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Edited Transcript of TREC earnings conference call or presentation 10-Mar-20 2:00pm GMT

Q4 2019 Trecora Resources Earnings Call

SUGAR LAND Apr 9, 2020 (Thomson StreetEvents) -- Edited Transcript of Trecora Resources earnings conference call or presentation Tuesday, March 10, 2020 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

* Jason Finkelstein

The Piacente Group, Inc. - IR Executive

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Conference Call Participants

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* Jonathan E. Tanwanteng

CJS Securities, Inc. - MD

* Joseph George Reagor

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

* Kurt Caramanidis

Carl M. Hennig, Inc. - VP

* Mitchell Lester Sacks

Grand Slam Asset Management, LLC - CEO

* Sarkis Sherbetchyan

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

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Presentation

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Operator [1]

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Good day, and welcome to Trecora Resources' Fourth Quarter and Full Year 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 Jason Finkelstein from The Piacente Group, Inc. Please go ahead, Jason.

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Jason Finkelstein, The Piacente Group, Inc. - IR Executive [2]

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Thank you, operator, and good morning, everyone. Welcome to the Trecora Resources Fourth Quarter and Full Year 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; in addition to 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, March 10, 2020. 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 financial markets yesterday afternoon. This webcast is accompanied by a slide presentation, 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, Jason, and good morning to all those participating in today's call. My remarks today will center around what we have come to do best over the past year, execute with discipline and focus. With that simple but vital framework in mind today, I will first review our key operational and financial outcomes achieved over this past year based on management commitments made in early 2019. I'll also discuss how our results are developing in the first quarter and introduce our expectations for growth both in 2020 and into the future. Our growth will be driven by the same disciplined focus on execution and accountability that drove our performance in 2019. But before I do, I'd like to provide an update on the sale of our stake in AMAK and address our planning for any impacts we anticipate from COVID-19.

As background for new investors on the call today, Trecora entered into an amendment to the previously announced share sale and purchase agreement with Al Masane Al Kobra Mining Co., or AMAK, and certain of AMAK's other existing shareholders, whereby Trecora will sell its entire 33% equity interest in AMAK, a noncore asset. Per the amendment, the date of the closing of the transaction was extended to March 31, 2020, allowing additional time to obtain approval from the newly established Ministry of Industry and Mineral Resources in Saudi Arabia and other government authorities. We have now received approval from the ministry for the completion of the sale of this noncore asset, a critical milestone. We are working on finalizing the remaining issues to closing. We delivered a notice to the buyers scheduling closing and believe the closing of the sale process is possible by the end of the quarter.

Now let me turn to COVID-19. First, we want to acknowledge the tragedies this virus has caused individuals and families now broadly around the world. It is still spreading and the full impact to people and economy are not fully known. As of today, the only direct business impact we have seen is in solvent demand into Southeast Asia, which is a very small part of our business. However, we do anticipate that the further spread of the virus could impact our North American markets, and we are already preparing for that potential. At Trecora Resources, our #1 priority is the safety of our people, the communities in which we operate and the integrity of our assets.

Building off of our hurricane preparedness plans, we have augmented our contingency plans and drilled at both sites on how to preserve our ability to safely maintain our operations and protect our people. We have also put plans in place, which allow our people, in particular those involved or associated with the supply chain to work from home, if necessary, and have plans in place to further protect our operating staff, if needed. Friday, we instituted a flight travel ban for the organization and canceled our participation in a number of events, including the G.research conference later this week, the ROTH conference next week and AFPM, a petrochemical conference at the end of this month. We will continue to take prudent steps consistent with recommendations from the CDC and World Health Organization as well as local authorities as this situation develops.

Now let me turn back to the successes of 2019 and how that positions us for the future. At the beginning of 2019, we set our priorities and launched a disciplined process for driving shareholder value. Our focus was on improving our safety performance, enhancing the reliability of our operations, capturing productivity improvements and driving commercial excellence. It's important to briefly highlight some examples of our accomplishments here.

We experienced one minor injury across our company last year. This compares to 5 injuries in 2018. This 80% improvement in safety is the foundation for delivering on our priorities across the company, it is -- as it is the leading indicator of our ability to control our execution. Our Advanced Reformer ran with high reliability allowing for the capture of improved by-product values in the market. We realized the savings from the reorganization in our Silsbee plant at the end of 2018 and captured further savings related to rail storage and railcar fleet reduction. These actions more than offset the cost of inflation and significantly contributed to gross margin improvements. We also advanced commercially by renegotiating contracts with more favorable pricing, raised price escalators and improved supply terms. We also restructured our compensation program to directly align to our profit improvement priorities.

