Trecora Resources
Q1 2016 Earnings Call Transcript

Published: 6 May 2016

[Operator:]

Good day, and welcome to the Trecora Resources First Quarter 2016 Earnings Conference Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Mr. Don Markley, Investor Relations. Please go ahead, sir.

[Don Markley:]

Thank you, Brian and good afternoon everyone. Welcome to the Trecora Resources first quarter 2016 earnings conference call. The earnings release was distributed over the wire services after the close of the financial markets earlier today. Our call today will include Simon Upfill-Brown, President and Chief Executive Officer; and Connie Cook, Chief Financial Officer. Following management's prepared remarks, there will be a question-and-answer session. Before we get started, I would like to review the Safe Harbor statement, which is found on Slide 2. Statements in this presentation 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 5, 2016. 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, 2015 and subsequent Quarterly Reports on Form 10-Q. This webcast is accompanied by a slide presentation that is available on the Company's website, www.trecora.com. At this time, I would like to turn the call over to Trecora's President and CEO, Simon Upfill-Brown. Simon?

[Simon Upfill-Brown:]

Thanks Don, and thanks to everyone joining the call this afternoon. As shown on Slide 3, I'll begin today with a brief discussion of the first quarter highlights. I'll then pass the call over to Connie for a more detailed discussion of the financial results. Following that, I'll review progress at South Hampton Resources and Trecora Chemical, and conclude with an update on developments at AMAK before taking your questions. Our first quarter results reflect improved year-over-year petrochemical sales volumes, and record revenue at Trecora Chemical, while we maintained the highest quality and purity standards in the industry. At South Hampton, increased capacity from our new D-Train unit allowed us to meet all customer requirements while performing inspection and maintenance on the other two processing line. At Trecora Chemical, record revenues were driven by an increase in custom processing activity and record wax sales volumes. On Slide 4, gross profit in Q1 although up sequentially was down about 22% year-over-year at $11.8 million. And operating income of $6.1 million decreased by approximately 37% year-over-year. We generated a total adjusted EBITDA of $9.2 million, a 28% decrease from a year ago, although also up sequentially. Our fully diluted earnings per share were $0.29 compared with $0.23 in Q1 of 2015. EPS in the quarter included an estimated $0.14 per diluted share from equity and earnings of AMAK due to a positive settlement with the former operator of the mine in Saudi Arabia. Equity and earnings in the year ago period from AMAK was about breakeven. Turning now to Slide 5, our average petrochemical selling price decreased because nearly 60% of our sales are contracted with formulas that are tied to index prices for natural gasoline which is our primary feedstock. First quarter revenues were $52.2 million, a decrease of 5.3% year-over-year as the average sales price of petrochemical products decreased by 19.6% from the year ago period. As a reminder, historically the first and fourth quarters are seasonally the weakest at South Hampton. NGL prices continue to fall during the first quarter reflecting the drop in crude oil prices. If you recall last year due to the nature of our contract, which typically have a 30-day trailing feed cost basis, we benefited from sharply lower feedstock prices. Our feedstock prices were 15% lower in the first quarter of 2016 than in the fourth quarter of 2015, while they were 40% lower in the first quarter of 2015 than in the fourth quarter of 2014. Therefore, we did not see the same benefit to margins from declining prices in the first quarter of 2016 as we did in the first quarter of 2015. This is confirmed on Slide 6 where you can see the dramatic downward slope of the curve prior to the first quarter of '15. During the first quarter of 2016, we paid 16.6% less per gallon than in the first quarter of 2015. However, this was offset by 19.6 lower petrochemical average selling price driven by significantly increased byproduct sales sold at lower prices, less positive impact from the price lag combined with pressure on our spot prime product prices. Overall, during the first quarter we continue to make - to take significant steps to improve our performance going forward. We will cover these steps during the rest of the prepared remarks. Now I'll turn the call over to our CFO, Connie Cook for a review of financial results.

