FutureFuel Corp (FF) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the FutureFuel 2013 second quarter conference call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will hold a question-and-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded today, August 9, 2013. I would now like to turn the call over to Mr. Lee Mikles, President of FutureFuel Corp. Please go ahead, sir.

Good morning. Thank you, Kevin. Good morning. This is Lee Mikles from FutureFuel Corporation. Thank you for participating in today's call to discuss FutureFuel's 2013 second quarter financial results and business progress. Joining me today from FutureFuel is Rose Sparks, our Chief Financial Officer.

I'd like to remind the listeners that comments made during the call will include forward-looking statements within the meaning of the federal securities laws. These forward-looking statements involve risk and uncertainties that could cause actual results to be materially different from any anticipated results. For a list and descriptions of these risks and uncertainties, please review FutureFuel's filings with the Securities and Exchange Commission. Please note that the comments of this call contain time-sensitive information that is accurate only as of today, August 9, 2013. FutureFuel disclaims any intention or obligation to update or revise any financial projections or forward-looking statements, whether as a result of new information, future events or otherwise.

With that out of the way, I'd like to turn our attention to the second quarter results. Second quarter 2013 was a record quarter for financial performance. Revenues were up 3% for the quarter. Adjusted EBITDA totaled $25 million, up 327%. Net income increased to $18 million, or $0.42 per diluted share, up from $8 million, or $0.21 of diluted share.

Rose will walk us through the details, and then we'll be available for questions. Rose.

Thank you, Lee, and good morning, everyone, and thank you for joining us. For the second quarter, revenue increased 3%, to $106.1 million from $103.2 million in the second quarter of 2012. Biofuels revenue increased 3% and totaled $64 million, as compared to $62.3 million in the comparable period in the prior year. We experienced increased biodiesel sales volumes with a higher average selling price, in a very strong market for biomass-based diesel RINs.

Chemical revenues increased 3% to $42 million. Revenues increased for the following chemicals. The antimicrobial industrial intermediate increased 92%; other custom chemicals, 45%; other performance chemicals, 6%. Partially offsetting these increases was the 29% reduction in the proprietary herbicide and intermediates, a 12% reduction in the bleach activator, the 4% reduction in CTOs, a 3% reduction in DIPD. As previously reported, our sales contract for the proprietary herbicide and intermediates will terminate on September 1. We anticipate that we will continue to do business with our customer after the termination date, provided we can reach mutually acceptable terms.

Turning to gross profit for the quarter, both segments experienced improved gross profit from economies of scale on fixed resources, as new chemicals were added, but to a greater extent from biodiesel over the comparable period of 2012. Biofuels gross profit increased from $3.2 million in 2012 to $12.8 million. This difference resulted from improved market conditions for biodiesel, largely as a result of the presence of the dollar blender's credit in effect as compared to the second quarter of 2012, when the tax credit was not available. And for the comparison period, biodiesel profitability in the second quarter of 2012 was negatively impacted, due to our inventory of unsold internally generated RINs. We do not allocate production costs to internally generated RINs, and from time to time, we enter into sales of biodiesel on a RINs-free basis. At June 30, 2012, we had RINs available for sale which were sold in the third quarter of 2012. Comparatively, we had minimal RINs at June 30, 2013.

These improvements in gross profit for the quarter were partially offset by reduced hedging gains in the second quarter of 2013, which totaled $2.3 million as compared to $8.6 million in the same period of '12. Chemical segment gross profit increased 31%, to $14.8 million from $11.2 million in the second quarter of '12. The improvement in gross profit, other than from improved economies of scale and fixed resources, was attributed to an increase from the bleach activator business, as the sales prices increased on the customer's reduced sales demands, and in the variation in product mix sold. Income before interest and taxes was $25 million, as compared to $11.6 million in the second quarter of '12.

Net income totaled $18.2 million for the second quarter, or $0.42 per diluted share. This compares against $8.5 million for the second quarter of 2012, or $0.20 per diluted share. For the six months ended June 30, 2013, revenues increased 5% to $198.2 million, as compared to $189 million in the first half of 2012. Biofuels' revenue increased 6%, from $109.7 million in the first half of 2012 to $116.1 million in the first half of this year. The gallons sold increased, as did the average selling price of B-100, given stronger biodiesel market conditions, as previously mentioned.