We believed at the beginning of 2019 that with relentless focus and clear accountability success along these priorities would dramatically improve our earnings, enhance our free cash flow and allow for meaningful debt reduction. I'm pleased to say that we have delivered. Full year 2019 consolidated adjusted EBITDA from continuing operations reached the high end of our indicated range, coming in at $31 million, a 50% increase over 2018. These improved year-over-year profit results translated into free cash flow growth of 100% when you exclude the benefit of the tax refund we received in 2018. By year-end, we paid down approximately $19.2 million in debt.

Results at Trecora Chemical were clearly a disappointment in 2019. This led to the write-down of goodwill associated with that business. However, I'm pleased to report that we are now seeing performance improvement at TC. You will remember on this call last year, I reported that our Advanced Reformer in Silsbee had restarted the first week of January and had run reliably for the quarter. It continued to do so throughout 2019 and does so today. Today, I'm pleased to report that we operated our hydrogenation unit at TC reliably and in maximum available rates since the first week of 2020.

In our Specialty Petrochemicals product segment, which operates in Silsbee, solvents demand remained steady with growth markets, helping to offset continued changes to oil sands. In December, we indicated that sales to the Canadian oil sands would most likely continue to see headwinds from the uncertainty surrounding government-mandated crude production curtailments and efficiency initiatives by our customers. While we saw no impacts in Q1 demand from customer efficiency initiatives, we do continue to face this risk.

We also provided an update in December on the impacts of the October storm event in Silsbee. The plant quickly returned to operation. However, we did incur significant costs associated with the remediation of the damage. The vast majority of those costs are covered by our insurance program. Due to the safe and prompt work done on remediation, we were able to file our insurance claims prior to the end of the year. Our fourth quarter results reflect most of the benefit of our insurance coverage.

As for the first quarter of 2020, the Specialty Petrochemicals demand remains solid. Results at TC should improve significantly due both to the operation of the hydrogenation unit and higher production and other custom processing activities. These benefits are likely going to be more than offset by maintenance spending and the pricing impacts of falling feedstock costs in the quarter, which Sami will discuss. We spent 2019 concentrating on execution within our business functions, a practice that led to achieving key operational outcomes committed to earlier in the year. Our strategy will remain the same in 2020. We will continue focusing on improving our base businesses through exceptional execution. We can now extend this strategy into driving growth for the company. We have launched a new growth initiative that has identified meaningful opportunities to raise our profitability in both 2020 and into the future. We expressed this on Slide 9 in the presentation deck today.

We have defined a portfolio of projects that touches every piece of our company. We identify growth as diversified opportunities to grow earnings in the company. We assess the value, risk, timing and necessary resources to deliver the value and the people responsible for delivering the result. We then prioritize those. As with any portfolio of projects, many will not proceed to execution. However, we believe we have line of sight to deliver approximately $4 million of value in 2020 and well over $15 million in the next 2 to 4 years. Our current opportunity portfolio spans 25 projects across South Hampton and Trecora Chemical. Each project falls into one of the following categories: new products and markets, asset and operational costs or productivity expansion.

Let me give you an example of a growth initiative we recently announced. We recently signed a multiyear managed logistics service agreement with global logistics solution provider, Odyssey. Odyssey will provide us with benchmarking data on Trecora's operations, distribution network, infrastructure and key metrics, such as total spend, vendor costs and productivity performance. Together with Odyssey, we aim to maintain our performance profile at lower cost by seamlessly integrating their technologies into our logistics infrastructure without disruptions to service. We are anticipating 2020 run rate savings of approximately $2 million. Other projects focus on improving our feedstock supply economics, increasing utilization of our existing manufacturing capabilities to provide new products into existing markets and driving productivity within our operations. We look forward to discussing these projects as they occur.

Now I'll turn the call over to Sami Ahmad, our Chief Financial Officer, for a more detailed discussion of our Q4 and full year 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's take a closer look at fourth quarter and full year performance. Net loss from continuing operations in the fourth quarter was $18.7 million or $0.76 per diluted share compared to net loss from continuing operations of $5.2 million or $0.21 per diluted share in the fourth quarter 2018. And net income from continuing operations of $1.6 million or $0.06 per diluted share in the third quarter 2019. The net loss from continuing operations for the fourth quarter included a noncash impairment charge for goodwill and certain intangible assets of $24.2 million in our Specialty Waxes segment, which is Trecora Chemical.

For the full year 2019, the net loss from continuing operations was $12.9 million or $0.52 per diluted share. The impact of the impairment charge was $0.98 per diluted share for the fourth quarter and for the full year 2019. We evaluated our goodwill in Trecora Chemical for impairment during the fourth quarter of 2019 in connection with our annual review in accordance with ASC 350. As part of our review, we assess 2019 operating performance and its impact on the operating cash flows of our Specialty Waxes reporting unit. We concluded, based on this analysis, combined with the historical underperformance of this business, that the fair value of our Specialty Waxes reporting unit was lower than its book value, including goodwill.

