Trecora Resources
Q3 2018 Earnings Call Transcript

Published: 4 Nov 2018

[Operator:]

Good day and welcome to the Trecora Resources Third 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 with Piacente Group Inc. Please go ahead ma’am.

[Jean Young:]

Thank you, GG and good morning everyone. Welcome to the Trecora Resources third quarter 2018 earnings conference call. The earnings release was distributed over the wire service after the close of the financial markets yesterday afternoon. Presenting on our call today will be Simon Upfill-Brown, President and Chief Executive Officer, Dick Townsend Executive Vice President and Chief Manufacturing Officer and Sami Ahmad, Chief Financial Officer. Chris Groves, our Corporate Controller will also 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, November 1, 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. The webcast is accompanied by a slide presentation that is available on the company’s website www.trecora.com. At this time, I’d like to turn the call over to Trecora’s President and CEO, Simon Upfill-Brown.

[Simon Upfill-Brown:]

Thanks, Jean and thanks to everyone joining the call this morning. While prime product volume recovered from levels in Q2 and wax revenue remained strong in Q3, we experienced feedstock cost pressure, higher operating costs and operational challenges that impacted profitability in the quarter. Third quarter adjusted EBITDA decreased 34.3% compared to the same period last year to $4.9 million. Reported net income in the third quarter included equity losses from AMAK of $1.1 million, encouragingly improved prime product sales and continued strong wax demand, heightened our focus on executing our ongoing transformational plan to drive more consistency and reliability in operations to yield more predictable financial results. We are committed to leverage our updated assets following a multi-year capital program. Now to the details of the quarter in Slide 3, looking at South Hampton, prime product volume bounced back from the customer related dip we saw in Q2. But, higher feedstock costs and higher operating expenses led to lower margins. In addition, we were pleased to see the unit was delivering the Advanced Reformer unit was delivering the margin uplift as expected. Unfortunately, we experienced external electrical power issues from our supplier late in Q3 that we recently discovered impacted the catalyst activity in this unit. Turning to Trecora Chemical, we were pleased with the performance of the wax business which continued to deliver solid volume and revenue. The strong results in the quarter came despite the wax feed supply issues that we discussed on the second quarter call that impacted the first few weeks of July. Third quarter custom processing at TC was below plan. As one unit in A plant and the hydrogenation distillation unit were down most of the quarter, the first due to plant reliability and feedstock supply issues and the second, while we implemented process safety improvements. Dick Townsend, our Chief Manufacturing Officer will speak in detail in a few minutes about our plans to improve performance at both TC and SHR. Dick has hit the ground running and we thought it would be helpful to have him share more details about the transformation plan, he is leading. Cash flow from operations in AMAK was positive, as evidenced by our net income before depreciation and amortization of $4.5 million. AMAK continues to show improved performance in the quarter, but delivered negative $1.1 million equity in earnings. The sequential decline was primarily due to reduction in MX inventory value for copper and zinc concentrates. Slide 4 shows a breakdown of total prime and byproduct volumes along with deferred sales at South Hampton Resources. Total product volume is down from the third quarter of 2017, but prime product volume increased year-over-year as well as sequentially from Q2. International sales volumes in the third quarter were 25.6% of total, as compared to 17.3% in the third quarter of 2017. We often experienced fluctuations in international orders from quarter-to-quarter, and this quarter was strong both in Canada and in the Middle East. As we shared last quarter, currently, we conduct no material business in China or the European Union. So while we continue to monitor proposed tariffs and existing tariffs. Today, we expect no impact from such actions. Our customers appear confident that tariffs are unlikely to impact their ability to compete as well. Petrochemical capacity utilization in the third quarter was 53.7% compared with 52.7% in the third quarter of 2017 and only just about 50% in the second quarter of 2018. Capacity utilization is based on 11,000 barrels per day of fresh feed for both years. Feed margins remained under pressure at SHR, as a result of elevated feedstock prices and slow to adjust end market pricing. We have a plan in place to address these and other cost pressures and Sami will discuss this in more detail. Moving to Slide 5, following commissioning in July, the Advanced Reformer was delivering the margin uplift as expected. In late Q3, we experienced external power supply disruptions that caused the shutdown of the entire plant as well as an outage on the Advanced Reformer. After the restart of the reformer and a thorough view of the performance by our engineers and by our catalyst provider, we discovered that the catalyst activity had been impacted. The unit continues to run but at reduced performance. We have made the decision to replace the catalyst, planning is underway to execute this work over the next few months. This will result in a 45-day shutdown of the Advanced Reformer with cost estimated at $4 million, which includes the cost of the new catalyst. The Pfenex units will continue to run. We are working with our electrical power utility to see what can be done to improve the robustness of the power supply to SHR and have an ongoing program, which is near completion to improve our ability to ride through external power disruptions. Our expectation for an annual EBITDA contribution from the Advanced Reformer of $6 million annual run rate in 2019 and $12 million to $14 million by 2022 has not changed. Turning to an update at Trecora Chemical on Slide 6, TC delivered solid results in the quarter with revenue up 29% year-over-year. Wax volume increased 12.7% and Q3 wax revenue increased 23.3% year-over-year. Average wax selling price increased 10%, reflecting our marketing strategy to enhance pricing and improve sales mix. Similar to last quarter continued strong demand for higher value waxes drove our performance. Third quarter custom processing revenue grew 42.9% compared to the third quarter of 2017, but would have been much stronger had we have not experienced plant issues and struggled to meet demand. As we have described over the past few months, we are executing a detailed improvement plan run by Dick to address all aspects of a minute manufacturing operation. We are five months into that plan and we are making significant progress on implementation. As some of you may remember, due to the importance of this effort, Dick agreed to step down from the Board to lead our manufacturing transformation plan. And today, I have asked him to share the broad outline of the plan and the progress that we have made to-date. So with that, Dick, please go ahead.