Revenues from chemical sales increased 4%, to $82.2 million from $79.3 million in 2012. Revenue from other custom product increased 27% and revenue from the antimicrobial industrial intermediates increased 47%. Partially offsetting these increases was the reduction in revenues from the bleach activator of 6%, from the proprietary herbicide and intermediate of 11%, and from DIPD of 10%. Gross profit for the first half of '13 was $49 million, up from $27.2 million in 2012. Both segments again benefited from the improved economies of scales on fixed resources.

Chemical gross profit increased 22%, to $27.9 million, up from $23 million in 2012. Other than the improved economies of scale, this increase was attributed to profits realized in the change in product mix, the variability in production expenditures and timing differences, and price adjustments to customers for such variability, and improved profit on the bleach activator, as the sales prices increased our lower sales demands. Biodiesel gross profit increased $21.2 million, from $4.3 million in the first half of 2012. This increase was attributed to the retroactive reinstatement of the 2012 dollar blender's credit of $2.5 million recognized in the first quarter of 2013. This credit is set to expire at the end of this year and no such credit existed in the first half of 2012.

Biodiesel gross profit was negatively impacted in the first half of 2012, due to the unsold inventory of the internally generated RINs, as previously mentioned. Also impacting gross profit for biodiesel was reduced hedging gains of $3.7 million, as compared to $5.2 million in the first half of 2012. Income before interest and taxes was $44 million in the first half of the year, as compared to $22.2 million in the first half of last year. Net income totaled $32.2 million for the first half of the year, or $0.75 per diluted share. This compares against $15.6 million for the first half of 2012, or $0.38 per diluted share.

And Lee, that concludes my remarks. I'll turn the call back over to you.

Thank you, Rose. That was really a good overview.

First, addressing the biodiesel margins and profitability, they continue to be very strong, given the RIN pricing and the return of the government's $1 biofuels credit. The RVO -- that's the required volume obligation -- we're very pleased that the EPA decided in the last week not to change the 2013 RVO. We'll hope and we expect that they'll continue to support the growth of biofuels, as it considers the proposals for next year's mandate. We also hope that our legislature will take a serious look at the dollar federal credit and not let it lapse at year-end, which they're very good at kind of letting that pass and then putting it in on a retroactive basis. So we're hopeful that they'll get in front of that, but we can have no assurance.

Chemicals remain very strong, with the bleach activator slowing, as expected, and the pre emergent herbicide contract that expires in September of this year. In spite of that, I think we've continued to show very solid results, and I think extraordinary profitability there. And that's a combination of product mix and execution. We had talked about those products previously declining, and so it's not unexpected, and not something that we haven't had time to get in front of. But we continue to discuss with the customer the continuation of that relationship, as it applies to the herbicide, on a modified toll basis. The chemical division has done a good job of replacing these declines from the larger contracts. I continue to be very optimistic about the future prospects there.

On July 29 of this year, we received notification from the customer on the intermediate anoid powder, you'd know that for the lithium-ion battery, a termination of that contract in accordance with the terms effective August 9, 2014. No additional material is expected to be produced or sold in 2013 or '14. Termination of the sales of this contract may affect the terms of the grant that we received from the US Department of Energy related to construction equipment utilized to produce the intermediate anode. While we're unable to predict or estimate the impact of this notice from our customer at this time, we do not presently believe that the ultimate resolution of this matter will have a material adverse effect on the overall financial performance results or operation, or our cash flow.

With those comments, Operator, we'll turn it over to questions.