As a result, we recorded a noncash impairment charge of $21.8 million in the fourth quarter, representing all of the goodwill allocated to this reporting unit. In addition, we also determined based on this analysis that certain intangible assets were also impaired. Thus, we recorded a noncash impairment charge of $2.4 million in the fourth quarter. These 2 charges combined represent the $24.2 million charge related to Trecora Chemical.

Gross profit in the fourth quarter 2019 was $8.3 million or a gross profit margin of 13.5% of total revenues. This compares to gross profit margin of 15.3% in the third quarter and 3.6% in the fourth quarter of 2018. Compared to the third quarter, gross margin declined in the fourth quarter due to lower margins for both prime products and by-products at South Hampton in our Specialty Petrochemicals segment. Additionally, fourth quarter results were negatively impacted by spending related to the October weather event. The total cost of the event was approximately $2 million. We received insurance proceeds of approximately $0.3 million in December and recorded an insurance receivable of $1.1 million for anticipated additional insurance proceeds to be received in 2020.

Gross profit for full year 2019 was $38.5 million or 14.9% of total revenues compared to $27.8 million or 9.7% of total revenues for this -- for 2018. The improved gross margins were primarily driven by lower feedstock costs, which resulted in better prime product margins, significantly higher by-product margins primarily due to a more reliable operation of the Advanced Reformer unit and lower labor costs as a result of the cost reduction program implemented at the Silsbee facility in December 2018.

Improved gross profit was partially offset by lower full year performance in our Specialty Waxes segment. Consolidated adjusted EBITDA from continuing operations for the fourth quarter 2019 was $6.4 million. This compares -- compared with adjusted EBITDA from continuing operations of $6.9 million for the third quarter and $1.8 million for the fourth quarter of 2018. 2019 full year adjusted EBITDA from continuing operations was $31 million compared with $20.2 million for 2018.

Moving on to cash flow. Cash flow from continuing operations for 2019 was approximately $25.6 million as compared to $19.7 million in 2018. The increase in operating cash flow reflects substantially improved operating performance as well as working capital management. Also, it should be noted that 2018 operating cash flow included $5.4 million in tax refunds. CapEx for 2019 was approximately $10 million compared with $25.3 million in 2018. 2019 CapEx for Specialty Petrochemicals segment was $7 million and $3.1 million for the Specialty Waxes segment. For 2020, we expect total CapEx for the company to be in the $13 million to $14 million range. This increase is mainly due to spending on feedstock pipeline maintenance as well as other infrastructure improvements.

G&A expenses for the fourth quarter were $5.9 million compared to $6.4 million in the third quarter and $5.3 million in the fourth quarter of 2018. For the full year 2019, G&A expenses were $24.4 million or about 8% higher than 2018. However, recall that 2018 G&A expense benefited from a $1.5 million reversal of certain post-retirement benefits for a former executive. Interest expense for the fourth quarter was approximately $1 million. For the full year 2019, interest expense was $5.1 million compared to $4.1 million for 2018. The increase in interest expense was mainly because we had approximately $0.7 million of capitalized interest in 2018 related to the funding for the Advanced Reformer unit construction. Our effective interest rate for the full year 2019 was 4.6%. We reduced total consolidated debt by $19 million in 2019. In the fourth quarter alone, we reduced debt by approximately $6 million. Our year-end debt was $83 million compared to $103 million at year-end 2018.

Our revolver balance was 3 point -- was $3 million as of December 31, with availability of approximately $50 million. Consolidated cash balance was $6.1 million as of December 31. Our consolidated leverage ratio are -- under our bank agreement was 2.20x. From a capital allocation standpoint, our priority continues to be debt reduction, both utilizing free cash flow as well as a portion of future proceeds from the AMAK -- from closing the AMAK sale. Our objective is to maintain a strong balance sheet with a leverage ratio in the 1.5 to 2x range. Our fourth quarter and 2019 effective tax rate was approximately 21%, which we expect to continue in 2020.

Now let me walk you through our business segments, starting with Specialty Petrochemicals. Specialty Petrochemicals adjusted EBITDA was $8 million for the fourth quarter of 2019 compared with $9.9 million in the third quarter. Specialty Petrochemicals volume in the fourth quarter was 20.3 million gallons compared to 20.5 million gallons in the third quarter and 25.1 million gallons in the fourth quarter of 2018.

Prime product sales volume in the fourth quarter was 16.3 million gallons, roughly flat to the third quarter and compares to 18.7 million gallons in the fourth quarter 2019. By-product sales volume was 4 million gallons in the fourth quarter, also roughly flat from the third quarter. Prime product margins in the fourth quarter were impacted by rising feedstock costs compared to the third quarter.

