Trecora Resources
Q1 2015 Earnings Call Transcript

Published: 30 Apr 2015

[Operator:]

Good day, and welcome to the Trecora Resources First Quarter 2015 Earnings Conference Call. Today’s conference is being recorded. At this time I would like to turn the conference over to Don Markley, Investor Relations. Please go ahead, sir.

[Don Markley:]

Thank you, Melissa. Good afternoon, everyone. Welcome to the Trecora Resources first quarter 2015 earnings conference call. The earnings release was distributed over the wire services after the close of the financial markets today. Our call today will include Nick Carter, President and CEO; Simon Upfill-Brown, Executive Vice President; 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 now to review the Safe Harbor statements, which is found on slide two. Statements in this presentation that are not historical facts are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon management’s beliefs and expectations only as of the date of this teleconference April 29, 2015. Forward-looking statements involve risk 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, 2014, and subsequent quarterly reports on Form 10-Q. This webcast is accompanied by a slide presentation that is accessible 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, Nick Carter. Nick?

[Nicholas N. Carter:]

Thanks Don, and thanks to everyone joining this call this afternoon. We appreciate your interest in the company. By the next call in August I will retire and hand the reins over to Simon Upfill-Brown who, as you know, currently serves as Executive Vice President of the parent company and President of our Petrochemical Division, South Hampton Resources. Simon has been with the company since 2012 and has more than 20 years of experience in senior leadership roles in the petrochemical industry. Simon and I continue work closely together to ensure a smooth transition and I think I speak for the entire Board of Directors when I say we are fortunate to have an executive like Simon to guide the company through its next phase of growth. Personally I have a significant number of shares in the company and so I am very interested in where the company goes from here. Simon and I have been working on a growth strategy for the last couple of years and I feel like we now have a clear path for growth and success. Couple that with a strong leadership within the company from Simon and the rest of the management team and I have no doubt it will perform as it should. I will have a consulting contract in place to allow me to help with AMAK or other areas where Simon would like some assistance. Transition will be completed in middle of July. Turning now to results, I will begin today with a high level look at our business, Connie Cook will follow with a more detailed discussion of the financial results. Simon will then follow with an operational update for South Hampton Resources and Trecora Chemicals. Afterwards I will conclude with a review of our initiatives at AMAK before taking your questions. As you can see on slide four, our first quarter revenue decreased 14% year-over-year to $55.1 million. In reviewing our financial results it’s important to keep in mind that a significant percentage of our current products are tied by formula [ph] to natural gas liquid prices which is our primary feedstock. So as the cost of NGLs declined it forces our average selling price lower and consequently our revenue decreases and that’s what we are seeing in our first quarter results. Our average feedstock cost was down by about 47% year-over-year and our average selling price was down 21% during that same time period. However, while lower feedstock prices adversely affect our reported revenue growth they are very beneficial to our margins as shown. First quarter profit was the highest in our history at $15.7 million. We generated adjusted EBITDA of $12.5 million in the first quarter, representing an increase of $6.7 million year-over-year. Our adjusted EBITDA margin was 22.7% which represents a significant increase over the 9% in the third quarter of last year. As you can see lower feedstock prices were beneficial to our business, notwithstanding the challenging revenue comparisons that result. Lower petroleum prices are always good for the manufacturing sector and bad for the E&P sector. Primarily due to the increased margin we reported diluted earnings per share at $0.23 which is the highest first quarter EPS in our history. Petrochemical sales volume was 18.1 million gallons, which was down about 3.8% year-over-year compared to the third quarter of 2014. The decline reflects a reduction of byproduct sales and the continuation of the fluctuations in the demand from the primary oil sands customer including the delay of their Phase II production program until the second quarter. I would like to emphasize that outside of the oil sands volume, prime product sales volumes were up almost 9% which indicates a healthy market in other sectors which use our products. This is encouraging in that historically the second quarter sees increased demand from construction industry for energy efficient foam [ph] installation and also the polyethylene industry demand increases as temperature rise across the nation creating the need for coolants. Those of you who have followed us overtime remember that the second and third quarters are historically are stronger quarters and while that is maybe not as pronounced as in years past there is still some seasonal effect. Slide five is a chart of our revenue and volume overtime. This chart illustrates quite clearly the relationship between volume and revenue is changed versus what we have seen over the last couple of years. As you can see on slide six; our processed petrochemical feedstock cost per gallon declined with a slight bump up in March, reflecting the significant drop in petroleum prices over the past few months. During the first quarter of 2015 we paid 47% less per gallon than in the first quarter of 2014. This directly benefited our gross margin which improved to 28.5% in the quarter versus 13.6% in the first quarter of 2014. Current wisdom seems to indicate continued oversupply and therefore continued lower prices in the NGLs. The NGLs are connected to the domestic natural gas industry, more or so than the worldwide crude markets. Therefore, even NGL vertically [ph] shouldn’t have the direct effect that it might have on crude oil. Now I will turn the call over to our CFO, Connie Cook for a review of the financial results. Connie?

