Arabian American Development Management Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 1.13 | About: Trecora Resources (TREC)

Arabian American Development (ARSD) Q2 2013 Earnings Call August 1, 2013 4:30 PM ET

Executives

Kim Rogers-Carrete

Nicholas N. Carter - Chairman, Chief Executive Officer, President, Chief Operating Officer and President of Texas Oil & Chemical Co II Inc

Connie J. Cook - Chief Financial Officer, Treasurer and Secretary

Simon Upfill-Brown - Executive Vice President

Cameron Donahue - Regional Vice President and Partner

Analysts

John H. Curti - Singular Research

Thomas Harenburg

Mitchell Lester Sacks - Grand Slam Asset Management, LLC

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Arabian American Development Second Quarter 2013 Earnings Call. [Operator Instructions] This conference is being recorded today, August 1, 2013.

I would now like to turn the conference over to Kim Rogers with Genesis Select, Investor Relations for Arabian American Development. Please go ahead, ma'am.

Kim Rogers-Carrete

Thank you, Chad, and good afternoon, everyone. Welcome to the Arabian American Development Company's Second Quarter 2013 Financial Results Earnings Call. The earnings release was distributed over the wire service approximately 30 minutes ago and should be available on most financial websites.

On our call today will be Mr. Nick Carter, President and Chief Executive Officer; Connie Cook, Chief Financial Officer; and Simon Upfill-Brown, President of South Hampton Resources. Following management's prepared comments, there will be a formal Q&A session open to participants on the call.

Before we get started today, I'm going to review the Safe Harbor statement, which is Slide #2 in the presentation. Statements in this conference call are not descriptions of historical facts are forward-looking statements relating to future events, and as such, all forward-looking statements are made pursuant to the Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including the following: a downturn in the economic environment; the company's failure to meet growth and productivity objectives; fluctuations in revenues and purchases; impact of local, legal, economic, political and health conditions; competitive conditions; impact of relationships with critical suppliers; impact of changes in market liquidity conditions and customer credit risks on receivables; the company's ability to successfully manage acquisitions and alliances; industry cycles; specialty petrochemical product and mineral prices; feedstock availability; technological developments; regulatory changes; foreign government instability; foreign legal and political concepts; and foreign currency fluctuation, as well as other risks. Further information on potential factors that could affect the company’s financial results may be found in the company’s reports on Forms 10-KA and 10-Q filed with the Securities and Exchange Commission, which can be reviewed at www.sec.gov.

As a reminder, this webcast is accompanied by a slide presentation that is accessible on the Arabian American's website at arabianamericandev.com. For those who want to participate in the Q&A, you must do so through the dial-in provided in the release today and in the call announcement on July 18.

And now I'd like to turn the call over to President and CEO Nick Carter, for his comments. Nick?

Nicholas N. Carter

Thank you, Kim. I'd like to thank all of you who have joined us for the conference call to discuss our second quarter of 2013 financial results. As Kim mentioned, slides are available on the website, and Slide 3 identifies the agenda for today's call. I'll start with an overview of our financial and operational highlights. Connie Cook will follow with a discussion of the financial details, and Simon Upfill-Brown will discuss South Hampton Resources operational updates. We will then conclude with an operational update on the AMAK mining activities.

Now let's turn to Slide 4. Our second quarter revenues were $56.0 million, which was a 9.5% decrease from the $61.8 million we recorded in Q2 of 2012 but an increase sequentially of approximately 6.1% from the $52.7 million from the previous quarter. The volume of our petrochemical products was 15.7 million gallons compared to 17.2 million gallons, a decrease of 8.6% from the second quarter of 2012. But that was up 6.7% from the previous quarter, which reflects typical seasonality.

A couple of significant reasons for the volume decrease of almost 1.5 million gallons was due to the reduction of orders from a customer in Latin America that has begun sourcing from a local manufacturer that's recently come back online, and we had another larger customer simply ordered less due to flat business results.

Additionally, we had significant growth in our deferred sales, which are, in essence, goods in transit. Deferred sales increased by 59% from the same quarter a year ago. And then, as Simon will address, our feedstock composition changed somewhat, producing less byproducts.

Turning to Slide 5. We're happy to see our volume improve sequentially, and that is typical seasonality we expect. However, last year's second quarter was exceptionally strong, with both revenue and volume being at record levels. And when the adjustments mentioned previously are taken into effect, the 2013 second quarter was essentially on the same line as prior year.