Benchmark natural gasoline pricing increased steadily during the course of the quarter from $1.06 per gallon in the third quarter to $1.19 per gallon in the fourth. Margins for by-products declined from the third quarter due to higher feedstock costs and lower selling prices for by-products. The selling prices for by-products declined from the third quarter due to lower market prices for the aromatics components that are in our by-product stream.

For the full year 2019, prime product sales volume declined approximately 1.9% from 69.4 million gallons in 2018 to 68.1 million gallons. Excluding sales to the volatile Canadian oil sands market, prime product sales increased about 4% year-over-year. By-product volume decreased 17.6% year-over-year to 16.7 million gallons. The improved operation of the Advanced Reformer unit resulted in expected volumetric yield loss, leading to lower volumes.

Moving on to Specialty Waxes. The Specialty Waxes segment, which is based at our Trecora Chemical, or TC facility in Pasadena, had adjusted EBITDA of $0.2 million compared to negative adjusted EBITDA of $0.2 million in the third quarter. Specialty Waxes generated revenues of approximately $8.9 million in the fourth quarter, an 8% increase from the prior quarter. This increase was despite lower wax sales volume, which declined 7 point -- which declined to 7.9 million pounds from 8.6 million pounds in the third quarter. Wax sales volumes were impacted by seasonal softness in demand and supply interruptions from a wax feed supplier. Wax sales demand remains solid. Custom processing revenues increased from $2.4 million in the third quarter to $2.9 million in the fourth.

Looking ahead to the first quarter of 2020, business conditions have remained consistent with the fourth quarter. However, the downward volatility in feedstock costs are likely to negatively impact our earnings by $3 million to $4 million due both to inventory costing and price lags in our contracts. We also have higher plant maintenance expenses versus the fourth quarter of approximately $700,000. We expect to partially offset these impacts by approximately $1.5 million from improved operations at TC on the hydrogenation unit, other custom processing revenues and the absence of spending on the weather event that weren't covered by our insurance claim.

Now we'd like to open the line for a question-and-answer session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Jon Tanwanteng from CJS Securities.

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

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Nice quarter considering. I wanted to start with the damage from the weather event. Did you get the tank back up and running as of the start of Q1? And was that cost that net difference between the insurance and what you paid reflected in the P&L? Or was that CapEx? And how was it adjusted out of EBITDA?

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

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A lot of questions there, Jon. So let me just start with the first one. So our situation at South Hampton is we had 2 tanks in service for feed. They're connected through a pipeline down to the Beaumont area, where we connect into our supplier's tank and then ultimately back into the natural gasoline supply network. As of now, we haven't decided to bring the impacted tank back into service for a variety of reasons, and we've been operating just fine since October in that mode. So right now, we do not have plans to bring it back in service.

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

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With regard to your other questions on that, Jon. So this -- it's not capital. It's all expenses. And the way it flowed through our fourth quarter results were there were 2 pieces. So as I mentioned, the total cost of the event was about $2 million. We got in the quarter, $300,000 -- roughly $300,000 of reimbursement related to the loss of stock, the inventory. And then we also, after submitting claims to the insurance company and having discussions with them, booked $1.1 million of insurance receivable. Now recognize that there were deductibles associated with this event, and that's roughly $275,000 of total deductibles. We expect to get additional proceeds sometime, hopefully, in the first half of this year on that and collect on that receivable that we booked.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [5]

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Okay. So I'm getting the net cost to you guys that hit in Q4 was, call it, $600,000?

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

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Yes, that's approximately. Yes.

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

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Okay. And that was on the income statement. Okay. And did you back that out of EBITDA was the question?

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S. Sami Ahmad, Trecora Resources - CFO & Treasurer [8]

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No, no, it's included in EBITDA.

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

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Okay. Got it. So kind of ex those costs, you would have been $7 million roughly?

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S. Sami Ahmad, Trecora Resources - CFO & Treasurer [10]

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Fair.

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

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Okay. Understood. Just in terms of the hydrogenation plant, Pat, it sounded like you made good progress there. The max rate, though, it doesn't mean max margins, I assume. Where can that go eventually? What improvements need to be done there still?

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

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So we are very disappointed in the reliability of that unit last year. Obviously, it was a catalyst for the action we took on goodwill. But as we worked through it throughout the year, really, I'd say, the second half of the year with the change in both the leader and the leadership team at TC, we've been talking about how that has been coming together well. We were starting to see indications of them performing well as a team and working through kind of fundamental improvement of operability in operations. And that's finally coming together for that unit at the beginning of this year. So -- and I chose my words carefully because I think I said available -- maximum available capacity. Listen, we've got -- that unit's got a lot of capability, both volumetrically. And as we build either our own use of the unit to support our product business or make it available for custom processing activities, I think, we'll see more contribution going forward. But things came together well for us in the first quarter. In the wax market, there have been other supply disruptions and not in the polyethylene wax, more in the FT wax market that presented a particularly strong opportunity for us to capture a lot of volume, and that's what we did. We expect that volume to continue for us as we go into 2Q, but we'll see how market conditions and opportunities with customers play out. But I feel a lot better about it.