[Connie Cook:]

Thank you, Simon. Slide 7 presents our income statement for the first quarter. Quarterly revenues decreased 5.3% year-over-year to $52.2 million compared with $55.1 million in the first quarter of 2015. The decrease in revenue was due to the 16.6% decline in our per gallon feedstock cost that translated into lower average selling prices. Our average selling price was 19.6% lower in the fourth quarter of '16 than in the first quarter of '15. Volume of petrochemical sales increased 12.4% year-over-year to 20.4 million gallons from 18.1 million gallons in the first quarter of 2015. Foreign sales volumes for first quarter of '16 was 4.2 million gallons versus 5.1 million gallons in the first quarter of 2015. This includes a 21.8% increase in the first quarter of '16 shipments to our oil sands customers which generates slightly lower margins. This uptick was more than offset by the timing of shipments to other foreign customers. Petrochemical product sales were $42.6 million, representing 81.7% of total revenue for the first quarter of 2016. Specialty wax sales were $4.6 million. We generated $5 million in processing fees during the quarter, compared with $4.6 million in first quarter of 2015. Processing fees included $1.7 million during both, the first quarter of 2016 and 2015. Proceeds are recognized annually due to contract wording dealing with performance timing, even though payments fall rightably [ph]. This is the last year remaining on that contract. First quarter deferred revenue was $3.4 million, a sequential decline of approximately $2.1 million from the fourth quarter of 2015. Before we continue our discussion, I would like to mention that we made certain reclassifications to the 2015 statement to conform to the 2016 statement. These reclassifications did not affect net income as previously reported. We also adopted a new accounting pronouncement which required us to the debt issuance cost from the carrying amount of debt on the balance sheet, this was applied retroactively. To continue, cost of sales, including depreciation, totaled $40.4 million, about a 1% increase compared with $40 million in the first quarter of 2015. The increase was primarily driven by an increase in material costs associated with product that TC is distributing for a third-party. Gross margins of the quarter was 22.5% versus 27.4% in the first quarter of 2015 as a result of lower average sales price and higher byproducts sales which generate lower margins. On a sequential basis, gross margin increased by 290 basis point. G&A costs were $5.4 million versus $5.2 million in the first quarter of 2015. G&A cost increased primarily due to higher group insurance premiums, and an increase in labor cost. Operating income was $6.1 million for the first quarter of 2016 versus $9.7 million in the first quarter of 2015, a decrease of 36.9% but up from $5.8 million in the fourth quarter of 2015 which was an increase of 6.8%. Equity and earnings of AMAK was $5.4 million in the first quarter of 2016 as compared to about breakeven in the year-ago period. During the first quarter of '16, AMAK settled with the former operator demand. This settlement included a reduction in previously accrued operating expenses at approximately $16.2 million which more than offset AMAK's first quarter 2016 operating losses. Net income attributable to Trecora Resources was $7.2 million or $0.29 per diluted share compared to net income of $5.8 million or $0.23 per diluted share in the first quarter of 2015. We estimate that EPS benefited from the reported equity and earnings of AMAK by approximately $0.14 per diluted share on an after-tax basis. Slide 8 shows that EBITDA and adjusted EBITDA calculations for the quarter. EBITDA for the quarter was $13.9 million compared with $5 million in the fourth quarter of 2015 and $12.1 million in the first quarter of 2015. Adjusted EBITDA which excludes the equity and AMAK losses and earnings in share-based compensation was $9.2 million for the first quarter of 2016 compared with $8.6 million in the fourth quarter of 2015, and $12.7 million in the first quarter of 2015. Adjusted EBITDA margin was 17.6% compared with 14.2% in the fourth quarter of '15 and 23% a year ago. Slide 9 provides a brief summary of some of the positives and negatives which we encountered during the first quarter that impacted our margins. As you can see, petrochemical sales volume, lower feedstock cost, and the recognition of previously deferred sales positively impacted profitability for the quarter. Whereas the increased byproduct volume at lower sales prices, lower margin sales and pricing pressures negatively impacted profitability for the quarter. Slide 10 presents our balance sheet. As of March 31, 2016, we had cash of $14.2 million compared with $18.6 million at the close of 2015. Long-term debt including the current portion were $79.2 million compared with $81.2 million and year-end 2015 and make principal payments on both our acquisition debt and term debt of approximately $2.1 million. Capital expenditures for the quarter were $7.6 million. This included equipment purchase for the hydrogenation project, the new advanced preformer unit, a new cooling tower, and a new custom processing unit along with various improvements throughout both facilities. We had $40.7 million in working capital as of March 31, 2016 and ended the quarter with a current ratio of 3

