Trecora Resources
Q4 2016 Earnings Call Transcript
Published:
- Operator:
- Good day everyone and welcome to the Trecora Resources Fourth Quarter 2016 Earnings Conference call. Today's conference is being recorded. At this time, I’d like to turn the conference over to Laurie Little, with The Piacente Group. Please go ahead, madam.
- Laurie Little:
- Thank you very much and good afternoon, everyone. Welcome to the Trecora Resources fourth quarter and full year 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; Sami Ahmad, Chief Financial Officer; and Connie Cook, Vice President of Accounting and Compliance. 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 two. Statements in this presentation 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, March 1, 2017. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected. These risks, as well as others, are discussed in greater detail in Trecora's filings with the SEC, including the company's Annual Report on the 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 web site at www.trecora.com. At this time, I’d like to turn the call over to Trecora's President and CEO, Simon Upfill-Brown.
- Simon Upfill-Brown:
- Thanks Laurie, and thanks to everyone joining the call this afternoon. As shown on Slide 3, I will begin today with an overview of the fourth quarter and full year and then pass the call over to Sami and Connie for a more detailed discussion of the financial results. Following that I will review progress at South Hampton Resources and Trecora Chemical. And conclude my prepared comments with an update on developments at AMAK before opening the call up for questions. Turning to our overview for the quarter and full year on Slide 4, in 2016 we focused our resources and invested in transformational projects to drive future growth. We made steady progress on these projects and believe we will be well positioned to take advantage of the resurgent’s in the North American chemical industry. Let’s first review our major accomplishments in 2016. We maintained the highest quality and purity standards in the industry, achieved record annual revenue levels at Trecora Chemical and completed the mechanical construction of the distillation unit at TC. This is the third of our four capital projects aimed at improving our capabilities, capacity and overall profitability. Also at TC, we expanded and diversified our revenue sources with the acquisition of B Plant in May and that acquisition has paid immediate dividends with the startup production beginning in June. AMAK’s zinc and copper plant restarted processing operations in December, after a full year of extensive renovation work. In late Q3, we announced the appointment of Sami Ahmad as our new CFO. Sami’s background includes extensive financial and accounting experience across a broad range of chemical, oil and gas and water service companies. We’re happy to have him aboard. Although, we encountered a few specific customer volume shortfalls in early 2016 that impacted volumes throughout the year, we’re encouraged with the state of our business, as the fundamentals for future growth remains strong. We’ll cover our progress as well as other recent developments during the rest of the prepared remarks. Now, I’ll turn the call over to our Chief Financial Officer, Sami Ahmad for a more detailed update on the quarterly results.
- Sami Ahmad:
- Thanks Simon, and good afternoon to everyone. Slide number 5, provides a financial overview for the fourth quarter. The fourth quarter historically one of our seasonally softest quarters, reflected a continuation of events from the third quarter, primarily in our petrochemical business. Total revenue in the fourth quarter was $54.2 million, a 10.5% year-over-year decrease. The decline in revenue was mainly driven by an approximately 25% decrease in petrochemical sales volume. This was mainly attributable to prime product volume short falls from four customers. This was partially offset by higher petrochemical prices, which were up approximately 10.1% compared with the fourth quarter of 2015.We also had record quarterly revenue at Trecora Chemical. Net loss for the fourth quarter was $0.8 million or $0.03 per diluted share, compared with net income of $1.1 million or $0.05 per diluted share for the fourth quarter of 2015 and net income $0.7 million or $0.03 per diluted share for the third quarter of 2016. The net income for the fourth quarter includes equity and losses of AMAK with an estimated after tax impact of $0.10 per diluted share. Adjusted EBITDA which excludes equity impact of AMAK and share based compensation was $5.7 million for the fourth quarter of 2016, compared with $8.6 million in the fourth quarter of 2015. Slide 6 illustrates our petrochemical revenue and sales volume summary by quarter and it’s broken out by prime product volumes and byproduct volumes. In the fourth quarter, prime product volumes decreased by about 17% year-over-year and by about 9% from the third quarter. Prime product volume was 14.4 million gallons in the fourth quarter, compared with 15.8 million gallons in the third quarter and 17.4 million gallons in the fourth quarter of 2015. Excluding shipments to our Canadian oil sands customers, prime product volume declined 4.4% as compared to fourth quarter of 2015. Byproduct volumes were down about 19% sequentially and 45.5% year-over-year. Recall that byproducts were sold at a significantly lower margin than prime products. For full year 2016, prime products volume was 58.4 million gallons, compared with 64.1 million gallons in 2015. As we’ve discussed, the decline is due to shortfalls at four specific customers. Now, turning to Slide number 7, petrochemical feedstock prices were generally rising through the fourth quarter and were above third quarter and fourth quarter 2015 levels. As you know our feedstock at South Hampton Resources is natural gasoline. In this chart we show we show the market price natural gasoline and our delivered cost of feedstock on a relative basis. The spread reflects a delivery cost from our suppliers. Average feedstock prices were about 5% higher in the fourth quarter compared to the third quarter of 2016. This was partly due to the general upward trend in feedstock cost and also due to volume related penalties that we incurred due to feed volumes being below certain contractual amounts under our agreement with our suppliers. As you can see, the effect of these penalties was to widen the spread between market and process cost. Altogether, this had a negative effect on margins. Now, moving to Slide number 8, Trecora Chemical generated strong and steady volume and revenue growth volume and revenue growth in specialty wax during the course of 2016. Wax revenue in the fourth quarter was up about 53% from the year ago period and higher by nearly 18% sequentially. We achieved record quarterly wax sale volumes of nearly GBP10 million. Some of the volume increase in the fourth quarter was due to selling off lower margin inventories to reduce working capital. For the full year 2016, sales volume was about GBP33.9 million, which is an increase of nearly 40% from 2015, while revenues increased 31%. Now, before I turn the call over to Connie, I would like to inform you an AMAK accounting matter, which we disclosed in our press release earlier today. Specifically, there were errors that resulted in; 1, an overstatement of the fair value of spare parts obtained by AMAK in the second quarter of 2016 by approximately $2.82 million; and 2, an understatement of the bases of our investment is a result from an equity raised by AMAK in the third quarter of 2016 by approximately $3.17 million, while the errors have been overall combined in minimus effect on net income and earnings per share less than $0.01 per share. For the 12 months ended December 31, 2016, the do have a material impact on net income for the second and the third quarter of 2016. As a result, the second and third quarter 2016, Forms 10-Q should no longer be relied upon, the company will re-stake these order on or before the due date for the filing of its 2016 Form 10-K. Now I’d like to turn the call over to Connie Cook.