[Dick Townsend:]

Thank you, Simon and thanks for the opportunity to share this plan with the investment community. Turning to Slide 7, through my 33 years of manufacturing experience at ExxonMobil, I had the opportunity to lead the turnaround of several poor performing plants and through my board work I am very familiar with the strengths and opportunities at South Hampton and at Trecora Chemical. So, I feel very confident in our ability to deliver real change. Knowing that we were nearing the end of our capital building plant and that the company would need to shift to a focus on fully exploiting the benefits of these new assets, we began crafting our implementation plan in April of this year. This plan addresses all aspects of operational excellence from safety, reliability, operations, work execution and culture. Our goal is to establish a standard suite of operational excellence work processes allowing us all to speak the same language at our plant sites. Those processes will focus on consistency, simplicity, and efficiency and will drive step change improvements that will be sustainable and replaceable as we continue to grow. Our guiding principles are safe work, quality work and productive work. So, turning to Slide 8 and highlighting safety first, we have already made progress on parts of our plan. We have conducted PSM, Process Safety Management assessments. We’ve defined gaps and developed our closure plans, we are well underway on closing these gaps and will have a significant percentage of these gaps identified closed by year end 2018. Some of the improvements may require some modest capital investment and will be implemented in future years. We redefined higher safety standards for employees and contractors as well as implemented behavior based safety programs at both sites that include greater management oversight in the field, attention to detail, additional metric tracking and initiating of corrective actions based on data. Turning to quality and process stability, South Hampton and Trecora Chemical are different life stages and therefore have different areas of focus. At South Hampton, established process technology is already in place along with a long operational history. The focus here is on implementing procedures and technology that will take South Hampton’s operation to the next level of performance. The plan we are executing will improve yields, increased capacity availability, reduce energy consumption and reduce unit cost of production. We expect to see improved results as we move throughout the year in 2019. We are a few years into our acquisition of Trecora Chemical. The initial focus was on assimilation of the organization, execution of the major investments in the hydrogenation and distillation facilities and production of higher margin products in the wax business. We have completed the assimilation process, the major capital investments and have made excellent progress in producing higher margin products with our wax business. Now, our focus will shift to fully exploring the assets we have both built and purchased by driving process stability, reliability and cost structure improvement. A challenge faced by Trecora Chemical has been feedstock constraints in our wax business. So, our team is experiencing some success in developing additional sources of feedstock supply. The custom processing business is very challenging, because of the varied products that we are producing and the short campaigns, we are currently running. We believe our improvement plan will be effective and allow us to capture the huge opportunities for growth, because of the strong demand for our customers for our unique set of processing assets. The hydrogenation and distillation investments have not yet yielded the performance we expected to date. We believe we have identified the deficiencies and we will be able to correct them with a few modest investments currently in a design execution and rigorous implementation of our operational excellence work processes, which includes a more robust stage gate process to screen new business opportunities to ensure we have a good match between our processing, capability and our customer requirements. In the end, our goal is to ensure our work is productive and generates returns for our stakeholders. As we hone our manufacturing focus, we are working to stabilize operations through the use of data and advanced analytics to drive a deeper understanding of our operations and enhance our predictive and early warning capabilities. Improve reliability by utilizing sensor technology and 24/7 monitoring of operations, leading to early detection of equipment degradation and improved capacity availability at reduced costs, improve our organizational capability by identifying needed core competencies, critical skills and appropriate staffing levels. Finally, we are facilitating cultural change to drive higher standards, accountability and organizational discipline. I am confident that the plan we are executing, which I have implemented many times before will transform our culture and deliver safe, reliable, predictable production to delight our customers and capitalize on the huge opportunities we see to drive profitable revenue and maximize the return on our assets. I look forward to meeting many of you in the future during your visits to our facilities. Thank you again. And I would like to turn it back over to Simon.