[Connie J. Cook:]

Thank you Nick. Slide seven presents our income statement for the first quarter. Quarterly revenues decreased 14% year-over-year to $55.1 million compared with $54.1 million in the first quarter of 2014. As Nick indicated the decrease in revenue was due to the continued sharp decline in average per gallon processed feedstock cost that translated into lower average selling prices due to the formula based sales contacts that we have in place. Volume at petrochemical sales declined 3.8% year-over-year to 18.1 million gallons from 18.8 million gallons in the first quarter of 2014. However by product sales declined more than 20% year-over-year which contributed to the increase in our margins. Deferred sales volume remained consistent at 6.8 million gallons for the first quarter of 2015 and year-end 2014. Therefore no material impact can be attributed to deferral. Petrochemical product sales were $47.2 million, representing 85.6% of total revenue for the first quarter of 2015. Specialty wax sales were $3.3 million and we generated $4.6 million in processing fees during the quarter, which was up from $1.7 million a year ago. The increase in processing fees was mainly due to the incorporation of TC's processing fees, including $1.7 million in custom processing fees generated during the 12 month ended March 31, 2015. However due to the contract wording dealing with the performance timing annual recognition is required even though payments flow ratably. Cost of sales, including depreciation and amortization totaled $39.4 million, a decrease of approximately 29% compared with $55.4 million in the first quarter of 2014. The decrease was driven by the sharp reduction in feedstock prices. Gross profit margin for the quarter was 28.5% versus 13.6% in the first quarter of 2014, also primarily a result of lower feedstock cost, higher custom processing fees and fewer byproduct sales as discussed previously. Typically when feedstock prices fall we see better margins because of formula pricing on some of our petrochemical sales that are based on the [indiscernible] average cost. G&A costs were $5.8 million versus $4.2 million in the first quarter of 2014. The majority of the increase relates to the consolidation of Chusei’s G&A expenses. Operating income was $9.7 million for the first quarter versus $4.4 million in the first quarter of 2014, an increase of 123%. Net income attributable to Trecora Resources was $5.8 million or $0.23 per diluted share compared to net income of $2.6 million or $0.10 per diluted share in the first quarter of 2014. Slide eight shows that EBITDA and adjusted EBITDA calculations for the quarter. EBITDA for the quarter was $12.1 million compared with $5 million in the first quarter of 2014. Adjusted EBITDA, which excludes equity and AMAK earnings and losses and share based compensation was $12.5 million compared with $5.8 million in the first quarter of 2014. We decided to start including share-based compensation in the adjusted EBITDA calculation because they are non-cash charges and it appears to be a standard practice. Slide nine presents our balance sheet. Cash was $9 million at the end of the quarter compared with $8.5 million on December 31, 2014. Long-term debt, including the current portion was $78.7 million reflecting funding used to acquire Chusei, partial funding of capital expansion and outstanding amount from the line of credit used for working capital purposes. This was down slightly due to the quarterly payment and no additional draws on the line of credit or on the expansion line. Capital expenditures for the quarter was $7.7 million and comprised expenditures related to our D-Train expansion, tank form improvement, [indiscernible] purchases, various petrochemical facility upgrades and improvements at Chusei. We had $31 million in working capital at March 31, 2015 and ended the quarter with a current ratio of 2.3 to 1. Shareholders’ equity increased to $127.7 million from $121.1 million at December 31, 2014. This concludes the financial review. And with that I'll turn the call over to Simon. Simon?

[Simon Upfill-Brown:]

