FutureFuel Corp (FF) 2013 Q3 法說會逐字稿

Welcome to the FutureFuel 2013 third quarter conference call.

(Operator Instructions)

As a reminder, this conference is being recorded today, November 8, 2013. Now I'd like to turn call over to Mr. Lee Mikles, President of FutureFuel Corporation. Please go ahead, sir.

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

I like to remind 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 risks 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 filings with the Securities and Exchange Commission. Please note that the content of this call contains time sensitive information that is accurate only as of today, November 8, 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 our third quarter results. In Q3, we had a very strong quarter in terms of financial performance. Revenues were up 37% for Q3 2012, a new record at $121 million in revenues. Adjusted EBITDA totaled $28.2 million, up 17%. Net income increased to $15.3 million or $0.35 per diluted share, from $12.5 million or $0.30 a year ago. Rose will walk us through the details, and then we will be available for questions. Rose?

Thank you, Lee. Good morning, everyone. For the third quarter ending September 30, 2013, sales revenue increased 37% to $121.1 million from $88.3 million in 2012 and was 14% stronger than the second quarter of 2013. Biofuels revenue increased 61% to $77.4 million from $47.9 million in the third quarter 2012 on stronger sales volumes and sales price. Chemicals revenue increased 8% to $43.7 million from $40.3 million in the third quarter of 2012. This change was attributed to higher sales volume with sales revenue increasing 39% for the antimicrobial intermediate, 27% for CPOs, 23% for performance chemicals, and 47% for other custom chemicals which included the first year shortfall payment of $2.3 million from the anode powder. Slightly offsetting these increasing in revenue was a 25% reduction in (inaudible) sales revenue. There was no change in the bleach activator for the comparable quarters.

From a gross profit perspective, Biofuels increased $6.6 million for the third quarter of 2012 to $12.2 million. This increase resulted from improved market conditions with the dollar blenders' credit in effect, which was not in effect of the prior-year quarter and the continued demand for biodiesel in the United States given the government-mandated renewable fuel standard. The Chemicals segment gross profit decreased from $15.4 million in the third quarter of 2012 to $13.8 million. This decrease included a net impairment on fixed assets for the NO powder in the amount of $1.4 million in a reduction in gross profit from the bleach activator and proprietary herbicide. Partially offsetting these decreases was the shortfall payment of $2.3 million from the NO powder customer, as increased sales volumes of products from other custom chemicals and the antimicrobial intermediate.

Income before interest and taxes was $23.5 million in the third quarter of 2013 as compared to $19.2 million in the same period of 2012. Net income totaled $15.3 million for the third quarter or $0.35 per diluted share. This compares against $12.5 million for the third quarter of 2012 or $0.30 per diluted share. For the 9 months ended September 30, 2013, revenues increased 15% to $319.3 million as compared to $277.2 million in 2012. Biofuels revenue increased 23% to $193.5 million from $157.6 million in the first 9 months, as compared to 2012. The gallons sold increased year-over-year as did the average selling price.

Revenues from Chemical sales increased 15% in the first 9 months from $119.6 million in 2012 to $125.8 million. This change was attributed to increase sales revenue from both the antimicrobial intermediate of 44%, and the other custom chemicals of 34%, which again, included the first year shortfall payment of $2.3 million from the anode powder. Offsetting these increases was a reduction in the sales revenue from the proprietary herbicide down 16%, the [IPBD] down 15%, and the bleach activator down 4%. Gross profit for the first 9 months of 2013 was $75 million, up from $49.2 million in 2012. Gross profit from the Biofuel segment increased to $33.3 million, or 206% from $10.9 million in 2012. The increase was from improved market conditions as previously discussed and partly attributed to the retroactive reinstatement of the 2012 blenders' credit of $2.5 million recognized in the first quarter of 2013. This credit is set to expire on December 31, 2013. No such credit existed in 2012. Also impacting gross profit was reduced hedging (inaudible), which totaled $1.7 in 2013 as compared to $3.1 million in the first 9 months of 2012.

Gross profit from the Chemicals segment increased to $41.7 million or 9% from $38.3 million. The proprietary herbicide and bleach activator gross profits declined in the first 9 months of 2013 as compared to 2012. That decline was more than offset by the increases profits in the other custom chemicals and antimicrobial intermediate. Income before interest and taxes was $67.4 million in the first 9 months of 2013 as compared to $41.3 million in 2012.

Net income totaled $47.5 million for the first 9 months or $1.10 per diluted share. This compares against $28.1 million for the first 9 months of 2012 or $0.68 per diluted share. Lee, that concludes my remarks, and I'll turn the call back over to you.

Thank you, Rose. I appreciate it very much. I think there was a typo that appeared, that Rose happened to mention, and I just caught it as she was talking. The revenues for the Chemicals increased actually 5%, not 15%, from $119.6 million to $125.8 million. Rose had the numbers exactly right. We had the increase, we added a digit to that. I just wanted to mention that.

