Thank you, operator, and good morning, everyone. Welcome to the Trecora Resources first quarter 2020 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 on this call 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 the date of this teleconference, May 6, 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 the financial markets yesterday afternoon.

The webcast is accompanied by a slide presentation that’s available on the company’s Web site, www.trecora.com. At this time, I’d like to turn the call over to Trecora’s President and CEO, Pat Quarles.

Thank you, Jason, and good morning to all those participating on today’s call. At the onset of 2019, we set our priorities and launched a disciplined process for driving shareholder value with a focus on improved earnings, enhanced free cash flow and meaningful debt reduction.

Delivering on these priorities has allowed us to enter this period of global uncertainty in a position of relative strength and stability. Through increased operational reliability, steady execution and disciplined cost control, the company’s first quarter 2020 results yielded cash flow from continuing operations of $4.4 million, a $3.5 million improvement from the first quarter of 2019.

First quarter 2020 net income from continuing operations, excluding a tax benefit from the enactment of the CARES Act, was breakeven due to the negative impact to earnings from falling feedstock prices during the quarter. Consolidated adjusted EBITDA from continuing operations was $5.5 million.

During the quarter, overall demand to all end uses was strong. While year-over-year volume was lower, it was mostly a reflection of unusually high volumes in the first quarter of 2019 related to timing of demand to Canadian oil sands and certain other export demand.

We did have a significant negative impact to our earnings due to the dramatic fall in natural gasoline, our primary feedstock during the quarter. As Sami will discuss, natural gasoline fell 55% across the quarter.

This resulted in approximately $4.5 million of negative impacts related to inventory costing during the quarter. Also in the first quarter, I’m pleased to mention that multiyear improvement efforts at Trecora Chemical have resulted in better performance as evidenced by growth in TC’s revenue, volume and gross margin.

We had over $1 million of EBITDA this quarter due to reliable operation of essentially all the units at TC, including the hydrogenation unit, which ran well for the quarter. In addition, we had strong demand from our existing customers as well as growth with new custom processing projects at both the B plant and the hydrogenation unit.

This was further enhanced by a quarter of reliable wax byproduct feed from our suppliers and strong wax demand across our portfolio. Turning to our new growth initiative launched in the first quarter, we continue to work towards both delivering on identified projects and increasing the number of projects in our current portfolio.

We have added two projects since last quarter and announced the completion of an additional project, the extension of our natural gasoline supply contract. On the supply contract, we expect to realize approximately $1 million of savings this year and average about $2 million of savings in each of the subsequent contract years.

Using last year’s business as a baseline, we expect to save more than $3 million this year between cost savings and logistics related to the Odyssey agreement announced earlier and this extension with Martin Oil and to add another $1 million from other projects in the portfolio. Now let me turn to COVID-19 and its impact on our people, our business and where we stand from a balance sheet and liquidity perspective.

In dealing with the impacts of the COVID-19 pandemic, our priorities have remained the same. The health and safety of our people and those in the communities in which we operate, the reliability of our assets and the sustainability of our company.

We have taken early and aggressive measures to protect our people. Specifically, we implemented social distancing protocols in early March and relocated all nonoperational roles into work-from-home settings with no impact to work execution.

At manufacturing sites, we have daily virus temperature screenings for employees and visitors and have been able to safely maintain our assets and continue to meet the needs of our customers. To date, we have not experienced any infections in our workforce.

As the situation develops, we continue to take cautious steps consistent with recommendations from the CDC and World Health Organization as well as local authorities. Our manufacturing operations, global supply chain and customer order fulfillment have not experienced any material impacts thus far.

However, we are seeing reduced demand emerging in certain end markets and geographies, in particular, durable end uses. This is being partially offset by higher demand in nondurable sectors with our products being in essential components and goods such as expandable polystyrene for foodservice, polyethylene for packaging and hot melt adhesives for home deliveries.

Although near-term market conditions present uncertainty and are likely to remain unpredictable, we believe our underlying long-term demand remains intact. We have also taken several important steps to proactively maintain our strong balance sheet.

In addition to the $10 million in proceeds from our partial AMAK share sale and out of an abundance of caution, we pulled $20 million in borrowings from our revolver. This brought consolidated cash at the end of the first quarter to $37.5 million.