(Operator Instructions)

Just as a comment, as we wait here for the questions to queue up, there's been a lot of questions come in about RIN pricing. And I think people feel that the RIN acceleration price this year vis-a-vis the end of the year has had a lot to do with the increased profitability. And it has. I mean, that's clearly been a positive for us. But if you look year-over-year, RIN prices in the second quarter of this year averaged $0.94. Last year, they were $1.30. So there's more going on here, not the least of which is the return of the dollar credit, but the other dynamics within the industry. And for the six months period, RINs so far this year have averaged $0.79 versus $1.39 last year. So it's clearly that profitability isn't coming exclusively through the RINs, although they are up from year-end, which they closed year-end at about $0.70. So they're quite a bit higher than they were at year-end, but lower than last. So I just wanted to make those notes.

Our first question comes from John [Tanawase] with CJS Securities.

That was a very nice quarter.

Hello, John.

Can you talk about the potential changes to the ethanol legislation that are being thrown around, and maybe how that impacts your biodiesel operations?

I think as it applies to the ethanol changes -- and clearly, I think the genesis of that is pretty clear. It has to do with a blend wall issue with ethanol at the 10% level. And part of that would have to do with the fact that the growth in gasoline has just not been there. It's actually declined a little bit. So I think the changes that are forthcoming on the ethanol side effect us one of two ways, if not both. One, we could see a modest reduction in the amount of corn oil that's in the marketplace, as you get reduced ethanol required usage. And I think that's on the margin. I don't think that's a huge issue, the best we can tell at this particular juncture. And the other side would be people jumping over and using the biodiesel RIN, buying the biodiesel RIN to satisfy their ethanol requirement. There had been a lot of speculation on whether they'd been in or out of this market. My suspicion is from time to time, they had been in, but for the most part they had been out of that particular market, although we have seen a little bit of reduction in the prices since that was announced, what was it, 10 days ago or whatever. We have seen a little bit of reduction in the RIN prices. And I think a little bit of that has to do with the fact that they took the settlement period, if you will, from the 20% carryover, from two months to four months next year. So they elongated the compliance period. So that probably has a little bit of a modest dampening effect on RIN prices. That's the best I know at this point, John, but I think it's a work in process.

Okay. You don't think the recent decline in the RIN pricing has anything to do with production expectations?

I don't know. Again, that's a hard one to answer. I suspect, given the timing of it, it had to do with the extension of the period from two months to four months. But again, John, there's no way I can know that for sure.

Okay. Got it. And then just touching back on the corn oil availability, we know that a large competitor of yours has a start-up facility. Just wondering where you think input prices are going to trend going forward, especially given the commentary in corn oil, as well.

Again, I think you and I have certainly talked about this, and there's been a lot of speculation about the Valero Darling facility and how much grease that might take off the market. And there's speculation that running flat out, that that could be as much as 10% of the grease market. And the market has been well supplied by corn oil. And again, my suspicion to 10% is not insignificant. But corn oil has certainly kept the market well supplied. My anticipation is that it will continue to do so, even with any modest cut-back on the ethanol side. But again, John, I can't know that for sure. It something we keep, I think, a very close watch on, and I think our ability to store product gives us a decided advantage, and I think some opportunity. When others maybe can't take product at certain unfortunate periods for suppliers, we're able to hold that product for longer periods of time. And again, as you know, we have both feedstock tankage and finished product tankage; and again, I think that's a reflection of our strategy to be able to take those feedstocks when others may not be able to hold them.

Okay. Got it. Finally, given your very nice cash flows in the first half, are you still holding out to do a potential facility acquisition, or is there a chance of perhaps another special dividend later in the year?

The dividend, our adjusted dividend, lastly, that's a Board decision. I have no way of knowing what the Board will ultimately decide and when they'll decide to do anything with that, if anything. On the acquisition side, clearly that is still our intent. It's been our intent for a couple of years. Again, there have been players in this marketplace that wanted to pay more for these assets than we did. We continue to be very active, both on the chemical side and the biodiesel side. I think the biodiesel side, candidly, got slowed down a little bit by the fact that the dollar came back in. It probably made some marginal producers that were either closing down or slowing down, probably gave them a little bit of a lift this year and maybe changed price expectation. So it's probably dampened a little bit of the M&A activity on the biodiesel side this year. Whether that returns or not, I can't answer. But that clearly would be the intent to grow the business, both organically and through acquisition.

Okay. Great. Thanks a lot.

Thank you, John.