Comments about the business, the Biodiesel margins and profitability continue to be very strong, with the dollar credit, the blenders credit, in spite of softening RIN prices. It was a terrific quarter in terms of that. The RVO which required usage mandate, we anxiously await to hear from the EPA what they'll do for the 2014 RVO. We thought it was going to come during the government shutdown. We haven't heard about it yet. We expect it any time. It is evident that without strong mandate in the dollar credit, the margins will suffer dramatically for the whole industry as the market adjusts to the capacity that remains. We strongly believe that they will continue to support the continued growth of biofuels, as it considers the proposal for next year's mandate. We also hope that our legislature will take a serious look now at the dollar federal blenders credit and not let it lapse at year-end as they did in 2009, and then they retroactively brought it back in. They did into the 2011 as well. They reinstated it in January 2013, retroactive to the first of 2012. The starting and stoppings don't help, so we're hopeful that they get out in front of if this time,

Chemicals remain strong with the bleach activator continuing to slow as expected. The pre-emergent herbicide contract expired, again as expected on September 1. We sold product on a purchase order basis in September to that customer while we discussed with them a path forward on a modified tolling basis. We signed a new agreement in the third quarter with another customer for a different herbicide intermediate. The revenue from the new customer will be less than 10% of our total revenues, but it will certainly help to fill the gap from the expected cancellation of the pre-emergent herbicide as we've discussed before.

As Rose mentioned, we impaired fixed assets related to the anode intermediate product with a net pre-tax amount of $1.4 million this quarter. That's a non-cash charge. The customers terminated the contract effective August 9, 2014. We do not expect any further product to be shipped under this contract. The customer is liable for the last shortfall this payment, and it is due upon termination of the contract. We certainly remain optimistic about the prospects for both segments of our business, Chemicals and Biodiesel. With that, I'd like to open the call up to questions. Operator?

(Operator Instructions)

While we have a second, as people queue up for questions, this is a good time to really thank our associates in our Company. I think we've done an extremely good job. It think they have done an extremely good job of replacing some of the run-off business on the Chemicals side. They've replaced and grown that business, and I think they are to be commended for that. The 32% margins on the Chemical business, the type of chemicals that we do is terrific, and 16% biofuel given the reduction in RIN prices during the quarter I think is a really commendable result. I think it performed at a high level, so I want to thank all of our associates for their performance. I think at senior management, we were very pleased with the performance of the underlying businesses and how they're been operated.

Jon Tanwanteng, CJS Securities.

Good morning, guys. Nice quarter and thank you for taking my questions. Obviously, we're all waiting on the EPA here. Can you bracket where you think RIN prices would be next year, if the RVO didn't increase and the credit lapses?

That is the $64 million question, Jon. A couple of things. The alleged, leaked reports out there which has the mandated usage, the RVO next year, staying stagnant word is this year, we previously heard rumors within the market. The rumors a year before happened to be true, of 1.5 billion or 1.55 billion gallons. I do not really know. Specifically, you question of what RIN price is will do, it'll certainly be a shake-up period, much like they did last year because we had no mandate until they put in retroactively, in terms of dollar credit. We ran with RIN price.

I would anticipate that they would increase how much of the dollar credit. Will that make up? I don't know. It depends on how many players fall out of the market. Without the dollar and without an increase in the RVO, you're going to knock a lot of players out of the market. Whether the dollar comes back and just the RVO does come up, you've got two parts moving. I would certainly anticipate that some players will fall out of the market, as they do. Obviously, less capacity we will get a increased RIN price.

Assuming the worst, are you guys ready to pursue plan acquisitions like you have in the past? Do you have potential targets lined up for that, if that's the case?

I think a couple of things, Jon. We've talked about it in the past, both on these calls, and I think we've been forthright that we like to be acquisitive. We'd like to make acquisitions. The prices that people have been willing to pay, and the price expectations from the sellers have just been something we didn't want to participate in. I will tell you without an increase in the RVO, and if you get any delay in the dollar credit, you're going to see more properties realistically priced on the marketplace. Given our balance sheet strength, and given our desire to want to grow both sides of our business, that would be an environment I think where we'd be very active.

Okay. Assuming that the RVO increases and the credit gets restated, would you think about other uses of cash, special dividends, that kind of thing?

Jon, we've been shareholder aware. I think the Board will continue to look at those items. We have a very strong balance sheet obviously. We're carrying a lot of cash on the balance sheet for just that event. But I think we've been prudent in use of that cash, whether it be returning some of our retained earnings to shareholders, or whether it be in pursuit of acquisitions. There's really a balance there, Jon. Again, depending on what happens going forward, whether we use our cash or whether we use other means to finance acquisitions, when and if we find them, we'll have to cross that road we get to it.