Turning to Slide 6. This slide shows the historical trend in our feedstock price, which shows the movement of the price over time. In the last 1.5 years, the price has fluctuated within a range. And though the feedstock price dropped this quarter, it continued within that same range. Going forward, we anticipate that pricing will continue the same pattern for the rest of the year. Historically, our feedstock pricing has followed the crude oil market in direction and, to a lesser degree, magnitude. We are seeing more of a disconnect with crude oil -- with crude price changes still being reflected with a price bounce in natural gasoline, but the magnitude of the changes are not near as comparable as they were just a couple of years ago.

Our focus remains sales and service, and with the formula pricing structure we're now using with about 50% of our customers, we anticipate our margins to be relatively stable for the year even if prices fluctuate. So we believe the company is well positioned to benefit from increased North American natural gas production and believe the country is continuing towards a more stable pricing in the petroleum market, which will be good for many petroleum-related businesses such as ourselves. We are evaluating how to best meet the long-term opportunities we see on the horizon with announced additions of ethylene crackers that are expected to come online in the next 3 to 5 years. These crackers produce feedstock for polyethylene, and polyethylene is our sweet spot in this niche business that we operate.

As we have previously stated, we are looking at various options to expand our processing capacity and should have more to say on this later this year.

Now I'll hand the call over to Connie Cook, our CFO, who will review our financial results for the quarter. Connie?

Connie J. Cook

Thank you, Nick. In reporting these numbers, I would like to remind you that we have converted to the equity method of accounting for our investment in AMAK. Therefore, prior results have been restated to incorporate the change. On June 26, we filed amended documents 10-QA for the first quarter and 10-KA for 2012 with the SEC to reflect the PCAOB audit of AMAK's financial results and to reconcile the difference between the audited statements and our previous filings.

For second quarter 2012 numbers, the restatement has the effect of lowering Q2 2012 net income slightly, from $3.8 million to $3.5 million, and reducing diluted earnings per share earnings per share from $0.15 to $0.14.

Moving to Slide 7, this presents the income statement for 2013. As Nick stated, our quarterly revenue decreased 9.5% to $56 million compared to revenue of $61.8 million for the same period in 2012. The decrease in revenue was volume-driven. Volume decreased 8.6%, primarily due to significant reductions in sales to 2 customers, lower byproduct sales and a significant increase in deferred sales, which are not recognized until the customer accepts delivery of the product and title has transferred. Deferred sales volume increased 59.1% in the second quarter of 2013 over the second quarter of 2012.

Petrochemical product sales represented $54.8 million or 97.8% of total revenues for Q2 of 2013 versus $60.7 million or 98.1% of total revenue for the same period last year. We recorded $1.2 million in toll processing fees during the quarter, which was relatively stable from a year ago. We are revisiting our toll processing contracts and have been able to negotiate the increases on most of them.

The cost of sales and processing including depreciation was $47.4 million versus $53.5 million in the same period in 2012 due to lower volumes processed and a decrease in the average cost per gallon of feedstock. Average feedstock price per gallon decreased 7.3%, and volume decreased 6.6% from Q2 of 2012 to 2013. Volume process decreased due to lower demand and a change in feedstock composition.

Total gross profit for the second quarter of 2013 was $8.6 million as compared to $8.4 million in the same period last year. Our gross profit margin for the quarter was 15.3% compared to 13.5% in the year-ago period. Typically, our gross profit margin increases as volume increases. However, during the second quarter of 2013, gross margins were up due to a combination of average feedstock price per gallon decreasing, improved feedstock composition, higher byproduct pricing and increased operating efficiencies.

G&A costs for the second quarter 2013 were $3.5 million versus $2.7 million for the second quarter of 2012. The increase is primarily due to increases in insurance premiums, property taxes, consulting fees and auditing fees. In addition, in the second quarter of 2012, we reversed expense related to expired options, which reduced post-retirement expense and, therefore, G&A by approximately $413,000. We reported net income attributable to Arabian American in the second quarter of 2013 of approximately $6.3 million or $0.26 per basic and diluted share, compared to a restated $3.5 million or $0.14 per basic and diluted share in Q2 2012.

EBITDA for the second quarter of 2013 was $10.6 million compared to $6.2 million last year. Adjusted EBITDA, which removes the effects of AMAK for comparative purposes, for the second quarter of 2013 was $5.9 million compared with $6.5 million in the second quarter of 2012.

