterly breakdown of total prime and byproduct volumes along with deferred sales at South Hampton Resources. Our revenue growth was driven by rising raw material prices and as I mentioned earlier, record volume of prime products. We also saw year-over-year growth in byproduct volumes which helped set the stage for our advanced reformer commissioning later this year. As you know, this will produce deliberative revenue stream. International sales volumes in the first quarter were 24.9% as compared to 19.6% in the first quarter of 2017 as we continue to focus on growing international business. We have a new three-year contract with the PE plants in the Middle East. First volumes under this contract were shipped in February. First shipments were also made to a PE plant in Asia under a large purchase order from that customer. We expect continued growth in 2018 as we gain some additional volume for the second Canadian oil sands customer later in the year, although this customer is under contract with our competitor for the bulk of their volume. A new North American PE customer starts up in the fourth quarter. A-Train continue to be used for the production of one new product, we sold show approximately 100,000 gallons more of this product in the first quarter then we did in the fourth quarter of 2017. We also used A-Train to complete the first step for a TC-processing customer, which resulted in good revenue there in the first quarter of 2018. Petrochemical capacity utilization in the first quarter was 56% compared with 41% in the first quarter of 2017 and 61% in the fourth quarter of 2017. Capacity utilization is based on 11,000 barrels per day of fresh feed for both years. Despite robust demand and strong volumes margins was under pressure at SHR as a result of increases in natural gasoline prices and slow to adjust end market pricing. Sami will discuss this in a more detail. As you can see from the photographs on Slide 5, we have made good progress in repairs to the advanced reformer since represented to you last quarter. The cranes have gone, along with most of the scaffolding. Training, start up protocols, process safety systems and standard operating procedures are all moving ahead well. In Q1, we have generated approximately 5 million of byproducts that would be suitable for processing in the advanced reformer. Turning to an update of Trecora Chemical on Slide 6. Trecora Chemicals revenue decreased 0.7% year-over-year in the first quarter but increased nearly 20% versus the fourth quarter of 2017. The sequential improvement in revenue resulted from our collective focus to improve execution effectiveness and the hydrogenation unit finally starting to deliver. TC’s own product wax revenue was a record for the quarter as we upgraded to higher value product specifically developed for hot melt adhesives and PVC lubricant markets. We did see a drop year-over-year in high performance wax products we distribute for another party in Latin America, supplier had significant production difficulties. First quarter custom processing revenue increased 1.8% compared to the first quarter of 2017 both the B Plant and hydrogenation unit rent. We had record revenue from B Plant, a record first quarter custom processing revenue overall in the quarter excluding the non-used fees that we use to be paid through 2016. We are delivering significantly more predictability to the four custom processing customers, we continue to request as much volume as we can produce. In March, we shared details about organizational changes we were making to help improve production particularly at TC. The three main pillars are the changes shown again on Slide 7 for emphasis. Good progress is being made and as always safety is priority number one. Nearly all headcount additions are in place at TC although we are still recruiting for three engineering positions. In my joint role as CEO and COO I have been closer to the plants in recent months and I have seen clear signs of safety focused operating discipline and a work process driven mind set taking hold at both site. Turning to Slide 8, for an update on AMAK. It is encouraging to have AMAK contribute equity in earnings to Trecora second consecutive quarter even though concentrate sales were in total about half what they were in the fourth quarter of 2017 due to timing of shipments. The Guyan gold project continues to move ahead with plans to commission this in the first half of 2019. Progress on the precious metal circuit has been slow but AMAK expect silver doré sales in the next couple of months. Slide 9 shows the solid improvement in Q1 in mill throughput and metal recovery. Concentrate quality also improved further in the quarter. AMAK expects to be able to show a sustained improvement in the coming months and with the strong start we are optimistic that 2018 will be a good year. Now, I’ll turn the call over to our Chief Financial Officer, Sami Ahmad for a more detailed update on the results.