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

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Okay. Great. And just a general macro, I guess, question for you guys. I know you mentioned COVID-19. But what are your customers saying right now in terms of their volume needs in light of potential for a full-blown recession heading forward. Have they said anything to you, especially in light of the Saudi decision yesterday, and what that means for your -- both your customer end markets and your supply chains going forward?

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [14]

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Fair. I think, as you'd appreciate, we've tried to stay very close to customers over the last several weeks. And the bit of the bombshell that came on Saturday with respect to oil is still playing its way through our customers' businesses and what that might mean downstream. And of course, it's early days to get that feedback. What I would say is, to date, no one is citing a change in their demand that they attribute to COVID-19. As I mentioned earlier, we did see in Asia -- in Asia, because that's where this thing started, supply chains and really economics of things like polyethylene were getting upset early. Basically, as the market came out of the Chinese New Year and was expecting to ramp up production to meet the return to the economy, of course, that didn't happen, polyethylene values got really distressed and one or more of our customers in that region as a result turned down their production. So that was the one demand impact we can put our finger on.

The truth is, at this point, I think we're all monitoring it. And I wouldn't be surprised by volatility and impacts on demand, but we just haven't seen it yet. And so it's really more about planning and contingencies at this point for us. I can tell you, if I reflect back on this issue, the nearest thing to relate it to, I guess, is the financial crisis of '08, '09. Operationally, our industry does things a lot differently than we did back then. We don't carry inventories like we used to. So I think I recall back then, units were just getting shut down because people just started working off their inventories. I don't think we're in that kind of a mode these days. But we're going to monitor it.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [15]

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Okay. Fair enough. And just on the supply side for you. I know the natural gasoline prices are usually correlated to crude.

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [16]

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I like it.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [17]

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Yes, have you seen that impact yet in the input costs? And where does that take you in light of Sami's comments on the lagging effect?

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

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Yes. No, absolutely. Yesterday, we saw natural gasoline non-tet closed at about $0.68 a gallon.

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S. Sami Ahmad, Trecora Resources - CFO & Treasurer [19]

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Yes, $0.67, $0.68 a gallon.

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

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So he walked you through kind of what the pricing was previously through the first quarter. So we do have EBITDA risk on those pricing impacts as they flow through. I'll remind you, it's cash positive, right? Effectively, we take cash off the balance sheet when prices come down and underlying margin over time is preserved, but we do face EBITDA risk with this...

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [21]

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Right, but that should normalize over Q2, right, as it goes through?

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [22]

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That's right.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [23]

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Okay. Okay. Got it. Just wanted to walk through the value you expect to realize both from growth projects and cost savings in 2020. Am I reading that correctly, you're expecting a $6 million improvement overall in terms of new projects and in terms of the agreement with Odyssey?

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [24]

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So Odyssey is part of that growth program, I use that as an example. So that's part of the $4 million.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [25]

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Okay. And is that aside from any growth expectations you have? Or is that the sum total of EBITDA improvement you're expecting over the year?

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [26]

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No. So what we're saying is, across a variety of projects that we have line of sight to, we think this year, we'll be able to add $4 million of profit value through the contribution from those projects. And Odyssey is the one that we've announced, right, and we've executed that contract. So I wanted to speak about that one.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [27]

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And these are...

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [28]

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There are others that we're working on.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [29]

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Okay. And these are specific projects, not the normal course of growth in the existing business? Or is it included -- inclusive of everything?

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

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Yes, that's right. So to the extent, like, say, poly-iso end use, which is growing very nicely, I think last year, over 6%. That's just -- we put that as part of our base business. But effectively, the way we're approaching it, Jon, is if it requires us to identify it, resource it and do something different then that's a project for us. And then we test it. Can it add value? And is it worth the resource in order to deliver it.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [31]

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Okay. Got it. So we should think of this as the way you phrased it last year, you had an EBITDA bridge from year-to-year. And then you gave a range of what you expected from improvements in certain areas. So this would be the plus $4 million and the market would be plus or minus on top of that, I guess. Is that the correct way to put it?

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [32]

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That's right.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [33]

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Okay. Great. No, that's very helpful. And then just, Sami or Pat, the expected final closing date for AMAK?

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [34]

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So what I said we've got the ministry approval now. We're going through certain other closed processes. We think it's reasonable to expect us to close by the end of the quarter. We have to recognize with all the turmoil in the markets right now. I never say it's without risk. So -- but we're focused on closing by the end of the quarter.

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Operator [35]

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(Operator Instructions) Our next question comes from the line of Joseph Reagor from ROTH Capital Partners.