Slide 8 presents our balance sheet. Inventory increased $2.5 million from December 31, 2012 due to the increase in deferred sales, which are counted as inventory even though they have been shipped, and an intentional build of inventory going into hurricane season.

Long-term debt was approximately $19 million at quarter end compared to $15.7 million for year end 2012. During 2013, we drew $6 million on our line of credit for working capital purposes and to fund the capital contribution to AMAK. We made principal payments of $700,000 on our term debt and $2 million on our line of credit.

We had $28.5 million in working capital at June 30, 2013 compared to $29.2 million at year end 2012. We ended the quarter with a current ratio of 3.4:1, and shareholders' equity increased to $93.8 million from $81.9 million at December 31, 2012.

That concludes the financial review. I would now turn the call over to Simon Upfill-Brown. Simon?

Simon Upfill-Brown

Thank you, Connie. We'll turn to Slide 9, where I'd like to add some detail on our sales and operational activities for the quarter. As we have reported, we enjoyed a volume increase from Q1 2013 to Q2, and we expect growth to continue. The victim of the refinery fire is back on stream, and we sold them approximately the same volume in the second quarter of '13 as we did in the same quarter 2012. This customer has committed additional volume to us going forward.

We supplied Canadian oil sands with approximately the same volume in the first half of '13 as we did in '12, but the customer continues to struggle to bring their process fully online. Although we were behind on a few customers, as Nick mentioned, the big difference between sales volumes in the second quarter of '13 and the second quarter of '12, and you will recall that second quarter '12 was and remains a record quarter for us in terms of sales, includes lower byproduct sales, a good thing; as well as a 73 -- 730,000 gallon increase in deferred sales for the June '13 quarter. Had deferred sales been the same as in 2012, our average monthly prime product volumes would've been higher in the second quarter of this year than the same quarter in 2012.

On the international petrochemical side, Q2 2013 revenues were $17 million, which is up 6.3% compared to the $16 million in the year-ago period. Volumes are also up 4.6 million gallons versus 4.1 million gallons in the second quarter of '12.

We expect continued growth as we invest other regions of the world. In July, we hired a representative in Shanghai, China to help us better understand demand for our products in Asia.

In terms of our current facility in Silsbee, we continued excellent progress during the quarter and are pleased with the results which we have seen from our de-bottlenecking and equipment upgrades. We completed the capacity testing in June and are happy to report that our current pentane capacity is equivalent to feeding 8,500 barrels today -- barrels per day of 2011 feed. The part of this capacity increase is driven by changes in the feed itself, higher pentane content and lower -- less low-value byproducts.

We are currently running about 6,000 barrels a day with this new feed, a little high to build inventory for potential hurricane shutdowns, as Connie mentioned. 6,000 barrels a day with the current feed is equivalent to feeding roughly 7,200 barrels a day with the old feed. Although this takes significant pressure off our need for expansion, we continue to analyze strategic options, and we'll go ahead with the permit application for Train B [ph] in Silsbee.

We continue to evaluate acquisition targets that will fit our existing business model, niche markets with a high service component which will allow us to add new customers and products. Although we have considered a number of these, nothing has fit thus far. We continue to see strong interest in our custom processing capabilities and are looking to add at least one new customer this year. We have been successful in negotiating an increase in fees and services with some existing toll customers. We pride ourselves on being responsive and flexible, which allows us to react rapidly to customer needs and deliver on the exceptional quality, impeccable service reputation we have earned from our Fortune 500 customers. This remains an important competitive differentiator for South Hampton Resources.

With that, I'd like to turn the call back to Nick. Nick?

Nicholas N. Carter

Thank you, Simon. Turning to Slide 10. The mine is continuing to produce zinc and copper concentrate daily, and we're happy to report that the mine is producing in line with what the original feasibility study indicated, and we see the development proceeding as planned. Now it's important that they keep everything running on schedule. This was a good quarter operationally, but we will see considerable fluctuations going forward, as AMAK is still processing a mixture of development ore that can vary in grade significantly as tunnels and rooms are built near the main ore bodies.

AMAK is projecting approximately 34,000 tons of zinc and 33,000 tons of copper concentrates for fiscal 2013, although for the first half of the year, they're above that rate of production. They will be processing development ore until sometime next year, as they're currently working on the second of the 3 ore bodies and probably won't have the third fully developed until next year.

Until recently, AMAK had not been running the gold recovery circuit. They wanted to make sure that all of their systems were running satisfactory and proper organization was in place prior to undertaking the handling of the cyanide, which is used in the gold recovery process.