Okay. Great. Do you have any comments on input pricing? Corn and oil supplies are likely to track next year. You have a competitor ramping up the plant in Louisiana. I'm just wondering if you're seeing that having a impact going forward?

Again, we are on record as saying, if that plant was to run flat out, which as best as we can tell hasn't really done that for any length of time, it was run flat out and they were to use 100% grease. You're talking about 10% of the grease market. That to be meaningful. Having said that, given that ethanol is in a profitable situation given corn, they're running flat out. There's a lot of corn oil on the market, so the market is well supplied at this juncture

Okay. Thank you very much.

Thank you, Jon.

(Operator Instructions)

Gavin Richey, Rockwood Investments.

Good morning. Just a quick question, if the ethanol mandate comes in below the 10% mark for blending, is there any [incentive] to blend biodiesel beyond the on RVO, where ever that comes in for biodiesel?

Probably not a question that I'm qualified to answer, but if we think about it for a second, if they stop that out at 10%, they'll probably fill up their mandate themselves. One would think that they wouldn't have to jump over to our designation on the RIN side to fulfill. It may not give as much support to our RIN pricing. I think there was some thought at the beginning of the year when you had the big spike this year in ethanol RIN pricing. Guys were jumping over to get 1.5 RIN to get ours. Remember, if they can jump over and get ours, we can't get jump back and get theirs to satisfy our mandate. We'll have to wait and see at the end of the day. Again, if our RVO does not increase, theirs does not increase, which is perplexing to me because they're completely different issues. But let's say they go that direction. I think you would see less support for our RIN and people jumping over. I would think that a lot of players would drop out of our market in increased RIN prices and make up for a little bit of some of the shortfall you might see elsewhere.

What level of cash are you comfortable with, as far as actually needing to keep on the balance sheet?

That comes down to a question of acquisition targets and potential targets. To run the business that we have today, it's a dramatically reduced number from where we are, call it $200 million roughly in cash, no debt. We have an unused credit line, so we have a very strong financial position to go out and made acquisitions in that type of environment. If we were just going to run a business of this size, it's a number that's dramatically less than what you see on the balance sheet today. That would tell one that given the right circumstance and the right opportunity that we have the ability to move quickly and not have to wait for financing or any type of best efforts to make acquisitions.

Thank you.

Carl Flournoy, Private Investor

I didn't hear. Maybe you said on here, is the freight logistic area, going out to California and Oregon, are you getting more tank cars? Are still putting money into R&D for glycerine?

The tank cars, I can't answer that specifically. I can get back to you, Carl, with a specific answer on that. On the glycerine side, we continue to improve our capability to basically, call it up-charge if you will, to get to a higher technical and industrial grade on that, to get a higher sales price. That takes capital, and that takes time. We continue to work towards that, and it's something we took a long time to commit to. We're fully committed to doing that with our glycerine. We can only burn so much. If we can refine to a higher grade, it allows us to sell at a higher price as we get a higher purity for that product.

Thank you.

Jon Tanwanteng, CJS Securities.

Yes, given where RIN prices are trading now, is that an indicating of demand in the market? Can we expect a similar degree of sequential decline in biofuel sales compared to Q4 last year?

Jon, I don't know. It's a reflection of the fact that the mandate for this year has been met and exceeded. They've extended the carryover period into next year. I think all of those dynamics have had a dramatic effect on RIN prices. I think the last RIN price that I saw for our designation is just under $0.40. I think it's a reflection of exceeding that amount, much like happened last year. We saw the demand reduction in October time frame. We started to see over the last couple of months degradation of prices in the RIN market. It's a reflection of meeting the required usage. Again, it's a seasonal business to a certain degree, as I know you're aware. Our biggest quarters are 2 and 3, and 1 and 4 are lower volume quarters typically.

On the Chemical side, Arista's now purchasing off-contract, and you have a new herbicide customer. Do those two added together equal the old business? Or is it somewhat less than that?

Again, we're not fully up. We're having to make some improvements in the plant to accommodate that business. I think we'd probably like to wait to comment on that until a little further down the road. We're very excited about the new customer and the business that we'll be producing with that customer. I think it's a little early to talk about, Jon.

One clarification, the [anode] contract runs until 2014. Do you expect a similar payment in Q3 of next year?

No, it'll be bigger. Rose, you might comment on that, if it holds in the deferred revenue line. Rose, what's that amount?

The amount that we'll collect next year, Lee?

Yes.

North of $8 million.

Thank you very much.

Thank you. I'm showing no further questions at this time. I would now like to turn the call over back to Lee Mikles for any closing remarks.

Thank you all very much. I appreciate your time and your consideration. We'll endeavor to continue to grow the business. I'm very pleased with the job that the associates are doing and the direction of both of our businesses. We'll look forward to talking to you next quarter. Thank you for your time and consideration.

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