Furthermore, with the Coronavirus Aid Relief and Economic Security Act, or the CARES Act, we expect approximately $14 million of cash sometime in the third quarter from tax refund claims. We also anticipate receipt of approximately $6 million in May from the Paycheck Protection Program or PPP, which will support the continuity of our workforce in these uncertain times.

Now I’ll turn the call over to Sami Ahmad, our Chief Financial Officer, for a more detailed discussion of our Q1 results.

Thanks, Pat, and good morning to everyone. Let me start with a discussion of liquidity, debt and cash flow, and then I will discuss our first quarter performance.

As Pat mentioned, at the end of the first quarter, we had cash on the balance sheet of $37.5 million and this compares to $6.1 million at year-end 2019. As previously announced in March, we received gross proceeds of approximately $10.1 million from the AMAK share sale to ARMICO.

We also borrowed $20 million on a revolver out of an abundance of caution and stacked the cash. In addition, we have availability on our revolving facility for an additional $21 million of further borrowings.

Our cash balance grew in April to approximately $45 million as we realized the cash benefit from falling feedstock prices. At the end of April, our total liquidity, including availability on a revolver, stands at approximately $65 million.

Balance sheet debt at the end of the first quarter was $102 million and this compares to $83 million at year-end 2019. The increase, of course, largely reflects the $20 million of revolver borrowings.

Total debt net of cash at the end of the first quarter was about $65 million. Total revolver borrowings at the end of the quarter stood at $23 million, and our leverage ratio under our bank agreement was 2.9x at March 31 compared to 2.2x at year-end 2019.

Cash flow from continuing operations for the quarter was approximately $4.4 million, a $3.5 million improvement from Q1 last year. Fourth quarter 2019 cash flow from continuing operations was approximately $5.2 million.

Free cash flow for the first quarter, which is cash flow from operations, less CapEx and debt service, was $1.1 million. Recall at the end of last year, we recorded an insurance receivable of $1.1 million related to the weather event at the end of October at our South Hampton plant.

We received insurance payments of $0.3 million against this receivable in the first quarter and an additional payment of approximately $0.7 million in May. We expect to receive the final smaller payment later this quarter to effectively close out this insurance claim.

In the current environment, we continue to manage working capital and cash flow in a disciplined manner. In addition to managing all of our discretionary expenses, we are closely monitoring the aging of our trade receivables and assessing customer credit exposures for potential risks.

We’re also evaluating CapEx, while maintaining focus on asset reliability as well as environment, health and safety projects. CapEx for the first quarter was approximately 1.9 million compared to 3.8 million in the fourth quarter of 2019 and 1.9 million in the first quarter last year.

Now moving on to a discussion of first quarter earnings and results. Recall that we disclosed in the third quarter of last year that our investment in AMAK is now classified as held-for-sale and thus reflected as discontinued operations in our financial statements.

Net income from continuing operations in the quarter was 5.9 million or $0.23 per diluted share compared to net income from continuing ops of 1.8 million or $0.07 per diluted share in the first quarter last year and a net loss of 18.7 million or $0.76 per diluted share in the fourth quarter 2019. Net income from continuing ops for the quarter includes an approximate – an income tax benefit of approximately $5.7 million or $0.22 per diluted share from the changes to the tax laws as a result of the enactment of the CARES Act.

The CARES Act allows for the deferral of income and social security tax payments, a five-year carryback for net operating losses, changes to interest expense and business loss limitation rules, certain new tax credits and certain new loans and grants to businesses. This will result in the filing of refund claims totaling approximately $17.8 million to recover prior taxes paid.

On April 30, we filed our first refund claim for approximately $14 million which we expect to receive in the third quarter. Additionally, as Pat mentioned, we were approved for the PPP loan under the CARES Act for approximately $6.1 million, which will further add to our liquidity.

We expect to receive funding on this loan later this week. We are securing appropriate amendments from our banks such that this debt will be excluded from financial and other covenants in our debt facility until the termination of forgiveness.

Gross profit in the first quarter was $8.1 million or gross profit margin of 13% as a percent of total revenues. This compares to gross profit margin of 13.5% in the fourth quarter and 15.5% in first quarter last year.

First quarter 2020 earnings were negatively impacted by the sharp decline in feedstock prices for our specialty petrochemical business. This rapid decline, along with reduction in inventory volume resulted in an approximately $4.5 million cost of materials impact.