[Simon Upfill-Brown:]

Thank you, Connie. Moving to Slide 11, South Hampton benefited from our capacity expansion project while remaining focused on producing high quality products with outstanding customer service. Petrochemical sales volumes was 20.4 million gallons, up 12.4% percent year-over-year. The increase was attributable to the increase of prime products sales of 4%. However, pricing pressure in the petrochemical spot market affected margins for non-formula priced products. Additionally, a significant increase in byproduct as well as sales to our lower margin oil sands customer had an adverse effect on our profitability in the quarter. Excluding oil sands shipments, byproduct sales were only slightly higher by 0.8% year-over-year. Byproducts volume sold increased by 42% over the first quarter of 2015. We continue to experience lower [ph] in our feed which required us to purchase more feed to make our desired volumes. Byproduct prices were approximately $0.13 per gallon below our feedstock cost this quarter compared with about an even cost in the first quarter of 2015 driven primarily by lower gasoline blend stock prices. To enhance the value of our byproduct stream, in December we announced a plan to construct a 4,000 barrels a day advanced reformer unit at South Hampton. The new unit will also provide a secure and reliable source of hydrogen for South Hampton's high purity pentane production, as well as for custom processing campaigns. The permit application for the new advanced reformer unit has been filed. Engineering is on-schedule, critical part equipment has been ordered, and construction is expected to be completed by the second quarter of 2017. First quarter deferred sales volume was 1.4 million gallons, a sequential decline of approximately point 0.7 million gallons. Petrochemical capacity utilization was 56% compared with 76% in the first quarter of 2015 and 96% in the fourth quarter of 2015. Capacity utilization was based on 11,000 barrels per day of fresh feed in 2016 and 7,000 barrels per day in 2015. International petrochemical volume is down to approximately 21% of total volume. However, there was a 22% year-over-year increase in shipments to oil sands customers which carried slightly lower margins than other petrochemical sales. We restarted shipments last month to the new polyethylene facility in the Middle East for initial fall. We continue working on supplying them with ongoing product once the plant starts up in the third or fourth quarter. We are also pleased to report that we received our first trial order from our polyethylene facility in the Philippines. If the trial goes well, we expect to receive follow-up orders later this year. We are also optimistic about another trial order from a PE facility in Thailand. Slide 12 presents our capital projects and expansions summary at South Hampton. D Train is now at service and has shown the ability to process 6,000 barrels of feedstock a day which is a 50% greater volume than originally projected. This quarter we were able to supply all customer demand and build some inventory while performing inspection and maintenance on the other two processing lines which we expect to be back in service later this second quarter. Additional capacity should satisfy the growing demand we expect to see through 2020 where we expect to sell $25 million to $30 million additional volumes of C5 about 53 million gallon sold in 2015. We continue to track nine new polyethylene production projects in the U.S. that would require approximately 6.5 million gallons of isopentane annually. Along with a significant new oil sands customer, looking for initial full volumes in 2017. We also expect general U.S. North American growth and are working hard to developing new business in Asia. We have already covered the significant benefits we expect from the advanced re-format. These come down to an EBITDA gain of approximately $13 million per year. In the third quarter of this year, we expect to begin producing significant volumes of a new high purity hydrocarbon that is used by a number of our customers. We also dialing a trial of a second new high purity product, that a number of our customers have asked us to provide. Our custom processing customer continues to see growing customer demand for their renewable jet fuel and iso-octane. The new reactor is installed and we expect to use an upcoming re-catalization to make the necessary [ph]. Our newest custom processing project would be Analtech fully-integrated development and testing facility, PCAP8 is nearing completion. We are excited about this project and are confident that Analytic