[Sami Ahmad:]

Thank you, Simon and good morning to everyone. Slide 10, provides a brief financial summary of the first quarter of 2018. Net income for the first quarter was $2.4 million or $0.09 per diluted share compared with net income of $1.5 million or $0.06 per diluted share for the first quarter of 2017. Net income for the first quarter includes equity in earnings of AMAK with an estimated after tax impact of $0.01 per diluted share. In the year ago period net income included equity in losses for AMAK of about $1 million or $0.03 per diluted share. Adjusted EPS which excludes AMAK was $0.08 per diluted share. Adjusted EBITDA in the quarter which excludes equity impact of AMAK was $7.2 million representing a 10% adjusted EBITDA margin compared with adjusted EBITDA of $7.4 million representing a 13.3% margin for the same period a year ago and adjusted EBITDA of $8.5 million in the fourth quarter of 2017. EBITDA margins were lower year-over-year at both South Hampton and TC. At South Hampton margins were squeezed mainly due to an increase in feedstock costs specifically a 29% increase in Mont Belvieu non-TET natural gasoline cost compared to Q1 2017 and a 7% increase compared to Q4. The increase in feedstock cost primarily impacted our spot or nonformula based prime product sales as competitive situations prevented us from recovering these costs. Spot sales are little over 40% of our total prime products sales. Formula margins were also impacted by rising feedstock costs as formula pricing is based on prior month feedstock cost. In addition South Hampton also had higher labor and logistic costs specifically labor costs were higher due to overtime associated with a freeze related shutdown and operation stream. Transportation costs were primarily due to an increase in third-party freight cost associated with governmental mandates which took effect in the first quarter of 2018 as well as greater sales volume. TC experienced higher year-over-year operating costs in the quarter including higher labor and maintenance costs as we focused on improving operations and equipment uptime as well as higher transportation and utility costs. Operating cost at TC in the first quarter of 2018 were roughly flat from the fourth quarter of 2017. TC also recorded $128,000 charge to bad debt in connection with the receivable from Brazilian customer that filed for bankruptcy. As Simon mentioned, we are taking steps to increase margins. At South Hampton we announced price increases for prime products in the first quarter and are considering additional price increases in the future. Cost management is also clearly a priority and the start up of the advanced reformer in the third quarter will further improve the margins. At TC, it’s all about ramping up custom processing revenues while managing costs. CapEx for the first quarter was $11 million during the quarter the primary use of capital expenditures was for the new advanced reformer unit and the addition of a rail spur at our South Hampton loading facility. Through the end of the first quarter, we have spent approximately $52.5 on the advanced reformer unit and our current estimate is that the project will cost approximately $58 million, including the $1 million insurance deductible. Under our insurance policy we expect to receive an initial payment under a POA of approximately $1.7 million for repairs to the advanced reformer unit in the next few weeks. G&A expense for the quarter was $6.34 million, a 1.8% increase compared to Q1 2017. The effective tax rate for 2018 is 21%, while the tax rate of 2017 was 35%. Long-term debt including the current portion but excluding loan fees was $107.5 million as of March 31, compared to $99.6 million at year end 2017. Revolver borrowings increased to $45 million at the end of Q1 from $35 million at year-end. Following the end of the quarter we paid down $4 million on the revolver with an income tax refund. We have approximately $15 million of availability under the facility. Slide 11, presents the summary of our quarterly petrochemical revenue and sales volumes broken out by prime products and byproduct volumes. Prime product volumes in the first quarter were approximately 17.7 million gallons compared to 17.1 million gallons in the fourth quarter and 13.9 million gallons in the first quarter of 2017. Due to the need to produce additional prime products to support the increase in sales volumes, our byproduct volume increased approximately 64% year-over-year in the first quarter. Byproduct volume was 5.6 million gallons in the first quarter compared with 3.4 million gallons a year ago. In the first quarter byproduct margin above feed was approximately $1.06 per gallon compared with $0.07 in the fourth quarter and $0.08 per gallon in the first quarter of 2017. Margins for byproducts were compressed because feedstock costs increased more than the price of byproducts. As we have said before, we anticipate a significant margin uplift for these byproducts once our new advanced reformer unit comes online in the third quarter. Turning to Slide 12. In this chart we show the market price of natural gasoline and our processed cost to feedstock on a relative basis. The spread reflects the delivery cost from our suppliers as well as any shortfall fees that we’ve incurred when volumes were below contractual minimum amounts. Average petrochemical feedstock cost was 17% higher per gallon in the first quarter of 2018 compared to first quarter 2017 and 9% higher then Q4. In a rising feedstock environment margins on our formula priced prime products contracts can get squeezed as the contracts are based on prior months average feedstock costs. Additionally we can lose margin on a stock nonformula business when we’re unable to push through price increases due to competitive reasons. As I mentioned, first quarter 2018 margins were impacted by both of these pressures. Moving to Slide 13. Wax volumes at Trecora Chemical were 9.5 million pounds in the first quarter, down 10.5% from a year ago but up 34% from the fourth quarter. Wax revenues were down 1.9% from Q1 of 2017 but up 22.4% sequentially. As Simon explained, we saw a significant ramp in wax production in Q1 relative to Q4. Average wax pricing increased approximately 9% year-over-year in the first quarter. The price uplift is mainly due to improving sales mix as TC sells more higher-value waxes and that has translated to a significant increase in wax feed margin compared to a year ago. Slide 14, presents an overview of our custom processing revenues at South Hampton and TC. Custom processing at South Hampton was $2 million in the first quarter of 2018 compared with $1.5 million in the year ago period. The increase in custom processing revenue was primarily due to higher process volumes and a first step processing for a TC project that was completed at South Hampton. Custom processing at TC was $3.2 million, a 14.6% increase compared to the fourth quarter. B Plant revenues in Q1 were a record breaking $1.25 million compared to $0.8 million in the first quarter of last year. Hydrogenation and distillation revenues were approximately $0.3 million in the first quarter. This concludes the financial revenue. And with that I’ll turn the call back over Simon.