[Simon Upfill-Brown:]

Thank you, Dick and thanks for your ongoing efforts to lead this transformational change. Turning to Slide 9 for an update on AMAK, the mine had a good third quarter and showed continued progress. We sold a total of 17,000 dry metric tons of copper and zinc concentrate during the quarter, which was up 17% from Q2 and net profit before depreciation and amortization was $4.5 million during the quarter. On the precious metal circuit, the first gold and silver shipments of the year occurred during the quarter and we expect the corresponding revenue to be booked in Q4. Improving consistency of operations at the mine continues to enhance marketability and we have initiated negotiations with investment banks as we look to monetize our investment in the mine. Slide 10 shows the continued solid improvement in Q3 in mill throughput. Metal recoveries increased during the quarter once again and reached recent highs. AMAK expects to be able to show sustained improvement in the coming months and our confidence grows that 2019 will be an even better year. Now I will 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 11 provides a brief financial summary of the third quarter of 2018. Third quarter was disappointing we had a net loss for the quarter of $1.6 million or $0.06 per diluted share compared with net income of $1.7 million or $0.07 per diluted share for the third quarter of 2017. Net loss for the third quarter includes equity and losses of AMAK of $1.1 million with an estimated after-tax impact of $0.035 per diluted share. In the year ago period, net income included equity losses for AMAK of $900,000 or about $0.02 per diluted share. Adjusted EPS which excludes AMAK was a negative $0.03 per diluted share in the quarter. Adjusted EBITDA in the quarter, which excludes equity impact of AMAK was $4.9 million, representing a 6.7% adjusted EBITDA margin compared with adjusted EBITDA of $7.5 million or 12.2% margin for the same period a year ago and adjusted EBITDA of $6.2 million in the second quarter of 2018. EBITDA margins were lower year-over-year at South Hampton, but higher at TC. At South Hampton, margins were squeezed mainly due to an increase in feedstock cost specifically an approximate 39% increase in natural gasoline cost compared to third quarter of 2017. Although natural gasoline costs have recently stabilized compared to the second quarter South Hampton’s cost of materials was elevated due to higher cost of inventory and this had a negative impact on prime product margins relative to the second quarter. In addition, South Hampton also had higher operating costs. Depreciation and amortization increased to $2.6 million for the quarter, this increase from the second quarter was due to additional DNA for the Advanced Reformer. Additional drivers for the cost increase were higher natural gas, electricity, labor and product transportation costs. Operating costs at South Hampton were up about 24% compared to third quarter a year ago and 9% compared to the second quarter. Compared to the second quarter, the higher costs were primarily due to utility overtime, training, contract labor and maintenance costs, all primarily associated with the start up and operating issues that we experience for the Advanced Reformer. With the startup of the Advanced Reformer many of these costs, which were previously capitalized were expensed. Transportation costs are significantly higher from a year ago, primarily due to an increase in the cost of rail freight because of higher rates and higher storage costs at third-party rail yards. We have previously reported that there were about $1 million of costs in the second quarter that were one-time and that they were related to personnel training and overtime for starting up the Advanced Reformer, although these costs did go away in the third quarter they were more than offset by costs for unit optimization and expenses that were previously capitalized. We are actively working on all fronts to reduce costs in all of these areas, operating cost, logistics and so on, now that capital projects are complete. TC experienced higher year-over-year operating costs in the quarter primarily due to higher costs for labor and maintenance as the plant team focused on improving equipment reliability and plant up time. While many of the headwinds to margin are temporary specifically the start-up costs for the Advanced Reformer and the feedstock impact I discussed earlier, we’re also taking active steps to improve margins. At South Hampton, we announced price increases for prime products in June and October for our spot business, which is about 30% of our sales. These increases have generally been successful and we are considering additional price increases as appropriate. The utilization rate at the South Hampton facility is 54% as Simon indicated, thus allowing us to increase prime product sales volume at relatively low variable costs. We’re also pursuing options to reduce our logistic costs specifically rail freight at South Hampton. CapEx for the third quarter was $3.7 million, down from $4.4 million in the second quarter. For the fourth quarter of this year, in addition to the normal CapEx of $2 million, we expect additional costs of approximately $4 million for the catalyst replacement that Simon and Dick discussed earlier. Our expected capital spending for next year that is 2019 should be in the $8 million to $10 million range. Long-term debt including the current portion, but excluding loan fees was $106.4 million as of September 30, compared to $99.6 million at year-end 2017 and $105.4 million at the end of the second quarter. Revolver borrowings were $20 million at the end of the quarter, down $25 million from the second quarter due to the refinancing we completed at the end of July. G&A expenses for the quarter were $6.3 million or 8.6% of revenues. Year-to-date, G&A expenses were $17.2 million or 8.1% of revenues. Slide 12 presents a summary of our quarterly petrochemical revenue and sales volume broken out by prime products and byproducts. Prime product volumes in the third quarter were approximately 17 million gallons, compared to 16.1 million gallons in the second quarter of 2018 and 16.7 million gallons in the third quarter a year ago. As we discussed earlier, prime product volumes recovered from customer issues that we experienced in the second quarter. Byproduct volume was 4.6 million gallons in the third quarter, compared with 5.7 million gallons a year ago. In the third quarter, byproduct margin above feed was approximately $0.29 per gallon and that compares with $0.05 per gallon in the second quarter. Thus, the increase in byproduct margins reflects the partial margin uplift from the Advanced Reformer that started up in July, which we didn’t operate at normal design specs for the full quarter. Turning to Slide 13, 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 costs from our suppliers as well as any shortfall fees that we incurred when volumes were below contractual minimum amounts. The average petrochemical feedstock costs was 37% higher per gallon in the third quarter 2018, as compared to the same period last year and approximately flat from the second quarter of this year. In a rising feedstock environment, margins on a formula-based prime products contract can get squeezed as the contracts are based on prior month’s feedstock costs. Moving to Slide 14, wax sales volumes at Trecora Chemical were $9.1 million in the third quarter, up 12.7% from a year ago, but down 14.1% from the second quarter. For the first part of the third quarter, we were particularly constrained by wax feed supply. Wax revenues were up 23.3% from third quarter of 2017, but down 7.4% sequentially. Average wax pricing increased approximately 10% year-over-year in the third quarter and were also up from the second quarter, the price uplift is due to improving sales mix as well as price increases that were achieved in the quarter. Slide 15 presents an overview of our custom processing revenues at South Hampton and TC. Custom processing revenues at South Hampton increased 35% in the third quarter 2018 from the same period last year primarily due to increased business with two specific customers. Custom processing at TC was $2.8 million, a 43% increase compared to third quarter 2017. B Plant revenues in the third quarter were $0.6 million, hydrogenation and distillation revenues were minimal in the third quarter as those units were down for most of the quarter. 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 16, prime product volume recovered from Q2, wax revenue, volume and margins were strong during the quarter and AMAK mine continued to increase production, but elevated feedstock and operating costs, pressured margins and operational disruptions impacted profitability in the quarter. Demand for our products remained strong. And as we go forward, we see many catalysts to drive increased revenue and improved profitability. With our mufti-year capital plan complete, we have shifted our full focus to efficient and reliable execution. We have significantly strengthened our executive team with the additions of Dick Townsend and Mike Humby whose experience will help guide us. And as Dick described on today’s call, we have developed and are implementing a transformational plan to achieve operational excellence. We are confident that, that effort will position us to fully exploit the assets we have built by driving process stability, reliability and cost structure improvements, strengthen our competitive position and deliver value to all of our stakeholders. This concludes my prepared remarks. At this time, I would like to ask the operator to open the call for Q&A.