has shown in SHR. Slide 13 shows the Analtech modular equipment being installed inside the protective SILO. The SILO roof is now on. Slide 14 provides an update on the overall South Hampton facility. Tough metal, you can see the new storage tanks installed which we expect to have in service by later this second quarter. At top right you can see the analytic SILO waiting for roof installation. Middle right you can see the installation of pipe racks from the Analtech unit which will later be used for the new advanced reformat. Moving to Slide 15, Trecora Chemical achieved record quarterly revenues including custom processing of $8.1 million in the first quarter. First quarter wax sales revenues were 36% higher than the same quarter in 2015 driven by record quarterly sales volumes. Our quality and technical improvements in wax production are resulting customer acceptance and follow-up orders in our major wax markets. We are pleased that we have also been able to develop a low cost that was selling well in the Asian market. Trecora Chemical continues to move forward well in custom processing with two successful trials and one long-term contract signed in the first quarter. We continue to make progress on our hydrogenation and distillation project. However, we expect to delay start-up until January 2017 due to extended delivery lead-time on major equipment. Once this project is completed we are well positioned to double custom processing revenues in 2017 compared with 2014 and deliver $6 million more in EBITDA per year. All 12-storey storage tanks have been installed and you can see on Slide 16 one of the final 630,000 gallon tanks being lifted in. And all six in their place with platforms installed. Earlier this week we announced an acquisition of a 6.5 acre BASF plant adjacent to our 22-acre Trecora Chemical facility in Pasadena which will be integrated into TC. As you can see on Slide 17, it is obvious how well it fits with the existing Trecora Chemical plant. Peter Long [ph] who runs our TC business has had his eye on the BASF facility for some time and when we purchased the TC, he predicted it would become available. I think Peter for his leadership in getting this deal done. Slide 18 shows the key attributes of our new facility. It includes vacuum evaporators and sand mix that are very similar to ours, along with numerous tanks and other vessels, loading spots and utilities. The acquisition positions Trecora Chemical to address new markets, expanding and diversifying TC's revenue sources and allow us manufacturing flexibility that will contribute to significant operating efficiencies enhancing the value of the combined facilities. We have already identified a project to run in the new facility. We expect to start up within a matter of weeks. The purchase price was not significant to the consolidated financial statements. We will provide additional information in our second quarter 10-Q. Turning now to an update on AMAK on Slide 19, Connie covered the full impact of the very, very favorable settlement with the former operator of the mine in Saudi Arabia. AMAK expects the mine to restart in the fourth quarter of this year. Extensive renovation work an upgrades to the facility to improve production efficiencies and precious metal recovery are proceeding on-schedule. We believe that AMAK has sufficient capital to complete the planned improvements. And an extensive exploration program is underway for both, the new gold mining lease and the existing copper and zinc mine. AMAK expects to see the benefits of this program towards the end of the year. Turning to Slide 20 for a summary; during the first quarter TREC achieved year-over-year petrochemical sales volume growth and also recorded quarterly revenues at Trecora Chemical while operating in a volatile commodity environment. Looking ahead, solid demand enables for our petrochemical and specialty wax product to support our growth objectives. We continue to make progress on our capital project at SHR and TC, as well as on our new product initiatives. By investing in our business today, we are positioning Trecora to grow volumes further in 2017 as new chemical industry production projects come online. We remain focused on attracting new customers, providing the best service, generating large orders to drive results, and creating value for our shareholders. I would like to thank our top notch employees across all functions for what they do to maintain that focus. We are very grateful for the extra effort you go to every single day. This concludes my prepared remarks. At this time, I'd like ask Brian to open the call for Q&A.