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Joseph George Reagor, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [36]

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So there's a lot of things that got touched on by the last caller. But we used to get these updates about potential new customers in the polyethylene space, et cetera. Do you guys have any expectations of adding new customers in the next 12 to 24 months?

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [37]

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We do and we are. The way -- I mean so we've talked about kind of the way we communicated in the past, it was important to me that for these purposes, we demonstrate how we're approaching it, the breadth of what we're approaching and likely value we can get out of it. So we've got notionally 25 projects that we're working today. We'll go through prioritization of those projects, resource them appropriately, set accountability for those projects and then talk about their results as they're delivered. So Odyssey is done with respect to the contract that we signed and the transition to that 3 PL. We have other projects that do include penetration of new markets, production of new products and so forth. But we'll talk about those really as they come to market.

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Joseph George Reagor, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [38]

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Okay. And then just trying to get a little bit more clarity on some of the comments that Sami made. How would that -- he was talking about some impact due to pricing adjustments, were -- was Sami speaking just to Q1? Was that supposed to be Q1, Q2 kind of overlap since we're already in March? How do I basically space that out in the model?

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

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Yes. I mean I was speaking really to Q1 because that's where we are almost at the end of Q1. We don't have a whole lot of visibility in terms of feedstock trends into Q2. And the point that I was making, Joe, was really when you see this volatility, there is a hit to earnings. As Pat said, when it's downward trending like it has been over the last number of weeks, it's good for cash flow and working capital, but it's a hit to earnings. And I tried to frame that out with the 3 point -- $3 million to $4 million kind of impact. So -- and the reasons behind it.

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [40]

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Yes, if you think about it, we entered the year with feedstock at $1.15, no, one of those was it -- sorry. $1.21 -- no, $1.25?

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

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Yes.

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [42]

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And we're down to $0.68 today. So I mean, it's a 50% -- it's almost a 50% reduction in feed costs. That's the kind of volatility that we're facing as we exit the quarter.

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S. Sami Ahmad, Trecora Resources - CFO & Treasurer [43]

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And it's also that slope of that curve, Joe. It hasn't been steady where you can kind of smooth it out. It's been very sharp, and that has an impact as well.

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [44]

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Sorry about ROTH conference, not attending.

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Operator [45]

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Our next question comes from the line of Sarkis Sherbetchyan from Grand Slam -- I mean from B. Riley FBR.

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Sarkis Sherbetchyan, B. Riley FBR, Inc., Research Division - Associate Analyst [46]

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This is Sarkis from B. Riley FBR. Just want to touch on Trecora Chemical. It looks like for the year the business did about, call it, mid-$30 billions to almost $40 million in top line, and that's if I annualize the 4Q number. And EBITDA is really just barely kind of eking out to the positive side. Like what does it take to turn this business around? And what are the plans your team has put in place to drive a more meaningful EBITDA contribution from that segment?

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [47]

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Yes, I'd say it's 3 or 4 things. So on the wax business, we had -- and we've mentioned this throughout the quarters. We had supplier issues that disrupted our feedstock. We're tied to just a few suppliers of this by-product fee that was disappointing. So we've put in place -- frankly, these are very big companies. We sit and review with them, the impacts on us and their opportunities to improve it. We think we have seen their improvement plans where that reliability should be better. It has been better in the first quarter, so that helps. A little bit out of our control, but that's what we're doing there. We mostly focus on what we can control. So in our, what I'd call, our legacy custom processing activities where we've had ongoing relationships with key customers for many years, we did an assessment of the profitability of those against really what threshold profitability needs to be to continue those activities. We negotiated and agreed on increases across that portfolio that range anywhere from 20% to over 50% increases.

If you look at that business status quo across 2020 based on those improvements, that's about $500,000 of profit improvement that we'd expect through those renegotiations, all things being equal. We also have operability, reliability plans in place, where even those existing customers, we believe, they can bring us more business if we improve our reliability and we have those plans in place. And then on the new assets that have run -- haven't run well at all, obviously, we talked a lot about hydrogenation. We've really been methodical in bringing up our capabilities to run that unit in a reliable way. And we were very frustrated by the successes of that last year.

But as I've said earlier, I think we're starting to get our arms around it. We brought the unit up in the beginning of January for the production of product that feeds our wax business and did that successfully through January. And then in February, turned over to a custom processing project and have run as hard as we can run throughout -- through today and would expect to continue certainly through the end of the first quarter on that project. And that's reasonable profitability. I'll never say it's the profitability we want. Our customers say it's ample, but we're always in those discussions. But I think we'll see a nice step up from TC as we get into 2020 now.

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S. Sami Ahmad, Trecora Resources - CFO & Treasurer [48]

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As well as cost management.

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [49]

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As well as cost management. That's right. We've got a variety of productivity programs that are just an overall cost to the site.