The test run of the gold-silver recovery circuit is under way, and the results are good so far. They will run for about 30 days for a good operational test. And then they shut down, and the economics will be evaluated based on the cost of operations and the output. In running this circuit, AMAK will be able to get a higher payout for the separated gold and silver. They have been getting partial payment for the gold and silver which was left in the zinc and copper, but of course, total recovery should have a much better return. Myself, Simon and Arabian American Director Al McKee, make up the commercial committee for AMAK, and we are in charge of marketing the product for AMAK. So we're closely in tune with that end of the business. Even though metal prices are off somewhat, the first 2 quarters of 2013 met expectations in terms of revenues and returns.

AMAK now has steady operations and has accumulated most of the equipment needed for an ongoing operation, and the spare parts procurement program is under way. The next step to ensure is a stable, experienced workforce. That program has been established and organized with the recent adoption of a typical pay grade position and benefits HR package.

As this has been a total startup-type business, AMAK has stepped through the pieces as time and funds have allowed. Unfortunately, there is no current firm news on the applications for the additional lease that's been applied for. AMAK Saudi shareholders assure us that the approvals are being worked through the process, but we don't have any firm date on results at this time. Obviously, we're following the progress of these closely, and we'll report any significant events.

In summary for the year and going forward, we'll look at Slide 11. We're pleased with our financial results for the quarter and feel that the outlook for our industry this year as well as the longer-term macro backdrop with the outlook for abundant natural gas bode well for the company's long-term prospects. We're working on diversifying our customer base and expanding our geographical footprint with additional opportunities in the Middle East, oil sands projects of Canada, the Asia Pacific area. We're optimistic about the potential for international business to continue to grow.

We're focused on evaluating the best approach for capacity expansion so that we will be well positioned to benefit from ethylene capacity projects, which have been announced by the leading petrochemical companies. Ethylene production ultimately leads to polyethylene, and polyethylene is one of our most important markets.

The AMAK mine is now a producing entity, and as milestones are met, it continues to encourage us with its potential as well as the expansion potential in the surrounding area. AMAK's actively exploring current ore bodies of the existing lease, and when the time is right, we'll start exploring neighboring areas. We believe it should continue to grow and prosper over time. From a financial perspective, we believe shareholders will ultimately benefit from the equity income stream from the mine.

This concludes my prepared remarks. And at this time, I would like to open the call for questions. Operator, please open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of John Curti with Singular Research.

John H. Curti - Singular Research

Wondering -- you mentioned the 2 customers that were -- volumes were down in the quarter. Do you expect both of those customers to continue to take less product going forward and lower volumes for the balance of the year from them?

Nicholas N. Carter

Well, one of them, the Latin American customer, most likely that will be the case. There was a little plant down there that was producing some product for them, and that old plant's back online, and so we're still getting a piece of the business. We're just not getting all the business like we used to. And for the other customer, I think it's more of a deal where their business is just currently flat and it's kind of hard to predict. Polyethylene, in general, in the U.S. so far this year, production has been flat, and I think that's part of the reason we were expecting about a 7% increase in polyethylene production U.S. -- in the U.S. And so far, it's been flat. It had not shown that 7% increase. I think that's part of the difference, but it's kind of hard for us to predict.

John H. Curti - Singular Research

With respect to the Canadian tar sands customer, are they taking their contractual amounts? Are they deferring any purchase at this time because of their operational difficulties?

Nicholas N. Carter

I think they're in a maintenance shutdown right this minute, and August shipments have been deferred. But up to this point in time, they're pretty well taken what we expected them to take. So hopefully, it's going to be a short-term maintenance shutdown.

John H. Curti - Singular Research

Do you believe that your increased shipments to existing customers or new customers might be able to offset some of these deferrals from the tar sands?

Nicholas N. Carter

I think we're going to -- we're starting to see more international shipments. It's probably more likely to offset some of that tar sands than, like I said, polyethylene industry, whatever is predicted to increase has been kind of flat. So I would say that more offset probably would come from the international business.

Simon Upfill-Brown

But there are few places where we'll see some increased volumes, too.

John H. Curti - Singular Research

Just switching gears to the mining operation, you mentioned that, I guess, production levels were a little better than anticipated, at least at the halfway point of the year, a little ahead of kind of the projection targets for the year. Can you give us what either quarter or year-to-date sales of the 2 concentrates have been in terms of tons?