[Operator:]

Thank you. [Operator Instructions] We will now take our first question from Joseph Reagor with ROTH Capital Partners.

[Joseph Reagor:]

Good afternoon guys and congrats on another strong quarter. Couple of different questions. I guess first thing, has been news with the wildfires in Canada, have you guys seen any hesitance by your oil sands customer that take shipments? I know that they have been seeing a changes in production as of yet but I just wanted to see if you're getting any indications or pushback from them?

[Simon Upfill-Brown:]

Joe, good to chat with you. We heard today that they offered starting May shipments until further notice. So I think it's a day-by-day thing. If this thing gets under control quickly they will like release them but for now, shipments that we had scheduled in May have been delayed.

[Joseph Reagor:]

Okay. Unfortunate but mother nature has complications. On a positive note, I know the TC wax sales were up both year-on-year and quarter-on-quarter. Do you think this is an indication that the new sales team is doing a much better job than the old one and therefore we can expect similar or better levels moving forward?

[Simon Upfill-Brown:]

Joe, we're very optimistic. The new team is very strong, customer acceptance is growing, we're optimistic about the rest of them. As you know, we don't give guidance but all indications are that we are certainly headed in the right direction.

[Joseph Reagor:]

Okay. On that note of guidance, we noticed in the proxy that management bonus structure is based off - if you do back again what the math, something like $50 million in EBITDA this year for the 100% threshold. Is that an indication that like last year, it was - you guys easily crossed it? So this year they set the expectation a little higher by the board. And then maybe we should more look at that 80% threshold as more reasonable expectation for the company?

[Simon Upfill-Brown:]

Well, I think you're asking me to give you guidance. That proxy indication is what - the board expects us to do. It's not really an indication of what the management team thinks we can do. It's a target set by the board and obviously we're going to be working very hard to get there. But at this point, it's very hard to tell.

[Joseph Reagor:]

Okay. And then one final, just on feedstock mix; is there anything you guys can be doing to improve it? I mean I know it's little bit better this quarter and hopefully a little better in each subsequent quarter but it's been three quarters in a row now that it's been kind of below your historic average as far as percentage prime in there?

[Simon Upfill-Brown:]

No, you know we racked our brains on this feedstock question and it's really what led us the advanced preformer project because the specifications for natural gasoline are pretty broad, everything we've been getting is leading natural gasoline specifications and there is not much we can do about what's in the big story to caverns and in Mont Belvieu. But the real fix comes with the advanced reformat. Indications are over recent weeks it's been a little bit better but it can turn around pretty quickly and go the other way. So it's just - it's one of those things we're going to have to live with until we start up the advanced format.

[Joseph Reagor:]

Okay. All right, thank you for the insights. I'll turn it over.

[Simon Upfill-Brown:]

Thanks Joe.

[Operator:]

We'll now take our next question from Sarkis Sherbetchyan with B. Riley and Company.

[Sarkis Sherbetchyan:]

Thanks for taking my question. So with respect to the wax sales and pretty good volumes it seems like, would you share what those volumes were?

[Simon Upfill-Brown:]

Did we give volumes in the queue, no. One of the concerns we have is, the fragmented market in the wax business and that's being so small we're bit concerned about giving out volumes to customers. So I don't think we do mention volumes Sarkis.

[Sarkis Sherbetchyan:]

No worries. So I mean - its looks like in the press release you did mention launched three higher value applications. Do you mind, maybe discussing what those three major applications are?

[Simon Upfill-Brown:]

I think it's on the on the slide; one was in adhesives, one was in PVC lubricants, and the other one was in coding/trademarking.

[Sarkis Sherbetchyan:]

Okay. So I mean those are applications you guys have already talked about so not necessarily…

[Simon Upfill-Brown:]

We'll be chasing those and we're just introducing the slightly improved higher quality product into those markets.

[Sarkis Sherbetchyan:]

Okay, understood. And then you also mentioned the low cost product for Asia, does that go into similar markets or are those different end markets?

[Simon Upfill-Brown:]

No, it does not, it actually - once again we have to be careful about how we describe its use but it's used in a completely different process and the good thing about it is, we've been losing business in Asia because we been unable to compete but now we've found a way to make this product significantly lower cost than our other products and also sell it there. So that's going to help us work down this big excess inventory we have at Trecora Chemical. And then as we develop more and more higher value markets, we can reduce the volume we sell to this low cost application in Asia.

[Sarkis Sherbetchyan:]

Understood. And then from - I guess the profitability standpoint, are you sacrificing profits to get that products out to Asia or is it a similar kind of profit margin business?

[Simon Upfill-Brown:]

It's reasonable profit margin business, not as good as the other but it certainly worth doing.

[Sarkis Sherbetchyan:]

Got it. And I guess just zooming out real quick, looking at the strategy here on the wax sales, has that have evolved since the acquisition or is it the same line of thinking?

