Trecora Resources
Q2 2015 Earnings Call Transcript

Published: 9 Aug 2015

[Operator:]

Good day and welcome to the Trecora Resources second quarter 2015 earnings conference call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Don Markley, Piacente Group Inc. Please go ahead, sir.

[Don Markley:]

Thank you, Matt and good afternoon, everyone. Welcome to the Trecora Resources second quarter 2015 earnings conference call. The earnings release was distributed over the wire services after the close of the financial markets earlier today. Our call today will include Simon Upfill-Brown, President and Chief Executive Officer and Connie Cook, Chief Financial Officer. Following management's prepared remarks, there will be a question-and-answer session. Before we get started, I would like to review the Safe Harbor 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 August 6, 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 available on the company's website www.trecora.com. At this time I would like to turn the call over to Trecora's President and CEO, Simon Upfill-Brown. Simon?

[Simon Upfill-Brown:]

Thanks, Don and thanks to everyone joining this call this afternoon. I also wanted to take the opportunity to thank Nick Carter for his many years of leadership with this company. He accomplished so much and what a pleasure it has been to work with him. We wish him well in his retirement and I am glad that he is still going to be engaged. Right now, he is on a safari in Namibia and we hope he is paying good attention to what he is shooting. I will begin today with a brief discussion of the quarter's highlights. I will then pass the call over to Connie for a more detailed discussion of the financial results. Following that, I will review progress at both South Hampton Resources and Trecora Chemical and conclude with an update on results and developments at AMAK before taking your questions. Turning now to slide four. Our second quarter results reflect many of the same themes we discussed last quarter. Revenue decreased 20% year-over-year to $59.4 million, reflecting the continued low feedstock prices compared to a year ago. Because roughly half of our contracts are tied to the cost of natural gas liquids, this eventually depresses our average selling price and consequently our revenue. However, while lower feedstock prices adversely affect our reported revenue growth, they are very beneficial to our margins. Gross present profit in Q2 reached the second highest level in the company's history at $15.2 million, up almost 30% year-over-year. We generated total adjusted EBITDA of $12.3 million, a 37.5% increase from a year ago and again the second highest level in company history. And our wholly diluted earnings per share was $0.25, compared with $0.20 in Q2 of 2014. Slide five is a chart of our revenue and volume over time. This clearly illustrates the year-over-year decline in revenue but also shows an uptick sequentially from the first quarter of this year in both revenue and volume. As you can see on slide six, our processed feedstock cost per gallon remains well below year ago, although cost did begin to move up during early Q2. During the second quarter of 2015, we paid nearly 42% less per gallon than in the second quarter of 2014. Feedstock prices are back down again over the last few weeks. If or when feedstock cost stabilize the benefits of lower costs will be limited as our selling price will also reflect that lower cost due to the pricing formulas we use on about half of our volume. We obviously strive to keep the prices to our non-formula customers up as much and for as long as possible. Now I will turn the call over to our CFO, Connie Cook for a review of the financial results. Connie?

[Connie Cook:]

Thank you, Simon. Slide seven presents our income statement for the second quarter and first half of 2015. I will begin with discussion on the quarter. Quarterly revenues decreased 20% year-over-year to $59.4 million compared with $74.6 million in the second quarter of 2014. As Simon indicated, the decrease in revenue was due to the sharp decline in per gallon feedstock cost that translated into lower average selling prices. Volume of petrochemical sales declined 5.5% year-over-year to 19.6 million gallons from 20.7 million gallons in the second quarter of 2014. Foreign sales volume for Q2 2015 was 3.8 million gallons versus 4.7 million gallons in Q2 2014. This was effectively due to reduction in Canadian oil sands 918 due to the variability in customer orders. Petrochemical product sales were $52.3 million representing 88.2% of total revenue for the second quarter of 2015. Specialty wax sales were $4.3 million. We generated $2.7 million in processing fees during the quarter, compared with $1.7 million in Q2 of 2014. The increase in processing fees was once again primarily the result of the incorporation of TC's processing fees. Cost of sales, including depreciation, totaled $44.2 million, a decrease of 29.7% compared with $62.9 million in the second quarter of 2014. The decrease was driven by the sharp reduction in feedstock prices. Gross margin for the quarter was 25.6% versus 15.7% in the second quarter of 2014, also driven by the lower feedstock cost. However this reflects the decline in the first quarter, which was 28.5%. This can be attributed to the slow rise in feedstock cost as shown on the previous slide and the recognition approximately $1.7 million in processing fees at minimum cost at TC during the first quarter of 2015. These processing fees were generated during the 12 months ended March 31, 2015. However due to contract wording, dealing with performance timing, annual recognition was required even though payments flow ratably. G&A cost were $5.4 million versus $4.2 million in the second quarter of 2014. A majority of the increase is due to the addition of TC. However, we did see an increase 8.2% in G&A excluding TC, due to additional officer compensation which included the accrual for year-end bonuses and a restricted stock grant and contributions to the 401(k) plan due changes in the plan. Operating income was $9.5 million for Q2 versus $7.4 million in Q2 of 2014, an increase of 28.1%. Net income attributable to Trecora Resources was $6.4 million or $0.25 per diluted share compared to net income of $5 million or $0.20 per diluted share in the second quarter of 2014. Now moving to year-to-date results. Revenues decreased 17.4% year-over-year to $114.5 million compared with $138.7 million in the first half of 2014. As mentioned previously, the decrease in revenue was due to the sharp decline in per gallon feedstock costs, which translated into lower average selling prices. Volume of petrochemical sales declined 4.7% year-over-year to 37.7 million gallons from 39.6 million gallons in the first half of 2014. Foreign sales volumes was 8.9 million gallons versus 11.3 million gallons in the first half of 2014. This again reflects the reduction in Canadian oil sands volume due to the variability in customer orders. Petrochemical product sales were $99.5 million representing 86.9% of total revenue for the first half of 2015. Specialty wax sales were $7.7 million. We generated $7.3 million in processing fees, compared with $3.4 million in the first half of 2014. The increase in processing fees was once again, primarily the result of the incorporation of TC's processing fees. Cost of sales including depreciation, totaled $83.6 million, a decrease of 29.3% compared with $118.2 million in the first half of 2014. The decrease was again driven by the sharp reduction in feedstock prices. Year-to-date gross margin was 27% versus 14.5% in the first half of 2014, also driven by the lower feedstock cost. G&A cost were $11.3 million versus $8.3 million in the first half of 2014. A majority of the increase is due to the addition of TC and the increases mentioned above in the quarter review. Operating income was $19.2 million versus $11.8 million in the first half of 2014, an increase of 63%. Net income attributable to Trecora Resources was $12.2 million a $0.48 per diluted share compared to net income of $7.6 million or $0.31 per diluted share in the first half of 2014. Moving to slide eight. It shows EBITDA and adjusted EBITDA calculations for the quarter and for year-to-date. EBITDA for the quarter was $11.2 million compared with $8.4 million in the second quarter of 2014. Adjusted EBITDA, which excludes equity and AMAK earnings and losses and share based compensation, was $12.3 million compared with $9 million in the second quarter of 2014. Adjusted EBITDA margin was almost 21% compared with 12% a year ago. EBITDA for the first half of 2015 was $23.3 million compared with $13.4 million in the first half of 2014. Adjusted EBITDA was $24.9 million compared with $14.8 million in the first of 2014. Adjusted EBITDA margin was 21.7% compared with 10.6% a year ago. Slide nine presents our balance sheet. Cash was $8.7 million at the end of the quarter, compared with $8.5 million at December 31, 2014. Long-term debt, including the current portion, was $77 million reflecting the funding used to acquire Trecora Chemical, construct D-Train and provide working capital. Capital expenditures for the quarter were $9.1 million and comprised expenditures related to our D-Train expansion and the expansion of custom processing capabilities at TC. We had $28.2 million in working capital as of June 30, 2015 and ended the quarter with a current ratio of 2.3 to 1. Shareholders equity increased to $134.6 million from $121.1 million as of December 31, 2014. This concludes this financial review. With that, I will turn the call over to Simon. Simon?

[Simon Upfill-Brown:]

Thanks, Connie. Moving to slide 10. Petrochemical sales volume was $19.6 million gallons, which was about 5.5% down, 5.5% year-over-year compared with the second quarter of 2015. As Connie mentioned, the decline is attributable to the variability in orders from our Canadian oil sands customer. Excluding oil sands shipments, prime product sales were up 11.1% year-over-year. It is also important to point out that the improvement in excess product sales, which is the prime product sales subjected from all products, the decline in excess product is approximately 200,000 gallons per month or 600,000 gallons for the quarter. This helps margins as excess products are generally sold at significantly lower prices than prime products. Deferred sales were approximately 0.5 million gallons lower than the year ago period. Petrochemical capacity utilization was 74% compared with 83.9% in the second quarter of 2014 and 75.7% in the first quarter of 2015. Capacity utilization was based on 7,000 barrels of fresh feed in 2015 and 6,700 barrels per day in 2014. International petrochemical volume was 19.4% of total volume reflecting the decline in oil sands shipments. We continue to expect a significant increase in Asian sales this year as we are in active discussions with several more potential customers. We expect to have some good volumes to report on next quarter. Overall, I am very pleased with South Hampton Resources second quarter performance. Our team has done an excellent job and I thank everyone for the extra effort required to deliver these results. On slide 11, our D-Train expansion is on schedule and keeping to our original capital budget. This slide lists several of the specific accomplishments in the second quarter, including completing the Hydro De-Sulfurization unit, installing distillation vessels, drums, pumps, fans et cetera and commissioning a new electrical substation. And we have shown the ability to run over 7,000 barrels per day in recent weeks. And we have done some major testing of the distillation section later this quarter and expect to have the D-Train at full capacity by year end, full capacity representing an additional 4,000 barrels per day of feed. As you know, much of the D-Train capacity is earmarked to serve the future needs of U.S. polyethylene produces as new grounds come on stream over the next few years. Slide 12 gives a quick photographic update on D-Train progress. The photo on the left shows fin fans, drums, vessel et cetera installed for the distillation tower system. And two on the right show the completed HDS. One by night and one by day. Moving to slide 13. At Trecora Chemical, we continue to make progress in both marketing and in processing capability. We have made great inroads with adhesive producers. We have been qualified by four different companies and received initial orders from all of them. One of these is buying in two different countries. We also signed on a new well-respected distributor in Europe who has agreed to sell minimum annual volumes on our behalf, meaning all of which will represent new volume. We have also completed the installation of a new wax distillation column. This is now fully operational and releases capacity for custom processing, which has been lagging expectations. As previously 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 first quarter of 2016. We do not expect significant custom processing growth before this unit comes onstream. Finally, we have initiated a new oligomer project for which the customer funded all of the necessary capital. This is an exciting new technology which will lead to longer-term additional processing revenue, if all goes according to plan. On slide 14, we again share some photos to illustrate the progress at Trecora Chemical. The two photos are different views of the new wax distillation column that is now operating in Pasadena. Turning now to an update on AMAK, which begins on slide 15. The key at AMAK is to continue to make the improvements in operations what the new management is certainly doing. Overall ore tons processed were 26% higher in the second quarter. Plant runtime was approximately 90% than in the first quarter where plant runtime was approximately 75%. The precious metal circuit was down for most of the second quarter due to governmental concern with the storage of the cyanide required for this process. This issue has been resolved and the circuit should run for most of the second half of 2015. The talc circuit is now operational leading to further recovery and other operational improvements. AMAK also received conditional approval for the additional issuance of additional leases for the 200 square kilometers which we have been expecting for some time, which will more than quadruple the current size of the mine area. I can add that we believe AMAK has addressed the specific conditions of the Saudi government. So al l indications are AMAK is moving forward on these new leases. Slide 16 shows the turnaround in recovery rates that coincided with the initiatives introduced by new management, beginning into Q3 of last year. The most dramatic impact has been for zinc, but copper has also improved. In the future, you will hear us talk more about the copper equivalent metal. Most mines focus on the primary mental they produce and they represent all other metals in equivalent value to the primary one. Slide 17 provides a year-to-date update on production and delivery for AMAK. They are operating near or above plan for zinc and copper concentrates. The average cash cost of production is below $60 per dry metric ton of ore. We have seen continued reduction here as we drive operational efficiency. Finally, in an area over which AMAK has little to no control, average metal price was slightly better in the second quarter than the first, due to a run up in spot commodity prices in April, but have declined somewhat since. Copper prices are at numbers last seen six years ago and will likely continue to be volatile as they are largely affected by economic data announcements from China. Zinc prices are still expected to be strong as time passes due to the rundown and closure of several large mines this year and next. However, there are no guarantees. Our expectations for zinc prices for the remainder of the year range from $2,000 to $2,200 per ton of metal and for copper between $52.50 and $57.50 per ton of metal. Let's go to slide 18 for a summary. First let me say that as I assumed the position of CEO in mid-July of this year, I believe the company is very well positioned to continue growing and delivering value to shareholders. We have efficient operations. We address strong growing markets and we have the financial resources to expand in order to capture new opportunities. In the second quarter, we delivered strong financial results. Both South Hampton Resources and Trecora Chemical are projecting strong growth well into the future and our capacity expansion plans are well underway and on track. And finally, I believe AMAK represents significant but largely unrecognized value, particularly as we improve production. That concludes my prepared remarks. At this time, I would like to ask the operator to open the call for Q&A.

[Operator:]

[Operator Instructions]. There is a question from Sarkis Sherbetchyan with B. Riley and Company.

[Sarkis Sherbetchyan:]

Yes. Thanks for taking my questions. First off, you mentioned you expected a significant increase in Asian sales this year, due to do qualifications with several customers and that you had good volume to report for next quarter. Can you give us perhaps an order of magnitude and/or what it could mean to sales for next quarter and beyond?

[Simon Upfill-Brown:]

Well, there is a one particular large order I am aware of, Sarkis. And we haven't shipped it yet. So I don't want to give actual numbers, but it's a nice size order. It's approaching 0.5 million gallons or thereabouts.

[Sarkis Sherbetchyan:]

And would that be on a quarterly basis and/or would it ramp from that point on?

[Simon Upfill-Brown:]

This is our initial order. And then there will be, as they run their facility, there will be monthly, quarterly purchases from then on.

[Sarkis Sherbetchyan:]

Okay. Understood. And then on that note, that wouldn't be reflected in your deferred revenue balance that you reported. Is that right?

[Simon Upfill-Brown:]

No. Not.

[Sarkis Sherbetchyan:]

Okay. That's not necessarily helpful.

[Simon Upfill-Brown:]

No, not yet.

[Sarkis Sherbetchyan:]

Okay. That's helpful. And then you also talk about the four different companies that have placed orders on the specialty wax side. Can you maybe give us some color as to perhaps the volume uptake and/or what it could mean from a ramp standpoint?

[Simon Upfill-Brown:]

Well, one of these customers can purchase more than all the wax we can make. I mean these are significant customers. So we are obviously not going for 100% of their business, because we couldn't supply it. But we are going for applications where our product matches what they need exactly. And so at least the volumes could be significant. They are ramping up though. They are conservative. They want to try it out and make sure it works probably and then continue to place orders. It's kind of similar to our polyethylene customers. They don't want to rush into making a change. They are very conservative and want to make sure that the product works probably.

[Sarkis Sherbetchyan:]

Yes. Understood. I mean if we talk about four customers, is it going to be a needle mover in the coming quarters? Or is it just something that we should look for expecting a more linear fashion?

[Simon Upfill-Brown:]

Our expectation is that by early next year, it should be a needle mover.

[Sarkis Sherbetchyan:]

Okay. Good. And then just finally on AMAK, you did mention the conditional approval granted for the additional lease areas. Can you maybe just give us some color on management's current thinking? Would it be essentially a reserve for development for the late 2016 IPO? Or is there something to do in between now and then?

[Simon Upfill-Brown:]

There are some small things to do in between now and then, access to some ore that we could process readily in the existing system and that should be relatively helpful to us before the IPO. But obviously fully developing the major lease areas is going to take some considerable time, Sarkis. That's not going to happen overnight. But our expectation is that once we do get all documentation and you know we will be talking about this for a long time. I was nervous about actually even mentioning this because we know that it's going to still take a long time. But anyway, we are making progress and that's the message I wanted to get across. And there will be some ore that we will be able to process in very short order through the existing system.

[Sarkis Sherbetchyan:]

Certainly helpful. And then just finally before our back into queue. Any updates as to the potential IPO of AMAK?

[Simon Upfill-Brown:]

No. We are still moving ahead with that in mind. We have been in touch with banks and so on and so on. So the plan is to go ahead and get that done. Obviously, if there is any change, we will let everybody know. But that's what we are still driving for, Sarkis.

[Sarkis Sherbetchyan:]

Okay. Thank you. I will hop back into the queue.

[Simon Upfill-Brown:]

Thank you very much.

[Operator:]

At this time, we will take a question from Joseph Reagor with Roth Capital Partners.

[Joseph Reagor:]

Good afternoon, guys and good work on the quarter.

[Simon Upfill-Brown:]

Thanks, Joseph.

[Joseph Reagor:]

A couple of questions. First one, it looks like margins hung in there pretty well during the quarter, despite kind of a run up in oil prices during the quarter, which I guess has now ended. Given that, working out Q3 with oil falling at the beginning of the quarter, can we expect to see a similar slight expansion in margin that we saw last time oil fell?

[Simon Upfill-Brown:]

Yes. I mean there is going to be a bit of less of a fall, right, this time. But yes, there should be some slight margin improvement. But I don't think it will be the same as from the peak, $120 a barrel, to what it was in January and February of this year.

[Joseph Reagor:]

Okay. And then thinking about volumes for the next quarter, it sounds like there is a couple of things that might be 05 million to a million gallons outside of the oil sands, but could you just give us a little bit color on what you are seeing from the oil sands customer as they ramp up Phase 2 of their expansion?

[Simon Upfill-Brown:]

Yes. They are in Phase 2. They started out ahead of schedule, in fact. And I think we said this last time, we have really given up predicting what they are going to take. They tend to order from us a few days into the month for the current month shipments and it's been all over the place, Joe. I mean it's just very, very hard to predict. They seem to be running okay over there. Both trains are running as far as we can tell. It appears they might have been able to improve efficiency and the consumption of solvents. And also, of course, we don't really know what share we are getting, because we do share with the other supplier. We never know exactly what percent of the business we are getting.

[Joseph Reagor:]

Okay. But ultimately you guys still expect them to consume the initial, I guess, 1,000 barrels a day that you guys would be able to put into there.

[Simon Upfill-Brown:]

Right. That's what we are hoping for.

[Joseph Reagor:]

Okay. And then --

[Simon Upfill-Brown:]

That's why I paused predicting. As I said, I have given up predicting what they are going to use. We really wait for the order and then we make it and ship it for them.

[Joseph Reagor:]

Okay. And then looking at Trecora Chemical, it sounds like the processing revenues might be basically flat to slightly up over the second half of the year waiting for the hydrogenation plant, but could you give us a little bit of color about what you are seeing on both pricing and sales volume heading into the third quarter for the wax side of the business?

[Simon Upfill-Brown:]

The wax pricing is doing pretty well, Joe. It's better than we were. We are competing mostly with HT Waxes and they tend to be driven a little bit more by crude oil prices. So the market price is down a little bit. But we try very hard to sell now that we can sell on performance to sell on performance and quality. So price is better than they were and based on our process too, we are improving yields, which is also a good thing, right. There is less material that we have to sell at fuel value and so that also helps. So our expectation is that not only will we see increased volume, we will see increased margin and in wax sales as well.

[Joseph Reagor:]

Okay. Thank you.

[Simon Upfill-Brown:]

Thanks, Joe.

[Operator:]

Kurt Caramanidis with Carl M. Hennig, Inc. has the next question.

[Kurt Caramanidis:]

Simon, Connie, you get rid of Nick and put out the finest quarter at South Hampton that I think I have seen. So congratulations. That, all things considered, very impressed with the results. So, good job.

[Simon Upfill-Brown:]

I don't think we can acclaim the credit that one. He has only been gone for a couple of weeks and actually he was here through the whole of the second quarter.

[Kurt Caramanidis:]

Hopefully he is not hunting Cecil's brother.

[Simon Upfill-Brown:]

That's what we are all hoping.

[Kurt Caramanidis:]

But most of my questions have been answered, except for Trecora Chemical, the one I guess, area of opportunity, not contributing much yet, but it sounds like you are on a trajectory. Do you see them starting to contribute profits in 2016? Yet this year? Some positive talk, not so much in the last quarter, but how do you see that?

[Simon Upfill-Brown:]

Yes. We should see a stronger second half and then you know our target is to double the size of that business, both the wax and the custom processing by 2017. So we believe we are on a good trajectory to be able to do that. So some this year, more next year and then we will be in really good shape by 2017, Kurt.

[Kurt Caramanidis:]

Great. Kudos to you guys. That's very impressive profit results with the revenue stream.

[Simon Upfill-Brown:]

Thank you.

[Operator:]

And at this time, we will take a question from Colin Lee with Luzich Partners.

[Colin Lee:]

Hi. Good afternoon.

[Simon Upfill-Brown:]

Hi Colin.

[Colin Lee:]

Can you just repeat the gallons from the international sales and revenue from international associated with those sales?

[Connie Cook:]

I don't think I gave the revenue, but let me find, I can give it to you. The gallons for the quarter were 3.8 million and the revenue was $11.7 million.

[Colin Lee:]

And for Q3 capacity, should we still assume 7,000? Or should we assume some incremental addition, as you know you layer in the capacity addition?

[Simon Upfill-Brown:]

Yes. We have 8,000 barrels a day now. So whether we use that or not will depend a lot on our friends up in Canada and we have run-abouts. We have run about 7,000 barrels in the recent weeks. So I think 8,000 barrels a day is a reasonable capacity assumption for the third quarter and the full. And then we will have rest of it by the first quarter of next year.

[Colin Lee:]

Got you. So with the increased volume, hopefully the more beneficial oil price decline seems your gross margins should improve in Q3, at least that's what I think?

[Simon Upfill-Brown:]

We already gave you the guidance, Colin.

[Colin Lee:]

I know. I was trying to --

[Simon Upfill-Brown:]

Wanted to still squeeze something out of me, I know.

[Colin Lee:]

Yes. And how about for the processing side on the South Hampton? Are there any updates on that? Or are you guys mostly just focused on processing on the Trecora Chemical side?

[Simon Upfill-Brown:]

We continue to look at projects for processing at South Hampton. We actually had some people in this week that have potentially interesting projects. It's a slightly hard to sell here because it needs to be a longer term project, because the capital has to be installed to be able to do it. But still, I think there are some opportunities out there. We have looked a number of them over the last three years. Come close on a couple. We lost one where we were told we had it, but they found somebody else who did it for free. It is hard to compete with that. So I mean, there are a couple of projects we are looking at and so ultimately we will get some here, but I think the custom processing, the multipurpose custom processing at Trecora Chemical isn't easy itself.

[Colin Lee:]

Understood. And for the oil sands customer, hopping back in the South Hampton side, you have an view on when Phase 3 will come?

[Simon Upfill-Brown:]

I am trying to remember, Colin. Well, let me try to find out and get back to you. I think it's a couple of years away.

[Colin Lee:]

Okay.

[Simon Upfill-Brown:]

And it represents -- it is not a doubling of volume either. It's like a third of the volume of Phase 1 and Phase 2, if I remember correctly.

[Colin Lee:]

And then on the AMAK side, have that operational team, have they layered in any hedges or is that price in the slide, is that a market price? Just wondering how their thoughts on hedging is or based on where those commodity prices are right now. Thank you.

[Simon Upfill-Brown:]

Yes. We do a little bit of hedging and we tend to do it when the product is at the port and try to judge looking it forward curves, et cetera, et cetera, what's the best thing to go for. We get a lot of advice from our partners who sell all the products for us and they are really the guys who help lead us through that process and we do our best to maximize pricing. But you know, it's a tough thing in this current environment.

[Colin Lee:]

Right. Okay. Those are my questions. Thank you.

[Simon Upfill-Brown:]

Thank you, Colin.

[Operator:]

At this time, we will move to Jeremy Hellman with Singular Research.

[Jeremy Hellman:]

Hi guys. I have got a question. I am kind of curious about the backdrop of exchange rates. And I think it's a good sign you are able to win this Asian business in the face of an appreciating U.S. dollar, but I am wondering if U.S. dollar movements were a headwind to winning any additional business? Or any other perspective on that would be helpful. Thanks.

[Simon Upfill-Brown:]

Yes. We are continuing to supply to all continents and we price everything in dollars. So, so far so good. I mean, it's an interesting thought. But all our existing customers are continuing to purchase from us and this big first fill order that we got from the one I discussed earlier, that was a relatively good margin piece of business for us. So it indicates to me that because our quality is so good, folks are prepared to pay the price for it.

[Jeremy Hellman:]

I like hearing that. Thanks guys.

[Simon Upfill-Brown:]

Thank you, Jeremy.

[Operator:]

At this time, we will move to Jim Gentrup with Val Vista Capital Management.

[Jim Gentrup:]

Good afternoon, guys. How are you?

[Simon Upfill-Brown:]

Good, Jim.

[Jim Gentrup:]

Listen, I want to ask you a little of clarification about the oil sands customer. Have you shipped anything to them this quarter yet, July or August?

[Simon Upfill-Brown:]

Yes, we have and obviously, I can't tell you how much because that's their story. That's their business.

[Jim Gentrup:]

Okay. No problem with that. I am sorry.

[Simon Upfill-Brown:]

They are working one month over the last -- there was at least one month in the previous quarter, where we did not ship them anything.

[Jim Gentrup:]

So do you expect shipments to them in the Q3 to grow from last year's quarter, Q3?

[Simon Upfill-Brown:]

I don't think, I mean, Jim, as I said earlier, it's just so hard to predict with these guys.

[Jim Gentrup:]

Yes. Understand. I just didn't know if you had already shipped some. So I just wanted to clarify that. Okay. And then overall your prime products, I think, you said were up 11% and you have got some new, was the right number 11%? Anyway, you have got some new customers coming on. I didn't catch, do you expect them to contribute in Q3 as well?

[Simon Upfill-Brown:]

The ones that contributed in the second quarter? Yes, I think so. There were a couple of customers that started buying from us in the second quarter and they are continuing into the third quarter. Things like the, which we have spoken about before, the iso-foam, the foam guys, the foam insulation guys, there is a lot of focus on energy efficiency and so there is a lot of demand for building insulation and those kinds have been pretty active. We expect that to continue. That often slows down in the fourth quarter, though when construction stocks will close down. But no, I think the guys that bought from us in the second quarter, we expect to continue.

[Jim Gentrup:]

So it sounds to me like Q3 is shaping up to be a little bit better than Q2 sequentially because you have got potentially more oil sands and also you have got some new incremental stuff going on as well. Is that safe to say?

[Simon Upfill-Brown:]

I think you are asking me for guidance again, Jim.

[Jim Gentrup:]

Sorry. Okay. You want to wipe that question off.

[Simon Upfill-Brown:]

Logical, not illogical, but yes.

[Jim Gentrup:]

All right. Okay. Fair Enough. And then your lower margin by-product type products that you have -- have you been successful eliminating those? Is that part of the gross margin sustainability here at these levels?

[Simon Upfill-Brown:]

We said we reduced it, they never were eliminated, right. Because we get some in with the feed and one thing we don't have control over is what's coming in with the feed. And what we have been able to reduce is selling the higher value by-products that we make at a discount because they are excess product and that's what we mean by excess product. But we always have a certain amount of by-product and it ranges from 20% to 25% depending on the feed, that we have to sell at lower prices. But we have been working very hard at finding better homes for that stuff too. So we thought we found some improvement there as well.

[Jim Gentrup:]

Yes. It sounds like you didn't.

[Simon Upfill-Brown:]

We don't want to make a lot of excess normal pentane and have to sell that at a discount and that's where I think we have been doing a pretty good job.

[Jim Gentrup:]

Okay. Fair enough. And then last one I have is just step back to AMAK for a second. The pricing, it sounds like you had another hiccup with shipping, with getting shipments out the door, but pricing, I guess has been pretty stable. I think zinc came down a little bit unexpectedly.

[Simon Upfill-Brown:]

Yes. We [indiscernible] in April, May and it's come down from there, maybe just today, I think it's just below $2,000.

[Jim Gentrup:]

Yes. I guess the thing is that it's tough for us to predict. I know it maybe used well, but I know you posted a $370,000 loss or right in that neighborhood this quarter. I was just kind of curious if you have had a little bit better a visibility, I guess. I mean I know the pricing, I am not asking to predict pricing. I am just asking you to predict production and shipping in the second half of the year. I appreciate it.

[Simon Upfill-Brown:]

Yes. Well, we do. We have had two shipments in July. I think Connie mentioned that.

[Jim Gentrup:]

Okay. I missed that. It's all right.

[Simon Upfill-Brown:]

Two shipments in July and there is a chance we will get a third shipment in before the end of September. So that will help just the way the numbers run. Until we get our accounting right and we account like some other miners do, which I touched on earlier, is doing this primary metal equivalent thing, which I think will improve the overall way we report the numbers. But we have got to make sure we fully understand all that and that's going to take a bit of time to get that in. We will have at least two shipments in the third quarter and maybe even a third.

[Jim Gentrup:]

Okay. Thank you so much.

[Simon Upfill-Brown:]

Thank you.

[Operator:]

And at this time, we will move forward to Sam Namiri with Grand Slam Asset Management.

[Sam Namiri:]

Hi Simon and Connie. Congrats on another good quarter.

[Connie Cook:]

Thank you.

[Simon Upfill-Brown:]

Thank you, Sam.

[Sam Namiri:]

I had a quick question. There was one mention of AMAK in the income or depreciation and two other things that were backed out. I think it was $4 million.

[Connie Cook:]

We backed out share based comp to get to the adjusted.

[Simon Upfill-Brown:]

We have put out a note in the press release actually about AMAK net income before depreciation, dilution and amortization. And that was just under $4 million.

[Sam Namiri:]

Okay. I wasn't quite clear. Was that to you, specifically? Or was that all of AMAK?

[Simon Upfill-Brown:]

That's all of AMAK.

[Sam Namiri:]

Okay.

[Connie Cook:]

And that will be in the Q which I hope to file tomorrow.

[Sam Namiri:]

All right. Okay. And then --

[Simon Upfill-Brown:]

And is just an indication of cash generation there. That's what we were trying to get across.

[Sam Namiri:]

Okay. And with Asia, I know a part of your business is seasonal, as the weather gets warmer you sell more of your product. Do you see the same thing happening with Asia as well with those customers potentially?

[Simon Upfill-Brown:]

Well, their applications are similar, yes.

[Sam Namiri:]

Okay. And then can you just kind of explain to me that new oligomer project, can you add a little bit more there? Because obviously I have no idea what that is.

[Simon Upfill-Brown:]

I won't start to give you a chemistry lesson, but it's basically you reacting one small molecule with two or three others of the same molecule and you make a molecule that's three times the size. So that's called an oligomeric before it becomes a polymer and those oligomers have a whole slew of different uses and we have been working with a customer for a little while now to start up this unit that we set up for them and they have paid for to make this oligomer. And it's just starting up. And the perspective is, is that if it runs well, we will continue to do a lot of that for this customer. And it would be, it's a unit that's separate from everything else and we can run it and make this stuff and some other derivatives of those oligomers for them going forward. And that's why it's exciting. I mean, we don't know for sure. We don't know if it's going to really work. It is new way of making these oligomers. But the product is available in the marketplace. This is just a different lower cost, more efficient way of making these products and will allow them to sell them into the marketplace more competitively than what's already out there. So that's why it's exciting for us, Sam.

[Sam Namiri:]

Okay. And then the final question for Connie is, in terms of the new expansion projects that have been ongoing, have you been beating what I guess you have been forecasting for budget in terms of spend? Or how does that look compared to what you forecasted going into it?

[Connie Cook:]

Yes. That was in-budget on the D-Train.

[Sam Namiri:]

Okay.

[Connie Cook:]

We expect just going forward, we try to come up with a number just for CapEx for the second half of the year and we are going to say, it's probably going to be around that $10 million to $20 million to finish up D-Train and then the expansion projects over at Trecora Chemical.

[Sam Namiri:]

Okay. Thank you.

[Connie Cook:]

You are welcome.

[Simon Upfill-Brown:]

Thank you.

[Operator:]

This time we will take a question from George Gaspar, a private investor.

[George Gaspar:]

Yes. Thank you. Good afternoon. Simon, I would like to just push a little bit more on your discussion on AMAK as far as this delay in shipments to going here in July. Is it right to assume that if you had a $400,000 equity loss in the quarter at AMAK, that the overall loss, equity wise was $1.2 million because you have about a third of it?

[Connie Cook:]

Well, there is some accretion in there. So our share of that was reduced by about $300,000. So the actual, our part of the earnings was actually $700,000 loss, rather than just $400,000. So you have to look at it that way.

[George Gaspar:]

I see.

[Simon Upfill-Brown:]

Their loss was about $2 million.

[George Gaspar:]

$2 million. Okay. And right now with two and possibly getting a third shipment and that would you think that you could get it to a breakeven mode in the quarter, considering your precious metal start up for the quarter maybe yielding something?

[Simon Upfill-Brown:]

Yes. I think of course depending on metal prices, George. Yes, I think there is a good chance that we could do much better in the second half of the year from AMAK. But a lot does depend, at this point, on the metal pricing and that's a too hard to predict.

[George Gaspar:]

Right. Okay. And further on AMAK, your discussion about getting some additional or singular approval on the additional leases, what are the mechanics moving forward that you still have to look at, number one? Number two, I recall way back when we first started talking about these additional leases coming into view, there was discussion about the possibility of another mining site with an actual mining installation, but the possibility of actually taking material from one of the sites into the existing processing unit that you have, question would be, if you get approvals do you have the ability to strip mine part of this location so that you wouldn't have to go underground to initially get the material to move to your mine? Or is it more complicated than that? And what's the projected time element that we are looking at?

[Simon Upfill-Brown:]

Yes. That's tough to predict. The exciting thing for us for these leases is what they will do to the value at the IPO point, right. Because the ore is like, there is all the thrust and excitement about the future for these things. But I mentioned earlier, there is potential to do some on the existing equipment and very readily available to get some ore from one of extra lease sites and process that through existing equipment. So we will do that. One of the leases has a lot of nickel and of course that's processed in a completely different way. So we would have to set up a separate processing facility to handle that. So I think it's going to be all the way across-the-board from taking what we can take and putting it through the existing system and then in the longer-term also building additional plants and running those to do things like nickel and potentially other metals, George.

[George Gaspar:]

Right. Okay. And looking forward to what you indicated about the IPO and the importance of this in terms of giving the mining operation longevity. I assume that there would be some numbers put out as to what the anticipated reserve might be on the additional leases at the time of that IPO?

[Simon Upfill-Brown:]

Yes. So it's some of that, but obviously not a lot, because I think a lot of the idea for the IPO would be to raise money to do the more detailed exploration of these new leases, et cetera, et cetera. But it will give some indication, right, so that we can extract the most value from the IPO, whatever we can.

[George Gaspar:]

Okay. All right. Okay. Thank you. And just a compliment on your chemical side, you really are doing a fantastic job in this market environment and you certainly have an opportunity to move the company forward on that side of the equation within the next six months. Thank you.

[Simon Upfill-Brown:]

Thank you, George.

[Operator:]

That concludes the question-and-answer session. I will turn things back over to management for closing remarks.

[Simon Upfill-Brown:]

Thank you all very much for joining us today. We are very pleased with our results and our progress .And finally, I wanted to let know that our Chairman Nick Carter will be meeting with investors that the ITG Midwest Industrials Conference in Milwaukee on August 19 and I will be presenting at the KeyBank Basic Materials Conference in Boston on September 3. We hope to see some of you at those events. I would like to say a huge thank you to all our very top notch employees and wish you all a very good evening.

[Operator:]

And again, this does conclude today's conference call. Thank you all for your participation.