Our next question comes from Craig Irwin with Wedbush Securities.

Good morning and congratulations again on the strong quarter.

Good morning, Craig.

Lee, I wanted to ask about the chemical segment. That segment seems to be outperforming with some pretty robust margins, revenue that's fairly consistently stronger than what we're looking for, with the decline of PG&E and Arista. Sorry, P&G and Arista. 35% margin, very strong. Can you talk about what's going on in that segment, what's driving the growth, and whether or not there were any one-time items in the margins?

It's an important point you make, Craig. And I think it comes down to a couple of things. I think it's product mix, clearly. And the much discussed decline in the P&G business and the Arista business, the herbicide business is being replaced clearly and actually outstripped a little bit by new business that we're bringing on and continue to bring on. Again, I think that the increased sales of biodiesel has a big impact on that, as well, as that absorbs more and more of the fixed costs of the plant. I think you've seen these margins go from a 20% number into the mid-20%s, up to 30% last year, and then 32% and 35% for the two respective quarters here. So again, I think it's very good execution as to product mix. But again, don't underestimate the amount of allocated overhead that's being absorbed on the biodiesel side. So I'm very pleased, and I'll give a shout-out to the people running that business. I think we've executed extremely well. But again, if biodiesel was to take a turn, that would have an effect, a negative effect, on these margins.

Understood. Understood. So then one of the things that we noticed on the cash flow is that your CapEx doubled sequentially. Can you talk about whether or not you're investing for a specific program -- well, first, if it's on the chemical side or the biodiesel side -- and whether or not you're investing for any specific program, and if maybe this is a take or pay contract or if there's other details you might be able to share?

Yes, yes, no. That means that we continue to invest in both the improved product mix on the chemical side, and there are larger and smaller pieces of business there that we continue to invest in. And as you and I have talked about before, the investment can either come from the customer or come from us. In the particular pieces of business that we're adding now, a lot of that investment is going to be coming from us, and obviously we have an expectation of a return on our capital and a return on our manufacturing of the ultimate product.

On the biodiesel side, it's an effort to continually improve efficiency on that side. And we've continued to invest in that in the first six months of this year, so I think we're really investing on both sides. But when I say it's a specific product, all products are specific by nature. But again, there isn't anything that we have to talk about at this particular juncture about any new particular piece of business that would be individually identified.

Understood. Understood. Then just going back to the biodiesel side of the business, there's been discussion that the EPA could be looking at an RVO of something like 1.8 billion to 1.9 billion gallons for 2014. In the reaffirmation of their 1.28 billion gallons this last week, they spoke very highly of biodiesel and they seemed to indicate that the industry could produce 2 billion gallons. How would this impact you, as a low cost producer, versus some of these more marginal players that will be brought into the market, and would that allow you more flexibility as far as feedstocks? What do you look at when you consider this sort of scenario?

Well, I think those are numbers that obviously would be extremely positive for the business, if that's the required usage for next year. Those are a bit higher than what had been batted around in the marketplace. But again, let's go to the origin of it, Craig. And clearly, you understand this as well as anyone. Biodiesel doesn't have the issues that you have with ethanol. And the blend wall issues and the rest that are being talked about as it relates to the RVO and ethanol, we don't have in biodiesel. You're only talking about approximately 2% of the over-the-road diesel market is biodiesel today. That's 1.3 billion gallons, 1.28 billion, versus a 60 billion gallon market, not counting railroad or marine. So it's still a very small percentage. We don't have the corrosion issues that you have at 10%. Most of the engine manufacturers, Cummings and so on, have approved the new engines up to a B-20. So there's a lot of room for biodiesel, in my view.

Expanded, to your question about feedstocks. Again, we make an effort each and every day to try to improve our process to take more and different types of feedstocks. I think that we have, on exploratory basis, taken in algae, made some very terrific, wonderfully performing product out of algae. We just can't get it in commercial scale. So I do believe that the 2.0 manufacturers out there are mostly on the feedstock side. Some of them want to also refine the product, but most of it's coming on the feedstock side. So any breakthrough there would be welcomed by us; because as a refiner, that just gives us more product in the marketplace. But a 1.8 billion, 1.9 billion RVO next year, I think, would be a tremendous boost to the industry. And I think that we and others would be beneficiaries of that.