[Simon Upfill-Brown:]

Well, we knew when we made the acquisition that we had to improve quality and we had to improve the consistency of product, so that that has not changed. What we're doing as we as we learn more about the market and all that kind of thing, we're actually further tweaking the quality of the product, improving it further etcetera, etcetera. We have a good team at Trecora Chemical and they are able to tweak the way we process it and all that kind of stuff to ensure that we're making products that better and better fit with these three target markets that we have - with what their requirements are.

[Sarkis Sherbetchyan:]

Good, understood. And then the final one for me here, can you maybe discuss what's going on with you seeing pressure on the prime product prices. Maybe what those levers are?

[Simon Upfill-Brown:]

Well, it's - you know our contract prices are reasonably well fixed, right. There we get the up and downs of associated with the lag of declining prices or the lag of increasing prices, how that impacts our margins. The actual fixed dollar adhere is not changed. What impacts - what gets impacted is the spot prime products and that depends very much on how our competitors pricing the product, and that is generally driven by their alternate market which is gasoline. So gasoline prices are way down than their spot prices tend to come way down and that hurts us a little bit. We always sell at prices little bit higher than they do. But you know, we are forced to come down a little bit just to maintain the business. So that's really what impacts the spot prime business, it's the gasoline blend stock pricing.

[Sarkis Sherbetchyan:]

Good, that's all for me.

[Simon Upfill-Brown:]

Thank you, Sarkis.

[Operator:]

And we'll now take our next question from Greg Eisen with Singular Research.

[Greg Eisen:]

Thanks, good afternoon. Could you - are you able to talk about what you've experienced so far in Q2, say month of April on the cost of feedstock. How that's varied compared to Q1?

[Simon Upfill-Brown:]

We generally don't - I think there are indices that are available. It looks like Q2 is a little bit higher, thus far than Q1, not significantly but it's up a little bit as you've seen crude oil prices. We generally track crude oil prices pretty much. So it's up - it’s up a little bit I think over the first quarter.

[Greg Eisen:]

Got it.

[Simon Upfill-Brown:]

I mean it's looking something up here I don't know - if we're able to tell you exactly but I think it's up little bit. And if you look at the chart on Slide 6, you can see the market price there was starting to trend up and depending on what our inventories are etcetera, it is likely that it might continue that trend.

[Greg Eisen:]

Got it, so continuation of that trend, okay. Turning to the South Hampton resources, maintenance work, the D-Train was operational for the quarter but the rest of the facility was down for maintenance, correct?

[Simon Upfill-Brown:]

Yes. A-Train and C-Train.

[Greg Eisen:]

Got it.

[Simon Upfill-Brown:]

And if we did, if we hadn't have got the 50% more capacity out of D-Train, we would never have been able to do that, that was the key point I was making in the presentation which maybe I wasn't clear on. A and C Train combined had capacity of about 7,000 barrels. And then we added D-Train which we thought was going to have capacity of 4,000 barrels to take us up to our permit level of 11,000. But it turns out that we can run a D-Train on its own and make of over 6,000 barrels a day. And that - so we have not needed more than that in the first quarter, so we were able to shut down the other units, do a full inspection which is required by law and maintenance upgrades and get energy efficiency, things we wanted to get done, all those things installed on those two units. And our expectation is that C-Train and D-Train together will allow us to make the full 11,000 barrels a day, freeing up a train for future capacity increases or to do other things. So this D-Train has had a very big impact on us already.

[Greg Eisen:]

Okay. And as far as your permitted size, it's was at 11,000 barrels.

[Simon Upfill-Brown:]

Yes. And to get to 13,000 barrels which is what we think we can do is, it should be relatively straightforward but won't do that until we won't get that permit increase until we think we need to.

[Greg Eisen:]

Okay. Is there a long time lag to get that permit or is it reason to get it quickly as possible?

[Simon Upfill-Brown:]

We don't expect it to be - it shouldn't be more than six months, Greg.

[Greg Eisen:]

So maybe six-month lag?

[Simon Upfill-Brown:]

Yes.

[Greg Eisen:]

But you've obviously ordered it up long before you needed.

[Simon Upfill-Brown:]

Yes, we'll allow for that time absolutely.

[Greg Eisen:]

Got it. And the actual maintenance cost that you incurred in the quarter, were any of them capitalized and is that kind of laid out in the Q?