Thanks Connie. At this point I will provide an update on our petrochemical business at South Hampton Resources and our initiatives with Trecora Chemical. On slide 10 we present additional detail on our petrochemical sales volumes for the quarter. Prime products average monthly volumes were $4.6 million, up 4.5% from $4.4 million during the first quarter of 2014. Excluding Canadian oil sands prime product sales volumes were up 9% quarter-on-quarter. Petrochemical capacity utilization was 79.1% based upon 6,700 barrels of feeds per day compared with 78.4% in the first quarter of 2014 and 87.3% in the fourth quarter of 2014. International petrochemical volume was 28.3% of total petrochemical volume as compared with 35.3% in the first quarter of 2014. We continue to expect an increase in Asian sales this year as we are in active discussion with several potential customers. To that end we are attending a significant petrochemical conference in Asia next month and we believe our higher profile in Asia will yield incremental opportunities for our company. Consistent with previous quarters, demand for our product from Canadian oil sands continues to bounce around. As they resolve operational issues, complete a major turnaround on their Phase I in June and work down inventory, full indications are that our customer will stabilize consumption. Their Phase II is expected to start up in the coming month. The reduction in oil prices has not caused any intentional slowdown at nine plants that are already producing. As a result we recently signed a new three year contract with this customer. Canadian oil sands will remain a strong revenue driver for the company going forward. Turning now to an update on our D-Train expansion the initial 1,000 barrels per day increase is on line and we are therefore currently able to feed an 8,000 barrels per day. We still plan to have D-Train fully operational by year end with a total capacity of 11,000 barrels per day of feed. The expansion will be on budget. We only require approximately 10 additional employees to run at 11,000 barrels per day, so that added capacity should afford us good operating leverage. Some of the D-Train capacity is earmarked to serve the future needs of U.S. polyethylene producers, we have continue to see increased worldwide demand. Slide 12, gives a quick photographic update on D-Train progress. The photo on the left shows final major foundation concrete work with the five group [ph] column put in on the right. The middle photo shows column [indiscernible] on their foundation. The final photo shows an almost complete HDS unit in the program with the recently erected distillation towers in the background. Trecora Chemicals continues to make great progress and most integration activities are now complete with the exception of some remaining HR and accounting items. We are not yet where we want to be at Trecora Chemicals but the company generated a modest profit during the quarter on total EBITDA of approximately $2.1 million. As Connie mentioned Trecora Chemical benefited from $1.7 million in custom processing fees from one customer, generated during the 12 months ended March 31, 2014. However due to the contract wording dealing with the performance timing annual recognition is required. Although payments flow ratably. The project is a very good one for the company with one year left on the contract, but concerns that occasionally custom processing revenues can be lumpy, depending on how the contract is structured. Slide 13, provides a few further details of progress at Trecora Chemical. Our wax quality and consistency was validated by customers this quarter. Our product has been qualified at a large global adhesives producer and one former customer who has started to purchase again, made the following comment, Trecora Chemicals is a different company. They now have quality products. The company has demonstrated the expected wax production capacity only minor modifications remain which will free up some common equipment for exclusive custom processing use. As previous mentioned, we are also adding new hydrogenation and distillation capabilities which will help us leverage existing relationships with our petrochemical customers and drive new custom processing business. We expect the project to be completed on schedule by the end of the first quarter of 2016. The customer has provided close to $2 million capital for a custom processing project that will start next month in May, providing further business growth to our business. Slide 14, visually demonstrates the improvements being made in the wax quality at Trecora Chemicals. As they do things the South Hampton way. The bottles to the right is before wax and the one on the left is after wax, once process improvements were instituted. We are very excited about what Trecora Chemical will bring to Trecora Resources. With that I would like to turn the floor back to Nick. Nick.

[Nicholas N. Carter:]

Thanks, Simon. Turning now to an update on AMAK, which can be found on slide 15. We are pleased to report that the operational improvements that we reported to you on our last conference call continue to generate positive results. AMAK was roughly breakeven during the first quarter, reflecting operational efficiencies, improved recovery rates and modestly improving prices for both zinc and copper. We continue to strive for sustained profitability at AMAK in anticipation of a potential IPO at the back half of 2016. The Saudi stock market will open to foreign investors beginning in June and we believe this would help us realize maximum value for our shareholders. In the meantime we are moving forward with plans to substantially increase the size of the mining lease which currently spans 44 square kilometers through the acquisition of leases covering an additional 200 square kilometers. We have hereto believed that the applications to move through the process in Riyadh [indiscernible] until received in writing we aren’t getting too excited about it, things move at their own pace in Saudi just as they do at the most governments. Turning to projections for AMAK on slide 16, these projections are unchanged from the previous two quarters. Annual zinc production is projected to increase materially to 51,500 wet metric tons. As we have discussed previously there are several zinc mines and in particular very large one in Australia that is scheduled to cease operations in the coming months and market wisdom says that this dynamic would drive an increase in the price of zinc over the next few years. We are projecting annual copper production of 34,000 wet metric tons this year. Copper prices hinge on the Chinese economy that are expected to be stronger towards the latter half of the year and actually have risen from their low point previously in this year. Everyone is probably wondering about security with the events in Yemen unfolding relatively close to the area of the mining operations. Extra security is being provided by the government. AMAK has explosives and cyanide on-site and since it’s brought up out of the red sea [indiscernible] in the Southwestern tip of Saudi Arabia. The main disruption we have seen currently is the periodic closing of the airport in [indiscernible] to commercial traffic. Simon and I will be traveling to Saudi Arabia for a Board meeting in the next couple of days and intend to issue information on AMAK first quarter production when we return. In conclusion slide 17 shows a summary of this presentation. We had excellent financial results this quarter with good margins and good profit. South Hampton is getting well positioned to make current increase in demand for its products and the expansion is moving along nicely. Trecora Chemical is coming around with improved product and marketing of the better materials is underway. We feel the return on investment will begin to clearly felt in the coming months and expanded processing facilities is moving along as it should. Also just to repeat what has been said previously the $1.7 million process fee which was recorded in the first quarter is not an aberration but it’s clearly part of the annual budget, it is unusual only in the way that it must be handled with the accounting rules. We expect to see something similar next year at this time. And finally the progress within AMAK is slower than we would wish but there is progress and we will continue to try to bring value forward on that investment. This concludes my prepared remarks. At this time I would like to ask the operator to open the call for Q&A. Operator?