- Connie Cook:
- Thank you, Sami. Slide 9 presents our income statement for the fourth quarter and full year 2016. I’ll begin with the discussion of the quarter. Fourth quarter revenues declined 10.5% year-over-year to 54.2 million, resulting from a 25.4% decline in petrochemical sales volumes to 18.4 million gallons when compared to 24.6 million gallons in the fourth quarter of 2015. The decline in revenue was also impacted by 8.5% increase in average per gallon feedstock cost, which was partially offset by 10.1% increase in our average selling price in the fourth quarter of ‘16 when compared to the fourth quarter of ‘15. Foreign sales volume for fourth quarter ‘16 was 4.2 million gallons versus 7.9 million gallons in fourth quarter of ‘15 and represents 22.7% of total petrochemical volume. These results include a 53.1% decline in volume to our oil sands customers in the quarter. Petrochemical sales were 44.2 million representing 81.5% of total revenue for fourth quarter of 2016. Specialty wax sales were 5.7 million, an increase of 52.6% from the fourth quarter of ‘15. We generated 4.3 million in processing fees during the quarter, compared with 3.0 million in fourth quarter of ‘15. The increase is a result of fees associated with the customer who reimbursed us for installation expenses plus the mark-up and additional processing fees generated at TC from new customers and additional volume with existing customers. Fourth quarter petrochemical deferred revenue was 4.3 million, a sequential increase of approximately 5.4 million in third quarter of ‘16. Cost of sales including depreciation and amortization totaled 46.6 million, a 5.6% decrease when compared to 49.3 million in fourth quarter of ‘15. Lower volumes of feed processed and 8.5% year-over-year increase in the average per gallon cost of petrochemical feedstock from fourth quarter of ‘15 caused the decline. Gross margin for the quarter was 14.1% versus 18.6% in fourth quarter of ‘15, as a result of lower sales volumes, higher feedstock cost and lower margin wax sales, which we resold for a third party in Latin America. General and administrative costs were 4.9 million, down 8.4% from 5.4 million in the fourth quarter of ‘15, primarily due to decrease in officer compensation. Operating income was 2.5 million for fourth quarter of ‘16 versus 5.8 million in fourth quarter of ‘15, a decrease of 55.9% and down from 4.1 million in the third quarter of ‘16. We recorded equity and losses at AMAK of 3.7 million during the fourth quarter, as compared to 3 million in the fourth quarter of 2015. Net loss attributable to Trecora Resources was 0.8 million or $0.03 per diluted share, compared to net income of 1.1 million or $0.05 per diluted share in the fourth quarter of ‘15. Adjusted net income for the quarter was 1.6 million or $0.06 per share. We estimate that our EPS is negatively impacted by approximately $0.10 from the AMAK equity loss. Now, moving to full year results, revenues declined 12.2% year-over-year to 212.4 million when compared with 242 million in 2015. The lower revenue was a result of a decline in petrochemical sales volume and lower per gallon feedstock cost, which translates into lower average selling prices. Average selling price was down by 12.1% year-over-year. Petrochemical volumes declined to 76.4 million gallons from 86.9 million gallons in 2015. Foreign sales volumes were 17.3 million gallons versus 21.9 gallons in the 2015. Oil sands volumes declined 31.1% in 2016. Petrochemical product sales were 173.3 million, representing 81.6% of total revenue in 2016. Specialty wax sales were 20.3 million and we generated 18.8 million in processing fees. Cost of sales including depreciation and amortization totaled 172.5 million, a decline of 6.7% compared with 185 million in 2015. The lower costs were a result of 7.4% reduction in feedstock prices and 10.9% drop in volume processed. Gross margin in 2016 was 18.8% versus 23.6% in 2015. G&A costs were 20.4 million versus 20.2 million in 2015, an increase of 0.9%. The increase in G&A was primarily due to increases in health insurance premiums, directors' fees and consulting fees. We reported operating income of 18.7 million versus 36 million in 2015, a decrease of 48.1%. Increased operating expenses were primarily driven by higher freight cost, increased equipment rental and maintenance labor cost, mainly associated with A and C Train refurbishments. Depreciation on D Train and expenses associated with the Anellotech project, which were reimbursed. Net income from Trecora Resources was 19.4 million or $0.78 per diluted share, compared to net income of 18.6 million or $0.74 per diluted share in 2015. Net income benefited from the bargain purchase gain on B Plant of 11.5 million, a gain on the additional equity issuance AMAK of 3.2 million, offset partially by equity in losses of AMAK of 1.5 million for an estimated combined $0.34 per diluted share on an after tax basis. Adjusted net income in 2016 was 10.8 million or $0.43 per diluted share, compared with adjusted net income of 22.1 million or $0.88 per diluted share in 2015. Slide 10 shows the EBITDA and adjusted EBITDA calculations for the quarter. We reported fourth quarter EBITDA of 1.3 million which compares with 4.5 million for the third quarter of ‘16 and 5 million from the fourth quarter of ‘15. Adjusted EBITDA was 5.7 million for fourth quarter of ‘16, compared with 7.2 million in third quarter of ‘16 and 8.6 million in fourth quarter of ‘15. EBITDA 2016, which includes the previously mentioned gains in equity and losses from AMAK was 41.7 million, compared with 39.6 million in 2015. Adjusted EBITDA was 31 million, compared with 47.3 million in 2015. Adjusted EBITDA margin was 14.6%, compared with 19.6% a year ago. Slide 11 provides a brief summary of factors that impacted our margins in the fourth quarter. As we had mentioned previously, prime product volume decreased year-over-year, but it is important to note that volumes in the fourth quarter of 2015 were at a record high making the