[Operator:]

[Operator Instructions] Our first question is from Joseph Reagor from ROTH Capital Partners. Your line is now open.

[Joseph Reagor:]

Good morning, guys. Thanks for taking the questions.

[Simon Upfill-Brown:]

Good morning, Joe.

[Joseph Reagor:]

I guess, the first thing maybe you just walk us through a little bit more detail on what you are going to be doing with the Advanced Reformer to prevent this kind of thing from happening in the future?

[Simon Upfill-Brown:]

I will take a first stab at it and then Dick can join us. We touched on the ability to ride through a power outage. It is very important as we just been recently confirmed to us to protect the catalyst and prevent carbon build up on the catalysts and that system did not fully function and so now everything has been put in place to ensure that, that does not happen again, because power can go down as we experience big storms in this part of the world. And so we need to be able to ride through the power outage. You at least have a little bit of preparation with the hurricane. This was a squirrel that visited one of the main transformers in our distribution system and took the whole plant down. So, we learned a lot during this experience and Joe, I am very comfortable that we have the systems in place now to do what’s called a ride through. So, it involves additional training, automatic systems, all those kind of things and those are all now in place.

[Joseph Reagor:]

Okay. Moving over to TC, two questions there, one on the wax pricing I saw in the quarter. Do you think you can keep that pricing as volumes tick back up or was a lot of the lost volume kind of lower revenue items?

[Simon Upfill-Brown:]

No, I think we can hold prices. We actually put through another price increase in October on our wax business and so we are optimistic that we can hold those prices. We increased the base wax business and we increased charges for freight to coves some of the additional road transportation costs that we’ve been experiencing. So it was a fairly significant price increase. And so far with the exception of a couple of delays, we have agreed to those prices or those price increases are holding. So, we are optimistic that we should be able to see continued improvement and as Sami mentioned and Dick mentioned also, we are trying to find additional wax supply. Peter is helping us drive that program, and it looks like we have been able to find some. So, we are hoping to eliminate some of the issues that we experienced in the early third quarter where we were short of supply. So, that’s certainly going to help us with absolute volumes as well.

[Joseph Reagor:]

Okay, fair enough. And then also at TC you guys mentioned the hydrogenation distillation units were down for a good portion of the quarter. Any additional color you can provide there and expectations for Q4 there?

[Simon Upfill-Brown:]

Well, there is – we were down during the third quarter primarily to install some process safety systems, pressure release valves and a couple of other things that had been missed in the initial design, the unit has been running this quarter, it hasn’t been running as well as we would like and so, we have got some significant outside help now Joe, which we haven’t used in the past on both the catalyst studies that we think we need to do and on some further modifications that we might have to install. Nothing major, it’s like increasing the size of heat exchanges and some pumps and also improving flow measurements on hydrogen and the feed into the reactors. So, relatively minor changes, but I think we will start to see the real benefit of that probably in 2019, not so much in the fourth quarter although we will do whatever we can to improve things as soon as we can.

[Joseph Reagor:]

Okay, thanks. I will turn it over.