[Simon Upfill-Brown:]

Thanks, Sami. To recap on Slide 15, we delivered a solid quarter highlighted by prime product sales volume increases at South Hampton, sequential revenue growth at TC and positive momentum at AMAK. In the near-term we are committed to drive margin improvements while continuing to deliver volume growth. I’m pleased with the progress we have seen resulting from the organizational changes we have implemented as we grow towards the culture of operational excellence, a vision of safety, consistency, reliability and responsiveness. Industry dynamics remain strong and we expect to capitalize on the expanding petrochemical production capacity on the Gulf Coast and stronger demand from polyethylene manufacturers in many parts of the world. We also look forward to some volume from the second Canadian oil sands customer in the second half of 2018, this is just a great time to be in the U.S. chemical industry. Improving operating discipline at TC allows us to capitalize on strong customer demand. The advanced reformer unit is progressing well after the incident and will come online in the third quarter, delivering significant EBITDA improvement by increasing the value of our byproduct. The hydrogenation and distillation unit is showing considerable operational improvement and reliability and with more progress expected in the coming months. AMAK delivered second consecutive quarter equity in earnings and continued operating improvements boost our optimism about our ability to monetize our investment in AMAK in the not-too-distant future. This concludes my prepared remarks. At this time I’d like to ask the operator Ruth to open the call for Q&A.

[Operator:]

Thank you. [Operator Instructions] We’ll go first to Jon Tanwanteng with CJS Securities.

[Jon Tanwanteng:]

Good morning. Thank you for taking my questions.

[Simon Upfill-Brown:]

Hey, Jon.

[Jon Tanwanteng:]

Simon or Sami, just given the rise in your raw material cost is there a change in the potential EBITDA contribution that you are thinking from when the advanced reformer finished from byproducts either this year or next.

[Sami Ahmad:]

Hey, Jon good morning. This is Sami, I’ll take that. So what we have seen on the byproduct side and you that in the margin explanation I gave is, natural gasoline feedstock cost they grow sharply the aromatics in byproducts, they didn’t rise as much as natural gasoline and therefore we saw margin compressed. So if that trend continues then that will affect the margin uplift when the advanced reformer starts up. Now, what we hear, we’re not very close to those aromatics market but we hear one-off reasons why that might be the case on – and tie those aromatics. But fundamentally those products are tied to oil prices. And also as you know, as we have described before natural gasoline has something like a 90% correlation with crude oil specifically brand. So they should keep up, but that’s not happened in the first quarter.

[Simon Upfill-Brown:]

But I think we’re still optimistic that the 40, round about 40 – uplift, what we’ve currently being getting or historically being getting for a byproduct is fully expected Jon.

[Jon Tanwanteng:]

Okay, great. That’s helpful. So you do expect the spread to normalize kind of inline with oil and natural gas price as it has in the past.

[Simon Upfill-Brown:]

Yes. That’s the expectation.

[Sami Ahmad:]

But there is still a lot being in North America because of cracking ethene. So how do you make benzene when you crack ethene?

[Jon Tanwanteng:]

Got it. And then just turning to the prime products. How much of the pricing differential can you – or do you think you can recover in the spot markets given the competitive pressure if any at all.