[Operator:]

Thank you. [Operator Instructions]. We will take a question from Sarkis Sherbetchyan with B. Riley and Company.

[Sarkis Sherbetchyan:]

Yes, thanks for taking my question and those are really nice margins you guys posted up there.

[Nicholas N. Carter:]

Thanks, Sarkis.

[Sarkis Sherbetchyan:]

Yeah, so first just on the margin front, looking at the input cost trends, do we expect to retain these kind of margins going forward or can we just get some color around setting up expectations given that maybe feedstock pricing have potentially stabilized?

[Nicholas N. Carter:]

Sarkis, well in this industry typically we’ve seen somewhere between 14%-16% of margins and there is no question particularly with that whole processing prime that we had this time that our margins were very, very good, very, very high. It's going to be hard to maintain that level going forward but we expect that this -- any time the prices are low the feedstock prices are low, as they are now, that the margins are going to be better than what we’ve seen historically over the last four or five years. And so will we maintain 28%, probably not but on the other hand, we are going to see increased margins from what we have seen historically, and no question about that in our minds. So and it’s hard to nail down exactly where they are going to level out, but right now it seems that our feedstock is kind of flattened out a little bit. It had a big drop, it bottomed and bounced up just a little bit, it's what we showed on that graph that we showed and we kind of think we are in the time period where we are going to see feedstock fluctuate within the range of kind of where it is at right now. So I think we will see increased margins going forward but it's hard to predict exactly kind of where it's going to level out at.

[Sarkis Sherbetchyan:]

That’s fair and then with respect to the ASPs for the products that you guys are selling off formula, would you say it’s fair to say that with respect to what’s going on feedstock it has potentially kind of flattened out or they maybe will bring it down?

[Nicholas N. Carter:]

Yeah, they have probably flattened out a bit. Also if you look at their graph that we had in the packet there, with feedstock going up a little bit. That’s going to bring some of the formula selling prices up a little bit but we think they are also probably going to be operating within a range close to where it's at right now.

[Sarkis Sherbetchyan:]

Okay, that’s helpful. And then turning the attention to the specialty wax part of the business, Connie I think you mentioned sales for the quarter in the specialty wax were $3.3 million is that correct?

[Connie J. Cook:]

That’s right.

[Sarkis Sherbetchyan:]

Okay and then with respect to the processing fees, I think the number I heard was $4.6 million. Is that the portion where we have that $1.7 million which has that accounting type of recognition?

[Connie J. Cook:]

Yes it is. Trecora Chemical processing fees if you break that out were $3.1 million and that includes the 1.7, the 4.8 was total.

[Nicholas N. Carter:]

Because we still have custom processing at South Hampton Resources.

[Unidentified Analyst:]

Right. So if we were to think about that $1.7 million, is that contract pretty kind of concluded or does that free up [ph] or continue to deliver to customers?

[Connie J. Cook:]

There is a year left on the contract.

[Sarkis Sherbetchyan:]

Okay great. And then just shifting attention to the Canadian Oil Sands customer, I believe you did mention you signed a new three year contract with that customer. Can you maybe give us some color around maybe volume expectations, were they inline or above what you guys were planning internally and what does that mean for the D- Train that obviously you guys have been planning for?

[Simon Upfill-Brown:]

Well I think I have mentioned in the prepared remarks, Sarkis they are still bouncing around, they are not fully stabilized in their consumption yet, so the volumes are very difficult to predict, I mean they are working very hard to get things stable, they are working very hard to bring on their Phase II which is matter of months away. And at present they also have some relatively high inventories that they need to work down. So I am not sure exactly when their consumption is going to stabilize but the whole indications are that by the end of next quarter or maybe early the following quarter we should be on a much more consistent basis with our customers there.

[Sarkis Sherbetchyan:]

Good and then Connie maybe if you can remind me CapEx for the quarter, I think it was $7.7 million.

[Connie J. Cook:]

$7.7 million right.

[Sarkis Sherbetchyan:]

Okay. And with respect to planned CapEx for 2015 and then I think you mentioned growing budget so no changes there.

[Nicholas N. Carter:]

Correct.

[Sarkis Sherbetchyan:]

All right, that’s it from me. I will hub back in the queue.