[Simon Upfill-Brown:]

Thanks. Thanks, Joe.

[Operator:]

Thank you. Our next question is from Jon Tanwanteng from CJS Securities. Your line is now open.

[Jon Tanwanteng:]

Good morning, gentlemen. As far as feedstocks declining for you guys, can you get prime product margin to increase sequentially in this environment and do you have to increase price anymore than you have already?

[Sami Ahmad:]

Well, in recent weeks in October, we have seen decline in natural gasoline prices. Jon, they are historically been correlated with Brent crude and as crude has come off we have seen decline there. So, we will get benefit of that in the fourth quarter. And also as Simon mentioned, we have been successful and I think I mentioned as well on price increases. Now, they will really impact the spot piece of our business, the contract formula business, really it was not affected by those price increases.

[Simon Upfill-Brown:]

And really there is that’s where a lot of energy is going in, Jon, in as those contracts come up for renewal, that’s the time where we can go for price increases, but the recent decline in natural gasoline prices should certainly benefit us provided, it continues the decline, right, it’s the month-over-month decline that we benefit if it’s flat, then there is no benefit from the lag and of course if it’s increasing as it has done for most of the year thus far we get whacked every month by the lag.

[Jon Tanwanteng:]

Got it. Thanks. And just regarding the catalyst replacement in the power outage, does the utility share any responsibility for the cost replacing that at all or are they – that’s all from any damage that occurred to your facility?

[Simon Upfill-Brown:]

No, they unfortunately, you have no way of getting back to the utility, other than jumping up and down and yelling and screaming at them. They are fully absolved from any issue with that unfortunately. We would like to think that they are responsible, but we have to be able to manage it that we can do a ride through and we will be able to do that in the future, but it is very frustrating that we have to pick it up ourselves.

[Jon Tanwanteng:]

Okay, great. And then just give you an update on your cash flow situation, when do you expect to start paying down debt with the updates on kind of where you expect all these capital projects to really start generating EBITDA for you guys?

[Sami Ahmad:]

Right, John. So, the CapEx as you mentioned is pretty much out of the way. Operating costs are higher as we discussed and partially related to that, our debt increased for the quarter as I talked about. In the fourth quarter, cash flow is good. In the fourth quarter, the key expense is going to be the $4 million for catalyst replacement and that’s both for the catalyst itself plus the cost of labor and other things to do the replacement and so we may need to borrow some to fund that expense and then going into 2019 as I mentioned CapEx declines to $8 million to $10 million for the year, so we expect significant free cash flow to be available for debt reduction.

[Jon Tanwanteng:]

Okay, thanks. And finally just a little bit more color on the loss at AMAK that was just simply your inventory going down to mark-to-market and is that the only issue there or is there something else going on and finally an update on the sale process for that asset?

[Simon Upfill-Brown:]

There were two things on the inventory, one there was – we sold quite a bit more than we produced, so there was a reduction in actual volume of inventory on the books and also it wasn’t a mark-to-market issue, but we have a lower cost to market and so the costs came down during the quarter because of efficiencies and everything else. So, there was also a drop in the value of the inventory. So it was a fairly significant impact, but not really cash or anything like that, hence the cash number has been pretty strong. And yes, I mean the, I think, I touched briefly on we are talking to investment banks we’ve been in fairly significant discussions, we are beyond discussions and we are negotiating prices on how to do this deal. So we will keep you guys informed as things move forward. Obviously, we have to be careful what we say under those circumstances, but that’s where we are.

[Jon Tanwanteng:]

Great. Thank you so much.

[Simon Upfill-Brown:]

Thanks, Jon.

[Operator:]

Thank you. Our next question was from Sarkis Sherbetchyan from B. Riley FBR. Your line is now open.

[Sarkis Sherbetchyan:]

Hey, good morning and thanks for taking my question here.

[Simon Upfill-Brown:]

Good morning, Sarkis.

[Sarkis Sherbetchyan:]

Just to touch on the cash flow situation, what was operating cash flow for 3Q?

[Simon Upfill-Brown:]

Operating cash flow for 3Q, well, we will be filing our Q next week Sarkis, but for the 9 months ended September 30, it was $11.1 million.

[Sarkis Sherbetchyan:]

Got it. And then if we switch gears real quickly and think about the price actions you are taking at South Hampton, it seems to be a little bit of a lag effect to catch up on margin. Now would you anticipate for the 4Q period having margins that were similar to 3Q or kind of ticking back up here, can you help frame that?

[Simon Upfill-Brown:]

Well, Sarkis we are very nervous about giving guidance on these things, but as Sami touched on in October, there has been a nice steady decline in natural gasoline prices. So, we should benefit from that lag, there was a price increase that we led in October, this is not something we have done very often in the past, but we led that price increase and in most cases it has held well, but it’s a small impact – a small piece of our business right. The real impact comes when contracts come up for renewal. So, there have been cost increases over the years and we haven’t really forced capturing some of that in our pricing and so this is one of the things that Mike is helping us lead is by being very aggressive where we can be on helping our customers understand as that we as the only on purpose manufacturer of these pentanes, need to be able to make a decent return and capture some of the cost increases that we have experienced. But I think the lag benefit we should get at least so far in October for sure, a lot depends on what pricing does in November and December, but thus far we are off to a good start for the quarter.