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Sarkis Sherbetchyan, B. Riley FBR, Inc., Research Division - Associate Analyst [50]

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Got it. And if I can kind of speak to some of the projects, like, are these kind of onetime in nature? Do you think there's kind of more base business to be built? And then as you layer on more revenues, the incremental margin should be much better? Just kind of help us think about that?

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [51]

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Yes. So we have one customer that brought us a project last year, relatively complicated, frankly. And we were able to produce it, but we weren't able to produce it efficiently. And it's a great example of what we can do when we identify something that's structural, important to both sides and we can work together on it. And basically, with this customer, our approach has been kind of open book, if you will. We've actually invited one of their engineers into our site to help drive improved operability as well as put our own teams on improved operability. We've -- I guess we probably more than doubled the cycle time on that particular piece of business.

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S. Sami Ahmad, Trecora Resources - CFO & Treasurer [52]

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Reduced the cycle time.

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [53]

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Reduced the cycle time, right. Yes. Doubled our productivity for that particular project. This is a specialty chemical for the customer that is part of their long-term kind of core growth plan. So we think it's something that can be with us for a long time. And we still see further volumetric growth opportunities. We're under contract, multiyear. And then can we drive more value on a unit basis? Perhaps; that will be a conversation with the customer. But I get a lot of encouragement from it because we're building our credibility with them, while we're improving kind of underlying financial sustainability of the site. That's really the model that we want to have as we approach these projects. We don't jump for kind of the one-off project. It just takes too much work and resource just to do something for a short-term opportunity. So the nature of custom processing is that you have a fair amount of commitment to resource upfront and whether we pay for it or the customer pays for it, it's expensive. And so you need it to be more sustainable. And that's typically the nature of what we have in there.

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Operator [54]

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Our next question comes from the line of Mitch Sacks from Grand Slam.

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Mitchell Lester Sacks, Grand Slam Asset Management, LLC - CEO [55]

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I have some questions around TC. And so you talked a bit about wax sales picking up in the first quarter. And I know you've been supply constrained. Can you give us a little more framework around wax volumes that you can produce, and where you see demand going?

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [56]

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So I always characterize our wax business as not really demand constrained. And what I mean by that is, the nature of our cost position and our feed puts us in a kind of unique mix or niche, rather, where we push on the performance side of the on purpose producers, but our cost position is differential. So we basically, to the extent we get supply, we're going to be able to sell it and make reasonable margin, but that's a limited supply base. We've been talking about that for a long time. So last year, we started the development of the purchase of on purpose feedstocks that can allow us to augment that supply. It's higher cost. So we do expect margins to be diluted, yet cash contribution to go up as we continue to grow. We were talking last year about qualifications. So all the qualifications are complete now. We are aligned with kind of the major hot melt adhesive buyers as customers, and are conducting business with them today. So I think that's going in the right direction.

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

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Yes, that's right.

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Mitchell Lester Sacks, Grand Slam Asset Management, LLC - CEO [58]

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Okay. And so just to sort of characterize that then in terms of the on purpose supply of feedstock, assuming that with these new quality controlled customers, you should be able to increase volumes, I would assume, markedly at that point then?

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

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So we see -- and this isn't for 100% of our wax portfolio, but where we're selling into hot melts, which is the biggest piece, biggest end use, we're seeing our ability to augment that supply by 15% to 25% depending on the product.

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Mitchell Lester Sacks, Grand Slam Asset Management, LLC - CEO [60]

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Okay. And then with respect to the hydrogenation distillation unit, the previous management team, when they had done the original CapEx, spent over $20 million, and there was a estimate of a potential EBITDA increase of $6 million to $8 million. Do you still feel that, that asset can contribute that type of cash flow? And if so, when do we think as a management team that we can get to those levels?

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [61]

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Yes. I don't have line of sight to $6 million to $8 million today, Mitch. It's kind of early days now that we can credibly go to the market and say, this is something we can do. And to be clear, hydrogenation and distillation are 2 different units, right? So what we're doing -- what we're talking about now is hydrogenation. That's the one that's fully loaded. It's going to be a nice step-up in contribution, as I said, beginning in first quarter and continue on. And it's not a few hundred thousand dollars. I mean I'm talking about something in million-plus range of step up. And then we have other projects, and it's part of our growth plan to begin to load the distillation unit as well. So I can't declare yet on that old basis, if we're going to get to $6 million to $8 million. I'm kind of turning, we'll start talking about is, how we think we'll be able to provide profitability through our overall growth program, and that's kind of the $4 million that we're talking about this year.

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Mitchell Lester Sacks, Grand Slam Asset Management, LLC - CEO [62]

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Okay. And final question has to do with the polyethylene customer. There was a question earlier about adding new customers. Of the major polyethylene plants that are still under construction here in North America, when do you -- are any of those expected to come online this year? And if so, do you expect that plant to be a customer?