Nicholas N. Carter

I don't have those numbers in front of me, John. I have to -- I'd have to go back and look at the reports. I guess the answer for this call would be, no, I couldn't. Just don't have them in front of me.

John H. Curti - Singular Research

That's fine.

Nicholas N. Carter

The second quarter shipments were down a little bit mostly because the ship came in one day late. There was supposed to have been a ship come in, load of zinc concentrate right before the end of the quarter, and the ship got there one day late, and so it falls into the third quarter. So going forward, I mentioned that the process rate is above what the target was, and the reason is that the grade of the ore for the next 6 months is supposed to be a little weaker than what they were doing on first 6 months. And consequently, they're predicting that their process output would be a little less for the last half. And it all has to do with the ore grade that they're getting into.

John H. Curti - Singular Research

Kind of a question for Simon. A little unclear on your comments on the throughput in terms of the -- I guess the feedstock that you're running now has a higher percentage of normal pentane, so it's a better-quality product, so you're getting more throughput. So it takes some of the pressure off to get the capacity expanded maybe as quickly as we had been thinking before?

Simon Upfill-Brown

That's correct, yes. It's not just normal pentane. It's both pentanes are high. In fact, the isopentane is perhaps even a little higher than the normal pentane. And so we get more output, and the polyethylene demand is primarily the pentanes. And so that allows us to -- a little bit more time to do our analysis and to make sure we expand in the right areas.

John H. Curti - Singular Research

You said you're going ahead with the permitting of the expansion of...

Simon Upfill-Brown

Yes. I mean, it's just -- at this stage, it looks like the lowest-cost capacity increase, and we just want to be ready, because the permitting process can take up to 9 months. So we want to just make sure we have that in hand so that we are ready to add capacity should volume increase a little bit better than what we forecast now beyond our -- beyond our current ability to supply, John.

John H. Curti - Singular Research

Lastly, a question for Connie. In terms of the balance sheet, a little more debt, a little less cash, a little more inventory. Should we kind of start to see some of that begin to reverse in the back half of the year? Debt come down? Inventories down?

Connie J. Cook

Yes, the only reason that I can potentially see that we might not be able to decrease that very much would be payment of income taxes. It may take some of our cash flow to make our estimated tax payments. So as far as the debt, I don't expect it to go up, but I'm not sure that it's going to come down a whole lot either. On the inventory piece of it, a lot of that is based on all those deferred sales that we have to count as inventory. And what happened to us this time is we had over 700,000 gallons additional above previous quarters that we had to take into inventory and defer into either July or August, depending on when they get there. Our typical -- normally, we run about 5 million on a quarter-by-quarter basis, and it went up above 7 million this time. Now a lot of that -- most of that is because it's foreign sales. If our foreign sales hold up, above 7 million may become the new norm. It's hard to predict when that's going to turn around. Of course, you know all of it will hit July and August, but we may have that much deferred at the end of July or at the end of August as well.

John H. Curti - Singular Research

What did the plant operate at, at what level of capacity in the second quarter versus last year?

Simon Upfill-Brown

Well, it depends very much on how you're measuring capacity. But at the 6,000 barrels a day of feed, we ran at about 73%. But if -- our capacity is higher than that now and significantly higher than that on pentanes. But if we take a current feed capacity of 6,800 barrels a day, we're in at about 64%.

Operator

[Operator Instructions] Our next question comes from the line of Mitchell Sacks with Grand Slam Asset Management.

[Technical Difficulty]

The next question comes from the line of Tom Harenburg with Carl M. Hennig, Inc.

Thomas Harenburg

These deferred sales from Q2, have those now been delivered in July? Or are they still hanging out there?

Connie J. Cook

Well, part of them will deliver in July, but not all of them.

Thomas Harenburg

But July is over, Connie.

Connie J. Cook

Right, I haven't looked. We haven't figured that at this point, since that's just the first. But some of them will hit July, but some of them are going to hit August.

Thomas Harenburg

They will, okay.

Connie J. Cook

Because they can have a 45- to 60-day delivery, Tom.

Thomas Harenburg

It is that long. Okay.

Connie J. Cook

Yes, it's quite a while.

Thomas Harenburg

Okay, okay. And same in the de-bottlenecking now, is that totally completed?

Simon Upfill-Brown

Yes. I think our limit now, the current bottleneck is the isopentane distillation capacity. So to get beyond that, we will need more distillation towers. That's what it looks like, Tom. I mean, it's worth [ph] it, but that's what it looks like.