Great. And then last question, if I may. I understand, from talking to other companies involved in the biodiesel industry, that RIN prices quoted on some of these sources are not necessarily an accurate representation of where RIN values are being traded in the market. Sort of like the LIBOR of old actually, right? People put in what they want. And some of the companies out there have RIN purchase agreements, or long-term RIN supply agreements, where they take RINs at a collared price, and that also impacts the biodiesel transaction prices. Can you talk about whether or not you have any of your biodiesel volume in sales agreements that are not based on spot values in the market, and whether or not you have RIN-related agreements under a similar sort of contract?

A couple of things. I think the futures market that's trying to get off the ground and evolve for RIN prices would be a positive for the industry. I think any time that a producer is able to hedge the outcomes -- and again, I think there's some natural reasons, Craig, on why that would evolve. You've got natural buyers and you've got natural sellers. In terms of our agreements, Rose, maybe you'd want to make a comment on that, on RINs that we may hold and any types of agreements that we may have there.

For RINs, the majority of our business, I would say, is RINs attached with the product we sell. However, for the RINs that we do separate, and we do from time to time with our regional market that we're trying to develop, we spot-sell those at the most opportune time. As far as a separate RIN contract, we haven't engaged there yet, because we don't see the benefit of it as of yet.

But as for as the biodiesel prices that you negotiate with your customers, are they heavily impact by spot RIN prices, or more by the long-term demands of these customers of yours?

It depends. We do it both ways. As far as the pricing formula, it can be structured either way.

Great. Thank you very much for that color.

Our next question comes from John [Tanaron] with CJS Securities.

Just a quick follow-up. Given the chatter on next year's RVO, or potential, what is your ability to increase production and capacity over the next 18 months or so and execute against that opportunity? Just trying to quantify that a bit better.

A couple of things, John. I think as we've talked about before, having taken our capacity down to try to improve our front end over the last couple of years, and then bringing it back, trying to bring it back up to capacity that we've endeavoured to do, and I think we've done a good job making progress on that front. The question is do you jump from a 59 million stated capacity in your facility, and as we move back up to that number, again, there's a small producer credit issue, and then you look at your localized market and how much can it really absorb. I think the number is higher than our stated capacity, but is it double? We don't think so. And again, this all comes back to how far you can move this product effectively. With the margins in the industry, ourselves and others are able in the current environment to produce, you could probably move the product quite a long way and still have economics that would be favorable. But I think cycle to cycle, you've got to look to kind of -- because the product comes in, the feedstock comes in by rail, goes out by truck, for the most part. So you're looking at maybe a 300-mile radius to move that product efficiently and effectively, economically.

So again, I think there's a little bit of room for growth at this particular facility, if we chose to do so. It isn't a question of the cost increase capacity. It's what the local market can absorb. So I think if we're going to grow modestly, we can certainly do it at this particular site as the market continues to mature and become more robust. But again, I think the larger issue of increases on the biodiesel side would include acquisitions. And again, we would be very excited about making acquisitions on that side of the business if, in fact, the right facility at the right price were available.

Got it. Can you quantify what would happen if you exceeded that small producer, that 60 million limit?

You've had in the past a 10% credit, which is on your first 20 million gallons. So it's $2 million. So that's why kind of the magic under 50. But again, these credits have a way of coming and going. And again, that may be a factor going forward, and again, that may not.

Great. Thank you very much.

I'm sorry, just a slight correction there, Lee. It's $1.5 million.

$1.5 million, okay.

Yes, sir.

Thank you.

Our next question comes from Craig Irwin with Wedbush Securities.

Thanks. Just a couple more questions on the chemical side. Lee, can you update us on the approximate facility utilization rate right now and how you see this progressing over the course of the next few quarters?