year-over-year comparison much tougher. Excluding the Canadian oil sands volume shortfall, volumes were off by 4.4%. Higher feedstock cost per gallon, both over the prior year and sequentially impacted our profitability. We did however see a decline in byproduct volumes, with prices moving closer to feedstock on a sequential basis. The prices remain below feedstock cost during the quarter. Even with the lower volumes related to the customers previously discussed, 2016 was the third best in terms of prime product volume in our history. Slide 12 presents our balance sheet, as of December 31, 2016, cash was 8.4 million compared with 18.6 million at the close of 2015. If you recall, we drew 15 million on our term loan in December 2015, which caused us to have a larger amount of cash on hand than we normally would. Our total liquidity which is cash plus availability under our revolver was approximately 37 million at December 31, 2016. Inventory was 17.9 million compared with 15.8 million at year end. Long-term debt including the current portion, but excluding loan fees was 84 million compared with 82.3 million at year end 2015. We made principal payment from both our acquisition and term debts of approximately 6.3 million. Capital expenditures for the quarter were 12.6 million and for the year were 40.5 million. These included construction on the hydrogenation distillation unit project, the advanced reformer unit, the acquisition of B Plant various improvements throughout those facilities. We had 30.9 million in working capital at December 31, 2016 and ended the quarter with a current ratio of 2.4
- Simon Upfill-Brown:
- Thanks, Connie. Moving to Slide 13 for an update on South Hampton, excluding oil sands shipments, prime products declined by 4.4% year-over-year as Connie mentioned. Our major Canadian oil sands customer experienced outages and forest fires in 2016. Production difficulties continued into early 2017 due to extreme cold temperatures. This customer also significantly improved the efficiency in which they use our pentanes to remove asphaltenes from the bitumen. And as you know the other Canadian oil sands and crude manufacturer shut down in January 2016 after that fatal explosion. In addition to our Canadian oil sands customers, we continue to experience volume shortfalls with two others, which we previously disclosed in the second and third quarters. One, a customer in Latin America preferentially using a low cost local supplier and the other, a U.S. refiner that had had a major maintenance turnaround and changes to its crude oil feed in order to improve long-term efficiency including in the use of our product. On the positive side, our prime product volumes to the polyurethane foam market were up about 7% for the full year of 2016 over 2015. Quarterly byproduct volume declined 45% from the fourth quarter of 2015, 18.9% sequentially, driven primarily by an increase in pentanes in our feed. Byproduct prices were approximately $0.07 per gallon, below our feedstock costs in the quarter, an increase of $0.02 per gallon from the third quarter of this year and a decline of $1.5 from the fourth quarter of 2015. Our byproduct sales continue to have a negative impact - effect on our gross margins, but we do anticipate higher value from our byproducts once our new advanced reformer comes online in late 2017. I’ll touch on the progress of that unit in a moment. As our volumes decreased in 2016, certain penalties on our feedstock supply contracts kicked in. As Sami mentioned, these impacted margins. Although these penalties will likely continue in the short-term, we’re working with suppliers to reduce them and we’re optimistic about release in the intermediate term. Petrochemical capacity utilization was 43%, compared with 96% in the fourth quarter of 2015 and 50% in the third quarter of 2016. Capacity utilization is based on 11,000 barrels per day of fresh feed in 2016 and 7,000 barrels per day in 2015. Quarterly international petrochemical volume decreased to approximately 22.7% of total volume from the 31.9% from a year ago. Our pentane is now fully qualified at the three new polyethylene plants in Thailand, the Philippines and Middle East. At the moment all three facilities are using lower specification local suppliers, but we do expect opportunities when they use higher technology catalyst. We’re very pleased to have received a large fruitful order for over 800,000 gallons for a third Asian polyethylene facility. We’ll ship this product shortly, roughly 50% in March and 50% in April. However, due to shipping time, we won’t be able to recognize revenue until it reaches the port of destination. Slide 14 presents the summary of our major improvement projects in South Hampton. When we completed construction of D Train, it was able to operate at 6,000 per day throughput, 50% more than we had planned for, enabling us to perform extensive maintenance and refurbishment on A and C Trains. This work is now complete and we see many long-term benefits. Specifically, A Train is being used for multiple new product trials and an extension of our product line. Currently, we have four new products in the works. As we have mentioned previously, we received a two railcar order for the first product in late September of last year. We will be shipping a fairly large order to a different facility in March of this year. The second product is on trial with the customer who requested it, initial feedback is very positive. For the third, we continue to work on finding an economical method to manufacture it using available equipment. We have completed computer simulation on the first product and have now initiated lab trails. We remain confident in the long-term industry prospect. New polyethylene plants in North America are expected to add approximately 8 million metric tons per year of manufacturing capacity, a 40% increase over current capacity. We expect to sell 15 million to 20 million additional gallons of pentane by ‘21, ‘22, approximately 35% above 2016 levels. We have a