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [63]

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They're not any coming on this year. So we're kind of getting ready for the second wave of investment on the Gulf Coast or in North America, I guess, more specifically. So I think the next significant plant is Shell.

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S. Sami Ahmad, Trecora Resources - CFO & Treasurer [64]

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2022.

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [65]

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2022.

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S. Sami Ahmad, Trecora Resources - CFO & Treasurer [66]

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Yes. For this year, next year, are -- there are no major start-ups.

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

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Yes, not in North America.

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Operator [68]

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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 [69]

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Any way you can lock in this historically low feedstock cost? Or is there risk in doing that, thinking it's going to go lower?

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [70]

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We're not going to hedge feedstocks. Just to be clear. It's a very risky game. We don't have the kind of balance sheet that would be appropriate for us to take positions on hydrocarbon. Our -- if you think about the way our business is structured, we manage earnings risk through essentially 2/3 of our portfolio being tied to feedstock on a formula basis. And so while we have near-term volatility on earnings, we manage the sustainability of our earnings through that sales contract portfolio. And that's really how we manage risk, and we're not going to take positions on feedstock.

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Kurt Caramanidis, Carl M. Hennig, Inc. - VP [71]

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Okay. Fair enough. What could happen to not close the AMAK sale? What are the variables out there now that they've agreed to it?

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [72]

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Yes. I don't want to kind of speculate on what could get in the way. But I think, listen, at the end of the day, we know that markets are in turmoil right now because of the fears and so forth associated with COVID-19. We're focused on the process. The next step in that process was establish -- communicating and establish closing date, which we've done now with the buyers, and we're pushing towards close by the end of the quarter.

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Operator [73]

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Our next question comes from the line of Jon Tanwanteng from CJS.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [74]

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Just a quick follow-up. I wanted to ask about the oil sands. Just remind us relatively what magnitude of business you did in 2019. And I think you mentioned that they didn't pursue efficiency upgrades as you thought they might have. So I'm wondering if that's in line for this year. And also, given where crude prices are, if they're going to cut production? Or is there a mandate that helps them do otherwise?

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [75]

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Yes. So oil sands last year, about 8% of our prime product sales volume, okay. And just to be clear, what I said was we've been aware of these efficiency projects over a year ago. I mean in this call last year, I had mentioned that this is something we were aware of. We thought they were more imminent at the end of the year, heading into this year. I had mentioned them when I spoke to investors in early December. What I'll tell you is that we haven't had the impact of those yet. But I'm not telling you that we don't think they're still pursuing them. I think we're monitoring it really month-by-month at this point. But as of today, no impacts.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [76]

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Okay. Got it. And on the production side?

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [77]

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I'm sorry, I missed the production question?

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [78]

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Just how you think that trends given the shock to crude?

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [79]

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Oh boy, I don't know. I think we all know oil sands, it's a hard -- those are hard units to ramp up and down because of the -- they need to sustain the heat and the production rate out of those tar sands. So as developed, they don't typically move them up and down too much. So I don't know if we'll see a short-term change or not. But listen, there's no doubt the economics of all this is challenged if Saudi is going to pump, what, 12.3 million barrels a day in April. So that's still yet to play through.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [80]

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Right. Is it -- this is getting into conjecture, but is it safe to assume if prices go down enough, it just makes sense to take them off-line and do the efficiency projects at the same time, and how are you planning for that?

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [81]

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Well, I mean, no, I don't think that's the reality. Listen, these are -- our customers are the big guys. It's not the smaller producers up there. If anybody is going to kind of sustain their production through these periods, I think it would be our customers. And with respect to these efficiency projects, I almost view them as independent. It's just, candidly, it's good business for them, right? They need -- just like we do, they run productivity plans. And if they can identify an opportunity to save some money, they should do that. And we think that's their intention. They just haven't done it yet.

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Operator [82]

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At this time, I'm showing no further questions. I would like to turn the call back over to Pat Quarles for closing remarks.

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Patrick D. Quarles, Trecora Resources - President, CEO & Director [83]

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Thank you, Gigi. So I want to thank all of you for your interest in Trecora and participating on the call today. While we are proud of the improvements we accomplished in '19 and confident in our ability to further improve in 2020, we are clearly entering a period of tremendous uncertainty due to the outbreak of COVID-19. We enter it today with a significantly strengthened balance sheet and ample liquidity to deal with the volatility, which is likely to continue. Our priority will be the safety of our people and the communities in which we work and the integrity of our assets. I believe we have taken the appropriate steps to date to protect each, and we will be managing our continuity plans daily as circumstances develop. And again, let me thank you for your participation. Thanks, operator. We're done.

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S. Sami Ahmad, Trecora Resources - CFO & Treasurer [84]

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Thank you.

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Operator [85]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.