[Sami Ahmad:]

It’s always a couple, and as you know, our competitor has fair amount of capacity to make these products, it is a byproduct for them, they came to price of gasoline there has been some price increase in the base value of gasoline. But they’ve been fairly aggressive there. We spent a lot of time reminding our customers that we are the only people to make this on purpose. And if they need us long-term, we need to get some of the business and we need to get a decent price. So we just keep pushing that Jon. We got a double this time because of the upward trend in the natural gasoline products and so that waked us on the formula based pricing as well as the spot pricing. And that’s relatively unusual. We’ll keep pushing on the products and we’ll do our very best to get what we can. It’s very hard to know exactly what our friendly competitors going to do. In a situation like this – really only two of us, there should be a lot of discipline on the pricing. And we will continue to lead.

[Simon Upfill-Brown:]

In the first quarter we announced price increases but we couldn’t support them for those competitive reasons.

[Sami Ahmad:]

Partially stuck, some of them stuck with a couple of customers, most of them we were unable to hold on.

[Jon Tanwanteng:]

I think you cut out there for the last second, Simon. Did you say you announced price increasing in the spot market and what happened after that.

[Sami Ahmad:]

In the first quarter, we did announce price increases and as Simon mentioned some of them stuck on few customers but large part they weren’t supported by the competition.

[Jon Tanwanteng:]

Got it. Thank you. And then finally Simon, just any update on how you plan to monetize AMAK in the timeline going forward.

[Simon Upfill-Brown:]

Yes. I mean, the more quarters of good results we have potentially the better the price we can get Jon. We’ve initiated a discussion with somebody who’s very well connected with the mining industry, they have started discussions with people that they know on an anonymous basis. We are yet to prepare a clear document and those kind of things that those are – some of them are in the preparation stage. So, we keep guiding away on that, but the more success we have with AMAK in delivering positive results I think there it is, it is for us and all expectations are that metal prices will remain strong because that’s a way we have concern right, you know the way to the point where metal prices going to decline. There is really a good outlook for both zinc and copper for the foreseeable future. So we really do want to get out of this business, but I think we need to do it on a methodical and sensible basis and I think over the next six months I think we will have scaler picture of what the timing will be.

[Jon Tanwanteng:]

Okay, great. If can just squeeze in one more. Just remind me, in terms of shipments for AMAK was Q4 unusually strong or was it Q1 just unusually week or maybe the combination of both.

[Simon Upfill-Brown:]

It’s a little bit of both, Q4 was particularly strong because we started building early in the third quarter and then we shift relatively early in the first quarter. And we shift in the fourth quarter right at the end of the quarter. So there was a little bit of both as you suggest it. But if you look at the one slide, I think it was Slide 9, the overall throughput rates and concentrate production numbers continue to go up. And the quality of the concentrate continues to grew, so all the trends are in the – very much in the right direction.

[Jon Tanwanteng:]

Great. Thank you very much.

[Operator:]

We’ll go next to Joseph Reagor with Roth Capital Partners.

[Joseph Reagor:]

Good morning, guys. Thanks for taking the questions.

[Simon Upfill-Brown:]

Hey, Joe. You like the time of the spoke Joe.

[Joseph Reagor:]

Yes, it’s a little later for us here in the West Coast. So that’s appreciated. First question, if you guys, TC the margins obviously haven’t been what you guys hope for when you bought in. And I think ultimately the goal was with the new hydrogenation and distillation unit you would be able to get to about 30% gross margin. Is that still the company’s goal or is there a revised expectation given what market conditions are today.

[Simon Upfill-Brown:]

No. I think we can still get there, Joe. As Sami pointed out, we continue to look for wax feed but we are limited on the wax feed that we can attain at this point which limits us on the wax volumes but we continue to draw wax pricing. So that’s going to help us drive in that direction but the big issue perhaps at TC is to increase custom processing revenues because as we’ve said a number of times, once you are above breakeven any incremental custom processing project just about all the revenues flows to the bottom line. It’s just a little bit of energy cost that you have to cover. So our custom processing revenue continues to ramp and there is just so much interest in our capabilities, we spend a lot of time in deciding which are the right projects and which are not and so on and so on. I think we can get there Joe. It’s been frustrating that we haven’t been able to get there up to now. But most of the issues we’ve been addressing have been starting up the hydrogenation, eliminating all the technical difficulties we had with the way it was set up and catalyst and the exchange all those kind of things. Those are behind us now. And B Plant is generating well, so we should be able to get there. I don’t know if Sami has anything if you like to add.