[Nicholas N. Carter:]

Sarkis, I think to make a point that I should have mentioned a while ago when we were talking about margins, one of the reasons our margins have improved so much is that we’ve made some production changes where we reduced the amount of byproduct that we used to have to sell at very cheap prices and the other thing is that we used to generate occasionally some imbalances in our premium products and we would end up selling some of those at a very cheap prices just because we had to control our inventories. And we’ve done a really good job in the marketing department of trying to get all those premium products into the premium markets and the production guys, production people have done really good job of figuring out how to reduce the amount of byproducts that we produce. And so not only is it prices have helped us but I think we’ve helped ourselves an awful lot by the way we run the business and focused on trying to get the margins up and to make sure that point is clear.

[Sarkis Sherbetchyan:]

That’s helpful, thank you.

[Operator:]

And we’ll take our next question from Joseph Reagor with ROTH Capital Partners.

[Joseph G. Reagor:]

Good afternoon, guys. Thanks for taking the question. First thing looking at the overall volumes the $18.1 million how much of normal quarter of the Phase I of the oil sands do you think was present in this quarter is it a full quarter or is it kind of a light quarter on seasonality?

[Simon Upfill-Brown:]

We have to be so careful how we answer those questions Joe, it depend so much on this one customer and we can’t disclose the customer confidential information but it was certainly lighter than the first quarter of last year and it was lighter than it was expected by us.

[Joseph G. Reagor:]

And I am assuming that’s probably mostly weather related right the abnormal cold weather slowed the production a little bit?

[Simon Upfill-Brown:]

I don’t think so. I think it’s more operational issues that they continue to work their way through.

[Nicholas N. Carter:]

I think we talked a little bit about on the last call that the results of rail fracas [ph] going on and I think that kind of tied up some railcars in that thing it was just number of factors that got to make sure that first quarter – no apparently have.

[Joseph G. Reagor:]

Okay. Then looking to Q2 it sounds like you are expecting the Phase 2 to contribute about one month out of the quarter for demand versus a full quarter based on just the delays they have announced is that accurate like one of the three months?

[Simon Upfill-Brown:]

That’s another one that’s difficult to predict I think the original plan were for have a month in the second quarter but it’s really tough to say for sure, Joe indications, late indications show that this might look a little bit into the third quarter.

[Joseph G. Reagor:]

Okay. And it’s just delays on their rent. Okay shifting gears to South Hampton I mean the Trecora Chemical the profitability there this quarter, can you give us an idea on that $1.7 million how you guys account for it, maybe it’s a question for Connie is the cost accounted for it on a quarterly basis or is it all lumped into the single quarter reporting as well?

[Nicholas N. Carter:]

I am going to answer that. That really is the standout fee that covers the entire contract year and we can’t really account for it because they can may up the volume anytime during the year. And so you can’t count the revenue because any time before the end of the year potentially they could come up and make up the volume in the standout, they wouldn’t be there. Now you get paid for operating the unit but with the different revenue stream than that standout fee. And this revenue can’t really be counted until the end of the year and you know that there is going to be in effect versus operating revenues. So now the cash they pay on quarterly basis, so the cash you see is really not affected by the way you have to account for the revenue.

[Joseph G. Reagor:]

[indiscernible].

[Nicholas N. Carter:]

You just can't account the revenue until the year is past and in fact they are paying you for standby versus paying you for operations.

[Simon Upfill-Brown:]

And because it is standby there is no costs associated with it.

[Nicholas N. Carter:]

Yeah.

[Joseph G. Reagor:]

Okay and then just on AMAK do you guys have an idea of what the operating cash flow and free cash flow were for the quarter?

[Nicholas N. Carter:]

Not really. We are going to get some reports when we go there, next month but based on what we have seen it's pretty hard to convert to US dollars and particularly the purchasing [ph] that they use is different than ours at that bank so it's kind of hard to sit here and give you a number, that we are confident as accurate.

[Simon Upfill-Brown:]

We do know it was positive.

[Nicholas N. Carter:]

Yes, it’s positive there is no question about that. But it's just hard to pinpoint what they have done with it.

[Joseph G. Reagor:]

Yeah that’s what I was more looking for, is that it’s still positive despite the decline in copper in the first quarter, so that’s promising. All right, I will turn it over.

[Nicholas N. Carter:]

They are going to try and pay their bills, and generally what they need to operate.

[Joseph G. Reagor:]

Okay. Thank you.

[Nicholas N. Carter:]

Thanks.

[Operator:]

We take next question comes from Jim Gentrup with Val Vista Capital Management.

[Jim Gentrup:]

Very good afternoon gentlemen, how are you? And Connie, how are you?

[Nicholas N. Carter:]

Hi.

[Jim Gentrup:]

Yeah, just three quick questions, Trecora Chemical, based on the discussion you just had, it sounds like we have to take $1.7 million out of the EBITDA that was totally incremental to the EBITDA than of $2.1 million, correct?