second Canadian oil sands customer expected to come online in early 2018 which will provide a significant bump in volumes. This is unfortunately later than our previous projection of mid 2017 due to some construction delays encountered there. Turning to an update on our new advanced reformer unit, this project will significantly enhance the value of our byproduct stream as well as provide a secure and reliable source of hydrogen for South Hampton’s high-purity pentane production and custom processing campaigns. We estimate this unit will provide an EBITDA gain of approximately $13 million per year once volumes fully ramp up. We now expect this unit to start up in the fourth quarter of 2017, with a total spend up 13% over our original budget to about 52 million. Scaling down to 4,000 barrels a day from the standard 40,000 barrels per day clock proved to be challenging. At Trecora, in the interest of speed and generating revenues quickly as possible, our philosophy has been to run the separate design, fitting, purchasing and construction phases concurrently and not to follow the large company stage gate process. We get things done very efficiently like B Train, but no one gets it right every time, even the big companies as proven by the some of the delays and cost over runs encountered on major of the petrochemical projects. Slide 15, shows the progress being made on the new reformer unit. Towards the back of the photo, you can see the total stabilizing tower. Front right is the electrical substation being assembled. Just behind that, the reactor structure progress. Moving left from there, the concrete Etta footings, followed by the main pipe wreck and the compressor area. We’re quite impressive, when you recall that we only received our permits for this project in May of 2016, nine months ago. Moving to slide 16, Trecora Chemical had a good bounce back following a difficult third quarter by generating total revenue growth of 49%, led by record volumes of wax sales. While we improved revenue levels, operating margins were 7% compared with 14% in the fourth quarter of 2015, higher by 310 basis points sequentially. Margins were lower from the year ago period due to us still having to move lower priced wax to keep volumes up. The sale of excess inventory and the ramp up in personnel and extensive training as get ready to run the hydrogenation, distillation project and additional business in B Plant. Our new wax products are being well received by the market, we are seeing worldwide acceptance of our product and the talk about thesis and obtain the first order of molten wax from a PVC Lubricant customer. Our distributor in Europe is kicking into gear with sales increasing GBP1.4 million year-over-year, with GBP700,000 of the increase occurring in the fourth quarter. In custom processing we saw increased volumes with our existing customers and continued to improve the processes with these projects, resulting in significant improvements in revenue per hour. We made 15 proposals in the fourth quarter alone. There is a huge amount of interest in our capabilities. We had over $560,000 of custom processing revenue from B Plant in the fourth quarter. Full year total revenue from B Plant was over $900,000, as we also use the assets to manufacture a specific wax product. We continue to expect to add approximately 5 million per year in annual EBITDA from our B Plant assets during 2017 and 2018. We are pleased to have the distillation tower mechanically complete, a major milestone for TC that will enable us to take advantage of the resurgence in the North American chemical industry, particularly through increased demand for custom processing. Startup of the hydrogenation section is on track by April, and TC is conducting extensive personnel training to handle the rapid deployment of new custom processing projects, once we are ready to start. TC has an extremely robust pipeline of projects with the new capabilities offered by this expansion, which positions us to deliver approximately 7 million in incremental EBITDA per year starting in 2018. On slide 17, you can see how things have progressed since we first started drilling foundation pilings nine months ago. The units have started processing water to ensure all aspects of the distillation unit are fully functional. The tower will then run an internal hydrocarbon separation before transitioning to a custom processing project in March. You can also see in this photograph, how the equipment is surrounded by TC’s existing operating equipment. Upward permitting due to welding with hydrocarbons in the area and the requirement sequence worth makes parallel construction activity impossible. This is the primary reason for our slight cost overrun and delay. Turning now to an update on AMAK on slide 18, in November 2015, AMAK took advantage of low metal prices worldwide to proactively shutdown the operation in order to undergo extensive renovation work, primarily focusing on improving production efficiencies. As we recently announced, AMAK restarted its processing operations on December ‘16. Since then, AMAK has had a robust and steady startup and milling operation and the plant has been able to run at high speed put rates. AMAK expects to continue to eliminate bottlenecks and to ramp up production of the mine during the first half of 2017. In addition, during the renovation period, processing of the gold-bearing waste dumps from historical mining at the Guyan mining license area was completed and gold extraction is underway. Diamond drilling of the Guyan mining site is complete, indications are very encouraging and we expect a full concept study including mining options by the second quarter of this year. Under the new operating model, the mining and processing operations will be managed by an onus team, led by a seasoned new CEO, with technical support and labor resources provided by Turkish company with considerable experience in the mining industry. 