Consolidated adjusted EBITDA from continuing ops for the first quarter was 5.5 million. This compares with adjusted EBITDA from continuing operations of 6.4 million for the fourth quarter and 8.5 million first quarter last year.

G&A expenses for the first quarter were $6.7 million compared to $6 million first quarter last year. The increase relative to Q1 2019 is primarily due to higher property taxes, higher insurance costs and compensation expenses.

Interest expense for the first quarter was approximately 0.9 million compared with 1 million in the fourth quarter 2019 and 1.5 million first quarter last year. The decrease in interest expense was mainly due to debt reduction in the second half of 2019, combined with lower interest rates.

Now let me walk you through our business segments, starting with specialty petrochemicals. Adjusted EBITDA from continuing ops for specialty petrochemicals in the first quarter of 2020 was 6.5 million compared to 8 million in the fourth quarter and 11.4 million first quarter last year.

Specialty petrochemicals volume in the first quarter was 19.7 million gallons compared to 20.3 million gallons in the fourth quarter and 22.5 million gallons in the first quarter of 2019. The volume reduction is mostly attributable to timing of demand in the first quarter of 2019 when we had unusually high demand into oil sands and also timing of certain export sales.

We saw some minor reduction in export demand in March of 2020, which we attribute to the pandemic. Prime product volumes in the first quarter were 16.2 million gallons compared to 16.3 million gallons in the fourth quarter and 17.6 million gallons in Q1 of last year.

Byproduct sales volume was 3.5 million gallons in the first quarter of 2020. Byproduct margins declined to about $0.08 per gallon in the first quarter from $0.25 per gallon in the fourth quarter.

Byproduct prices, which are tied to benzene and toluene prices, fell faster than natural gasoline feedstock. Let’s talk about the impact of falling natural gasoline feedstock prices on first quarter results.

As you may know, we use natural gasoline as feedstock for producing our specialty solvents at South Hampton. The price of natural gasoline is highly correlated with the price of crude oil, which, of course, collapsed during the course of the quarter.

Natural gasoline prices declined 55% over the course of the first quarter. At the end of December, natural gasoline price was $1.25 per gallon, and by the end of March, it had fallen to $0.56 per gallon.

The decline continued in April with current average market price for natural gasoline at approximately $0.36 per gallon. The trend in the market price of natural gasoline is shown on page 7 of the earnings presentation that is posted on our Web site.

This dramatic and steady fall in feedstock prices had a negative impact on Q1 results mainly due to the consumption of higher cost inventory throughout the quarter. In addition, we drew down the inventory during the quarter, which also had a negative cost impact.

Both of these inventory cost factors had an unfavorable effect on prime product and byproduct margins, the total cost of this was approximately $4.5 million. Obviously, the fall in feedstock pricing had a positive impact to working capital and cash flow.

Moving on to specialty waxes. The specialty waxes segment, which is based at our Trecora Chemical or TC facility in Pasadena, Texas, had adjusted EBITDA from continuing operations of 1.1 million in the first quarter compared to 0.2 million in the fourth quarter of 2019 and a negative 0.9 million in first quarter last year.

Specialty waxes generated revenues of approximately $10.4 million in the first quarter, a $1.6 million increase compared to $8.8 million in the fourth quarter and a $2.2 million increase from first quarter last year. Revenues included $6.8 million of wax product sales in the first quarter.

Wax sales volumes increased approximately 29% or nearly 2.3 million pounds from first quarter last year. The increased sales volumes in Q1 2020 reflect reliable supply throughout the quarter of wax feedstock and the absence of supply interruptions and our own maintenance outage that we had in the prior year quarter.

Custom processing revenues, which were 3.6 million in the first quarter increased 26% from the fourth quarter and 60% or approximately $1.4 million from first quarter last year. The increase was due to significantly improved operation of the hydrogenation and distillation unit as well as strong revenues from other custom processing customers.

As a result of the number of equipment and operating enhancements that we made to the hydrogenation and distillation units, its reliability has improved significantly in recent months as did the overall reliability of the TC site. As we enter into a period of great economic uncertainty and business downturn, we believe we have ample liquidity, a strong balance sheet with no near-term debt maturities and a keen focus on cost management.

Now we’d like to open the line up for your questions.

Good morning, gentlemen. Thanks for taking my questions and nice quarter.

Thanks, Jon. Good morning.