[Sarkis Sherbetchyan:]

Understood. And I think Sami mentioned about a $1 million of one-time costs that were out of the bucket from 2Q, but it seems to be some more cost inside of 3Q that perhaps more than offset that. Can you maybe talk about the absolute number of non-recurring costs inside of 3Q?

[Sami Ahmad:]

Yes. I am hesitant to talk about the absolute number, because I am not sure how much of that is going to be nonrecurring, okay, as we go through this process, but what I can say is most of the million that we referenced to on Q2 did go away. So they were related to training and over time for the startup all that was done. What we experienced in Q3 is really the costs that were being capitalized CIP, construction in progress, related to Airmax came into expense and then there were a variety of costs during the quarter related to just lining out and optimizing the unit and we had a shutdown in that period. So, it was a combination of things.

[Sarkis Sherbetchyan:]

And Sami, it sounds like most of that hit the cost of goods line, is that the right way to think about it?

[Sami Ahmad:]

Yes.

[Sarkis Sherbetchyan:]

Got it. And then if we kind of look at the $4 million of cost associated with writing the reformer and some of the issues you had there, is that all going to be capitalized or would some hit the P&L in the period?

[Sami Ahmad:]

No, that would be capitalized. That’s going to be catalyst replacements, so both the cost of the catalyst and associated labor costs and all that will get capitalized.

[Sarkis Sherbetchyan:]

Yes, that’s helpful. That’s all for me. Thank you.

[Simon Upfill-Brown:]

Thanks, Sarkis.

[Operator:]

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

[Mitch Sacks:]

Hey, guys. With respect to the Advanced Reformer, when I look at Q4, when I look at byproduct sales and byproduct margins, because you have the shutdown, how do we think about that for Q4 and then again for looking into next year, I know you put into your presentation how much you are expecting that business to generate, but when I think about it from a cents per gallon, how do we sort of think about that for next year for that for the reformer?

[Simon Upfill-Brown:]

Well, I think that when this thing was running, Mitch, we were getting the uplift we were expecting the $0.35 to $0.40 a gallon. And as Sami mentioned that even during the quarter with the startup in July and then shutting down in September, we averaged to $0.25 gallon uplift. So, I think going forward in 2019, we should be able to get that $0.35, $0.40 a gallon of uplift. But in the fourth quarter, I wouldn’t count on much, because we are through October already and the unit continues to run, but it’s running sub-optimally, which is why it makes financial sense to spend $4 million on replacing the catalyst and then it will be down for the 45 days or so while we replace the catalyst. So, I would expect very little in the fourth quarter, but in 2019 provided we get it all started up efficiently by January 1 we should have the benefit for the full year.

[Mitch Sacks:]

So, will you inventory some of the BTX to save it over for running properly in Q1?

[Simon Upfill-Brown:]

The feed for the unit?

[Mitch Sacks:]

Yes.

[Simon Upfill-Brown:]

Yes, we will do what we can on that, because we can run faster than what we can as we are running the normal production. So, we will store what we can, but we have limited space for that, Mitch as you know. We don’t have a lot of space for inventorying things, but we will do as much as we can as we did a little bit before we started up in on the July 10 whatever it was.

[Mitch Sacks:]

Does business interruption insurance help you at all with this $4 million of the spend or is it not covered by this?

[Simon Upfill-Brown:]

No, it’s not covered unfortunately.

[Sami Ahmad:]

It’s not insurable event, Mitch.

[Mitch Sacks:]

And then in terms of the design of the reformer, what is it that you could have done or should have done to alleviate this possibility in the past and obviously going forward?

[Simon Upfill-Brown:]

Well, it’s the thing I was discussing with Joe a little while ago is this ability to ride through a power outage, that system is it needs to be very, very robust, right, because protecting this catalyst is absolutely essential. I mean one of the debates, we were having during early October was can we recover this catalyst with the carbon burn if it’s coked you can burn off the carbon with oxygen and so that turned out is not feasible with what happened to the catalyst. So we have to have a very, very robust ride through and we have that now installed and that means that you will get all the hydrocarbons of the catalyst immediately. The unit goes down and you drop temperatures immediately the unit goes down and those systems are now fully in place and fully automated. So, we won’t have this issue, again. The technology provider has mentioned to us that this catalyst impact thing is not unusual, we are not the first guys to have this problem, but this is why you have to have everything completely automated and setup right, so that there is no waiting for some employee to react or something like that, it’s just cut into the automatic controls.

[Mitch Sacks:]

Are there any other systems that you need to do that for in your two plans to avoid similar situation in those plants in those operations?

[Simon Upfill-Brown:]

Dick can maybe step in a little bit here, but I mean I think there you are always trying to automate more and more wherever you can and this is a big part of our transformation plan is to use the systems that we have optimally. Dick, I don’t know if you have anything you want to add on that?