Thomas Harenburg

So their plant is really pretty much, at this point, able to -- is running at -- I should say, is running at, but is able to meet maximum capacity?

Simon Upfill-Brown

Yes. That's what it looks like.

Thomas Harenburg

Okay. And as far as expansion, earlier, it was given that you'd look to probably make a decision by June. That obviously has been delayed. Have you got any kind of a time frame on that?

Simon Upfill-Brown

No, not yet. I think a lot depends on the growth in international sales, whether we can justify a plant overseas, how Canadian oil sands look and then the availability of supply in places like places like Corpus Christi for Eagle Ford. So the fact that we can delay a little bit is a good thing for us.

Thomas Harenburg

It is.

Simon Upfill-Brown

So we can really work the numbers and come up with, I think, a much better decision than if we had to rush into it.

Thomas Harenburg

Okay. And as far as the oil sands and the project up there, you're probably, what, a 50-50 part of the delivery process, and your competitor is also the same? Are they facing delays as well?

Simon Upfill-Brown

Oh, yes, yes.

Thomas Harenburg

They are, okay. And what can you tell us...

Mitchell Lester Sacks - Grand Slam Asset Management, LLC

It's not because we're losing share or anything there. It's just because they're struggling.

Thomas Harenburg

And what can you tell us about that? I mean, Is this going to get up and running before the end of the year? I mean, a best guess estimate.

Simon Upfill-Brown

Well, they were supposed to start last September. So you can imagine the pressure they're under up there to get that thing rolling. I mean, it's a big investment and getting a lot of attention. I'd hate to be the project manager. Well, he's probably not the same project manager anymore. So our expectation is that they should get back up pretty quickly because they just need to. They are so way behind and have this huge, huge investment [indiscernible]

Thomas Harenburg

Have you been up there and looked at the physical operation?

Simon Upfill-Brown

No, I have not. In fact, we had a trip planned for this August, but they asked us to delay because of the problems that they're having. I've met the people in Calgary, but we haven't actually been to the mine site yet.

Thomas Harenburg

So did they tell you how long that delay was going to be, which might give us an idea as to when they're going to start up again?

Simon Upfill-Brown

Well, they were saying come late September or October. So I mean, that might be an indication. But I think it's very hard for them to predict at this stage, because you know what these startups of these big new systems, how they go, I mean, you think you've got something solved, and something else pops up. So -- but that's -- as soon as we can go, we'll go.

Thomas Harenburg

Now there's another project up there somewhat similar, correct?

Simon Upfill-Brown

There are a couple of other projects lined up waiting to be confirmed that have not been confirmed as yet.

Thomas Harenburg

And one of them was going to use their own product, as I understand. Is that correct?

Simon Upfill-Brown

I think there is one running already using their own product. In the 2 new ones, we're planning to use something similar to what we make.

Thomas Harenburg

Okay, okay. So are they running into difficulties? Or they -- is their operation running much smoother?

Simon Upfill-Brown

They're -- it has been running for some time. I don't know how they started up, but they have been running for some time.

Cameron Donahue

Okay. So then there's a potential for 2 more startups there that you would be bidding on both of those?

Simon Upfill-Brown

Right.

Thomas Harenburg

And any idea? I mean, are we talking year, 2 years, 3 years?

Simon Upfill-Brown

To build them takes 3 years or so, so, and they haven't even been confirmed that they're going ahead yet. So 2018 or that sort of time frame.

Thomas Harenburg

Okay. So going to this project, though, you had -- if memory serves me, you had a 5-year contract with them, and 2 years or 3 years was going to be the startup, and then you were going to get into the full phase, and then that was extended another 2 or 3 years, so you've got roughly a 5-year contract with them. Will these 2 new startups, I mean, will they be looking to sign contracts relatively soon on a startup basis and then going forward?

Simon Upfill-Brown

It's hard to predict. I mean, the first thing we're waiting for, of course, is to see whether they go ahead. And we're in contact with those people that if they don't go ahead, obviously, nothing happens. If they do go ahead, we'll jump right on it. But we remain in regular contact with them.

Thomas Harenburg

Okay. And the delays that they're having up there are not really related to the products that you're feeding them?

Simon Upfill-Brown

No.

Thomas Harenburg

Okay, sounds good. We'll look for -- I assume that we're going to see an increase in revenues here in the third quarter. Is that correct?

Simon Upfill-Brown

That's what we're hoping for.