[Sami Ahmad:]

Yes. You hit the nail in the head, Simon, couple of things Joe. So in the quarter EBITDA at TC was $379 million as we shown in the segment information and if you roughly add the bad debt expense that I talked about call it $0.5 million which is about 5% adjusted EBITDA margin. So then if you follow Simon’s logic and you add – I’m just making up a number just to show you the leverage of custom processing a million on custom processing you increased their margin for 5% to 16%. So that leverage is really what’s important. We’ll get benefit on wax really volumes were roughly at steady state in terms of sales versus production going forward. The growth in revenues are going to come from wax pricing as we improve the mix and then largely as we drive custom processing.

[Joseph Reagor:]

Okay. Thanks for the detail there. Then kind of shifting gears to the balance sheet. I would say that loads continue to rise as you guys have worked through all these capital expenditures and reformer unit looking like a Q3 item just in contributing and then draining cash too. How do you guys feels about your balance sheet, I mean the stock performed reasonably well over the last 12 months, would you consider raising equity to review stat or do you feel comfortable you can get to the finish line and then use cash flow.

[Sami Ahmad:]

I think – and Simon can add to this. I don’t think the board has influenced raise equity right now to pay down debt. I think from a liquidity standpoint we talked about $15 million availability following the small pay down that we did. We’re hitting up against covenants. So if you recall last year we did a covenant reset that basically pushed it – pushed those covenants that won’t lose covenants through 331 of this year. And then it resets back to the original one. So there’s a little bit of squeeze from the covenant reset just $1 million or so on availability or couple million on availability. But the bulk of the CapEx expense and I highlighted that is done with. And as we get the reinvestments from the insurance carriers or we’re starting get that under POA over the next few weeks that will really pay for all the repairs. So we’re done with the bulk of the expense and now I think we will – starting in Q3 we would enter into a period of good free cash flow coming out of business and that we would apply to debt reduction.

[Joseph Reagor:]

Okay, fair enough. And then one kind of point of clarification the $0.40 per gallon on the byproducts that you guys planned to get as a price increase in the current market. How does that compare with the expectation when you guys embarked on building the reformer? I don’t have that in my notes, but I just wanted to know, has that number changed at all or is that been consistent throughout.

[Sami Ahmad:]

No, it’s been pretty consistent Joe, that’s the number we’ve been talking about. I think we’ve said anywhere between $0.35 and $0.45 or something like that over the years since we started this thing.

[Joseph Reagor:]

Okay, so your follow on time to right at the midpoint of what you’d expected it just take for the long-term.

[Sami Ahmad:]

Yes, yes.

[Joseph Reagor:]

Okay. I’ll turn it over. Thanks guys.

[Sami Ahmad:]

At least three months longer and that’s very frustrating that we went through that incident. The big thing was of course nobody was hurt and it didn’t damage any of the other production units that we have here at South Hampton. And I think the photo that we showed tells a good story there – the things are ramping up on the repair side.

[Joseph Reagor:]

That’s good. Thank you.

[Sami Ahmad:]

Thanks, Joe.

[Operator:]

We’ll go next to Sarkis Sherbetchyan with B. Riley FBR.

[Sarkis Sherbetchyan:]

Good morning and thanks for taking my question here.

[Simon Upfill-Brown:]

Hi, Sarkis.

[Sarkis Sherbetchyan:]

So first wanted to kind of dive a little bit more into the pricing opportunity at South Hampton on the formula based plus spot initiatives. Can you may be dive into this a little bit further. And help us understand what perhaps may give you some confidence in future price increases to off set some of this rising input costs that you’re experiencing.

[Sami Ahmad:]

Well, so the way to think about that is from a competition standpoint I think we’ve talked about this in the past. The competitor prices of gasoline and specifically as far as we understand it they price off CBOB which is the conventional blended CBOB 87 U.S. Gulf Coast. So the way to think about competitor response is based on the blending value and that’s going to be affected by gasoline prices going up. So if you look at that CBOB it’s been in the fourth quarter, CBOB was about $1.67 then it increased to about $1.82 in the first quarter and it’s in that $1.80 to $1.90 here in April. And as we go into the summer driving season, I think our gasoline prices typically trend higher we will get support perhaps that way. And then secondly I think we just need to be as Simon talked about we’re the market leaders here we are beyond purpose producers it may require some more leadership in that sense to get these pricing. And then finally on – just to your margin question, we were squeezed on byproduct margins from fourth quarter to first quarter as I talked about. And that was a result of natural gasoline prices going up more than what we could recover with the byproduct components. That we think will also improve over time and then more significantly when the reformer starts up in the third quarter.