[Dick Townsend:]

Yes, I would say most of the – the rest of the plant as we have said is pretty material process. It’s been around for a while. So we have the systems in place. This is a new unit, as you know, we just built it and started it up so got a few startup issues, but I believe we are in pretty good shape on the rest of the unit as far as protective capability.

[Mitch Sacks:]

And then with respect to the hydrogenation and distillation unit, so are we expecting to see revenues from that in Q4 and when I start to think about 2019, are we going to be running that at some more normalized rate that we were expecting before we still expecting ‘19 to be dealing with some of the startup issues?

[Simon Upfill-Brown:]

Well, the unit has been running through the month of October. It hasn’t been running well, we had some issues there. And as I mentioned, a little while ago is there is certainly some changes we would like to make and we have a catalyst expert and we have an engineering company expert looking at some of the changes that we should introduce to have it running as smoothly as possible and that work is underway. Our expectation is that we should have the thing fully functioning in all of 2019, Mitch, maybe a little bit delayed in the first quarter, but I think we have a very clear action plan or what needs to be done to the unit is a little bit of engineering work and a little bit of fabrication work that has to be executed, but that shouldn’t take too long, but we have over-promised and under-delivered on this hydrogenation unit since it started up last year, so a little bit loath to be too optimistic, but we have a very different mindset now.

[Mitch Sacks:]

Is there still high demand for the service on that unit?

[Simon Upfill-Brown:]

Yes, it’s very strong.

[Sami Ahmad:]

Yes, the restriction is not on the demand side, Mitch as you know and we have been saying that it’s really our inability to run that unit consistently and efficiently.

[Mitch Sacks:]

Okay. And final question, you talked about wax supply and I think you said that you had found another supply of wax I guess starting this quarter, do we start to look for an increase in revenues then in this quarter regarding that ability to have that extra supply?

[Simon Upfill-Brown:]

I think so, yes. I think we should have some more in this quarter. One of our suppliers has a planned outage in the first quarter of next year and we are hoping to have another source of wax to ride us through that outage as well and then that supply should be ongoing also. So there is some potentially two different sources of additional wax, Mitch and we have placed the first order for the one and we are optimistic that we will continue to get from the other. So, yes, I think we should see some additional volume and as mentioned earlier, we did put in a price increase for waxes in October as well.

[Mitch Sacks:]

Okay. And then final question you mentioned on the call with respect to AMAK, I guess you are looking at different investment banks and then you mentioned that you were talking about price, you were talking about what they are expecting to sell the asset for you, you are actually talking with purchasers. I was a little confused on that?

[Simon Upfill-Brown:]

No, we are negotiating with the investment bank what their fees will be.

[Sami Ahmad:]

It’s more negotiation with investment banks rather than…

[Simon Upfill-Brown:]

Not yet with purchases. I mean, the one is listed a bunch of potential purchasers for us, but it’s all about getting the right terms with the investment bank. As you know, these guys can be a little bit demanding with their expectations on success fees and things.

[Mitch Sacks:]

Yes, thank you very much.

[Simon Upfill-Brown:]

Thanks, Mitch.

[Operator:]

Thank you. Our next question is from Greg Eisen from Singular Research. Your line is now open.

[Greg Eisen:]

Thanks. Good morning. And I apologize for jumping on the call a little late, so you may have answered this question already earlier in the call, but Simon, how long was the power out for during this outage?

[Simon Upfill-Brown:]

It was. I can’t remember exactly, but I know it was long enough to take the whole plant down. We have these UPS systems that can hold you up for a few cycles, Greg, but this was a significant outage. It took down one of the main transformers at the substation and that’s very tough to switch over from. So, it was a nasty little squirrel that got in there and…

[Greg Eisen:]

Are we talking hours?

[Simon Upfill-Brown:]

Yes, it was over a period of a couple of hours. We had some very severe voltage dips due to the faults that occurred in the system from the animals connecting to the power. So yes, it was pretty severe.

[Greg Eisen:]

Okay. I am trying to understand, what you do in this situation, do you actually have backup power generators in place at the plant?

[Dick Townsend:]

We have small generators for office buildings and so forth. We do not have the capability to provide total power for the plant. It’s something we will look at, but we don’t have that capability right now.

[Simon Upfill-Brown:]

You will recall when the hurricane hit us Harvey, we got so much rain. We had to bring in three 2 megawatt generators Greg to be able to run the plant before we got power back. And that’s you just don’t have that capability with the flick of a switch at the present time, but we do – we are able to keep computers and offices running and all that kind of thing and the UPS systems can hold you through a couple of cycles of a blip, but nothing like Dick described.

[Greg Eisen:]

Okay. Because I am trying to understand the idea of working through one of these outages, what you could do differently in the future and I don’t see how if this happened again you wouldn’t be hurt the same way?

[Simon Upfill-Brown:]

Well, the big thing is getting the equipment safely shutdown without any residual hydrocarbon on the catalyst and you do this with inert gasses and with cutting off heating systems. Greg, it’s not unusual to be able to do that, you need to be able to blow out all the hydrocarbon from the reactors and drop the temperature and that protects the catalyst. And you can do that, you don’t need power to do that, because you have your inert gas under pressure and that will pump all the liquids out of the reactors.