[Simon Upfill-Brown:]

Yeah, I mean you might want to do that. I mean we had it in the budget we knew it was going to come and it will come again next year depending on whether they run or don’t run. But yeah…

[Jim Gentrup:]

You said there was no expense associated with that. So I guess I am assuming that was totally incremental, is that the way to look at it?

[Simon Upfill-Brown:]

Yeah.

[Jim Gentrup:]

Okay, all right. And then based on what you talked about the gross margins overall earlier I mean obviously it's tough until we look at it in arrears what your feedstock prices do, but so, I guess… I am just looking for a little bit more color on I guess gross margins in Q2 because feedstock prices have bounced back a little bit and you’ve got this month delay. I guess what I am trying to say is, probably if we assume that they stay right here, you probably would do -- they are still on the 20s in your gross margin I guess is that… can you help us out a little bit with that mix or…?

[Nicholas N. Carter:]

If we adjust for that $1.7 million annual fees that we will receive gross margins would be just over 26%

[Jim Gentrup:]

Okay. And then -- go ahead.

[Nicholas N. Carter:]

That’s the question right.

[Jim Gentrup:]

Yeah, that’s actually a good -- I am sorry…

[Nicholas N. Carter:]

Yeah, without the $1.7 annual fee that we will receive the gross margin was still 26%.

[Jim Gentrup:]

Okay, alright. But if you take that out then and you look at what you are looking at, we are looking at moving forward especially in the near-term here, is that since you have had a little bit of a bounce back in the feedstock price, I mean obviously you don’t know, you can't -- we were still looking at probably well over 20% because of the dramatic reduction from Q2 of last year on a year-over-year basis is that safe to assume?

[Nicholas N. Carter:]

We would think so yeah.

[Jim Gentrup:]

Okay. Alright. And as you look into Q2 with some uncertainty do you still believe that you would grow your seasonality would kick in and you would still grow sequentially as far as volumes go from Q1.

[Nicholas N. Carter:]

Yeah I think volumes would grow from Q1 of course you got the oil sands, it’s kind of a wild guard and we talked that out, it may or may not come about and oil sands being in the big picture, is not the higher margin business. So margins should be good, volumes should be up on what the total volume is, is kind of hard to predict at this point.

[Jim Gentrup:]

Okay, because to me it's kind of important because your Q2 volumes versus year-over-year in other words, it sounds like you could be down year-over-year because of the Tar sands contribution last year but yet it was pretty late in Q1 so that’s kind of important I guess in this context to try and look at a little shorter term, is that a fair question?

[Nicholas N. Carter:]

It's a little bit curvy. The other business, non-oil sands business were up 9% versus a year ago. And so that indicates that the other portion of our businesses are doing well and we’ll probably see an increased volume, we should see increased volumes in the second quarter because of the foam installation people will be running harder than what they have been, that’s been weather related and also the temperature effects the polyethylene people. They use more for coolants and they generally start taking more particularly at the end of the second quarter. And so yeah, we expect there is still some seasonality, still see some growth in products in the second quarter. I would say it's just hard to predict what that oil sand piece is going to do and so we can't really predict the total volume that we are going to be working at. But we are confident that our base business is doing good and it's going to be growing.

[Jim Gentrup:]

Is that international business that you are growing, is that a higher margin business as well?

[Nicholas N. Carter:]

Yeah that’s good margin business, it's not the low margin business. The oil sands is good for volumes, as it's not low margins, it's the other international business is comparable to what we do domestic equipment.

[Jim Gentrup:]

And should we expect better profitability as well from continued improvements at Trecora Chemicals is that safe to assume in Q2 as well?

[Nicholas N. Carter:]

That’s kind of time function. We will get the product cleaned up, we are getting it to where it going to go in the higher price markets, but we still have to go through the sales process and it's going to hard to say exactly how core side growth is going to happen. It's the time factor involved here.

[Jim Gentrup:]

Okay. And then my last question is just AMAK, maybe you already talked about this, but how much revenue I know you guys broke even on it but how much revenue does that company generate in Q1?

[Nicholas N. Carter:]

If you can find it there…

[Jim Gentrup:]

I know it jumps around a lot so I am just kind of curious what…

[Nicholas N. Carter:]

$5.3 million.

[Jim Gentrup:]

So you broke even on 5.3 million I know that…

[Connie J. Cook:]

That was revenue, 5.3 million in revenue.

[Jim Gentrup:]

That’s total revenue, I mean that’s not your -- I mean you guys only…

[Connie J. Cook:]

That’s not our 35%, that’s total revenue.

[Jim Gentrup:]

Okay, so not very much in Q1 and you still --okay, alright. Thanks guys. I appreciate it.

[Nicholas N. Carter:]

Thanks for calling.

[Operator:]

Thank you. We will take the next question from George [indiscernible], private investor.