2017 is a pivotal year for AMAK and we hope to have better and better news for you in subsequent quarters. Turning to slide 19, as we have highlighted in the past, we are investing over 100 million on four major capital projects in anticipation of the significant chemical industry expansion that is expected to come online in the coming years. We have spent a total of 65 million on these projects so far, which includes the mechanical completion of the distillation tower, completion of D Train and acquisition of B Plant. Based on our current view in the market, anticipated increase in pentane volumes and stronger operational efficiencies, we continue to believe that our capacity expansion has the potential to drive an additional 28 million to 36 million in annual EBITDA beginning in the 2018 to 2022 timeframe. These projects underscore our commitment to maximize our profitability and shareholder value. Finally on to slide 20, for my closing remarks, to recap, 2016 was focused on building a foundation for future growths. We made significant progress on our capital project initiatives and remain confident regarding the long term prospects of our business which is reinforced by expanding petrochemical production capacity on the Gulf Coast and stronger demand from polyethylene manufacturers. For 2017 we will see competition of our major capital projects as well as improvements in our business. We have two capital projects ramping our production later this year and we expect to benefit from new polyethylene plants coming online as well as expanded custom processing work. At TC we had record revenue year and look to carry that momentum into 2017, driven by steady improvements in wax margins, an increase in custom processing work especially once the full hydrogenation distillation unit is on stream in April. We are pleased to see AMAK operational again and look to reap the benefits from expanded exploration, enhanced production efficiencies and potential mining at Guyan. While 2017 will be a year of progress; we believe that 2018 will be a catalyst year for Trecora. We will have all our capital projects in place for the full year and with the results in positive impact on EBITDA. New Canadian oil sands projects will be online along with one new PE plant, starting up in the third quarter of ‘17 and additional PE plant starting up in the fourth quarter of ‘18. Both that will use our pentane. We believe we have the potential to start to monetize our investment in AMAK and thereby to deliver significant value to our shareholders. This is an exciting time at Trecora, we are under presuppose of numerous growth opportunities and look forward to delivering on our strategic objectives. I would like to take a moment to thank our very special and motivated team of employees. With their hard work and dedication as well as thank all our shareholders for their continued support. This concludes my prepared remarks. At this time, I would like to ask the operator to open the call for Q&A.
- Operator:
- Thank you. [Operator Instructions] We will hear first from Joseph Reagor of ROTH Capital Partners.
- Joseph Reagor:
- Good afternoon guys and thanks for taking the questions, a couple of things; first one on the capital projects, what is left to be spent in 2017 and how does that break out across the four quarters?
- Simon Upfill-Brown:
- We have roughly 40 million to go and most of it is going to be Aromax clearly and the quarter breakdown would be first, second and a little bit into the third quarter. I don’t know exactly how that is going to go, but that’s what it will be approximately Joe.
- Joseph Reagor:
- Okay and then following on that, given about 37 million in current liquidity, do you guys sure comfortable with your ability to continue fund that from liquidity in cash flow.
- Sami Ahmad:
- Yes, we are fine there Joe.
- Joseph Reagor:
- Okay. Switching over to the mine, when do you think we will get your first look at the kind of the production level and the cost structure under the new management there? Do you think will get something before Q2 earnings that you guys can provide or is that going to be just a quarterly update?
- Simon Upfill-Brown:
- I think it is going to be quarterly update Joe. It is very unlikely we will ship any product in the first quarter, first shipment look like they are sort of aiming at April - May timeframe. And I think the third quarter should be pretty close to our second quarter we should be pretty close to running reasonably full. So I think the result at the end of the second quarter will give us a very good indication of what things will apply. Maybe not complete but I think we should be very close then.
- Joseph Reagor:
- Okay. Switching again over to Trecora Chemical what is the maximum wax volume rate you guys think you can do there on an annual basis?
- Simon Upfill-Brown:
- It is more currently because we are not making any on purpose wax. It is the wax volume capacities really driven by the two suppliers we have from the two polyethylene facility as we take their byproduct. It is of the order 40 million pounds or so. Joe, we have the capacity to process more than that, but I don’t think we can get much more than that from those two supplies.
- Joseph Reagor:
- Okay. Thanks. I will turn it over.
- Simon Upfill-Brown:
- Thank Joe.
- Operator:
- And we’ll go next to Sarkis Sherbetchyan of B. Riley & Company
- Sarkis Sherbetchyan:
- Hi good afternoon guys.
- Sami Ahmad:
- Thanks Sarkis.
- Sarkis Sherbetchyan:
- So, just following up on Trecora Chemicals specifically wax, do you expect this level of wax sales kind of continue and filled half of for future quarters?
- Simon Upfill-Brown:
- Yes, we do. We don’t want to build anymore wax inventory. We are taking all the volume that we can take from our existing two suppliers. So we will keep those volumes moving Sarkis. And at the same time we are driving margin improvement by going off to these higher value markets like hot melt adhesives and PVC lubricants. I think as I mentioned in my prepared remarks we are getting some good traction in both of those markets.
