Trecora Resources
Q4 2015 Earnings Call Transcript

Published: 4 Mar 2016

[Operator:]

Good day, and welcome to the Trecora Resources Fourth Quarter and Full-Year 2015 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Don Markley of The Piacente Group Incorporated. Please go ahead, sir.

[Don Markley:]

Thank you, [Janis] and good afternoon everyone. Welcome to the Trecora Resources fourth quarter and full-year 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 statement, which is found on Slide 2. Statements in this presentation that are not historical facts are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on management's beliefs and expectations only as of the date of this teleconference March 3, 2016. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected. These risks, as well as others, are discussed in greater detail in Trecora's filings with the SEC, including the Company's Annual Report on Form 10-K for the year ended December 31, 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 the call this afternoon. As shown on Slide 3, I'll begin today with a brief discussion of the fourth quarter and full-year highlights. I'll then pass the call over to Connie for a more detailed discussion of the financial results. Following that, I’ll review progress at South Hampton Resources and Trecora Chemical, and conclude with an update on results and developments at AMAK before taking your questions. In 2015, we made significant progress on a number of fronts, including capacity expansion projects at both South Hampton and Trecora Chemical that stayed on time and under budget. Achieving higher production volumes while maintaining the highest quality and purity standards in the industry and increasing profit margins despite a very turbulent commodity environment. While we are pleased with the overall results there were a number of factors that impacted our business in the fourth quarter and therefore the full-year. Principally, the trend of lower feedstock prices continued into the fourth quarter. Turning now to Slide 4, because close to 60% of our contracts are tied to the index cost of natural gasoline. This lowers our overall selling price and consequently our revenue. Fourth quarter revenues were $60.5 million. As you know historically the fourth and first quarters are seasonally the weakest at SHR. While revenues were down 18% year-over-year. Gross profit in Q4 was only down 4% year-over-year to $11.8 million. As a result, we achieved gross margin of 19.6%, a record for a fourth quarter and up 300 basis points year-over-year. Operating income of $5.8 million increased by more than 18% year-over-year. We generated a total adjusted EBITDA of $8.6 million, a 6% increase from a year ago. Our fully diluted earnings per share were $0.05 compared to $0.09 in the quarter four of 2014. During the quarter there were several factors that negatively impacted our results, including a loss in equity at AMAK of $3.0 million, deferred revenue of $5.5 million related to undelivered shipments for which revenue will be recognized in the first quarter of 2016, but associated shipping costs were incurred in the fourth quarter. Higher sales to our oil sands customer, which carry slightly lower margin than other petrochemical sales, lower prices for byproduct sales on higher volumes, a strengthening dollar that impacted Trecora Chemical distributor sales in key markets particularly Brazil and China and pricing pressure in the petrochemical spot market which affected margins for non-formula priced products. I will provide added detail on each of these items later on the call. Slide 5, is a chart of our petrochemical revenue and volume over time. Even though volumes were a record for the fourth quarter, the decline in feedstock costs continue to impact revenues. This is further emphasized on Slide 6, were our processed feedstock cost per gallon was significantly lower compared to the year ago period, which helps drive the improved year-over-year profit margins. During the fourth quarter of 2015 we paid 37% less per gallon than in the fourth quarter of 2014. The challenging factors mentioned way on both revenue and profitability in the quarter. Nevertheless, we are pleased with how the Company is positioned to take advantage of new market opportunities and long-term demand growth. In fact, we already beginning to see an increase in custom processing activity and believe that bodes well for 2016. Now, I'll turn the call over to our CFO, Connie Cook, for a review of the financial results.

[Connie Cook:]

Thank you, Simon. Slide 7 presents our income statement for the fourth quarter and the full-year 2015. I will begin with the discussion of the quarter. Quarterly revenues decreased 18% year-over-year to $60.5 million compared with $74.1 million in the fourth quarter of 2014. The decrease in revenue was due to the continued sharp decline in our per gallon feedstock cost that translated into lower average selling prices. Our average selling price is 30% lower in the fourth quarter of 2015 than in the fourth quarter of 2014. Volume of petrochemical sales increased 14% year-over-year to 24.6 million gallons from 21.6 million gallons in the fourth quarter of 2014. Foreign sales volumes for Q4 2015 was 7.9 million gallons versus 5.9 million gallons in Q4 of 2014. This reflects a 24% year-over-year increase in shipments to our Canadian oil sands customers. Petrochemical product sales were $53.8 million, representing 88.8% of total revenue for the fourth quarter of 2015. Specialty wax sales were $3.8 million. We generated $3 million in processing fees during the quarter, compared with $3.7 million in Q4 of 2014. Cost of sales, including depreciation, totaled $48.7 million, a decrease of 21% compared with $61.8 million in the fourth quarter of 2014. The decrease was primarily driven by the reduction in feedstock prices. Gross margin for the quarter was 19.6% a record for fourth quarter versus 16.6% in the fourth quarter of 2014, indicating some of that will lead to hold up spot prices. G&A costs were $5.9 million versus $7.3 million in the fourth quarter of 2014. G&A costs decreased primarily due to the executive bonus as being accrued throughout 2015 as compared to the accrual in 2014 being recorded in the fourth quarter. Consulting fees were also lower due to cost associated with the acquisition that were reflected in 2014. Operating income was $5.8 million for Q4 2015 versus $4.9 million in the fourth quarter of 2014, an increase of 18%. Equity and losses of AMAK was $3 million in fourth quarter 2015 as compared to $0.4 million in fourth quarter of 2014. Lower metal prices significantly impacted the mine. Simon will discuss this in more detail later. Net income attributable to Trecora Resources was $1.1 million or $0.05 per diluted share compared to net income of $2.2 million or $0.09 per diluted share in the fourth quarter of 2014. We estimate that EPS was negatively impacted by tax affected equity in losses of AMAK of approximately $0.08. Now moving to full-year results. Total revenue decreased 17% year-over-year to $242 million compared with $289.6 million in 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 increased 5% year-over-year to a record 86.9 million gallons from 82.8 million gallons in 2014. Foreign sales volume was 21.9 million gallons versus 22.9 million gallons in 2014. This reflects the reduction in Canadian oil sands volume for the year. Petrochemical product sales were $212.4 million representing 88% of total revenue in 2015. Specialty wax sales were $15.5 million. We generated $14 million in processing fees, compared with $8.8 million in 2014. The increase in processing fees was primarily the result of the incorporation of TC processing fees for the full-year period. Cost of sales including depreciation, totaled $182.6 million, a decrease of 25% compared with $243.9 million in 2014. The decrease was again primarily driven by the sharp reduction in feedstock prices. Gross margin was 24.5% versus 15.8% in 2014. G&A costs were $22.6 million versus $19.7 million in 2014. The majority of the increase was once again due to the addition of TC and associated acquisition cost. Operating income was a record $36 million versus $25.5 million in 2014, an increase of 41%. Net income attributable to Trecora Resources was $18.6 million or $0.74 per diluted share compared to net income of $15.6 million or $0.63 per diluted share in 2014. We estimate that EPS was negatively impacted in 2015 by tax effected equity and losses in AMAK of approximately $0.14. Slide 8 shows that EBITDA and adjusted EBITDA calculations for the quarter and for year. EBITDA for the quarter was $5 million compared with $7.1 million in 2014. Adjusted EBITDA, which excludes the equity and AMAK losses and share based compensation, was $8.6 million for fourth quarter 2015 compared with $8.1 million in fourth quarter of 2014. Adjusted EBITDA margin was 14.2% compared with 10.9% a year ago. EBITDA for 2015 was a record $39.6 million compared with $29.8 million in 2014. Adjusted EBITDA was also a record at $47.3 million compared with $33 million in 2014. Adjusted EBITDA margin in 2015 was 19.6% compared with 11.4% a year ago. Slide 9 presents our balance sheet. As of December 31, 2015 cash was $18.6 million compared with $8.5 million at the close of 2014. In late December, we drew an additional $15 million on our existing term loan spending would no longer be available after December 31, 2015. We did this in anticipation of construction of a new reformer unit during 2016. Long-term debt, including the current portion was $82.3 million compared with $80.5 million at year-end 2014. The increase is only slightly higher than 2014 even though we drew on the term loan as I just mentioned because we paid down $6.2 million on our line of credit and $7 million on the acquisition loan. Capital expenditures for the quarter were $7.7 million and comprised expenditures related to our D-Train expansion and the expansion of custom processing capabilities at TC among others. We had $43.4 million in working capital as of December 31, 2015 and ended the quarter with a current ratio of 2.9 to 1. Shareholders' equity increased to $142.1 million from $121.1 million as of December 31, 2014. This concludes the financial review and with that I'll turn the call back over to Simon.

[Simon Upfill-Brown:]

Thanks, Connie. Moving to Slide 10. Petrochemical demand remained at healthy levels during 2015 and we benefited from continued operational excellence and competitive advantages achieved through our business mix and focus on producing high quality products and outstanding customer service. Petrochemical sales volume was 24.6 million gallons, which was up 14% year-over-year compared with the fourth quarter of 2014. The increase was attributable to the increase of prime product sales of 6%; while we have a pricing pressure in the petrochemicals spot market affected margins for non-formula price products. Additionally, an increase in excess and byproduct sales as well as sales to our lower margin oil sands customer at an adverse effect on our profitability in the quarter. Excluding oil sand shipments, prime product sales were up 1% year-over-year. Byproduct sales increased 2.2 million gallons in the quarter over the fourth quarter of 2014. We continued to experience lower pentanes in our feed which required us to purchase more feed to make our desired volumes. Byproduct prices were approximately $0.06 below our feedstock cost this quarter compared with about $0.01 per gallon below cost in the third quarter of 2015, driven primarily by very low gasoline blend stock prices. To enhance the value of our byproduct stream, we announced in December a plan to construct 4,000 barrels per day Advanced Reformer unit at South Hampton. The reformer utilizes cutting-edge catalyst processes that were originally tested and proven for commercial application at our Silsbee facility. The new unit will also provide a secure and reliable source of hydrogen for South Hampton’s high-purity pentane production as well as for custom processing campaigns. We expect to receive all environmental permits in the second quarter of 2016 and complete construction by mid-second quarter 2017. As Connie mentioned, fourth quarter deferred revenue of approximately $5.5 million was related to undelivered shipments and will be recognized in the first quarter of 2016. However, associated shipping costs were recorded in the fourth quarter. Petrochemical capacity utilization was 96% compared with 87% in the fourth quarter of 2014 and 92% in the third quarter of 2015. Capacity utilization was based on 7,000 barrels of fresh feed in 2015 and 6,700 barrels per day in 2014. In 2016, we will measure ourselves against capacity of 11,000 barrels per day. International petrochemical volume was approximately 32% of total volume reflecting a 24% year-over-year increase in shipments to our Canadian oil sands customer which carries slightly lower margins than other petrochemical sales. Our previously announced order of 4,000 gallons of pentane for initial fill from a new polyethylene facility in the Middle East began shipping in December. This order reflects the benefits and strengths of our product quality as well as our international capabilities. We have shipped about 35% of the volume thus far and we will ship the remaining product by iso-container in May through July. We are also working on supplying them with ongoing product once the plant starts up in full in the third or fourth quarter. On the [indiscernible] positive side, one of our Canadian Syncrude customers tragically experienced a fatal explosion in January of this year. They purchased 750,000 gallons of n-pentane from us in 2015 and will be returning 180,000 gallons to us this quarter. At this point, we do not know when the plant will restart. On Slide 11, I am pleased to announce that D-Train completed its full capacity test in January and demonstrated an ability to process 6,000 barrels of feedstock a day, which is 50% greater volume than originally projected. The increase in D-Train capacity will allow full production at SHR while we perform maintenance and inspection on the other processing lines. Currently, we are only committed to process 11,000 barrels per day. D-Train efficiency does not immediately increase South Hampton’s overall capacity although it is relatively straightforward to expand the operating permit. The additional capacity should satisfy the additional demand we expect to see through 2020 and perhaps a little beyond. We are actively tracking nine new polyethylene production projects in North America that would require approximately 6.5 million gallons of isopentane annually. As discussed earlier, our plan to be adding value to our byproduct sales with the completed construction of our Advanced Reformer by mid-second quarter 2017. Gevo continues to see growing customer demand for their renewable jet fuel and isooctane. We are pleased that they are working with us to increase capacity to meet that demand. We also welcome the increase in custom processing fees. At SHR, we continue to strive to broaden our product line. We successfully piloted one of these products at Silsbee in the first quarter of 2016 and are now working on customer approval. We will trial another product in second quarter of 2016 where we have had a number of customers asking us to supply. We will provide more detail on our new product initiatives throughout the year. You have likely seen the announcement on our new custom processing project in Silsbee with a company called Anellotech, a New York based sustainable technology company focused on producing cost competitive renewable chemicals from non-food biomass. We are excited about this project and the confidence that Anellotech has shown in SHR. Slide 12, shows the foundations for this pilot plant along with the factory produced kits that will soon be installed. Slide 13, is a photograph taken this week showing the new D-Train unit with set of distillation columns and ancillary equipment in the foreground. In the top right, you can see four of our extra distillation columns we were able to purchase very cheaply under our D-Train budget being stored there for E-Train or some other use. The Anellotech unit will go in just in front of those distillation towers. You can see the foundation if you look very closely. Bottom right is another extra column we purchased during our D-Train shopping. This column will be used in the Advanced Reformer project. We expect the D-Train unit to serve us well as prime product sales continue to increase and as demand from polyethylene projects and oil sands continue to come online. Moving into Slide 14. At Trecora Chemical wax sales declined from third quarter levels primarily due to lower export volumes and customers trying to limit inventory at year-end. The stronger dollar eliminated our pricing advantage in key markets particularly Brazil and China. Overall the fourth quarter wax sales revenues was 16% higher than the same quarter in 2014. We did have record wax production during the quarter or meeting our new high-quality standards. Our quality improvements in wax production have opened new markets and attracted new customers as evidenced by approval from and initial supply to two additional adhesive companies. Approval for a tape adhesive application as well as the road paint producer with orders expected in the first quarter of 2016 from these two customers and a successful trial of our high quality polyethylene wax at a new PVC customer. Our European distributor appointed a dedicated person with extensive experience in polyethylene wax to focus on our product in that region. Our Latin American direct sales effort was successful in getting our wax products tested at several new direct customers. We received our first order from Brazil in February. At the same time, we added Baker-Petrolite Polywax distribution to our portfolio in Latin America. Our owned high quality polyethylene wax is complementary considering the market previously covered by Baker-Petrolite using Fischer Tropsch waxes. TC also ran three successful custom processing trials in the fourth quarter and we expect ongoing business from at least two of these in 2016. Further three custom processing trials was scheduled in the first quarter of 2016. There is considerable interest in our capabilities. The expansion of the custom processing distillation and hydrogenation project continues to progress and remains on schedule to be completed in the third quarter of 2016. Once this project is completed, we are well-positioned to double custom processing volume in 2017 compared with 2014. Slide 15, shows pictures of the tank farm for this extension, completed excavation and rebar installation for the foundations with six 30,000 gallon tanks that will be installed early next month. The left hand photograph includes three of the six new 15,000 gallon tanks that have already been installed. On the right-hand side we have a different angle showing the TC rail rack in the background. Now turning to an update on AMAK on Slide 16. As previously announced AMAK temporarily shutdown the mill in late November and terminated its contract with the existing mine operator. In the current low commodity price environment it was felt that this was an opportunity to leave the assets in the ground while performing much-needed facility, maintenance and upgrades. The renovation work at AMAK has begun and the mill is expected to begin operations in the fourth quarter of this year. The goal is to gain efficiencies and production and improvements in recovery such that the mine can operate profitably even at current copper and zinc prices. Precious metal recovery can continue even during the temporary shutdown. Prior to the shutdown, we announced in November that AMAK had received the long-awaited license for an additional 150 square kilometers of territory close to AMAK’s current 44 square kilometer mine. This new territory comprises the Guyan and Qatan exploration licenses and within the Guyan exploration license at 10 square kilometer mining lease which we awarded a 10 square kilometer mining lease, which has potential for significant gold recovery. This 10 square kilometer mining license in Guyan covers an area containing multiple ancient gold mines that are shallow and surrounded by tailings from previous efforts to extract the metal. AMAK expects to be able to process gold from the ancient tailings in Guyan using existing equipment ahead of the startup of the main production facility. We will do this just before startup to better manage operational labor. Importantly and as part of the overall plant renovation, we are installing SART modifications in the precious metal circuit, which should lower chemical use, thereby reducing operating costs once processing resumes. These changes meshed nicely with the recently announced receipt of the new Guyan mining license which is purely a gold play. We are excited to see gold prices on the ascendancy over the last few days. The additional property significantly increases the long-term value of AMAK and combined with the increased efficiency following renovation work, we are optimistic that AMAK will provide significant long-term value to Trecora shareholders. We firmly believe that AMAK has sufficient cash to cover all renovation and upgrade work as well as operating and exploration expenses through the restart in the fourth quarter of 2016. Turning back to AMAK’s results in the quarter, lower commodity prices continued to significantly impact AMAK. Average spot prices for zinc and copper in the fourth quarter were down approximately 13% and 7%, respectively, compared with the third quarter. Additionally, certain operating expenses remained following the contract termination with the existing mine operator in late November, resulting in fourth quarter operating expenses that were only slightly lower than the third quarter 2015 levels. More significant expense reductions are expected in the first quarter of 2016. Slide 17, shows year-to-date update on production and delivery at AMAK. Following the mill shutdown AMAK sold its remaining inventory of approximately 12,000 tons of copper concentrate in the fourth quarter of 2015 making one shipment. The sale of the remaining inventory of approximately 17,000 tons of zinc concentrate occurred in February also in one shipment effectively clearing the warehouse in Jizan. This compares with two shipments of copper concentrate and one shipment of zinc in the third quarter of 2015. It is important to note that we can fix the price of the metal and the latest zinc shipment at anytime during 2016. The Wednesday cash settlement price for zinc was up 2% from Tuesday and up almost 27% from the low this year on January 12. So although it is way too early to be certain perhaps the long expected pop in zinc prices is beginning to occur, let’s be optimistic. On Slide 18, for a summary. In 2015, we significantly increased our profitability and positioned Trecora to grow and meet the needs of an expanding market. We face several challenges in the fourth quarter some seasonal and some we believe were one-time. Nevertheless, we continue to provide our customers unmatched levels of product and service quality. The outlook for the industry is as positive as ever as the $115 million being invested in additional chemical production capacity over the next 10 years in the U.S. Our customers have become more competitive internationally and our high purity pentanes are in demand throughout the world. This outlook is based on very positive, economic and demographic trends, including competitive feedstocks and our rapidly growing global middle class that will drive demand for plastics and other petrochemical products. Our investments to expand capacity and improve operations at Trecora poised to take advantage of these positive industry dynamics and also whether a more volatile macro environment. We remain focused on attracting new customers, generating large orders to drive results, and creating value for our shareholders. This concludes my prepared remarks. Before we conclude I wanted to note that we are presenting at 28th Annual ROTH Conference in Southern California on Monday March 14. I look forward to seeing some of you there. At this time, I would like to ask Janis to open the call for Q&A.

[Operator:]

[Operator Instructions] We will take our first question from Joe Reagor with ROTH Capital Partners.

[Joseph Reagor:]

Thank you. Good afternoon Simon and the rest of the team.

[Simon Upfill-Brown:]

Hey, Joe.

[Joseph Reagor:]

Thanks for taking the question. First one, the 750,000 gallon customer, you didn't give the name of who that was, but what type of customer where they?

[Simon Upfill-Brown:]

It was a Canadian Syncrude. They make Syncrude. They are not the same as the mining guys. They modify the bitumen through a chemical reaction.

[Joseph Reagor:]

Okay. And then you said that they will be returning 180,000 gallons, will that have some kind of impact on Q1 earnings or it is the plan to just turnaround and resell those?

[Simon Upfill-Brown:]

We’ll resell them. Obviously, it will go into an inventory until they resell, but they will be resold very quickly. I mean we do expect some impact because we would have sold that 180,000 gallons anyway, but we don’t think it will be significant, Joe.

[Joseph Reagor:]

Okay. The other thing I noticed was that - goodwill went up, pretty good amount with the year-end versus Q3, is there some – I think color there perhaps Connie could add on why that will went up?

[Connie Cook:]

Goodwill didn’t go up.

[Joseph Reagor:]

Is it maybe because that’s just summary version I’m looking at or is it…

[Connie Cook:]

It went up like $40,000 from year-end 2014 to 2015 and that was just going adjustment in the accounting, but it’s not changed otherwise.

[Joseph Reagor:]

Okay. All right. I’ll take a look at certainly on that, because – okay, I understood what you are saying. Was there any adjustments I guess to AMAK have you Connie on asset impairment tests or is there any potentially going forward?

[Connie Cook:]

No, we did not do any adjustment for impairment purpose. AMAK did go through on their side, a lot of cash flow analysis to make sure that they didn't think for their PCAOB segments that they will release that there would be an impairment over there. So then we took what they have done and looked at it to make sure that our investment, the amount that we have on the books was still correct and we felt like that we were still fine.

[Simon Upfill-Brown:]

Yes, we did our – our order does helped us with that and we did sensitivity analysis and things like that Joe and no need to take any impairment.

[Joseph Reagor:]

Okay. And then prior looking at the first quarter it sounds like you’re going to be offers this customer, the 750,000 gallons were they pretty even across quarter-to-quarter historically. And then the gains that you are getting at Trecora Chemical, now could you quantify what that means as far as volumes and total processing on an order of magnitude?

[Simon Upfill-Brown:]

Well, as you know we don’t like to give guidance, Joe. The first question that were reasonably ratable across the year. The customer that killed – I think that they killed one person and severely injured two. It’s a tragic accident that they experienced. They were fairly ratable over the year, but the – as I mentioned they are very optimistic signs in Trecora Chemical bodes on the wax, approvals and new orders and then also on the custom processing side both there and at South Hampton.

[Joseph Reagor:]

Okay. And then just one final question I think here if you guys have stated and normally you guys trying to give the EBITDA for chemical broken out from the overall EBITDA, did you guys give that for this quarter and if not can you – what was that?

[Connie Cook:]

We did not give that for this quarter.

[Simon Upfill-Brown:]

It will be in the Q, but I think we do have it somewhere. I think it was 0.6 .

[Connie Cook:]

Yes, it was 0.6.

[Simon Upfill-Brown:]

$0.6 million, so they didn’t really contribute a lot in the fourth quarter. It was better than the fourth quarter last year, but on AMAK and custom processing, but it was not – it wasn't what we wanted Joe. We were hoping we would get back to the $1.5 million or so and that didn’t happen.

[Joseph Reagor:]

Do you interpret that to the kind of the transition from your previous wax sales agreement to the new people that are now in charge of that in Europe and Brazil?

[Simon Upfill-Brown:]

Yes, I think so. And there is a little bit of an impact of the stronger dollar especially against China and Brazil particularly through that distribution agreement that we have, but we’re all starting to get very good orders in Europe and as I mentioned we’ve got our first direct sales order through our Latin American guy in February. So these are all very, very good indications.

[Joseph Reagor:]

Okay. All right. I’ll turn it over. Thank you.

[Simon Upfill-Brown:]

Thanks Joe.

[Operator:]

Our next question comes from Sarkis Sherbetchyan with B. Riley and Company.

[Sarkis Sherbetchyan:]

Hi everyone, so Simon can you give us more insight into the byproduct volumes and if we should continue to expect on elevated volumes of byproduct at these prices?

[Simon Upfill-Brown:]

Well, just recently [indiscernible] prices which kind of reflect gasoline prices have improved a bit. So not necessarily on the pricing and obviously you know the big issue for us as we can’t address the feedstock. I think you know that's our key suite. We told about this long and hard, we cannot actually change the feedstock quality so that’s why our focus is on upgrading the value of the byproduct hence our investment in the reformer starting up next year. There has been in the last few weeks an uptick in the pentane content of our feed, but as you know that is very unpredictable having that now doesn’t mean that will have it for the rest of the year, but it has been pretty positive over the last few weeks. So we are optimistic about that, but we are not going to really have a huge impact until we built the reformer. So we were 2 million gallons more byproduct this quarter compared to the same quarter last year. It was about the same volume of byproducts in the third quarter of 2015. So – but we did a little bit better on pricing then as we’ve mentioned in the call. So yes, I think it's something we’re going to have to live with it a little bit, it should be better going forward, but until we get the reformer up and running it’s going to be a little bit unpredictable.

[Sarkis Sherbetchyan:]

Understood and that kind of transitions into my next question here for the capital expenditure budget as well as the timeline kind of for this year. I mean three things I guess in this question here. So what's left over from the D-Train if any, right? The next part for custom processing at Trecora Chemical I know you guys have been spending there for the capital budget, but also what’s leftover on that side, on that segment. And then I think for the advanced reformer unit I believe you guys had mentioned $40 million figure, is that line of thinking correct and also what’s kind of the timeline for that?

[Simon Upfill-Brown:]

Yes, the expectation is and Connie you can correct me if I'm wrong, the expectation is at South Hampton we have roughly $5 million a year of what we call plant health capital and we do that every year, that's based on mostly environmental safety, other projects that we need to tweak things, extend the life of equipment et cetera, et cetera. The reformer, I think we're expecting probably roughly 30 something million of that to occur this year in 2016 and D-Train is really effectively finished. I mean there are a couple of minor little things that we’re doing, we’re hooking up cooling towers and most of that stuff has been done. At Trecora Chemical we have about $2 million plant health budget and then I think we’ve spent about $2 million or $3 million…

[Connie Cook:]

$2.5 million.

[Simon Upfill-Brown:]

$2.5 million on the hydrogenation and distillation project at most $18 million, $17.5 million left to spend on that. And then of course, if we ever get a custom processing project that requires capital, we justify that by the project. The project has to make the returns to justify any capital we invest in those project. So…

[Connie Cook:]

It’s on the customer base.

[Simon Upfill-Brown:]

Yes, exactly. And as Connie points out most of the time the customer paid for it. In 2015, we had a $2 million project at Trecora Chemical that the customer advance to catch for. So that’s the way we like to do significant custom processing project to both sides.

[Sarkis Sherbetchyan:]

Okay, understood. And then I’m just kind of touching back on the custom processing capability at Trecora Chemical, I think you said $18 million left there? So what’s kind of the timeline for that to be spent I mean is it here in the next two quarters or is it fairly throughout kind of the year?

[Simon Upfill-Brown:]

Yes, I think the most of it should be over the next two quarters as always finishing up stuff, so yes, I would say fairly ratably over the next eight months or so.

[Sarkis Sherbetchyan:]

Good. And then with respect to the deferred revenue figure of $5.5 million that you’ve pointed out. I guess can you maybe talk about what the bucket consists of and how that's different year-over-year?

[Simon Upfill-Brown:]

Well, it can vary and Connie should chime in here at any point, but it can vary at anytime, it depends on export shipments. And what drives it is we cannot recognize revenue on an export shipment until it arrives with the customer. It’s some accounting principle that we have to follow. So what happens is, we pay for the freight and shipping and all that kind of stuff and the cost of manufacturing and all that is – it is paid for in the period, but we can’t recognize the revenue until it arrives at its destination. So that means that you can have at the end of a period, at the end of a quarter you can have an overhang of a bunch of product that’s been shipped, produced and everything else shipped and we can’t recognize the revenue. It takes us roughly 27 days or 30 days to get from here to Canada. It take by rail and it can take six weeks to get to Singapore or the Middle East by sea. So we can ship stuff almost in the middle of the quarter and not have it count as revenue for that quarter. And we just – at the end of the fourth quarter, we experienced a jump in that. I think it was about $2 million higher than at the end of the third quarter Connie.

[Connie Cook:]

It was $2 million higher than the end of the third quarter.

[Simon Upfill-Brown:]

So you can imagine that what the impact of 2 million bucks of revenue were all the costs have been included in the period pretty much at least the freight has…

[Connie Cook:]

Yes, all the inventory cost has not been included because we pull it back in the inventory.

[Simon Upfill-Brown:]

Right.

[Connie Cook:]

But as long as – it is consistent, if its guided $5 million a quarter-over-quarter-over-quarter there would basically be no impact when it varies and goes up and down that’s when we feel it.

[Sarkis Sherbetchyan:]

Yes, so that’s actually the bulk of my questions started - you guys out there, but I know year-over-year, right I mean I think last Q4…

[Connie Cook:]

Last 12/31/2014 it was $6.8 million than at the end of 2015 it was $5.5 million, but does that doesn’t really – that was all accounted for all during the year when it really hits this quarter-to-quarter and at the end of the third quarter it was $3.4 million and it jumped to $5.5 million at the end of December.

[Sarkis Sherbetchyan:]

Understood. Thank you. I’ll hop back in the queue.

[Operator:]

Our next question comes from Bill Dezellem with Tieton Capital Management.

[William Dezellem:]

Thank you. Could you discuss what was behind the lane processing the tailings at the mine?

[Simon Upfill-Brown:]

Yes, the plan was initially to process them here in the second quarter, Bill. When the new consultants came in, these guys are going to provide technology and processing advice to us, came in, they said why are you doing that because that means we have to hire labor to get set up to do that processing and then send them away again at the end of the second quarter and then bring them back, all back we start-up the main mill. So it was just – it made a lot more sense to process the tailings just before the start-up of the main mill and then we have consistency with the labor. That was the primary decision that was made.

[William Dezellem:]

That is helpful. Thank you very much.

[Operator:]

Our next question comes from Colin Lee with Luzich Partners.

[Nick Toor:]

Hi, Connie and Simon. This is actually Nick Toor from Luzich Partners.

[Simon Upfill-Brown:]

Hi Nick.

[Nick Toor:]

Hi, how are you?

[Simon Upfill-Brown:]

Good.

[Nick Toor:]

Connie would you be able to give a little bit of granularity on the change in margin sequential quarter-over-quarter that is related to the deferral in revenues versus any other major factors?

[Connie Cook:]

We don’t have it broken out by reasoning. However, as Simon mentioned, part of it is the deferred revenue, part of it is the increase in the byproduct sales, and part of it is we had an increase in the fourth quarter to our Canadian oil sands customer which is a lower margin customer to start with. So there are several reasons there that it would change.

[Nick Toor:]

Right. I guess maybe another way you’ve mentioned that some of those items are seasonal versus one-time. Would you be able to outline what is seasonal versus one-time in terms of magnitude that impacted the quarter?

[Simon Upfill-Brown:]

Well, I mean how our Canadian oil sands customers in mine purchases product is something that we just – we’ve had a very, very difficult time predicting and knowing how that’s going to happen and in fact they purchased I mean a little bit short of 50% of their full-year demand in the – sort of bundled up in the fourth quarter. I mean a little bit a less than that, but it was a big bunch of it went into the fourth quarter and their prices are lower. I mean we gave you some indication on the variation in the value of the byproducts. I mean it looks out to be about $0.05 a share – at $0.05 a share. I’m sorry, thinking of shares. $0.05 a gallon that were roughly 7.2 million gallons in the quarter, so that’s almost 4,000 bucks lower. So all those things impacted.

[Nick Toor:]

Okay. And then would you be able to give some color on after you’ve done some more work on the mine in terms of any grade or any sort of resource estimate there?

[Simon Upfill-Brown:]

No, that's underway in terms of exploration. We’re spending some money over the next few months on Guyan, the mine, that’s the gold mine, the ancient mine area. In fact holes have been drilled there and I can't remember the total number of holes that need to be drilled, but those of course need to be evaluated and so on and so on. So we want to better understand the extent of the gold at Guyan. And then at this point we’re still at eight years of mine, life of mine at the copper and zinc side of this. There is a plan to do development drilling et cetera, et cetera to extend the life of mine and some of that money will be spent over the course of this year. So hopefully like this year or early next year we will have a much better picture of what life of mine looks like et cetera, et cetera.

[Nick Toor:]

Okay. I guess. I’m sorry go ahead.

[Simon Upfill-Brown:]

Go ahead.

[Nick Toor:]

So I was actually asking just on the gold side, if you guys had any more color on other than what you had outlined in your press release in the beginning?

[Simon Upfill-Brown:]

No, we don’t. We don’t unfortunately – we were still working on exactly how much tailing there is and how easily it can all be swept up and we don't think that's going to take too long to process, but there is a lot of excitement about the rest of the mine; we just have to finish the work. And as I said that’s in progress I think six or seven holes have been drilled. And I can’t remember what’s the total number of holes required is, but it’s of the order of 20 or 30 and then we will have a much better picture of what's there.

[Nick Toor:]

And at the timing on that you said is by the end of this year?

[Simon Upfill-Brown:]

Well I think that should be sooner, but I don’t want to comment too before the end of the year, but I’m hoping it’s going to be sooner than that.

[Nick Toor:]

Okay, great. Thank you.

[Operator:]

And our final question comes from Kurt Caramanidis with Carl M. Hennig, Inc.

[Kurt Caramanidis:]

Great year. I know we’re hung up on a lot of the details and things, but a lot of records by Connie reading the details of the year so congratulations on that. That's very good performance and the outlook looks very strong as well.

[Simon Upfill-Brown:]

Thanks Kurt.

[Kurt Caramanidis:]

I have some questions. That was in Q1 last year if I remember right on Trecora Chemical like a one-time I want to call them maintenance fee for customer is that repeatable in 2016 or is that one and done?

[Connie Cook:]

It will occur again in the first quarter of 2016.

[Kurt Caramanidis:]

Okay. But that would be sooner than – okay. And then feedstock as I am tracking it has dropped significantly from Q4 to Q1, is there anyway we can capture as we see the growth coming in the next couple of years, this type of pricing can you get anyway to lock some of this and I can't imagine that the feedstock has like unlimited downside if you know what I'm trying to ask here just seems historic, the price currently of feedstock?

[Simon Upfill-Brown:]

Yes, Kurt this is something we look at almost on a daily basis, the guys you know lot more about this tell us that their view is that there is still a little bit more downside on the feedstock price and then we should wait a little bit. The same thing applies to natural gas prices I mean they are extremely low at this point in time. So we do monitor that all the time. We had some rules we have to follow on hedging. We can't do everything.

[Connie Cook:]

40%.

[Simon Upfill-Brown:]

40% is the max we can do. And of course when you look at out months end of 2016 and early 2017 some increase was already priced in. So it's – but anyway we all monitoring that. I mean it’s very important to us to try and grab this opportunity if we can.

[Kurt Caramanidis:]

Yes, because your margin should be better this quarter than last quarter just based on that – that's a pretty significant drop in Q1 is it not?

[Simon Upfill-Brown:]

Yes, I mean January and February were very low I mean we’ve seen a bit of a jump over the last few days, but it’s still historically a very, very low.

[Kurt Caramanidis:]

Yes. Final question, a year from now the mine is up and running the new areas going, what are your thoughts around monetizing that asset because it just looks like Trecora Chemicals, South Hampton Resources is in like a golden age of outlook all of the things ahead of you in the mine is – fits and starts and fits and starts if that things gets to some level of sanity just monetizing that maybe you're from now what’s your thought around that?

[Simon Upfill-Brown:]

Yes, I mean as obviously another thing we think spend a lot of time thinking about the before we realize that we had to get rid of the operator and do some upgrades and things like that. We’re talking about an IPO at the end of this year obviously that’s not going to happen. It looks like that an IPO on the Saudi stock exchange is still the best way to go and that will likely happen end of 2017 or early 2018, Kurt. But you know if zinc prices really go up which - because I mentioned in my text we’re optimistic about you know somebody might jump out and want to acquire part of our ownership there or something like that. But right now location wise with the war going on with Yemen and with metal prices where there are it's not a great value proposition. We get the gold then, we get the SART running we get the mine running efficiently you know this could be a really great little asset and hopefully somebody will [buy it of us].

[Kurt Caramanidis:]

Okay great. Well certainly we’ve been following the company for decades and the future has never looked brighter so good luck and it looks like things are going to be pretty exciting here in the next 12 to 24 months?

[Simon Upfill-Brown:]

Yes. Thank you. Thanks Kurt.

[Operator:]

And we do have a follow up question from Colin Lee with Luzich Partners.

[Colin Lee:]

Hi, thanks for taking my question. Connie can you just breakout the international gallons and associated dollar amount with that?

[Connie Cook:]

Okay do you want it quarter or year?

[Colin Lee:]

The quarter.

[Connie Cook:]

Okay for the quarter foreign sales accounted for 7.9 million gallon and $20 million.

[Colin Lee:]

Great. And for Anellotech what’s the – it’s not really asking for guidance but what is the earning power associated with that project. What do you guys expect and how long do you expect that to go for?

[Simon Upfill-Brown:]

Well, I think it’s a five-year contract we’ve signed with automatic renewals, but the expectation is we have three existing projects and it will bring us revenue roughly the same as the average of those three projects, that’s a sort of indication we’ve given in the past Colin.

[Colin Lee:]

Okay.

[Simon Upfill-Brown:]

So it’s not huge, but it’s a nice little addition and it’s an opportunity for us to stay on top of what's happening, what's the new technology happening out there and make sure we then sort of get our eyes – keep our blinders on and not know what's going on in the renewable space. It’s a great opportunity for us to do that.

[Colin Lee:]

Gotcha. And then 11,000, that was the D-Train expansion you are up to 11,000, what is the – I guess the long-term business plan? How long do you guys expect to take to kind of ramp up that capacity of the new capacity you guys have?

[Simon Upfill-Brown:]

Well, it took us from 2008 to observe the C-Train capacity which was about 3,000 barrels a day. We don’t expect that it will take that long and there is a lot of this polyethylene capacity coming on stream. There is another big Canadian oil sands project coming on stream next year. We are working very hard on export sales. So we've been saying roughly the 2020 time frame, but obviously that depends on how many customers we can convinced by our product between now and then. And obviously we worked very hard at getting that done.

[Colin Lee:]

Thank you.

[Simon Upfill-Brown:]

Thanks, Colin. End of Q&A

[Operator:]

That concludes today’s question-and-answer session. At this time, I will turn the call back to Simon Upfill-Brown for closing remarks.

[Simon Upfill-Brown:]

Well, thank you all very much for being on the call. We very much appreciate you attendance. Thank you for the questions. And I hope to see some of you down in Southern California. And please if you have additional question don’t hesitate to get in touch. Thank you very much for your interest in Trecora Resources.