[Unidentified Analyst:]

Yes, good afternoon everyone.

[Nicholas N. Carter:]

Hi, George how are you?

[Unidentified Analyst:]

Good. Nice to hear all your voices and congratulations. Great quarter. And you seem to be moving along pretty well in your expansion. Also I would like to address the first question on the expansion, how are you viewing the expansion cost consistency, is your cost structure associated with the expansion seeing pretty much with what you anticipated or have you found ways of maybe cutting some of that cost structure as you get further down the track here and deploying the expansion?

[Nicholas N. Carter:]

I think I said in the prepared remarks that we plan to be on budget George, we might come in a little bit under that, but at this point it looks very good that we will be on budget as we wrap this up by the end of the year.

[Unidentified Analyst:]

Okay. And your target for wrapping up and putting it totally online would be what, the end of the first quarter of 2016?

[Simon Upfill-Brown:]

No, for this project will be by the end of this year, by the end of the fourth quarter of 2015.

[Unidentified Analyst:]

I got you, okay alright good. And question on oil sands in the explanation that was given about Phase 2 moving ahead and getting closer to acclimating operations. I am not sure if I picked up a comment that is there a possibility that there is going to be some redo on Phase 1 after Phase 2 comes up and there could be some disruption there or is that not a question?

[Simon Upfill-Brown:]

No, there is a planned shutdown for Phase 1 in June, and we are not sure exactly how long that will be but it could be much of the month. So that will reduce demand in the second quarter.

[Operator:]

Thank you. We will take the next question from [indiscernible].

[Unidentified Analyst:]

Hi everyone. Most of my the short-term questions have been answered, maybe a little bit of a step back, does it seem like this year there is just a little bit of noise with different things whether it’s the feedstock or the oil sands but for longer term when next year do we see the real boost, would it be Q1, Q2 from Trecora Chemical kind of kicking in and then all these plants that are going to be coming online in ’16, is that a mid-year, early year, can you just give some color as we look out a little bit further?

[Nicholas N. Carter:]

Well on Trecora Chemical expansion is supposed to be finished the first quarter of 2016 and our goal is to obviously have customers lined up as we finish the project where it can take off the run immediately, start our marketing probably six months later down and try to get business lined up prior to the completion of the project okay. So you would see particularly in second half of 2016 you would see some revenue generation from the expansion that we are doing there. On South Hampton we kind of see it from the start that it’s probably a four or five year process to sell out that capacity and it really depends upon when the polyethylene units start up because that’s where most of the volume is going. And there’s about six or seven of them that we are anticipating that we would be supplying not all of them some of the refis that they need. And just potentially it’s pretty hard for us to predict when they are going to be finished. We kind of go about what they tell us but you could start to see some of that maybe in the last half of 2016. If the Phase 2 oil sands thing gets started up and they kind of get mined out on our Phase 1 we could see some good volumes out of them later half of this year and next year. It’s kind of a moving party we see nothing that gives us concern as far as the market won’t be there. It’s just awfully hard to predict when it’s going to be there.

[Unidentified Analyst:]

Okay, great, that’s very helpful. Thank you.

[Operator:]

[Operator Instructions]. We will take a question from Colin Lee with Luzich Partners [ph].

[Unidentified Analyst:]

Hey guys.

[Nicholas N. Carter:]

Hey Colin.

[Unidentified Analyst:]

Can you just confirm that G&A expense of $5.8 million is there any one time charge or is that a steady run rate?

[Connie J. Cook:]

No, there is no one time charge. One thing that I have done this year is I am trying to account for the end of the year executive bonuses a little better than I have in the past on a quarter-by-quarter. So that has impacted that a little bit and then some of it is just the addition of Trecora Chemical. But I would expect probably going forward I would say it’s probably going to be around 5.5 quarter.

[Unidentified Analyst:]

Got you. And Connie can you breakout revenue from international and associated international gallons sold?

[Connie J. Cook:]

Yeah, just one second. Let me pull that out. Did you have another question in the meantime and I will get that for you.

[Unidentified Analyst:]

Sure and I think I have heard that you guys believe that NGL prices track closer to natural gas instead of oil I just wanted to confirm that?

[Nicholas N. Carter:]

Well, the records generally come out of the gas field and so if there is no gas production generally you are going to have more NGLs produced. And the natural gasoline that we use as feedstock correlated with crude oil prices, probably 88%, something like that, in fairly high correlation, in recent years with other sales gas production, possibly crude oil, that number is really notwithstanding it's probably down below 50% correlations. So NGLs will move in the direction that crude oil will a lot of times but it's not necessarily positive as it used to be. And so that’s why there is good separation what it used to be.

[Connie J. Cook:]

I have got the numbers for you. We had 5.1 million in foreign sales and the dollar amount of that was $13.5 million.