- Sarkis Sherbetchyan:
- I guess to maybe reconcile the year-over-year difference in the margins for Trecora Chemicals, can you help us bridge what is going on there? It sounds like substantially lower and maybe if you can help bridge how we can get what that businesses is, historically delivered?
- Simon Upfill-Brown:
- There are number of things driving the lower margins, one is sort of overall wax market is a little bit long and so overall wax prices have come down a little bit. But the big thing for us is selling this low cost wax that we produce in fairly significant quantities now in two places China, Turkey and Latin America. It is very low price, it has got positive margin for us, but we are selling that wax in order to not to build inventories but the long term view as more and more we sell the higher value added waxes, we will reduce those cheap wax volumes and sell more into the high value market. So that is just going to take to build that business. But all indications are good, we get more approvals every time and hot melt adhesives, we are selling into Europe, Latin America and North America. Never quite penetrated Asia yet, but it is really looking quite good in those markets. And then the other thing that brings the margin down a little bit is the we distribute wax resale wax in Latin America and on purpose producer and those margins are little bit lower.
- Sarkis Sherbetchyan:
- Okay, so I guess as you build up for the hot melt market, and the PVC I mean what would you say the model looks like for those end products I mean as on par with the corporate average margins or is it better can you maybe help us understand that?
- Simon Upfill-Brown:
- Sorry, we had a bit of distraction here, sorry Sarkis, could you repeat your question?
- Sarkis Sherbetchyan:
- Yeah, so with regards to the higher margin products that you mentioned the PVC and the hot melt, is it - I guess can you help us understand the difference in economics versus what you are selling now. You know is it, on par with your corporate average margins or is it significantly better and we just kind of frame it?
- Simon Upfill-Brown:
- No it is certainly built on our average margins now, Sarkis. I don’t know if I can give you any exact number but it is significantly better pricing than what we are getting for our averages now.
- Sarkis Sherbetchyan:
- Okay that’s helpful. I guess moving on to petrochemical side of the business, even though these second oil sand customers delayed into ‘18 now and it sounds like there is some polyethylene plant startups here. Are you confident in the volume growth into 2017 because of the polyethylene customers or you can maybe help us understand what is going on there that gives you volume growth confidence?
- Simon Upfill-Brown:
- For 2017? Yeah, well there is some - our existing Canadian oil sands customer I think he is likely to have another fire and hopefully later on in the year will be more reliable than they have been so far this year. I mentioned this new customer in Asia was given us a fairly significant order and there are number of other areas that we are looking at polyurethane markets as it is expected to continue to grow. So they were certainly be - we are expecting volume growth in 2017, perhaps not as high as we thought it was before we saw the delay in the Canadian oil sands business but they should still be there during 2017. There is this other polyethylene customer; we are starting up in the third quarter. We should get some volume from that and in third quarter as well. There is business to head there.
- Sarkis Sherbetchyan:
- Good and then just with respect to the project delays that you mentioned and sounds like some cost over, is this something that’s specific to your facilities, is it something that is specific to the region because obviously in the area with all the build going on, there has been finding more cost overrun delays. So I just wanted to get a flavor of what you are seeing?
- Simon Upfill-Brown:
- For most of the cost overrun and delays are significantly bigger than ours. I think these were specific issues and when we make the decision not to go through the first detailed engineering stage gate and then move on to bidding and so on and so on. You do run the risk of missing it occasionally but our view is that, do it - if we do it this way, you get things done much more quickly in the long run. And much lower price, because these steps tend to cause significant funding requirements and everything else. We still believe the right way to go and just on these two, we underestimated a few things and the two main reasons which is discussed in full is, is trying to work inside and operating plant at TC. We underestimated how much that would slow us down when you are surrounded by operating equipment that is very, very difficult. And the other one was the scale down from advanced reformat from the conventional facility which is a 40,000 barrel a day plant. We thought that would be relatively straightforward, but it turns out, utilizing, piping sizing, reactor sizing, heat exchange sizing all became a lot more complicated than everybody thought because you had to maintain certain liquid level flows, certain heat transfer for emergence and all of those resulted in some fairly unusual design. And we never expected that when we started this project and of course the more we got into it, the more we discovered this. So I think there is little bit specific to ask, I don’t think we had issues like some other plants have had like running out of welders, or not having sufficient steel all those kind of things. I mean some of the lead times and some on the small complicated equipment, we needed the advanced reformer. I mean some of those were quite long and that hasn’t aided us in getting things done as we were hoping to. I don’t think that’s will major reasons for our being little bit behind Sarkis.
- Sarkis Sherbetchyan:
- That’s helpful and one more from me and I will hop back in. So you did mention the scale down for the events, obviously the cost going up a little bit but you did maintain the estimated kind of annual EBITDA once up and running, made arrangements for 12 million to 14 million and then it sounds like the timeframe might have extended a bit? So with respect to the scale down in the maintenance of what you think you can get out of that machine? Can you maybe help me think about that?
- Simon Upfill-Brown:
- Basically, the high EBITDA numbers depend on high volumes going through the advanced three formats. So we really only reached high volumes going through the format as our pentane volumes grow because that’s what drives the amount of byproducts volume that we create. So as of pentane volume grows over the next four to five years, that will allow us to ramp up the volume going through the advanced reformer So that’s really what determines that. The other things that drive the economics on the advanced reformer or post things like painting prices and - particularly painting and coloring prices, so those - we are very optimistic and positive about those and I think we would be little bit conservative in our estimates of what those might be. But the big thing is we get the volumes up and that’s why there might be a little bit of delay in reaching the big number.