Could you start maybe by breaking down where you’re seeing strength and weakness that you exit in March and then during April and into May? Maybe break it down between packaging, construction, the oil sands and then custom processing?

And if you expect net volumes to be up or down overall on a sequential basis, given all the puts and takes?

Sure. Yes.

And it shouldn’t be surprising, right? So if you think about how our product demand is tied to end uses, it’s fairly clear-cut along durable and nondurable end uses.

And of course, some of our applications, such as polystyrene touch both, right? So I’d say our polyethylene demand is relatively stable as we would expect.

Essentially all, except perhaps one or two U.S. assets continue to run in our portfolio.

So that remains steady. If we talk about EPS, polystyrene, food packaging has been an offset to the decline in construction-related end uses.

We still see that net negative, to be clear. Similarly, for poly-iso, again, a lot tied to commercial construction.

And again, this would normally be their strong season where we would expect volumes to be ramping up in the second quarter. We’re not seeing that.

We are seeing some declines. And I’ll wrap this all up at the aggregate level in a minute, but let me – I’ll just go through the end uses.

Another important use to us is synthetic rubber, like rubber applications, both export as well as domestic tied to automotive, again, down fairly significantly in the near term. And then oil sands.

And as you guys know, oil sands is – we’re tied to the large producer in that market. And while their circumstance has been dire, these large manufacturing units don’t turn quickly.

So I wouldn’t say we’re seeing anything unusual in demand in oil sands yet, although we – it’s certainly a risk. What is happening as we’ve been talking about for about a year is that our customer is implementing efficiency projects, and so our demand to them in the second quarter is down consistent with that prior expectation.

But I really don’t attribute that to the pandemic. So if you take it at the aggregate level, in March, we saw very minor impacts.

We all know that this started in Asia and started rolling through Europe and the U.S. So our initial impacts were on some polyethylene consumers in Southeast Asia that had turned down demand as they saw supply chains back up.

So that was really economic driven, but it was related to the pandemic. So that was late in March.

And frankly, that’s actually returned. So that’s not really the driver.

In our domestic business, which is, of course, the bulk of our demand, that really started a little bit in April. And I think in May, we’re seeing another year down in terms of demand.

So as we look across the second quarter today, it’s not unlikely that we’ll see notionally a 15% reduction in demand in the solvents business. At TC on waxes, of course, we have a lot of exposure from an end-use perspective to hot melt adhesives.

But again, that has some split to it between, like the home – delivery home corrugated box type applications, which are strong, but we also have exposure to furniture applications in the U.S. Southeast.

So that’s probably – we’re going to feel some downward pressure I would expect in the second quarter. We’re working to mitigate that.

The benefit we have in the wax business is that we’re – frankly, we’re small in the context of the overall business. So we’re working hard to see whether or not we can find alternative markets for that product.

But from an underlying demand perspective, it’s net down also. And then lastly, on custom processing.

We have a portfolio of end uses there, like everything else, fairly diversified. Some of it ties into polyurethane end uses, which again have their automotive and construction and home bedding type application ties.

And we have seen some reduction of some of the custom processing. But I would say it’s not as – not to the level that we see in solvents at this point, something less, 15% overall is what I would expect.

Got it. Thank you, Patrick.

That’s great color. Can you comment a little bit on the benefit that you’re expecting from lower inputs in Q2 at this point?

I know you commented on Q1 the last time you reported. Maybe talk about what spreads you’re seeing now, and if byproduct spreads have expanded from where they were in Q1 also?

Yes. So actually, that’s going to be a challenge for us in the second quarter.

So let me talk through a little bit of that. So as we talked about, if you look at our selling kind of cash cycle as it relates to cost of goods coming in and our selling prices, we’ve said that our payables were long payables, right?

So we have a lag, essentially in a falling market that hurts us. So if you imagine overlaying, for instance, the graph that you see in our deck on the decline in the prompt market for natural gasoline with a lag, you can see that we actually today or maybe I should say two days ago, there was a continuation of falling feedstock profile in our portfolio.

So what that means is there continue to be negative impacts in the second quarter with respect to falling feedstock prices. So we still have that headwind as of today.

And I should speak a little bit about what’s going on in kind of the general hydrocarbon market. So as you appreciate, our byproduct value is tied to the pricing of benzene, toluene and those are highly related to what’s going on in the fuels market.

And frankly, as we’ve all seen, the fuels market has been in complete disarray for the last four weeks, five, six weeks. We saw the negative WTI posting at the end of last month.