[Simon Upfill-Brown:]

And then if – if our natural gasoline prices moderate then you also lose the negative impact of the lag that we’ve been experiencing over the last three months. If you look that semi-slide it was sort of a steady increase throughout the quarter which means we’re buying in the current quarter but pricing both the previous quarter. And when you just lose that differential and so as things stabilize or at some point maybe. And that’s for gasoline prices start to trend downward then we get the benefit of that lag. And I think as you recall from 2015 that was when there was generally a consistent trend downwards in natural gasoline prices we benefited that from that throughout the year.

[Sarkis Sherbetchyan:]

Thanks for that. That’s super helpful illustration. And if I may ask with respect to the byproduct margins. It sounds like the reformer units still scheduled to start up in 3Q here. And I think in 1Q you generated about $5 million of byproduct, so it’s sounds like that would be suitable for processing on the reformer. Can you may be remind us what the throughout limit is for the reformer assuming it’s online and processing?

[Sami Ahmad:]

Well, we do have some byproducts that cannot go through the reformer. We have some lights, some sea force, streams, we can’t put those through the reformer but the bulk of the byproduct that we make those through the reformer. And we have a unit that will be able to process 4,000 barrels a day and I can’t do the math quickly in my head but that’s significantly more than the 5 million gallons a quarter that we had in the first quarter Southeast. We have – well I think, we’re expecting when we are up to the 11,000, 13,000 barrels a day to be fully utilizing the advanced reformer even then I think we still have some extra capacity. And as you saw, we’re running 6,000 barrels a day or 5,500 barrels a day, we’ve got more than enough capacity on that unit.

[Simon Upfill-Brown:]

We shouldn’t be capacity constrain at all not for a long time.

[Sarkis Sherbetchyan:]

That’s also helpful. And if I step back and think about your comments with respect to making the first shipments of polyethylene plant in Asia under an order. The Canadian oil sands customer potentially starting up in the reminder of the year. And it sounds like there’s some other piece, so will that start at this year. I mean, it sounds like the prime product volume should be trending higher and is that the kind of right assumption to start modeling from a contribution standpoint.

[Simon Upfill-Brown:]

Yes. I think so I mean, we had really good first quarter for us, the prime product volume was very high. And particularly January where we shift quite a bit of volume into Latin America, but it’s strong – it’s the trend is definitely up on product volumes, Sarkis

[Sarkis Sherbetchyan:]

Understood. And then if I step back and think about the comments on additional distributions in storage costs. Maybe walking through that sure taking to mitigate some of that cost structure and/or some of the kind of incremental labor cost that you experienced in the quarter.

[Simon Upfill-Brown:]

Yes. I’ll kick that off Sarkis. So we want to pass through freight costs at Southampton to the customers as much as possible within competitive reasonableness. And so that’s the first approach is to make those adjustments to recover those costs in our pricing. Secondly, we are looking at things like restructuring some of our leases, rail car leases specifically to reduce lease payments. We have exited from some off side storage at TC to reduce those costs. We have again restructured some tank trucks whereby we got out of leases and bought tank trucks in auctions at very low values and never sold us this since they have some money that way. So we’re looking at all kinds of incremental things by themselves are maybe modest, but in aggregate they should amount to good amount. Secondly, we’re faced with generally just higher rates coming from the carriers for the reasons we talked about and due to tightness in a rail car market and regulations. So we’re going to try to push those costs through as well as takes some of the steps that I talked about to reduce costs. And then the project that I mentioned at Southampton the rail spur sales loading rack that will help quite a bit in terms of reducing rail expenses like switching expenses and so on. So I mean the point is we are not sitting idle about this. We’re doing things and hopefully we can mitigate some of these cost increases.

[Sami Ahmad:]

What other things that we have to adjust to was this the local rail we’re here used to allow us to store rail cars there for a very, very low price. And that where we are that brought out by one of the big rail companies, one of the big national companies and they withdrew that, right. And so we had to adjust to that and that’s a lot of our attendees describing is how what we’re doing to minimize the impact of that change. And that there is a big one I think that’s going to have a good impact and then only other things like optimizing the rail cost of each store anywhere it is cheaper to store and all those kind of things will have positive impact.

[Sarkis Sherbetchyan:]

Great, thanks for that. One final one for me, I saw that the slide deck contain the CapEx number, which is I believe that what is $1 million for the quarter. And do you remind providing cash from ops generally in the quarter?

[Simon Upfill-Brown:]

Cash from ops will be probably Q here shortly with $2.7 million.

[Sarkis Sherbetchyan:]

Okay, thank you all. I’ll back in.

[Simon Upfill-Brown:]

Yes.