[Simon Upfill-Brown:]

I don't think we break down all that details, some is capitalized - it's only capitalized if it's extending the life of the equipment. The actual things like clean-out and inspection, and all those kind of things obviously does have to be expense. But if we're replacing like - we're in London, I think it's in A-Train, we're replacing a thin fan. That thin fan will extend the life of the unit that will likely be capitalized. So it all depends on exactly what exactly what we're doing.

[Greg Eisen:]

Okay. And the cost itself on the maintenance, can you disclose that on the call or is that in the queue?

[Connie Cook:]

No, it's not in the queue. I mean I don't have those numbers.

[Simon Upfill-Brown:]

We haven't broken down, it will be wrapped up in sort general, maintenance, labor and everything else. We generally do you all are own maintenance work, Greg, especially in terms of labor. So it's pretty hard to separate that stuff out.

[Greg Eisen:]

Understood. Okay, I let someone else go.

[Simon Upfill-Brown:]

Thank you very much.

[Operator:]

And we'll now take your next question from Bill Dezellem with Tieton Capital Management.

[William Dezellem:]

Thank you, a couple of questions, Simon, first of all, would you please discuss the first quarter capacity utilization at 56% versus the fourth quarter, I think you said 99%.

[Simon Upfill-Brown:]

Yes, I think we said 96%. So in the fourth quarter of 2015, I mean just because D-Train came on a little bit late in the fourth quarter, we were still counting that 7,000 barrels a day of pre-stock capacity built. And then when D-Train came online, we bumped up the coastal capacity to the 11,000, the permitted amount, 11,000 barrels a day. In the first quarter - we only changed it in the first quarter of 2016.

[William Dezellem:]

Understood. Okay, that makes a lot of sense. And then secondarily, would you please repeat the volume that will be required of the nine new polyethylene plants that you referenced that you're tracking? And then in addition to that, what's the timing of the start-up of those plants?

[Simon Upfill-Brown:]

The total is - I think the number I gave was 6.5 million gallons. And some of that starts late 2016, not much, most of it comes in 2017, 2018, 2019. So it's spread out over the next three years.

[William Dezellem:]

And would you break that out in terms of percentage of that 6.5 million gallons that you anticipate late this year and then over the course of the next three years or is it rather equivalent move?

[Simon Upfill-Brown:]

Well, it depends on when the projects come on-stream and we have to be a little bit careful because then we'll be indicating which polyethylene plants use how my volume and that information belongs to our customers. So we have to be a little bit careful with that. While we've given out thus far is the total of these nine new facilities that we expect to see them consume. And one of them has already given us an order for 100% of their business.

[William Dezellem:]

Well, that's a decent start.

[Simon Upfill-Brown:]

Yes.

[William Dezellem:]

And the other eight, is there - what's your prognosis for how those will develop? Do you anticipate they will split the business between you and someone else or do you feel like you have a pretty decent chance of winning a lot of that business?

[Simon Upfill-Brown:]

We feel we have a decent chance of winning the bulk of it, whether we get all of that or not, it's always difficult to say but we have very good relationships with these companies already. And - so we're optimistic Bill that we'll get a big piece of it.

[William Dezellem:]

Great, thank you.

[Simon Upfill-Brown:]

Thanks.

[Operator:]

And we'll now take our next question from Nick Toor with Luzich Partners.

[Unidentified Analyst:]

It's actually Colin [ph], good afternoon. Simon, that 6.5 million gallons, was that annual number?

[Simon Upfill-Brown:]

Yes.

[Unidentified Analyst:]

Okay. And I have three questions; first, for Analtech, is the custom processing revenue - was that recognized in Q1 or is that going to be going forward from Q2?

[Simon Upfill-Brown:]

I think that custom processing revenue will likely only occur in Q3 but they are paying us for all the work that's being done. I mean you saw that SILO being built and pipe-racks going in and those kind of things - those costs, they are covering their - what's the use for them, they are covering those costs for us. But actual processing revenue, I don't think that starts until the third quarter.

[Unidentified Analyst:]

And is the Trecora Chemical, is that a seasonal business? How should we think about it on a quarter-by-quarter basis?