Well, I think -- I'm going to let Rose take the actual number, because she's a little closer to it than I am, but I think there is still some modest growth available at this facility. As they often say, if you listen to your sales force, it's going to be limit out in the next 30 days, but it's a little bit harder to wrestle that to ground. I think we've done a very effective job of filling the plant up with profitable business. But again, in terms of capacity utilization, you never get to 100% in a plant like this. It just doesn't -- the puzzle doesn't fit together that way. But Rose, do you have an idea of where we are and how much more capacity is available at the facility, without going back and rationalizing the older business?

That's a little difficult to quantify, Lee, in the fact that we do have a batch plant. And our batch plant, yes, is becoming more full than it's ever been. But as you know, the proprietary herbicide intermediate is declining, and we are able to add some new products there that are helping to fill that gap. But there's some room for growth in the batch plant, not a considerable amount of room for growth there. Obviously, with our other custom chemical business, it depends on what type of contracts we're able to negotiate with the customer as to whether we build a separate, independent continuous plant for those customers. We can do such. But I think, Craig, your question is more in terms of our batch plant, possibly. But if you look outside the batch plant at continuous processes, it just depends on what we're able to negotiate with our customers and their needs.

Thank you. And then another question on the chemical side. Can you update us on the approximate number of customers that you have and the breadth of SKUs that you sell to these customers?

Rose, that's better for you.

The current number of customers we have right now, it would be kind of hard for me to quantify as well, because we do have the proprietary chemicals where we sell to many different customers. It's less of our, what, 4% of our revenue. In terms of our major chemical customers, where it's more custom, I would say probably 25, possibly 30. And Craig, I apologize, that's completely off the cuff. I can get you a more accurate answer later. But as far as the performance chemicals, that could be up to 100, 150, off the cuff.

Excellent. I appreciate that. Then another question on the biodiesel side. So, many years ago, Lee, when -- close to the time when you formed FutureFuel, there was significant discussion about building a much greater capacity on the biodiesel side. Can you maybe update us on roughly what it would cost to add capacity and what the potential to add capacity would be in the existing plant? What would it take to go to, I don't know, 150 million gallons or something like that, if we really did see some of the market conditions that the National Biodiesel Board is suggesting might actually occur?

Yes, it's really a logistics issue more than it is anything else. In terms of going from, call it 59 million gallons to, let's call it 159 million gallons, certainly would not be inexpensive, but it wouldn't be anywhere close to what you see in the plants that have been built in the past, where it's $1.00, $1.50 of construction costs. It would be de minimis vis-a-vis those types of numbers. But the number would not be insignificant.

But again, all the accoutrements are there. We've got, I guess I would call it, an oversized tank farm. That's Tony Novelli's business, and he knows it all too well. We did that initially, not only to accommodate this kind of straw hats in the wintertime approach that we talked, but our loading and unloading of rail capacity has doubled since we bought the plant. So I think we're ready to get a lot bigger, if the marketplace was there.

But to quantify exactly what it would be to expand the plant, I don't think we've run those numbers with any specificity, just because the marketplace hasn't yet evolved. If that RVO goes to 1.8 billion, 1.9 billion, clearly that might expand the market that we could get to, and I could probably give you a little better answer at that particular juncture.

Understood. Understood. But what sort of lead time would it take to complete a capital project like that? Are we talking something that's 18 months to two years?

No, no, it's not anywhere close to that. It's probably 9 to 12 months. But again, don't hold me to that number. That's probably a guess, just given, if I look back on our other expansions that we've had, I would hope that we could do it in a year or less. But again, that's probably less of a priority right now for us than executing on the capacity that we have in place today. And again, if we could get some clarity out of the government on what these RVOs are going to be going forward, what the credits are going to be going forward for more than months at a time, 12 months at the outside, I think it would allow us and others to invest more prudently and plan more effectively for the future.

Great. Thanks again for taking my questions, and congratulations on the strong execution.

Thank you, Craig.

And I'm not showing any further questions at this time. I'd like to turn the conference back to our host for closing remarks.

Thank you both very much. Thank you, Rose. I think did you a very good job of giving us a financial overview of the company. We appreciate each and every one of you as shareholders and stakeholders, and we'll look forward to talking to you after our third quarter results.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.