So right now byproduct values are highly compressed to the point of being materially negative in April. So that’s going to be a challenge for us.

What I expect is these markets rebalance as they always do. In fact, we’ve seen a remarkable change as we’re all watching these past five days in hydrocarbons.

So WTI is up over 100% in the last five trading days. We’ve seen natural gasoline daily price go from really $0.40 two days ago to $0.50 yesterday.

So I really can’t give you a very valid forward look on how this hydrocarbon volatility is going to play through. But if you’re watching, I just urge you to watch WTI and that we’ll have correlation [ph] in Brent.

We’ll have a strong correlation to our inputs on natural gasoline and gasoline volatility will have impact on how benzene is going to be trading around, which will influence our co-product values for the remainder of the quarter. But unfortunately, I just have to tell you, it’s an uncertain time and we’re just taking appropriate actions that we can control to manage through the volatility that we’re facing.

Got it. Thank you.

And then finally, just for Sami. How much of the CARES and the PPP cash that you’re getting in the door is kind of a forgivable grant or loan that you can keep or how much needs to be returned at some point?

Well, first of all, the CARES Act loan is designed to support our continuation of our workforce as is in terms of wages, benefits, headcount and all that. So that’s where that money is going to go.

In terms of the forgivability piece, Jon, we’re going to examine that. There are criteria in terms of how much has to be used for payroll.

There are other allowed uses in terms of things like utilities and rents and those kinds of things. So we’ll have to go through that analysis later in the quarter along with our auditors and determine what’s a forgivable amount.

Okay. Should we consider it a 100% loan at this point?

I think that’s the conservative scenario, is to consider 100%. We believe that we will qualify for a significant amount of forgiveness, but I don’t know what that amount is right now.

Okay, got it. Thank you.

And then, Pat, if you had just any final comments on the rest of the sale of AMAK and if there’s been any change in the buyers?

Sure. No real update, as you appreciate.

We updated at the end of March, early April. We were able to close the ARMICO piece, of course, and didn’t have the rest of the buyers come in due to all the shutdowns that were going on in the region.

Those shutdown situations actually haven’t changed. Both Saudi and Dubai and the other GCC countries remain largely in shutdown.

And of course, this month, beginning a couple of weeks ago, we’re now into Ramadan. So things are really just quiet in the Middle East.

And I really don’t expect anything to change until we get into early June, they return back from Ramadan and hopefully will begin to open up their economies.

Got it. Thank you very much, guys.

I appreciate the answers.

Thanks, Jon.

Good morning, guys. Congrats on a good start to the year.

Thanks, Joe.

Thanks, Joe.

So prior caller asked most of the questions I had. Just maybe two other things.

Sorry about my voice as well. I’m struggling with allergies luckily.

Wax pricing was down quarter-over-quarter, about 10%, 15% but your volumes spiked back up. Was it higher volume of lower priced waxes that drove that or any other color you could give there?

Yes. I think it’s mostly a mix effect.

But listen, all of our customers are watching input costs and what they call every day, looking for relief because we’re all suffering in this environment. So everyone is appropriately and aggressively pushing on pricing, as do we.

So I don’t think we’ve seen significant erosion in pricing at this point, but it’s a pressure we face. But that particular effect was more about mix.

Okay. And then just kind of following on some of the stuff from the prior caller.

With pricing – with feedstock pricing kind of now stabilizing a bit and WTI’s rebound, do you guys expect that there will be an opportunity to catch up some of the negative impact of the falling price that occurred during April or possibly during May to where it will somewhat wash out or do you think you’re going to have compressed margin this quarter?

So we talked about the 4.5 million in the first quarter. And if we were at feedstock pricing from two days ago, I would tell you that we still have some negative impacts in the second quarter, but they’re less.

So sequentially, it will be less negative. So you’d have in convoluted sequential math, that means it’s an improvement.

But candidly, it’s anybody’s guess how all these hydrocarbons are going to price out for the – in the near term. So as I said, we jumped from $0.40 to $0.50 a gallon yesterday and the day – well, yesterday, effectively – that was up over 20% yesterday.

And I can’t tell you where it’s going to be tomorrow. So it will – it’s a structural element for us.

So whether it’s good or bad, it will flow through. Ultimately, if you believe we returned to prior norms of crude pricing, then that will flow back through the P&L consistent with that return to higher prices.