[Operator:]

We’ll go next to Bill Dezellem with Tieton Capital.

[Bill Dezellem:]

Yes, thank you. Couple of questions. Where we are doing the math correctly when – where the byproduct volume opportunity with the advance reformer in this quarter for example you had 5 million gallons that you produced and you have an incremental $0.40 so that’s another $2 million of pretax profit just rounding.

[Simon Upfill-Brown:]

That relatively close, that’s relatively close Bill. That’s the reasonable number.

[Bill Dezellem:]

Great, thank you. And then how should we be thinking about the profit that the incremental profit that you should be making on the $17.7 million gallons of prime product that you produced this quarter because clearly your profitability was not optimized with the many issues you talked about here this quarter.

[Simon Upfill-Brown:]

Well, I think Bill the cost of producing an incremental gallon is pretty low as we’ve discussed in the past. It doesn’t cost much to produce an incremental gallon of pentene provided your byproducts you can sell those at a decent price. We were impacted a little bit by that of course and both really have a little bit of energy and those kind of things. So incremental volume should very much have a better impact on the bottom line, but we did experience some of these additional costs that Sami covered there’s still be some trading going on during the third quarter, we mitigate some of the distribution expenses and all those kind of things. We should really start to see the benefit of incremental volume. I don’t know we’ve actually given an exact number on those kind of things, but I mean it’s…

[Sami Ahmad:]

No, we haven’t, but the incremental cost really for us is energy, it’s a fuel gas. And so you can kind of think that, we haven’t disclosed that obviously for competitive reasons.

[Bill Dezellem:]

And you may not want to disclose this next one, but I will try. Relative to the pricing mechanism and that lagged effect, if the mechanism were to catch up. I guess, maybe prices were to be flat and the pricing mechanism were to catch up. What would be the incremental profitability that would be experienced?

[Simon Upfill-Brown:]

I’m not sure, we want to talk about that for competitive reasons, but it’s really significant.

[Sami Ahmad:]

60% roughly of our volumes formula, the 17.7 million gallons of prime product that we sell as a round number, so it would be significant. And just looking at those charts, I mean I think there’s a scale on the chart, but if the increase in natural gasoline price from one month to the other was $0.10 a gallon that, that $0.10 will come back to us, if the price is stabilized, right. So it can be quite significant. I’m not telling the increase was $0.10, but that’s in some months, it’s been higher than that, right. So…

[Simon Upfill-Brown:]

It could be a one month effect.

[Sami Ahmad:]

Yes. So one month effect.

[Simon Upfill-Brown:]

Wouldn’t be three months…

[Sami Ahmad:]

It wouldn’t be a quarterly effect, but 6 million gallons. So we’re that. So we’re carefully dodging your question.

[Bill Dezellem:]

And you have done a very nice job navigating it.

[Simon Upfill-Brown:]

We gave you a little bit of an indication as lead Bill.

[Bill Dezellem:]

It’s directionally. Thank you.

[Simon Upfill-Brown:]

Let’s switch if we could to byproduct volumes were up 64%, on a 27% increase in prime product volumes. Now I think of those two as moving really together and at this time for your function of the byproduct volumes are in a smaller base, so that why their growth was so much higher and a percentage than the prime product.

[Sami Ahmad:]

Well, what else happens if we get big jump in pentane to month. So we take in more hexane than we can sell. And that’s what – and that hexane has to be sold as byproduct for example. We don’t have a lot of capacity to convert all the hexane into finished product. So that goes to byproduct. And that’s generally what happens, of course is the jump. And we had a very strong January pentane requirement and as a result made quite a lot of excess hexane product and we had to sell that into the byproduct market. So that’s how it happens, when you have the jumps in volume of pentanes and this is why there is advance reformer is so important to us.

[Bill Dezellem:]

Great, thank you. And then final question is, relative to the competitive – competitors pricing action or lack of pricing action. What more would you like to add to that conversation?

[Simon Upfill-Brown:]

I’m not sure where you’re headed with that question, but we want – we need to be able to recover these costs in the marketplace right now and many of the segments that we selling to polyethylene, polyurethane. Those market segments are doing very well. I’m not just talk about volumetrically, but growth wise and probability wise. Okay, so we’re aware of that and we will take steps.

[Bill Dezellem:]

Thank you, both.

[Simon Upfill-Brown:]

Yes, Thanks, Bill.

[Operator:]

We will take our last question from Greg Eisen with Singular Research.

[Greg Eisen:]

Thank you, good morning. Couple of questions.