[Simon Upfill-Brown:]

I don't think it is, we don't really yet have enough history but our view is that it's not - it's not as seasonal as South Hampton is. It seems to be a little bit more ratable across the year than South Hampton is. Colin, I'm not 100% sure but it certainly looks less seasonal.

[Unidentified Analyst:]

Got you. And then finally, what's the - you might have mentioned as going to the expectation for CapEx for the rest and do you think you will be able to fund it with cash from operations and cash on hand or do you think you will need to draw some debt to fund those CapEx?

[Simon Upfill-Brown:]

It's likely we will have to do a little bit. I think it's about $40 million we're expecting to spend in the rest of this year with another $20 million next year. So it's likely we'll have to drill a little bit on our credit facilities.

[Unidentified Analyst:]

Okay, great, thank you.

[Simon Upfill-Brown:]

Thank you, Colin.

[Operator:]

[Operator Instructions] We'll now take our next question from Kurt Caramanidis with Carl M. Hennig, Incorporated.

[Kurt Caramanidis:]

Hi, thanks for taking the call. Just to wrap up that spot market, I've got crude and gasoline up about 15%, that's quarter-to-date since the beginning of April so would that be reasonable to think that the spot market for you should be improving?

[Simon Upfill-Brown:]

It should be, it should be in the second quarter, it usually does. Highest gasoline demand increases right with the driving season in the summer. Generally gasoline prices do increase. So it's should help.

[Kurt Caramanidis:]

Yes, it makes sense. And then our…

[Simon Upfill-Brown:]

You have to remind our sales guys with comptroller [ph].

[Kurt Caramanidis:]

Because here, we've seen it depart, that's for sure. Thompson to - correct me, if I'm wrong, last year second quarter warrant, wasn't there a month or so of shutdown or some kind of non-ordering periods as far as comparing this quarter to last year second quarter wasn't there were similar - wasn't a fire but a similar situation.

[Simon Upfill-Brown:]

There was a shutdown last year Colin, there is another shutdown planned for this second quarter as well. So that's the other question about the second quarter when they will really ask for the May volumes, even if the fire is put out.

[Kurt Caramanidis:]

Yes, got you.

[Simon Upfill-Brown:]

But we’d be careful about that but I my understanding is that they have publicly announced a shutdown in June.

[Kurt Caramanidis:]

Okay. And then are the new products that you've got going at South Hampton impactful, incremental - because it sounds like you've got a number of different things going on there, are those generally incremental ads or are there or are they…

[Simon Upfill-Brown:]

We're optimistic about the long-term effect but obviously as you start these things it's takes a while to ramp up Kurt. So I would say, to answer your question initially incrementally, but hopefully longer term they should be fairly impactful.

[Kurt Caramanidis:]

Okay, great. Final comment, it's interesting that with the market and the economy capital spending is - one thing nobody's doing any investment and certainly you guys are bucking the trend in investing in future growth. So that great to see.

[Simon Upfill-Brown:]

No, it's good and do you know these projects have really good payback and will be very additive as far as EBITDA is concerned, so they make huge amount of sense. So it's really - I couldn't be more excited about where we are with this new little plant at Trecora Chemical that we've just got starting business up there in a couple of weeks and then all these other big projects. The mine is starting to look like it's turning around, it's a very, very exciting time for Trecora Chemicals, I couldn't be feeling more positive than I am right now.

[Kurt Caramanidis:]

And that area has kind of heated up as well, the gold and silver just surprises - those type of companies, so it seems like we have had some good tailwinds. So keep it up and I appreciate you taking my call.

[Simon Upfill-Brown:]

Thanks, Kurt.

[Operator:]

And there are no further questions in the queue at this time. I'd like to turn the conference back over to management for any additional or closing remarks.

[Simon Upfill-Brown:]

Thank you, Brian. Thank you for joining us this afternoon. We appreciate your interest and your support. One final note, I will be presenting at the B. Riley Conference in Los Angeles on May 26th and also holding one-on-one meetings that day. So I do hope to see some of you there. Have a very good evening.

[Operator:]

And ladies and gentlemen, that concludes today's conference call. We thank you for your participation.