But honestly, Joe, it’s just – every day is kind of a new day in the crude world.

But you did see the benefit on the cash side, Joe, and I mentioned that in terms of the April cash, that growth was really mostly driven by the fact that AP reduced as a result of lower prices.

Okay, fair enough. And then one final thing.

You mentioned byproduct values are materially negative right now or at least they had at some point reached that level. Do you guys have any ability to build up a byproduct inventory and wait for an opportunity to sell that at somewhat of a less negative valuation?

So two components that answers; the short answer is physically no. We don’t inventory it nor do we have the storage capability to play physical inventories for market timing.

And frankly, the second answer is we don’t think we have any particular wisdom on calling hydrocarbon prices. So it didn’t seem prudent for us to be effectively trading by moving those inventories around.

My inclination would have been at $40 crude, maybe we would build inventory, and then it goes to $20. So I just don’t feel like that’s a smart position for us to take.

So we just try and run low cost, run efficiently and lean and then manage the volatility through our portfolio.

Okay, fair enough. I’ll turn it over.

Thanks, guys.

Thank you. First of all, I do want to come back to that $4.5 million feedstock impact.

How much of that was due to your reduction of inventory and chewing into that higher-priced inventory? And then how much of the 4.5 million was due to the contract lag that you would be experiencing with your customers, which we would understand or think we understand that there is just a natural lag, but the feedstock prices do work into pricing.

So if that’s correct, can you break those two out please?

Yes. Roughly about 1 million to 1.5 million was volume as we pulled volume down and the balance of that, call it, 3, 3.5 was price/cost impact.

And Sami, would you be comfortable with me characterizing that as a contract lag impact?

Yes. Effectively, it is.

The cost layers are not – Pat mentioned this overhang on – not overhang, but AP versus AR difference. That’s really the driver on the cost/price side.

Okay. So maybe I have to take this offline and you’re welcome to cut me off here, but it would be my understanding, and so correct me where I’m off here, that when feedstock’s pricing goes down, that there is a lag.

Well, actually that lag is supposed to work in your favor when feedstock goes down and work against you when feedstock goes up, correct?

No. Think of it this way.

So we have lags on the sales – so we’ve talked about before, right, a significant portion of our sales contract are on formula. So they reference a natural gasoline price.

And many of those formulas reference a prior month price. And then on the feedstock side, we also have the combination of both a reference to a prior month as well as the actual physical inventory that’s in our system.

So those – when you think about those things in aggregate, that basically means your cost of goods sold reflects an older price than the adjustment in your product price. When we talk about the lag, that’s what we’re talking about.

So in a falling market, your product pricing is reflective of a market price that’s newer than your feedstock pricing. So that’s why we lag.

We’re long payables and we get the negative impact of that in a falling market.

Understood. And so – I’m sorry, did I just cut you off?

No, it is a little bit noise in the system, go ahead.

So if feedstock prices were simply flat from this level, which seems highly unlikely given the volatility in the market, but if feedstock prices were flat, then you would see this lag effect go away because the feedstock would then catch up with the newness of the market price.

That’s right. But recognize that in April, we had effect – we had a negative effect because it was still falling in April.

Just so we’re talking about within the current quarter, just recognize we’re starting already in April with some negative effects.

Right. Okay.

Thank you for that clarity. And then I’m going to jump to the mine for a second and kind of go off on a potential squirrely direction.

When does the Guyan gold production begin at the mine? And given the delays in the closure of your sale, are there any adjustments that may work in your favor if the Guyan gold production begins before you close the rest of the sale?

Sure. So the Guyan gold project, of course, that was launched and approved by the Board early last year and it’s a capital project that’s been continuing.

They were anticipating completion by this summer. And they’ve had some impacts on their ability to complete the project, frankly, because they can’t get external to Saudi resources in for certain technical work.

So that’s just delayed the project for some period of time, not extensively, but they have some delays. But it’s progressing and it looks to be a good project.

That was all contemplated, of course, in our negotiation. So I wouldn’t say that – and we have negotiated price.

It’s not a formula. So the price is the price.

We expect the buyers to pay the price and we expect them to – we expect to get this thing closed by the end of the third quarter.

Great. Thank you.

And then lastly, would you talk about your sales initiatives to build the volumes, especially prime product volumes?