[Simon Upfill-Brown:]

Hi, Greg.

[Greg Eisen:]

Hi, Simon. Hi, Sami. First on byproducts. On the byproducts, when we first started talking – when I first started talking with you. You referenced the $0.40 a gallon incremental benefit, at a time when your existing margin on byproducts was a lot more than $1.06. I’m trying to remember maybe it was more or like $0.10 at the time, or $0.10 to $0.15. When you say $0.40 incremental margin, will that be on top of what would be a normal byproduct margin? If I look at this quarter’s byproduct margins being more than a standard deviation below the average. Should I be thinking more in terms of, well, you could be making over $0.50, or $0.45 to $0.50 as opposed to $0.41, you sort of driving that?

[Simon Upfill-Brown:]

Yes, I understand your question. So the driver for the margin uplift in byproduct – when we talk about the margin uplift, what causes the uplift is basically the new reformer will increase the concentration of those aromatic components, not only getting into all the detail behind it, but it increases it substantially and that’s what makes it more valuable. So at any point in time, so for instance, in the last quarter byproducts margins were $0.01 or $0.02 – $1.06, it’s relative to that because that $1.06 reflects the value of those components in the market at that period of time. So I wouldn’t suggest that you go back and say $0.40 over a year ago when those components were different, it might have been $0.10, it’s relative to where we are now.

[Sami Ahmad:]

So, may I – I think it’s going to fit in. If we’re in a situation like the first quarter it would be $0.40 above the first quarter of 2017. So I think the number to take is an average of $0.05, and then it’s a uplift from there. But it does depend on what’s happening in the benzene, toluene aromatics marketplace. It’s kind of tough to take it versus a particular product that would break because it’s going to average out the $0.40 uplift across the year – multiple years and so on.

[Greg Eisen:]

Understood, understood. I’ll move on to my next question, which was the hydrogenation and distillation unit. You quoted a revenue number that it is possible for kind of nominal amount of revenue but its working. And sounds like it’s improved over where you had it last quarter. I guess my question is if we think of it as in percentage terms of how far long is going to drive this? Is the hydrogenation and distillation unit could be operating at post field? You had your hiccups with it. Is it 60%, 70% along to be – everything you wanted it to be or pick a number?

[Simon Upfill-Brown:]

No, it’s a lot lower than that, Greg. I don’t know what the exact number is, but it’s significantly below that. And we’re also doing more through the distillation tower as well. So I think what we’ve shown here is that, when we’re running we can run steady, we still have these other hiccups, we still have Penhex that we’re pushing, eliminating and so on. And they will definitely be on significant continued progress on the hydrogenation unit there. We are a long way from where we want to be, but at least we know we can now feel it, it runs it makes good product, but there is still part of optimization that we need to go through. And that’s what I mentioned on the call there will be continued progress in the coming quarters.

[Greg Eisen:]

Understood, okay. So I was a little bit high there on my number, understood. One last question if I could, Simon. On the – you stepped into a more of a hands on role at Trecora Chemical in recent months. You’re probably closer to the operations now than you were previous to that. Is there anything you could share about what you’ve learned from this time period that got any surprises about the business there that you’d want to share?

[Simon Upfill-Brown:]

No, I think we touched on the fact that folks are becoming a lot more work process driven, a little bit less use of intuition, really analyzing something and doing real sort of records, analysis before you make a change or an adjustment. So there’s certainly a lot more of that. And then with the additional resource, we can do more. I mean, it was one of the big issues we were having was that first we’re just overwhelmed with the amount of stuff that had to be done. So that’s why we’ve added additional people and we’re still going to add a few more. So there is significant improvement in the way we approach a new project, the way we approach a modification that needs to be made, and all those kind of things. So I’m very excited about the way the place is starting to run now.

[Greg Eisen:]

Great, thanks for answering my questions.

[Simon Upfill-Brown:]

Thanks. Thanks, Greg.

[Simon Upfill-Brown:]

So thank you all for listing in today, we greatly appreciate your interest. We would like to thank especially our shareholders for their continued support of our company. And please remember to vote your shares, we have our AGM in less than two weeks time, and it’s very important to us that all those shares that need to be voted are in fact are voted. Sami will be at the IDEAS Conference in Boston on May 9. I will be at the B. Riley Annual Institutional Conference in Santa Monica on May 24. And we look forward to updating you on our progress at those events and at our next call. Thank you all very much.

[Operator:]

This does conclude today’s conference call. Thank you for your participation. You may now disconnect.