Nicholas N. Carter

We hope so. Tom, I wanted to expand just a minute on this, why we've kind of changed our tune a little bit on this expansion. There's 2 things that happened, and one is that, as we talked about, we did these test runs to really see what our true capacity was and to see where the bottlenecks were. And the other thing we did was a very thorough market study to try to predict volumes over the next 5 years, or actually went out 7 years and did a very detailed study on the market as we know it, which we probably know more about it than anybody. And it appeared to us that we had more time with the capacity that we confirmed before we really had to get into this expansion thing, and that's really what took the pressure off, because it's really a double-edged deal. The market study with the volumes indicated that we would need, and then also a true capacity test. And that's how we've arrived at the fact that we think we had more time than what we were originally thinking. We just got better data.

Simon Upfill-Brown

And we'll be able to make a better decision as a result.

Thomas Harenburg

And that's kind of playing into your favor, right?

Nicholas N. Carter

Yes, that's right.

Thomas Harenburg

Okay, okay. And do you expect an increase -- let's see here. Your new company that you're talking to, that will increase volume by about how much, do you figure?

Simon Upfill-Brown

Well, we -- it's very hard to predict. I mean, one company is committed to an additional 500,000 gallons a year, which is a nice bump.

Operator

And we have a follow-up question from the line of John Curti with Singular Research.

John H. Curti - Singular Research

This is for Nick. I was wondering -- I know earlier in the year, cash flow from AMAK was being used to buy extra spare parts, possibly pay down some great [ph] debt or accounts payable. Wondering as we exited the second quarter, any cash flow being devoted to paying down some of their longer-term debt?

Nicholas N. Carter

No, not at this time. But they've still got a moratorium on that SIDF money that they borrowed that was -- when we did borrow that equity raise back in January, February, we did pay down some of the bridge loan. But the SIDF loan, which is really the longer-term debt, there is moratorium. And that's because SIDF as of yet has not finished advancing everything they're supposed to advance. So consequently, the debt repayments have been put off for another year. So there's really not anything to do at this point in time, and AMAK is still in process building working capital. There's still a lot of ongoing development expense and stuff, and so there hasn't been any debt payments at this point.

John H. Curti - Singular Research

How much more remains to be advanced by the SIDF?

Nicholas N. Carter

In dollars, it's probably, let's say, I guess it's probably something like $12 million or $14 million or something like that, I guess. Somewhere in that magnitude. And it all has to do with there's some discussions about what expenses are allowed and what are not, all that, we're working through that. The CFO, in fact, has got a meeting with them this month to try to get all that resolved.

John H. Curti - Singular Research

Likely to be resolved by year end?

Nicholas N. Carter

I would think so, yes. Hope so. Goodness. Of course, things -- the history of the deal is that things just happen slowly over there, so yes, that's another example. So I would think with all the paper that's been thrown at it over the last few months, that I hope we'd be getting near to the conclusion. But like I said, they have already agreed that there wouldn't be any debt payments due for a year. So it's -- whenever they finally kind of close the thing out or finalize it, with that point in time, the debt schedule will be set for the repayments.

John H. Curti - Singular Research

With respect to the petrochemical operations here in the United States, on the last call, you had been talking about the likelihood that you would be running at pretty close to capacity during the summer months and maybe into the early fall. has that been the case or going to be the case?

Nicholas N. Carter

Well, there've been periods we've gotten the thing up pretty high. It's not been a -- from the first of the month to the 30th of the month. But there's been times that we cranked the thing up pretty high, and plus, now that we're trying to build a little bit of potential hurricane inventory as a little safety valve there, yes, we're running pretty close. Like we've talked about is that what is the capacity is kind of been a moving target, but we're still up in the range where we thought we would be, I would say that.

Simon Upfill-Brown

But we have a higher throughput of pentanes now, too, which relieves some of the pressure.

Nicholas N. Carter

Yes, the feedstock change has been actually pretty big change.

John H. Curti - Singular Research

And with that feedstock change, does that new feedstock cost a little bit more, but you're getting more throughput and...

Nicholas N. Carter

No, actually the prices are same.

John H. Curti - Singular Research

Price is the same.

Nicholas N. Carter

It's better feed, it's got more C5s and less byproduct.

John H. Curti - Singular Research

I know you do not give guidance and make projections, but wondering, is that -- this quarter was a little bit lower in terms of sales. Obviously, a couple of customers backed off a little bit. Given with -- given that is likely to continue, given what new customers you have coming online or existing customers maybe increasing demand, for the third quarter of this year, is it reasonable to expect that we will see a year-over-year decline in shipment volumes? Maybe not as large as the second quarter decline, but probably a decline nevertheless?