Sure. I’ll talk kind of about our growth funnel that we launched last quarter, is really the way in which we think about this as we’re driving value for shareholders generally.

So it encompasses really any work that requires, frankly, thoughtful execution over time to deliver value, and we focus that approach on feedstocks. You saw that in the Martin contract.

That’s actually a negotiation that started, say, a year ago, effectively. You saw that in our announcement of the Odyssey contract, which again really got underway – that negotiation got underway last summer.

So these things do have some lead time to them. Other pieces that are in this portfolio are custom processing projects, where we’re engaging with customers to bring new business in against the assets at TC and at South Hampton.

So there are projects in for both sites. There are some application type projects where we will drive higher utilization of the assets we have.

We’re looking at, in some cases, repurposing assets. Those are very long cycle times.

That’s nothing that’s going to hit in the near term. But we tend to think of it really comprehensively across the company and we want to bring both the kind of the priority and the visibility to the executive leadership team, so that the proper projects get funded and they get properly resourced.

So we can continue to deliver the value that we’ve outlined in there.

That’s fair. Thank you.

And then Sami, with the tax refund that you’re anticipating, the anticipation of the remainder of the line sale closing and then the forgiveness of the PPP loan, you’re going to have some meaningful debt pay down. What are you anticipating that your interest expense reduction will be?

Right. So in terms of debt pay down, right now I think we believe that’s probably a little premature.

On a number of fronts, none of this – these items that you mentioned, we don’t have the cash in hand just yet. I think we’ll look at it.

And depending upon business circumstances in terms of cash flow expectations from the business, we’ll decide on how much and when to pay down. But you’re absolutely right.

If all these things happen as they’re supposed to, we should have decent liquidity. And depending upon business conditions, we could choose to pay down a meaningful amount of debt.

I pose the question in the spirit of your interest expense. And this actually could be the equivalent of one of the large projects that you are thinking about.

One way to think about the interest expense question, Bill, is if you look at the first quarter, we didn’t do the revolver borrowing until March. So the interest expense that we had in the first quarter is reflective of a debt balance that’s roughly, call it, $80 million or so.

And that’s reflective also of current rates. So that’s probably a good place to start in terms of projecting.

We should probably move on to next caller.

Yes. Thank you, Bill.

Great. Thank you, guys.

Hi, guys. This is Mitch.

Most of the questions have been asked. One question I had has to do with your discussion on the price – average price of wax sales.

And can you just discuss – you discussed mix a bit. Did falling higher petrochemical prices also impact?

And if you have any sense of how much of that was from each?

So we talked before about our – we have been on a path to augment our feed supply with other on-purpose products that are higher costs. So as part of that migration, those are higher-priced products because they also have higher costs.

So that is a driver of some of the mix effect that you’ve seen. And just we had other sales in the quarter that basically brought the average price down.

Our feedstock cost doesn’t move that much because most of our feedstock are these byproducts that doesn’t have quite the volatility that you see if you’re buying toluene, for instance, to make polyethylene wax on purpose. So our niche in the market has been – we’re making a product that fairly competes with on-purpose polyethylene, but at a lower price point and a lower cost point for us.

That remains our niche. Those guys are certainly under pressure for price reductions because their customers can see their feedstock costs have come down a lot.

That’s why I mentioned – we’re under pressure every day to sustain our pricing. But we haven’t had significant price reductions yet because we continue to kind of carve out this niche that we have.

Okay. So in terms of looking at wax sales, the level that it was in the first quarter would seem to be a sustainable level at least for the short term?

In the near term, we are tied to certain end uses. You get qualified in for those applications.

And when those applications turn down, like our exposure to furniture, you can’t turn on the dime. But what I had mentioned is, so [indiscernible] mitigate if we can find other end uses, other channels or other outlets maybe at lower pricing than the established customers.

But we’re trying to mitigate the loss of volume because of the turndown of that demand. I don’t know that we’ll get it all done this quarter, but that’s our mitigating step to counter this reduction in demand.

Okay. And then the second question has to do with custom processing.

So you had a nice move forward in terms of custom processing as you’ve got the hydrogenation and distillation units running. Do you expect that to continue into the near future or do you have visibility in terms of how that’s moving?

Yes. So we had the benefit of a combination of some really good – finally seeing the turn in operations we’ve been talking about, right.

So that was consistent across the site, including hydrogenation which was great. It also corresponded with the circumstance in particular end use, wax end use, frankly, that had some supply interruptions from others.