- Sami Ahmad:
- Right and to what Simon said, Sarkis, though the scale down didn’t change the design volume, the design volumes still 4,000 barrel per day. What Simon was referring to is conventionally these are built at much bigger levels of 4,000 barrels per day up to 40,000 barrels. So that scale down is what he is referring to. Our capacities are unchanged; when it starts up we expect it to be a 4000 barrel per day unit.
- Sarkis Sherbetchyan:
- Okay, that second part was very helpful, thanks for that.
- Operator:
- [Operator Instructions] And we’ll hear next from Bill Dezellem with Tieton Capital.
- Bill Dezellem:
- Thank you, first of all would you please re-describe for us if you would, the US refinery that using less pentane, what is behind that. I know you mentioned in your opening remarks but I simply missed it.
- Simon Upfill-Brown:
- Hi Bill, this unit uses our pentane to remove heavies from crude oil. So that crude oil can be processed in the refinery without cooking their various practices and various other units that they use to refine the crude oil. So they had a maintenance turnaround in early 2016 to drive some efficiency improvements but then more importantly they change their crude oil select. They went from a very heavy crude oil to a much lighter one and as you know in the US the crude that we produce is generally lighter than what is produced in the other parts of the world. So they switch to a much lighter crude oil and as a result of that, need a lot less of our pentane to remove the heavies from the crude oil. Because it is just a whole lot left in there. So that’s the big driver for their volume reduction, Bill.
- Bill Dezellem:
- And then Simon, did they change their slate because the light heavy spread has decreased - I am not look recently or was there some other structural shift that specific to the plan rather than the overall economic refinery
- Simon Upfill-Brown:
- I think more than anything else these refineries are driven by economics right, the crack spread is down a little bit and maybe they hope that this with help them maintain profitability and all those kind of things. So I am not 100% sure as to the reason behind this switch. If the economic situation changes we are optimistic that at some point they might change back. But for now their demand is very low. And when our guys visit there is no indication that they will be changing soon. Refinery economics can turn very, very quickly. So we just have to wait and see.
- Bill Dezellem:
- That’s helpful, thank you and then your byproduct volume declined roughly 46% would you describe really why you saw that decline in byproduct volume?
- Simon Upfill-Brown:
- Yeah sure, the primary reason is that - the especially those specifications for feed stock is very wide for the natural gasoline it is pretty broad specification. And the pentane content which is obviously the product that we chase more than that we really want because this is the bulk of our business. Pentane content increased during the course of 2016 and that therefore means, we need less feed to make what we need to make and at the same time we make less byproduct. So that was the key driver, we also becoming better and better at managing reducing byproducts wherever we can but they are mostly driven by the pentane in our feed and that’s what caused the reduction. That can easily change back because as we mentioned specifications is broad and we do see a little bit of seasonality in the pentane content that is 2016 it was quite a bit higher than what we saw role in 2015.
- Bill Dezellem:
- Right, thank you and then finally your oil sands volume to the oil sands customers are down more in the fourth quarter on a percentage basis than they were for the full year. I don’t think in my mind on grasping why my Q4 is worse than the full year average?
- Simon Upfill-Brown:
- The primary reason for that was that in Q4 of 2015, we had significant volumes with that customer. We don’t disclose the exact volume but we had very, very high volumes in fourth quarter of 2015 we had two major Canadian oil sand customers. And the one, obviously shut down in January, so that volume went away but the other one, the bigger customers took very, very large volumes from us in the fourth quarter of 15. And much higher than the run rate for the rest of 2015. So they took a lot of volume and of course in 2016 with some of their shutdowns and things like that, they did not need that much volume in the fourth quarter of ‘16. So that was the big drop.
- Bill Dezellem:
- That is helpful and I guess we are also wondering did the oil sands customer had that fatal accident shutdown to the best of your knowledge did they sell any of their pentane, as they weren’t operating to your existing customer up there?
- Simon Upfill-Brown:
- No, because they were actually using slightly different pentane and they actually sold it back to us.
- Bill Dezellem:
- Great, that is helpful.
- Simon Upfill-Brown:
- We took back it in a restocking fleet and we have sold it elsewhere.
- Bill Dezellem:
- Thank you, Simon.
- Simon Upfill-Brown:
- Thanks Bill.
- Operator:
- And we’ll hear next from Greg Eisen of Singular Research.
- Greg Eisen:
- Good afternoon, Simon, you mentioned that because you didn’t meet minimum volumes of destock purchases, you encourage some penalties that you had to pay your suppliers correct? Well do you get to pass through those penalties each month as you pass through the change and feed stock cost for that 60% of your customers are on the formula?
- Simon Upfill-Brown:
- No, unfortunately not, Greg. That is not part of the pass through. We obviously work hard where we can to try and capture that increased cost that earlier real place we had to do it is in with our spot customers but it is fortunately it is not a pass through, because our fee is based on the raw material index itself which includes no transportation to our facility by our pipeline.
- Greg Eisen:
- Got it, got it. Okay so you don’t get to pass back penalty on and that hurt your margin this quarter and as you look at prospects for greater volumes next year in 2017 do you expect you’ll be able to do enough volume that you can avoid these penalties in 2017 and release most of the time?
- Simon Upfill-Brown:
- While, we certainly do volume rate makes all the difference right, so whatever we can do to increase volume it will help. I think for the full - towards the end of the year, we might be close to being out of the penalty stage. But as I mentioned on my call we are working hard with our suppliers to minimize the impact of these penalties and we are optimistic that they will help us out. So hopefully we can recapture at least some of that pain over the next few months.
- Greg Eisen:
- Okay and you talked about pre-stock cost went up during the quarter sequentially from last quarter therefore you didn’t get to pass it all through.
- Sami Ahmad:
- It is from the lag. One month lag.
- Greg Eisen:
- Sure, we are now done with the first two months of, the first quarter of 2017, can you comment on the trend in feedstock cost, since December which way they have gone?
- Sami Ahmad:
- I think that continues to get up a little bit, Greg, we are just looking here, we can find it. But I think there has been a little bit of increase. I think maybe in January there was - it was down a little bit, but February, more recently it has been up a little bit. So yeah, it’s been up a little bit.
- Greg Eisen:
- When you say little not a big magnitude that would put a huge dent in margins, that’s what I am taking in that.
- Sami Ahmad:
- Yeah, it is about same sense.
- Greg Eisen:
- About $0.10. Okay understood. Looking at the whole year 2016 versus 2015 it seems like you had lower cost of feedstock through the year and the product - the feedstock getting has a higher pentane content. So all else equal given that 60% of these customers are on the formula and that reduces lower cost to good sold, reduces the sales prices but your dollars of margin remain about the same for those customers per volume, shouldn’t you - and has a higher pentane content also shouldn’t more or less equal that have driven up the gross profit margin percentage?
- Simon Upfill-Brown:
- Yes, I mean we should have got them; we should have got some gains from that but just having to buy less feed than we would have to buy under the old system. But then these penalties partially offset that and then then also this lag thing that hits us every now and then, sort of also impacted us. If you remember in 2015 that was the year of pretty much steady declining feedstock cost over the whole year. So we sort of benefited from the lag during the whole year and during 2016 anything it’s been a little bit the other way. So you are right, it is a very good question. We should run those numbers and see where we would have been without other impacts.
- Greg Eisen:
- And then just thinking about the overall prospects from demand for your product, and I realize you can’t make investment decision inline based up on what is in the wall street journal. But there was some article describing at the prospects for. Basically the ability of Canadian oil sands producers to stay in business, if we maintain continued low prices for an extended period of time that they become uneconomic whereas demand could still be strong for producing in places like Texas where cost to production is lower than in Canada which makes me ask well could you lose revenue, could you lose demand for product up in Canada as they become uneconomic to compete and who would you actually replace it with an equipment not the product from the United States, given that it is probably producing a lighter sweater product in the U.S. markets.
- Simon Upfill-Brown:
- I mean, that’s a very good question. The mines that we look at supplying in Canada are low cost end of the Canadian oil sands production volumes. The guys who manufactures improved, the guys who use the steam assisted SAGD process to get the bitumen up from underground, that’s a much higher cost process. So I think these - the facilities that we supply will be the last ones to shut down if there are any shut downs in Canada, Greg. I mean we do need some heavy crude oil queue by the way and I mean the Canadians are pretty competitive with heavy crude from other parts of the world, especially the mines are. When they’ve invested all this money in these facilities and the cash cost to produce a barrel is pretty low, they’re going to run. They want to make some sort of return on that investment. It is not going to be what they thought it would be, but it’s still reasonably good.
- Greg Eisen:
- Okay, good. Thank you, I’ll let someone else go. Thanks.
- Operator:
- And our last question comes from Tom Harenburg of Carl M. Hennig Incorporated.
- Tom Harenburg:
- Yes, Simon. You mentioned monetizing AMAK, my question - it wasn’t clear to me, are you looking to do that in 2017 or 2018.
- Simon Upfill-Brown:
- No, I don’t think we can do it in ‘17 Tom. No, that would be 2018. We’re still trying to do an IPO in 2018 and that’s really what we’re talking about. I don’t think we can do it before then because I think we need at least a couple of solid quarters under our belt, right. So the third and fourth quarters of this, we need to have all the exploration work done and announced and published and all those kind of things. And then you can get a very exciting IPO story to go forward to the market with it. We couldn’t do it in 2017.
- Tom Harenburg:
- Okay and diamond [indiscernible] start to kick in the third quarter, is that of ‘17?
- Simon Upfill-Brown:
- The Guyan; the gold mining piece of that.
- Tom Harenburg:
- Right.
- Simon Upfill-Brown:
- I think it could. I mean at this point we want to wrap up the study, the conception study and decide on how to mine it. And that will be in the second quarter, but at the moment it’s full quote press on optimizing the copper and zinc processing. And extracting the gold that we can, optimizing the gold extraction that we can from that facility. And then if we can get some Guyan or into the existing equipment, that will be gravy, but we got to work our way through all that. I don’t know if it’s going to happen later this year or in 2018.
- Tom Harenburg:
- Okay, thanks Simon. Good luck on it.
- Simon Upfill-Brown:
- Thanks Tom, nice to talk to you.
- Simon Upfill-Brown:
- Thank you for listening to us today. We greatly appreciate your interest. We look forward to seeing you at a number of conferences we plan to attend in the coming months. Thanks a lot.
- Operator:
- And so this concludes the call for today. We do thank you for your participation and you may now disconnect.
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