[Unidentified Analyst:]

And so for the capacity for the South Hampton for the upcoming quarter that’s going to be 8,000 barrels per day?

[Nicholas N. Carter:]

Yes.

[Unidentified Analyst:]

And do you have a sense, I don’t know if that’s really -- but do you have a sense of demand throwing that up or do you have to work on that?

[Nicholas N. Carter:]

No, Colin, we work hard to trying to get our estimate for next quarter, you would ask the question a different way, Colin. We will be requiring that volume, that capacity is good for combination of Canadian oil sands and for the upcoming polyethylene expansion. The polyethylene expansions really haven’t started yet and I think you heard us cover the bouncing around of the oil sands. So hopefully we will be able to get there.

[Unidentified Analyst:]

That’s helpful. And then like you mentioned, gross margins improving, a reason for that is the operational improvement of less byproduct and selling improvement in next year premium products but for the right market. Do you have a sense of what gross margin impact that had for example compared to the previous year’s quarter one gross margins?

[Nicholas N. Carter:]

I can't say that with the steady enough operations, we’ve really been able to track that very well, I mean it's obvious but you can see it, every day operation but I can't give you a number on that. Oil price is moving and sales mix moving and all of those services it’s hard to come up with the exact number.

[Simon Upfill-Brown:]

When we sell the byproduct we sometimes struggle to get much of our feedstock costs so you can probably calculate it a little bit but it does have a big impact.

[Unidentified Analyst:]

Okay. Thank you. Those were my questions.

[Nicholas N. Carter:]

Thanks Colin.

[Operator:]

We will take a question from Thomas Harenburg with [indiscernible].

[Unidentified Analyst:]

Hey great quarter guys and congratulations. What is the status of the third part of the oil sands operation, has there been any discussion on that. It might be a little premature but memory serves me the right here, there are three different phases, if you could just give us an update on that?

[Nicholas N. Carter:]

Yes the Phase III was a lot less of a volume increase versus Phase II or the Phase I right. I mean it's a smaller volumes expectations and indications are that that’s under construction. So that’s going ahead.

[Unidentified Analyst:]

So is there any timeframe as to when that might start to kick in?

[Nicholas N. Carter:]

George I am not prepared to give any timeframe because I mean Tom, sorry. Tom, any timeframe I have given before on Canadian oil sands I have been wrong.

[Unidentified Analyst:]

Okay. Well congratulations again on a great quarter.

[Simon Upfill-Brown:]

Thank you, thanks Tom.

[Operator:]

Thank you. We will take a follow-up question from [indiscernible] who is a private investor.

[Unidentified Analyst:]

Hi, thank you kindly. Would like to ask a question on the phone insulation growth that I forget if it was Nick or Simon mentioned that mentioned that is taking place. Is there a specific part of the market that you are seeing that happen and how do you perceive the outlook there?

[Nicholas N. Carter:]

George I was referring more to the fact that it’s absolutely seasonal business because of the construction industry -- about the bad weather in there where demand really picks up in the spring and we generally start seeing more business from those kind of people in the spring. I am personally not familiar with the growth as we ended group sales out of thinking more of the seasonality of it.

[Unidentified Analyst:]

Well are you in a position to actually see that area of the business grow for you still if it comes along?

[Simon Upfill-Brown:]

The expectations are it will grow overtime as people, as regulations drive energy efficiency and all those kind of things. So the expectation is that in additional to having when construction is very active in the spring and summer and fall there is our customers ramp up but it’s also ramping up for additional volume overtime driven by the strive for any deal efficiency and growing regulations building regulations are increasing demand for better installations that supports our customers would continue to support that.

[Unidentified Analyst:]

Great, I am encouraged to hear that Simon because, Step-in Corporation reported just in the last couple of days they had a gigantic leap in the market yesterday but one of the things they pointed to was the home installation market really taking off and of course Simon short-term are down here in Florida and hitting out pretty quick but I got to tell you I mean the construction going on here is absolutely [indiscernible] still and it isn’t going to go away. So there is a lot that can happen here yeah. Thank you for that and keep the always great work that you are accomplishing up that’s wonderful to see.

[Nicholas N. Carter:]

Thank you, George, good to hear from you.

[Unidentified Analyst:]

Yes, sir.

[Operator:]

That concludes today’s question-and-answer session. At this time I will turn the conference back to management for any additional or closing remarks.

[Nicholas N. Carter:]

Yeah I just like to say thank you to everyone for joining the conference call and showing the interest in our company. We are very pleased with our results and our progress this quarter and probably like to know that we are pertaining at the [indiscernible] Industrials Conference in New York on May the 6th, we are also going to be at the Astrologers Conference in New York on May the 12th and the B. Riley Conference in Los Angeles on May the 13th and we hope to see some of you at those events and with that I will say have a good evening and thank you for calling.

[Operator:]

This concludes today’s conference. Thank you for your participation.