So we had an opportunity to capture a lot of volume. Some of those disruptions are continuing, but frankly the supply chain is having its own issues, not related to us.

So I don’t think in the second quarter you’ll see the same level of business across that unit. We think the opportunity remains there.

The customer that we had that we did the project with, in the first quarter, remains interested. So we’re optimistic that we’ll be able to continue to drive business against that asset.

But I don’t expect in the second quarter you’ll see the same level of revenue against it.

Okay. Thank you.

Hi, guys. Back in I think 2014, 2015 when oil crashed, the margins actually went up due to some type of minimum markup, meaning you can’t just keep dropping your prices to the point of you’re getting killed on it.

Is that still a factor or is that what you’re wrestling with here in this – they’re trying to work on price, but you have kind of a minimum that you have to make. You can’t just keep dropping to unlimited for feedstock?

Yes. So candidly, I’m not familiar with what happened in 2014.

Neither am I.

Yes. So I can’t really comment on the specifics of what that was about that.

What you’re describing isn’t a situation we find ourselves in today.

One thing is that prior to 2017, this company was on LIFO inventory accounting. And they switched to FIFO.

So you could be thinking in those terms.

That was more just about the fact that the – at the lower levels, the gross margins went up just due to the fact that they didn’t drop the price all the way in correspondence. It wasn’t so much about quarter-by-quarter timing, but that’s fair enough.

One other question. So you’re going to keep the 20 million from the revolver?

You’re going to keep that borrowed?

So listen, I would characterize where we are today, guys, as a very defensive posture. We really don’t know how the market is going to unfold in the coming, frankly, months and quarters.

Personally, I’ve been through these resets in the market before and they can be brutal. So we’re posturing ourselves to deal with very tough circumstances.

Today, we’re at difficult circumstances, but I’ve learned over the years it can always get worse, frankly. So listen, we’re taking every action that we think is appropriate to sustain the company through a tough time.

And then as we get through that time, our strategy remains the same and our expectation with respect to our balance sheet remains the same, which is we think around a 2x or less than a 2x lever is the right place to be ultimately, and that we should be rewarding our shareholders through other mechanisms as cash is available. So I think all those things become options.

But today we’re going to remain defensively postured until things settle down.

And what I would add to that is that as we’ve seen in the last few days with hydrocarbons turning up, that’s good on earnings but it has an unfavorable working capital impact from a cash standpoint. So we’ve seen a collapse in prices over the last number of weeks.

I’m not saying it could go the other way, but to have that defensive position is good in the event that we do have a working capital spike.

Okay. And I noticed you said comp went up in Q1.

Have you looked at Board comp, executive comp in the short run to try to – if it’s all hands on deck, I noticed a number of other firms are looking at that or where are you at on that?

So, we always test how we reward everyone in the context of the market. And as we’ve surveyed the market, we think we are appropriately positioned.

One of the things that’s important to us and you saw by virtue of us participating in the PPP loan is the maintenance of our organization and our people and their pay and benefits. So while in a normal circumstance we might be looking for significant cost reduction opportunities, that’s not really the path we’re on today because we want to be consistent with really the intentions of the PPP program, which is to support the continuity of our workforce.

And that remains our priority.

Okay. Thanks.

Good luck for the quarter.

Okay. Thank you.

Thank you, May. Listen, thank you all for your interest in Trecora and participating on the call today.

I want to acknowledge the tragedies this pandemic has caused to individuals and families around the world. I also want to acknowledge the hardship on our people.

We have drivers on the road delivering to our customers every day. We have operators coming to our sites and many in a work-from-home situation, balancing the needs of our company with the needs of their family.

These present unique challenges and I thank all of them for their dedication, hard work, diligence in staying safe, keeping those around them safe, meeting needs of our customers and sustaining our company. It’s been – candidly it’s been – I’m really impressed with the maintenance of the morale of our organization and their ability to deal with these changes very, very helpfully.

Despite these current challenges, our focus remains the same. We continue to prioritize the safety of our people, those who come to our site and the communities in which we operate.

We’re focused on improving the reliability and productivity of our operations and to advance our growth programs. As we saw last year, we believe excelling in these dimensions will sustain us through the current challenges and create significant shareholder value over time.

And so again, thank you for your participation. Thanks, May.

We’re done.

Thank you.