Nicholas N. Carter

Well, I guess, I don't -- I haven't really looked at third quarter last year. But let's see if Simon has...

Simon Upfill-Brown

It's between the sales -- the sales volume was a little bit higher than the second quarter over this year.

Connie J. Cook

Yes, sales volume was 16 million for the third quarter of last year, 16.1 million.

John H. Curti - Singular Research

That was down a little bit from the second...

Connie J. Cook

From the second quarter frac [ph] because it was 17.2 million.

John H. Curti - Singular Research

But was there anything in the second quarter or third quarter last year that dropped that down that would not be happening this year?

Simon Upfill-Brown

I don't see why we should see a significant drop from this quarter to next quarter. But that's why it's always difficult to know what our customers are going to do exactly, but -- yes.

John H. Curti - Singular Research

I'm not thinking so much in terms of the second quarter to third as from third quarter last year, that 16.1 million.

Nicholas N. Carter

Probably nothing -- the only thing affected, John, would be this feedstock change, where your total volume might be down, but your prime products would be up a little bit.

Simon Upfill-Brown

And maybe your margins...

Nicholas N. Carter

And your margins would be bigger, better, up, yes. But your total volume might be less. That's probably the only change, because you'd assume there would be a big increase we had in deferred sales, that that'd be pretty hard to increase that yet again. And so with that magnitude, and so probably the biggest thing would just be the feedstock difference and less byproduct and more prime products give you a higher margin the less total volume.

John H. Curti - Singular Research

Could you define again what prime products are?

Nicholas N. Carter

C5, C6s. The pentanes and the hexanes. It's all the pentanes and hexanes.

John H. Curti - Singular Research

And in terms of this pretty substantial increase in deferred sales, that was due to increased international sales?

Nicholas N. Carter

Right. And that was a pretty big jump. And it would -- for them to quickly jump up that same amount again would be probably unusual.

John H. Curti - Singular Research

You're going to have to add some -- several new customers for that to happen.

Nicholas N. Carter

Yes, probably, or the customers we've got would have to change their operation somehow to show that much of an increase again.

John H. Curti - Singular Research

So the increase in the quarter this year, the 59%, due to a combination of new customers and increased sales for existing customers?

Nicholas N. Carter

Yes. And I think what you're going to see is the third quarter of 2013, if you compare it to the third quarter of 2012, you'll probably going to still see that incremental change, similar to what we saw in the 2 second quarters, you know what I mean?

John H. Curti - Singular Research

That kind of sounds like if you're continuing to increase your international sales, you're going to have to cycle through 4 quarters to get to the new higher base, where the levels are not so dramatically higher.

Nicholas N. Carter

Yes,.

Operator

And we do have another follow-up question from the line of Tom Harenburg with Carl M. Hennig, Inc.

Thomas Harenburg

Yes, can you give us an update as to where we stand on bringing AMAK public? Has there been any discussions? And knowing the time frame that it takes to get anything done over there, have you got any idea as to when we might see that?

Nicholas N. Carter

Well, I think we're still -- I think we discussed that a little bit on the first quarter call. Still looking at the first half 2015. I don't see anything that I thought would change that.

Thomas Harenburg

Okay. Have there been any discussions? Are you starting to map things out on that?

Nicholas N. Carter

Oh, yes.

Thomas Harenburg

You have?

Nicholas N. Carter

Oh, yes.

Thomas Harenburg

Okay. So it is moving forward?

Nicholas N. Carter

The system they got over there is that the banks, in essence, buy the issue, the whole issue, and then they -- banks market it to the public. And they've gotten some preliminary proposals from 3 or 4 banks and different things, trying to kind of figure out where we're going with it at that -- yes, there's some preliminary stuff going on.

Thomas Harenburg

Excellent. That sounds good. At least it's on the drawing board.

Nicholas N. Carter

Yes.

Operator

I'm showing no further questions at this time. Please continue with any closing remarks.

Nicholas N. Carter

Okay. Well, I'd just like to thank everybody for their participation, and thank you for the interest in our company. We know your time is valuable and hope you'll join us for our next call. We also hope you'll see the unrecognized value that's in our stock and will continue to follow our progress. So thank you very much for calling in, and we will see you next time. Thank you.

Operator

And, ladies and gentlemen, that does conclude the Arabian American Development Second Quarter 2013 Earnings Call. Thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!