[Greg Eisen:]

Okay. So you had this catalyst – essentially your catalyst was destroyed for all intents and purposes, it’s not….

[Dick Townsend:]

It’s, coke. It has a layer of coke, which is catalyst is preventing the platinum, the precious metal there from being able to be contacted and we can’t get the coke off.

[Greg Eisen:]

Got it. So, for all intents and purposes, it’s shot and you are going to capitalize the new catalyst material that you put in place. So my question is, from the accounting perspective and I couldn’t look closely at the press release, was there a write-down this quarter for that cost, that’s no longer recoverable?

[Sami Ahmad:]

Right. So, we are looking at that in the fourth – there is nothing in the third quarter, there was no write-down of that catalyst in the third quarter, because we did not have a full assessment of whether we could use that catalyst, the old catalyst until just in the past week or so, 2 weeks – a week yes, exactly. In the fourth quarter based on that assessment, yes, there could be a write-down.

[Greg Eisen:]

Okay.

[Sami Ahmad:]

And it’s not expected to be material. Greg, it’s probably going to be on the order of a couple $200,000, $300,000 if there is a write-down.

[Simon Upfill-Brown:]

And you might be asking why there is such a difference.

[Greg Eisen:]

Yes, I am.

[Simon Upfill-Brown:]

Because it’s why, is it $4 million versus $250,000, the issue is Greg, is that with the initial catalyst we were able to purchase recycled catalysts from other users of this technology. As we have mentioned, they are much bigger than we are and there was catalyst that was still active that had been used before and we were able to purchase that at a very, very low price. This catalyst – there is none of that available at this time and so we are purchasing fresh catalyst and that is very expensive. It’s a very multipurpose, a multi-step process to make this platinum catalysts and the backbone is extremely expensive. So that is why the price difference is so much and because we use new catalyst, we are expecting much longer life from it and more activity initially. So, those are the benefits of using this fresh catalyst.

[Sami Ahmad:]

As you can tell from the numbers that we just discussed, the relative price of the catalyst is about 10 to 1

[Simon Upfill-Brown:]

Right.

[Greg Eisen:]

Yes, yes, I see that’s a pretty big difference. When you say a longer life, how long would a new catalyst last?

[Sami Ahmad:]

On the throughput rate that we’re pushing through the units, so it’s totally dependent on that. If we were running flat out, we are probably talking 3 to 5 years.

[Simon Upfill-Brown:]

So, we are not going to be running flat out. So we should get at least 5 years, but it all depends on how we take care of it.

[Greg Eisen:]

I guess, maintenance is a factor, I get that. I guess the big question I have on top of all those is that as I look at your kind of where we are at with your core business and 54% utilization rate at South Hampton Resources. And kind of all along, I have been thinking that one of the keys to success to your business is to drive more volume through that plant at a 54% utilization rate getting up closer to 80%, which most people would call 80% for most flow operations at full utilization would be very incrementally profitable? When can we expect the utilization rate to really tick up and where are the additional customers that you are going to get in order to bring up the utilization. We are kind of been stagnant sitting around this 50% utilization rate for quite some time?

[Simon Upfill-Brown:]

Yes. I mean, we did have some cost issues and we had some feed margin issues this time, Greg, but the company has been able to make pretty good returns even at low asset utilization rates. And as Sami touched on the operating leverage didn’t work this quarter because of some extraordinary costs, but there is ongoing investment in polyethylene, there is a polyethylene customer starting up this quarter in Louisiana. We have 100% of that business. There is another big one starting up in the next few years up in the Pennsylvania area. So there is ongoing investment in that business, we continue to chase additional Canadian oil sands business and we continue to chase exports. And I think we’ve said, we are expecting another $6 million to $7 million of EBITDA from additional pentane volume by the 2022 timeframe and that looks fairly reasonable. The polyisocyanurate foam business continues to grow at 4% to 6% a year. So, there is some generally some good growth, but we do experience wild swings on our export business and we have these issues with customers having outages and things like that, some planned and some unplanned like the unplanned one we have been through. So, this is sort of part of being in the chemical industry.

[Sami Ahmad:]

And I would point out, Greg, that if you look at year-to-date 2018 versus year-to-date 2017, prime product volumes are up over 8% year-on-year. So, we have had decent growth, I think in the third quarter, what you saw, I mean you are reflecting about utilization rate in addition to that the operating costs kind of slumped the volume leverage.

[Operator:]

Thank you. At this time, I am showing no further questions. I would like to turn the call back over to Simon Upfill-Brown, President and Chief Executive Officer for closing remarks.

[Simon Upfill-Brown:]

Thank you all for listening in today. Our time has run out, but I did see some people wanting to ask questions, we will gladly try to schedule a call with you over the next few days to answer those questions that you might have had. We would like to thank our shareholders for their continued support of the company. We as always thank our wonderful team of employees that work so hard to try to make this business as successful as we can be and we look forward to updating you on our progress in the coming months. Thank you all very much.

[Operator:]

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect.