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Edited Transcript of TREC earnings conference call or presentation 6-Aug-19 2:00pm GMT

Q2 2019 Trecora Resources Earnings Call

SUGAR LAND Aug 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Trecora Resources earnings conference call or presentation Tuesday, August 6, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Patrick D. Quarles

Trecora Resources - President, CEO & Director

* S. Sami Ahmad

Trecora Resources - CFO & Treasurer

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Conference Call Participants

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* Aman Raj Gulani

B. Riley FBR, Inc., Research Division - Associate Analyst

* Joichi Sakai

Singular Research, LLC - Equity Research Analyst

* Jonathan E. Tanwanteng

CJS Securities, Inc. - MD

* Joseph Charles Catania

G. Research, LLC - Research Analyst

* Joseph George Reagor

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

* Kurt Caramanidis

Carl M. Hennig, Inc. - VP

* William J. Dezellem

Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer

* Jean Marie Young

The Piacente Group, Inc. - VP

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Trecora Resources Second Quarter 2019 Earnings Conference Call. (Operator Instructions) Today's conference is being recorded.

And at this time, I would like to turn the call over to Ms. Jean Young from The Piacente Group. Please go ahead, ma'am.

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Jean Marie Young, The Piacente Group, Inc. - VP [2]

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Thank you, operator, and good morning, everyone. Welcome to the Trecora Resources Second Quarter 2019 Earnings Conference Call. The earnings release was distributed over the wire services after the close of the financial markets yesterday afternoon.

Presenting on our call today will be Pat Quarles, President and Chief Executive Officer; as well as Sami Ahmad, Chief Financial Officer. Chris Groves, our Corporate Controller, will also be available for the question-and-answer session, which follows management's prepared remarks.

Before we get started, I would like to review the safe harbor statement. 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, 2019. 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 most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q.

During today's call, management will also discuss certain non-GAAP financial measures for comparison purposes only. For a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results, please see the earnings release issued after the close of the financial markets yesterday afternoon.

This webcast is accompanied by a slide presentation that is available on the company's website, www.trecora.com.

At this time, I'd like to turn the call over to Trecora's President and CEO, Pat Quarles.

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [3]

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Thank you, Jean, and good morning to all those participating in today's call. It's been a busy and productive first 2 quarters since joining. I've had the pleasure during this time to meet with many of you who are listening on this call, and I very much appreciate the high level of engagement and interest from all of you.

Our Q2 performance demonstrates our ability to increase earnings and achieved strong cash flow when we execute and operate well. As we strive towards positive and sustainable operational, financial performance, I'm pleased with the current results, specifically in our specialty petrochemicals business driven by solid operational reliability and cost control, the company was able to exceed Q1 '19 results despite approximately $4 million of headwinds in our P&L, attributable to higher feedstock costs. This resulted in consolidated adjusted EBITDA of $9.2 million, which compares to $8.4 million in Q1 of '19 and $6.2 million in Q2 of '18, a 49% increase year-over-year. This represents a Q2 adjusted EBITDA margin of 13.3% compared with 9.1% margin in Q2 of last year and 13% in the first quarter this year.

The key drivers to our Q2 improvements were the following. First, we continued our emphasis on establishing a culture of safety at the company, providing the foundation for every improvement we seek. While we did incur a low-severity injury during the quarter, I see the culture of the company continuing to develop positively.

Second, we ran our key assets reliably, delivering on productivity initiatives and executing on key projects according to plan. For example, the Advanced Reformer ran with very high reliability for the full quarter, allowing us to capture improved by-product values in the market. Our by-product pricing spread of raw materials was approximately $0.24 per gallon, a $0.05 per gallon improvement from the first quarter.

Finally, we fully offset the higher costs from annual market rail freight increases, which went into effect in April, by utilizing new on-site railcar storage and improving our logistics utilization.

Our improved operating results also translated into excellent cash generation during the quarter and allowed for meaningful debt reduction. In Q2, we paid down $5.1 million in debt with an additional $4 million being retired in July. This brings current outstanding debt to approximately $94 million compared to $102.5 million at the end of '18. We plan to spend from $10 million to $11 million on CapEx this year. We expect to further reduce our debt in the remainder of the year.

During our Q1 call in May, we touched on some near-term turnaround priorities that improve our financial performance. As noted then, we plan on continually revisiting these priorities in these forums, which provide shareholders a consistent way to track Trecora's development. I'm pleased to report Trecora's turnaround has already demonstrated early results in the first half of '19. Our 3 main turnaround priorities are: operating our assets safely and reliably; capturing productivity opportunities; and driving commercial excellence.

Safety, maintenance and reliability efforts are critically important to us. Under the leadership of Dick Townsend, our Executive Vice President and Chief Manufacturing Officer, Trecora has been implementing a standardized set of reliability work processes to boost performance to desired levels, targeting no unplanned outages, maximization of equipment availability and efficiently planned, scheduled and executed work. In addition, we have deployed Industry 4.0 technologies and tools for advanced analytics that will help with troubleshooting, analysis of data in real time, enabling faster decisions, business forecasting and identifying opportunities to improve. Overall, we are seeing progress in our ability to effectively detect and resolve issues proactively. And as a result, our operational dependability is steadily improving.

For full year '19, we expect our safety and reliability efforts to drive EBITDA improvement over 2018. We are ahead of schedule at the midway point in the year. With continued solid Advanced Reformer reliability as well as favorable market conditions, we expect at least $3 million to $4 million in improvement from reliability this year.

We saw supply chain cost savings benefits from prior and current quarter actions, including the subleasing of excess railcars, the utilization of new railcar storage capabilities at our Silsbee site and the revision and renegotiation of certain contracts. These cost-saving activities have allowed us to fully offset the higher costs of annual rail freight increases. We continue to see the benefits of the Q4 reorganization in our results, and we are working to capture additional savings across our system, much of which will be back-end loaded in the second half of this year.

We're generating $2.5 million of annual savings from the alignment of resources at our Silsbee facility to match our scope of operations. With those initiatives and others, we are on track through the first half to reach our goal of $3.5 million to $4.5 million of savings in 2019 from our productivity efforts.

The final focus of our turnaround is to drive commercial excellence through measuring and improving every aspect of our value proposition to customers. In Q2, we made excellent progress in reviewing and renegotiating commercial contracts with more favorable pricing, price escalators and supply terms that will cumulatively improve both margins and sales volumes over time. By measuring customer profitability at the ship to level and acting to reduce costs and improve our sales terms, we are on track to add $1 million to $2 million of EBITDA from our commercial actions this year. Based on the success of our turnaround initiatives in the first half of '19, Trecora is trending towards the high end of the expected adjusted EBITDA range laid out on Slide 6 of today's earnings presentation.

Let me now turn to AMAK. Q2 EBITDA for AMAK was $7.3 million, bringing first half 2019 AMAK EBITDA to $14.4 million. The resulting and transformation -- excuse me, the restructuring and transformation of AMAK's mining operations is progressing very well. AMAK continues to make progress in throughput rates, concentrate quality and recoveries. AMAK's mill feed rate was near its capacity of 720,000 tons per year in Q2. Approximately 31,000 dry metric tons of copper and zinc concentrate were shipped in the first half of 2019 compared to 27,000 tons of copper and zinc concentrate in the first half of '18.

On Slides 12 through 14 of our earnings presentation, we provide some additional insights into the operations and performance of AMAK. The mine is stabilizing with mill throughput near its 720,000 ton per year capacity as our concentrate qualities. There are no significant mill expansions planned. This is the basis for the 9-year mine life calculated against the 57,000 tons of proven and probable copper reserves. An additional 98,000 tons of measured or indicated are planned to be further established to facilitate extending the mine life. AMAK has purchased and manned an additional drill to begin that process.

In addition, the Guyan gold project is proceeding on schedule and on budget for a second half 2020 start-up. The AMAK Board approved this project earlier this year based on internal rate of return of 25% with total CapEx of $36 million. Once complete, the project should significantly add to AMAK's earnings and cash flow. Our process to monetize our ownership at AMAK continues to advance. We have launched the marketing process for our shares and have received encouraging engagement regarding our shares and look forward to providing further updates.

In summary, Q2 and the first half of 2019 have shown solid improvements. As outlined in Slide 15 of our earnings presentation, Trecora is focused on value creation through operational improvement, increased cash flow and debt reduction. We have seen success in these areas in the first half of '19. Our Q2 EBITDA was nearly 50% greater than last year's second quarter. Our cash flow from operations improved to $5 million in Q2 compared to $800,000 in Q1. We have reduced our debt by $8.5 million since beginning of the year, currently standing at $94 million. The monetization of AMAK -- of our AMAK interest can provide additional debt reduction.

We have much more to accomplish, the operational reliability of Trecora Chemical remains unacceptable, and we need to improve our logistics costs and efficiency. Our safety and reliability program is demonstrating improved performance, our culture of productivity is reducing costs and our commercial contracts are being improved. With these accomplishments in the first half of '19, we're now trending towards the high end of our expected adjusted EBITDA range.

Now I'll turn the call over to Sami Ahmad, our Chief Financial Officer, for a more detailed discussion of our Q2 and first half results.

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S. Sami Ahmad, Trecora Resources - CFO & Treasurer [4]

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Thanks, Pat, and good morning to everyone. Let me begin with a review of our consolidated Q2 and first half 2019 Trecora Resource performance. This is before I go on to the individual business segments. Total revenue in the second quarter 2019 was $69.4 million compared with $68.1 million in the same quarter last year, an increase of approximately 2%. This brings total revenue for the first half of 2019 to approximately $135 million.

Net income in the second quarter 2019 was $2.4 million or $0.10 per diluted share compared with net income of $2.2 million or $0.09 per diluted share in second quarter 2018. Net income for the second quarter includes the impact of equity and losses from AMAK of $0.1 million. Adjusted net income, which excludes the after-tax impact of AMAK for the second quarter 2019, was $2.5 million or $0.10 per share compared with adjusted net income of $0.08 per share in the second quarter 2018.

Looking at the first half of this year, net income was $4.2 million or $0.17 per diluted share compared with net income of $4.6 million or $0.18 per diluted share for the same period 2018. It is important to note, the net income for the first half of 2019 includes the impact of equity and losses from AMAK of $0.2 million compared to equity in earnings from AMAK of $0.5 million for the same period a year ago. Adjusted net income for the first half of 2019 was $4.3 million or $0.17 per share compared with adjusted net income of $4.2 million or $0.17 per share for the same period of 2018.

Gross profit in the second quarter was $10.6 million, representing a margin of 15.2% of total revenues. This compares with $8.1 million or 12% of total revenues in the second quarter of 2018. Gross profit for the first half of 2019 was $20.6 million, representing 15.3% margin as a percent of total revenues compared with $18.3 million or 13.1% of total revenues in the same period in 2018.

Consolidated adjusted EBITDA for the second quarter was $9.2 million, which represents a 13.3% margin, and that compares with adjusted EBITDA of $6.2 million or 9.1% margin in the same period a year ago. Adjusted EBITDA for the first quarter 2019, as you recall, was $8.4 million. Adjusted EBITDA for the first half of 2019 was $17.7 million compared with $13.4 million in the same period a year ago. Adjusted EBITDA margin improved to 13.1% in the first half of 2019 compared to 9.6% in the first half last year.

Compared to the first quarter 2019 consolidated adjusted EBITDA improved due to better performance in our specialty waxes business and increased margin above feedstock for our byproducts. This was partially offset by higher natural gasoline feedstock costs, which impacted prime product margins. On a 2019 year-to-date basis, consolidated adjusted EBITDA increased by approximately $4.3 million compared to 2018 or about 32%. This increase was driven by a 4.4% increase in prime product sales volumes as well as an increase in both prime product and by-product margins. Prime product margins increased mainly due to lower feedstock cost, while by-product margins benefited from nearly a full 6 months of reliable operation of the Advanced Reformer unit. This was partially offset by a nearly $1.4 million decline in EBITDA for the specialty waxes business, which was driven by lower PE wax sales volumes, lower custom processing revenues, and we also had approximately $1 million in maintenance expenses for 2 unit turnarounds at the Silsbee facility. We do not expect any additional plant turnarounds for the rest of 2019.

Additionally, G&A expenses were lower in 2018 due to a onetime benefit of approximately $1.5 million from the cancellation and reversal of stock comp and other post-retirement benefits for Mr. Hatim Al-Khaldi, our prior CEO.

Cash flow from operations for the first 6 months of 2019 was approximately $5.8 million as compared to $9.8 million in the first 6 months of 2018. Operating cash flow was impacted by payments in the first quarter for the Advanced Reformer catalysts, additional wax feed and severance. Recall that this was discussed in the first quarter earnings conference call.

Interest expense for the first 6 months of 2019 was $2.9 million compared to $1.7 million for 2018. The increase in interest expense was due to higher interest rates in 2019 and capitalized interest of $0.7 million in 2018 related to the Advanced Reformer project.

CapEx for the first half of 2019 was $3.7 million. As Pat mentioned, we expect CapEx for the full year to be approximately $10 million to $11 million as our spending pattern is back-end heavy. Our revolver balance was $16 million as of June 30 with availability of $42 million. Revolver debt, as Pat noted, was further reduced by $4 million in July.

Our Q2 2019 and first half 2019 effective tax rates were approximately 21%, which we expect to continue for the rest of the year.

Now let me walk you through our business segments, starting with specialty petrochemicals. Q2 2019 adjusted EBITDA for our specialty petrochemicals segment was $9.9 million compared with $6.1 million in Q2 2018. Adjusted EBITDA margin increased to 16.4% from 10.6% in Q2 2018. First half 2019 adjusted EBITDA for our specialty petrochemicals segment was $21.3 million compared with $14.5 million in the first half of last year. Adjusted EBITDA margin increased to 18.2% from 12.1% in the first half of last year.

Prime product sales for the second quarter '19 was 17.7 million gallons compared to 17.6 million gallons for the first quarter of 2019 and 16.1 million gallons for Q2 2018. Compared to the first quarter, we saw a decline in sales to the Canadian oil sands, which was as expected, and this was offset by good demand from polyethylene and polyurethane markets. For the remainder of 2019, we believe that sales to the Canadian Oil Sands will continue to see headwinds from the uncertainty surrounding government-mandated crude production curtailments as well as the overall crude oil pricing environment.

The decline in by-product sales volumes from the first quarter 2019 was due to a change in the feed mix to the Advanced Reformer unit, which is the unit that produces byproducts. This change in the feed mix was done to maximize prime product production by producing more hexane as prime products versus utilizing it for Advanced Reformer feed.

Prime product margins in the second quarter 2019 were unfavorably impacted compared to the first quarter by the sharp decline in feedstock cost during the quarter. Recall that in Q1, margins benefited by approximately $1.5 million from the timing effect of rising feedstock costs. This is because our cost of inventory, which is on a FIFO basis, lags the current feedstock pricing by as much as 50 days.

As you can see from Slide 9 in our earnings presentation, benchmark natural gasoline pricing declined from a peak of $1.30 per gallon in April to $1.05 per gallon in June. This resulted in approximately $1.5 million negative impact to margins. In July, benchmark natural gasoline prices were relatively flat at approximately $1.10 per gallon.

On the operating cost side, Q2, as I mentioned, was impacted by $1 million in turnaround expenses at the Silsbee facility.

Moving on to specialty waxes. The specialty waxes segment, which is based at our Trecora TC facility in Pasadena, had second quarter adjusted EBITDA of $0.7 million compared with a negative $0.9 million in the first quarter of '19 or a swing of $1.6 million. Wax sales volumes increased 10 million pounds or nearly 27% from Q1 sales volume of 7.9 million pounds. Recall that in Q1, wax production was impacted by a plant turnaround at the Pasadena facility. Wax sales in Q2 continue to be negatively impacted by disruption of wax feed supply from suppliers and a slower-than-expected rate of customer qualifications of new blended wax products. Our wax feed is based on certain byproducts produced as a result of polyethylene production at major polyethylene producers facility on the Gulf Coast. Average wax price declined compared to the first quarter due to a less favorable product mix.

Custom processing revenues at TC were $2.5 million in the second quarter compared to $2.3 million in the first quarter. TC had minimal revenues from the hydrogenation distillation unit as the unit was down for most of the quarter due to mechanical issues.

Now moving on to AMAK. AMAK had a net loss of $1.3 million for the second quarter compared with a net loss of $0.3 million in second quarter 2018. AMAK's EBITDA was $7.3 million in second quarter '19 compared to $8.3 million in second quarter '18. For the first half of 2019, AMAK had EBITDA of $14.4 million compared to $16.1 million in the first half of 2018. This year-over-year decline in EBITDA was primarily due to the change in inventory valuation methodology and other onetime nonrecurring expenses. Adjusted for these factors, year-to-date 2019 EBITDA would have been approximately $19.5 million.

Trecora reported equity and losses of approximately $0.1 million in the second quarter '19 compared to equity and earnings of approximately $0.2 million in 2018.

This concludes our prepared remarks. At this time, I'd like to ask the operator to open the call up for questions and answers.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question comes from the line of Jon Tanwanteng with JCS Securities (sic) [CJS Securities].

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [2]

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Congratulation on a nice quarter. So you had a pretty good sustaining of your gross profits from Q1 to Q2, even with the input price headwinds you talked about. Can you give us a price between the gross profits there? What was the slight improvement? What was pricing of your inputs? What was the general productivity and reliability and other stuff that you had in there?

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [3]

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Sorry, Jon. You're breaking up just a little bit. I think what you're asking for is, what were the principal drivers of gross profit improvement, Q2 into Q1 -- Q2 from Q1. Is that right?

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [4]

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Yes, especially with the maintenance downs and then -- and the input price headwinds you saw.

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [5]

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Yes. So a variety of things. We spoke to some of the productivity improvements we made. So cost structure helped a bit. We had, what I'd characterize a little bit as, some onetime benefits in the quarter. We had some improvement on the mix of our product sales in the solvents business in the second quarter of some very high-value product that helped contribute. We had some -- I talked before about the volatility of demand, ratability of demand in the oil sands. We had some benefit -- positive benefits of some of that volatility in the second quarter as well, which helped offset some of those headwinds.

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S. Sami Ahmad, Trecora Resources - CFO & Treasurer [6]

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And I would add to that, Jon, that you saw that TC, the specialty waxes business, also improved quarter-on-quarter. In the first quarter, specialty waxes had a EBITDA -- negative EBITDA of nearly $900,000 and that flipped and -- for a net benefit of close to $1.5 million quarter-to-quarter.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [7]

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Okay. Great. Can you breakout how much freight saved you?

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [8]

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So we essentially offset the increase in freight that is annually implemented through the railroads, and we drove a little bit better utilization of our rail fleet. So it's kind of more of an offset to headwinds.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [9]

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Okay. Got it. Which of these trends do you expect to be sustainable into Q3 and beyond? Where do you see pricing going up, both in input and your selling price side?

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [10]

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Well, of course, natural gasoline is a function of crude oil, and we haven't solved the puzzle yet on good crude forecasting. But from a market perspective, I would say, I don't see a lot of price increase activity going on today. We did successfully increase a portion of our solvent portfolio due to kind of our unique supply-demand situation. It wasn't a big driver of our financials during Q2, and it will contribute -- it will further contribute in Q3. But I would expect that -- the margin outlook is really pretty stable, but for the kind of the normal changes that we see as natural gasoline prices change. On the wax side, again, relatively stable. I think if we can stabilize better our supply side to our customers we'll be back being able to discuss additional value capture. But frankly, right now, we've got to improve the operability at TC before we can start having those conversations.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [11]

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Okay. Fair enough. And then can you talk about your customer demand trends? And if you're seeing or expecting any impact from global uncertainty and then tariff situations and all of the follow-up that can work its way up to the supply chains?

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [12]

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Sure. So I think you must be familiar, right, our different mix of end uses and how that contributes value-wise. The most valuable piece is our polyethylene end use. We saw very solid growth first half this year versus first half last year, nearly 10%, not quite there, yes, and that's really due to a couple factors. One, generally, polyethylene continues to grow globally. So those producers in the U.S. benefit from that. And of course, we saw a few start-ups of new units over the past year that contribute to our demand as well. So that growth remains steady, I would say, and we have a good degree of confidence in it.

As I've said before, we're selling to some of the lowest cost producers in the world, by virtue of the hydrocarbon situation in U.S., so we feel good about that. I think when you look in -- somewhat similar, our polyurethane end use, they're benefiting from a push to higher energy efficiencies. So things like spray foams and these polyisocyanurates, I think, are growing better than GDP, and we saw the benefit of that over the last year. Again, something -- it's less than 10%, but good solid growth. The flip side is, like in the EPS market has been going on for years that continue to struggle with substitution, environmental pressure there and packaging. So that end use is down for us. Synthetic rubber was down for similar reasons and maybe in their relationship to automotive.

And then lastly, what we always love to talk about is oil sands. And it's just volatile. Our -- actually, our volumes, first half to first half were up considerably, but I can tell you, if you -- we would expect by the end of the year that they won't be up considerably because we had extraordinarily high demand in the last half of last year. So just really, they have the ability to swing us a lot. We had a great start to the year. I think we'll be relatively steady for the rest of the year.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [13]

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Okay. Great. And then Sami, how much more debt do you expect to pay down by year-end? And how much stock are you are putting into monetization of AMAK before year-end?

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S. Sami Ahmad, Trecora Resources - CFO & Treasurer [14]

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So obviously, I can't talk about specific amounts of debt that we'll pay down. We don't know. I mean it'll depend on operating cash flow. As you saw, operating cash flow was strong in the second quarter. Our priority for use of cash, as you know, and we've been very clear about that, is to delever the balance sheet. And that applies to AMAK proceeds as well. Pat can talk about more on timing of the process and so on, but that's how we're thinking about debt reduction.

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [15]

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Yes. I guess just to comment on AMAK. I mean as I said, we've launched the marketing process. We've got some encouraging engagement from the market on that process, and it just needs to run its course. And we will keep everyone informed to the extent there's news there.

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Operator [16]

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And our next question comes from the line of Sarkis Sherbetchyan with B. Riley FBR.

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Aman Raj Gulani, B. Riley FBR, Inc., Research Division - Associate Analyst [17]

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This is actually Aman, I'm jumping in for Sarkis. So I guess my first question is, can you talk about some of the puts and takes going forward, given your 15% gross margin? Do you think that's sustainable throughout this year and next?

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [18]

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Well, there's always puts and takes, right? So I think you heard Sami talk a little bit about in the second quarter, we had the benefit -- or, excuse me, the detriment of FIFO impacts. So we have the absence of that, which will probably help us going into the third quarter. We had a turnaround work in the first quarter -- excuse me, in the second quarter, so we'll have the absence of that. But it's more than likely, those things are going to be at least fully offset, if not more by some prime product volumes that are -- we would expect to come down. I mentioned a second ago, we have some benefits in the second quarter of some sales that probably aren't going to repeat in the short term. So that will all come out Q3 and discount some other puts and takes in the mix, probably net-net negative.

So our best call right now, honestly, is probably kind of flattish heading into Q3, based on everything that we know today, subject to change, of course. We talked earlier about some of the back-end loaded activities and benefits that we have. We're still working hard to ensure that we can deliver those. I don't think that's going to be kind of a third quarter event, but we'd like to see some benefit by the fourth quarter.

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Aman Raj Gulani, B. Riley FBR, Inc., Research Division - Associate Analyst [19]

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Got it. Okay. And then one more question for me. What type of opportunities are you seeing in the pipeline for custom chemical processing, so you can utilize some of your new capacity?

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [20]

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Yes. That's a great question. And frankly, it's one I candidly continue to be a bit frustrated by -- we see good opportunities in the market. We said that consistently that we're giving in our own way on custom processing. So at this point, our focus every day is to improve the operability at TC, so that we can start making commitments to customers that we have out there and start building up that business, and we've got more to do.

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Operator [21]

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And our next question comes from the line of Joseph Reagor with Roth Capital Partners.

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Joseph George Reagor, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [22]

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Congrats on a strong quarter. So I guess maybe following a little bit on one of the earlier questions. Maybe asked in a different way. What were some of the surprises that you guys had in the second quarter that led to the strong operating results, given, I think, the expectation coming out of the Q1 call was that Q2 would be similar, if not worse than Q1 instead of better than? So what happened that was positive that was unexpected?

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [23]

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Yes. I wouldn't say it was unexpected, it was more -- the word I would choose is uncertain. So I talked about some of the onetime sales, both one, from a kind of a high-value sale, other was a higher volume sale. We certainly were aware of them, but we didn't have them in the bank. So we didn't want to guide that we'd expect absolutely for that to happen. So very pleased to see that come in. Again, as I said, at the end of the first quarter, one quarter didn't make a trend on our reliability, but I was very pleased to see really particularly in specialty petrochemicals, we had -- we continued to have great reliability in the second quarter. So I think we certainly exceeded trend and probably fair to say, met our expectations. So it's very good to see that, and we did it while staying very safe there in South Hampton.

Other than that, we saw the typical seasonality we would expect. So the construction demand did go up as we would want to see it and that came through, so that benefited the polyisocyanurate in use.

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Joseph George Reagor, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [24]

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Okay. Fair enough. Moving over to TC, and it looked like pricing for waxes fell quite a bit in the quarter. Was that just mix?

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [25]

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So it's actually a good story, surprisingly. What we're able to do is further upgrade some -- what were previously waste streams into some more value-added products. And those value-added products are low value, but they're certainly better value than the waste stream. So you're seeing that play into that price calculation now. So -- but it was positive contribution. So that was actually a good thing.

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Joseph George Reagor, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [26]

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Okay. And should we expect that to continue then?

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [27]

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Yes.

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S. Sami Ahmad, Trecora Resources - CFO & Treasurer [28]

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Yes. You should expect that to continue. And also, you should expect that the basic strategy in wax of targeting our higher margin end markets like HMA and PVC and those markets, that strategy will continue as well. We are supply constrained, as we talked about, and so we want to maximize results out of the business.

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Joseph George Reagor, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [29]

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Okay. And then one final one. I think, Sami, you mentioned the hydrogenation unit had some mechanical issues. Any additional color you guys can provide there? And what to expect going forward?

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [30]

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Yes. Joe, so I think you can probably detect a little bit of frustration in my voice around some of that. So we're building a foundation at TC, and I alluded to the work that Dick has started there. And it really requires getting down to very basics in terms of common work processes, bringing process, analytical monitoring and active control of our future. And that's a process we have to bring the organization's capabilities along. And as we ramped up in the second quarter, and to be clear, the second quarter activity was primarily focused on facilitating the development of these new higher value waxes that we talk about. So on the one hand, we made progress and that we produced those waxes and they're being evaluated by our customers for qualifications in the coming months, but it still didn't run reliably. And that, if anything, probably impacted our custom processing capabilities.

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Operator [31]

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And our next question comes from the line of Joseph Catania with G. Research.

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Joseph Charles Catania, G. Research, LLC - Research Analyst [32]

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Nice quarter. Just following on the last question. In terms of facilitating the higher value waxes, and you're still somewhat constrained by feedstocks. I know you've talked before about having additional feedstock suppliers, admittedly you had a higher cost, but can you speak to what's going on there in terms of that?

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [33]

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Yes. And that's exactly what I was just talking about, Joe. So from these higher cost feeds, we bring in, we process them through hydrogenation and then they provide a new -- additional feedstock for us to support our growth. So we did get those products produced in the second quarter, we do have customer evaluations now underway. And that should provide the foundation for our growth going forward. But those same unit, that same unit is also available for custom processing. And its reliability today just isn't getting the level necessary to really build that customer processing business.

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Joseph Charles Catania, G. Research, LLC - Research Analyst [34]

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Okay. Moving on, based on your EBITDA bridge and your progress to date, you are trending higher, and you said as much, but implies that the second half should be substantially weaker than the first half on an EBITDA basis. I know you've talked a little bit about some onetimers in Q2 and some in Q1 as well. But can you point to specific reasons as to why it's taking such a dip and maybe parse out the cadence between Q3 and Q4?

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [35]

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Yes. We didn't mean to leave anybody with the impression it was substantially worse. So I think the way I characterized third quarter is, it looks a lot like second quarter, ultimately with some puts and takes. So our best views is this going to be plus or minus 1 or 2 coming at this point, depending on how feedstocks go and just the normal cadence of business.

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S. Sami Ahmad, Trecora Resources - CFO & Treasurer [36]

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Right. Yes. No, I just add to -- just to add to that is that we said that in terms of -- for the full year, we're trending towards the higher end of the expected EBITDA range. So that wouldn't imply a significantly weaker second half.

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Joseph Charles Catania, G. Research, LLC - Research Analyst [37]

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I figured -- sorry, I figured that it would maybe imply guiding up based on doing well for the first few months of the year.

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [38]

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And I think if you look at our bars, and you take the high end of those ranges, you'll find us pretty consistent with the track we're on.

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S. Sami Ahmad, Trecora Resources - CFO & Treasurer [39]

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Yes, yes.

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Joseph Charles Catania, G. Research, LLC - Research Analyst [40]

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Okay. In terms of AMAK, are you waiting until the mine life can be increased through this drilling activity before selling the business to try to better terms? Or is it just -- if you get an offer that you like, you're going to take it, timing would be down?

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S. Sami Ahmad, Trecora Resources - CFO & Treasurer [41]

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So we're in the middle of the process, right? We've produced our [SIM]. We've had a few parties engage. This -- we're encouraged by their level of engagement. It's based on the current situation of the mine and the disclosure under confidentiality of the details of where the mine is and where they think they're going, of course, in that process, you can provide projections that we wouldn't do in this setting. But that's the basis by which we're engaging people on a potential transaction, and we'll see where it goes.

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Operator [42]

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And our next question comes from the line of Bill Dezellem with Tieton Capital.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [43]

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First of all, I would like to talk about the $4 million of feedstock headwind. Is that just simply the normal timing lag that takes place? Or was there something more in there that contributed to that $4 million?

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S. Sami Ahmad, Trecora Resources - CFO & Treasurer [44]

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No. There was nothing unusual. The best pictorial build to kind of describe that is the natural gasoline price chart on -- it's in the slide deck, and it's Slide 9. Basically, we're on a FIFO basis, as you know, and the lag is about 50 days. So in the first quarter, you saw, we got a benefit when feedstock prices were rising, and that was -- we had said roughly $1.5 million plus or minus. And in the second quarter, as you can see, it went sharply the other way, and so the benefit be flipped to a negative. So that's the $4 million we were referring to in terms of headwind. So there's nothing unusual, it's just volatility.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [45]

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And so the one thing that does -- or appears to be a bit unusual is the magnitude. I mean as we can see from that chart or graph, it's unusual to have that big of a drop in such a short time period. So the $4 million is a bit large. The $1 million to $2 million that you had into Q1 happened to be a benefit. But would that be a more normal thought there?

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [46]

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Yes. So it's the same. So it's just the other side of it. So we talked about the $4 million. We're talking about the quarter-on-quarter. So it's the absence of the benefit, plus the negative of the negative, right? That's why it's $4 million.

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S. Sami Ahmad, Trecora Resources - CFO & Treasurer [47]

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But I agree with you that in these 2 quarters, the steepness and sharpness of that increase and drop relative to prior periods is unusual and the steeper it is, the bigger that impact is going to be, right?

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [48]

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Right.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [49]

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Right. Then shifting to your by-product pricing. It was up from the first quarter, and I guess we're trying to figure out, is that simply a function of the market pricing? Or was there something on a management execution or good work by employees that led to that?

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [50]

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Well, we always think they do good work. So again, I do want to recognize the site because the safety and reliability have been fantastic at South Hampton, particularly. But to answer your question, really, that is a function of the market. We convert these byproducts into this stream that's heavy on aromatics, and we get the value of benzene and toluene. And those markets were at historical low levels at the beginning of the year. So if anything, we're reverting back to a more normal environment for pricing, which is encouraging, I think, for -- in terms of our outlook on financials. So it's really just following the market.

And maybe one thing, which you haven't asked, but people, as you get into the numbers, you may recognize, you'll see our volumes were lower in the second quarter versus the first quarter. I mentioned earlier, the kind of this onetime sale of some higher value product. And when we sell that product, it does reduce our by-product stream to their Advanced Reformer. So that really is why the volumes are lower. It is the right thing to do financially, but you'll just see volumes come down second quarter versus first for byproducts.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [51]

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Great. Thanks for that heads up. I had not linked the 2. And then in the release, you did make reference to disruptions of your wax feed supply. Would you talk in a bit more depth about that, please?

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [52]

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Sure. Well, as a -- our advantage in this market is we're effectively sourcing low-value byproducts out of these Gulf Coast polyethylene units, that's the advantage. The disadvantage is that they're not running for our benefit, right? They're running for their customers. And when they have reliability issues, it impacts us directly, and that's what's happened in this case. So there are some liability issues at the suppliers and that flows right into our supply.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [53]

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And then finally, about the hydrogenation unit. Would you like to discuss that downtime and what needs to be done to improve it?

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [54]

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Sure. The short answer is, no, I don't, but I will. So it's frustrating. It's -- what I've said before, we brought in a capability at that site and a complexity that I don't think they've dealt with before. So we've had to elevate the capabilities of the organization and some of the tools to be applied to run that reliably. And that's the ramp that we're on to bring along the organization to be able to do that. And we're wanting to be extraordinarily careful with it, given these are high-pressure processes with hydrocarbons. So you want to treat them with a lot of respect. So we're not rushing it. We're trying to do it the right way. We're building out capabilities around it, and as those capabilities come, we'll be booking business against it.

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Operator [55]

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And our next question comes from the line of Chris Sakai with Singular Research.

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Joichi Sakai, Singular Research, LLC - Equity Research Analyst [56]

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Can you talk about -- I guess it looks like you had a reduction in CapEx in petrochemicals and wax? Just wanted to hear, was that just a comparable? Or what was going on there?

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S. Sami Ahmad, Trecora Resources - CFO & Treasurer [57]

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Well, I mean basically, in the first half that was -- we're done with all the capital projects, as you know, that was finished up last year. So this year, the $10 million to $11 million that we spoke of is really just a normal run rate CapEx for maintenance, environmental health, safety, plant caretaking, those kinds of spending. So that's the normal spending. This year, the CapEx just happens to be more back end of the year, heavy. And so that's why it's low in the first part of the year, but we expect it to ramp-up in the third and fourth quarters, so we expect to hit to the -- hit the $10 million to $11 million full year number.

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Joichi Sakai, Singular Research, LLC - Equity Research Analyst [58]

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Okay. And then going to AMAK, if you guys are expecting increased profitability in the second half of next year, why would you look to sell the business?

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [59]

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So we didn't say it's second half of next year, just for clarification. We -- I think the message we're trying to send is that their operations continue to improve, and we're seeing the benefit of that quarter-on-quarter, and it's probably reaching a point to where they're reaching more of a steady state. So -- I'm sorry, and then the gold mine actually does start contributing second half next year. The short answer for why we're interested in selling it is, we're a specialty petrochemical and wax company that really needs to be our focus in our portfolio. The AMAK mine is not an activity that we think is core for us going forward, and if we can go through this process, get a reasonable value and continue our ambition to dramatically improve our balance sheet that's what we're going to do.

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Operator [60]

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And our next question comes from the line of Kurt Caramanidis from Carl M. Hennig, Inc.

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Kurt Caramanidis, Carl M. Hennig, Inc. - VP [61]

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To the extent that your mine proceeds exceed your debt, has there been any conversation of returning anything to shareholders, buyback, special dividend?

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [62]

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So there was a share repurchase that the mine executed at the end of last year and went into the first quarter a bit. And so we saw the cash benefit of that in the fourth quarter and a little bit in the first quarter. But on a going-forward basis, with the approval of the gold mine investment, we're expecting over the next year that their free cash flow will be applied towards that capital improvement. So we're not expecting in the near term any other cash being made available to shareholders.

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S. Sami Ahmad, Trecora Resources - CFO & Treasurer [63]

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Yes. In terms of the use of proceeds...

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Kurt Caramanidis, Carl M. Hennig, Inc. - VP [64]

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Yes. That was my question.

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S. Sami Ahmad, Trecora Resources - CFO & Treasurer [65]

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Yes. On that, Kurt. I mean our first priority is debt reduction. We would like to get down to around 2x leverage. We're still -- even with the progress we've made, we're still above that. And that will happen both as EBITDA grows and as debt goes down. And then beyond that, in terms of using it for shareholder-friendly purposes, that's an option. It's really up to the Board to decide, but that's a viable option as well.

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Operator [66]

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And I'm showing no further questions at this time, and I would like to turn the conference back over to Mr. Pat Quarles for any further remarks.

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [67]

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Thank you. Yes. Thanks for joining today's call, everyone. We greatly appreciate your interest as we strive to improve operational, financial performance. I want to thank the management team and all of our employees for their continued efforts, which has been the key to our improved results. Our goal is to continue improving our execution, reduce our debt and form the foundation for future growth, and we look forward to providing further updates.

As a reminder, Sami will be participating at the Jefferies 2019 Global Industrials Conference in New York on August 8th and the Midwest IDEAS Investor Conference in Chicago on August 28. And I'll at the Seaport Global Chemicals Conference in Boston on September 17th, and we look forward to seeing you soon. Thank you.

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S. Sami Ahmad, Trecora Resources - CFO & Treasurer [68]

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Thank you.

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Operator [69]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.