FutureFuel Corp (FF) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the FutureFuel 2013 fourth-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).

And as a reminder, this conference is being recorded today, March 18, 2014. I would now like to turn the call over to Mr. Lee Mikles, President of FutureFuel Corporation. Please go ahead, sir.

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

I would 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 description of those risks and uncertainties, please review FutureFuel's filings with the Securities and Exchange Commission. Please note that the contents of this call contains time-sensitive information that is accurate only as of today, March 18, 2014. FutureFuel disclaims any intention or obligation to update or revise any financial projections or forward-looking statement, whether as a result of new information, future events, or otherwise.

With that out of the way, I would like to turn our attention to our fourth-quarter results. The fourth-quarter 2013 results were much improved over fourth quarter 2012. On a consolidated basis net income increased 327% to $26.5 million. This increase was primarily from improved biodiesel market conditions, with the reinstatement of the $1.00 blenders' credit and a continued RSF2 mandate.

Revenues increased 68% from the fourth quarter of 2012. Adjusted EBITDA was $28.2 million compared with $6 million in the fourth quarter 2012. Rose will walk you through some detail, and then we'll be available for questions afterwards. Rose?

Thank you, Lee; and thank you, everyone, for joining us this morning. For the fourth quarter ended December 31, 2013, and with all comparisons against the fourth quarter 2012, sales revenue increased 68% to $125.6 million from $74.6 million, a new record quarter. Biofuels revenue increased 166% or $89.9 million as compared to $33.8 million on stronger sales volumes and sales price, with the blenders' credit in effect this year and not in effect last year.

Chemical revenues decreased 13% to $35.7 million from $40.8 million. Revenues from the bleach activator decreased on reduced sales volume, and the proprietary herbicide sales volume was significantly less quarter over quarter with the cancellation of the contract on September 1, 2013, when we began selling this product on a purchase order total conversion basis. Slightly offsetting these reductions were sales revenues from other custom products, two of which are new products in addition to increased sales volume of two existing products.

Gross profit increased from $8 million to $25.1 million. Biofuels gross profit increased from a loss of $2.3 million to a profit of $12.1 million. This increase resulted from increased market conditions, with the $1.00 blenders' credit in effect, again, which was not in effect last year; and the continued demand for biodiesel in the United States, given the government-mandated renewable fuel standard.

Further improving gross profit was an adjustment in our inventory carrying value as determined utilizing the LIFO method of inventory accounting. Partially offsetting these improvements was a hedging loss of $0.6 million this quarter as compared to a hedging gain of $1.5 million in the fourth quarter of 2012.

Chemical segment gross profit increased to $13 million from $10.4 million, in part from increased sales volume from the two new products and two existing products, and from an adjustment in our inventory carrying value as determined utilizing the LIFO method of inventory accounting. Income before interest and taxes increased 385% to $22.8 million from $4.7 million.

Net income totaled $26.5 million for the quarter or $0.61 per diluted share. This compares against $6.2 million for the fourth quarter of 2012 or $0.15 per diluted share.

For the fourth quarter of 2012, we had a provision for income taxes of $3.6 million. For the fourth quarter of 2013, we had an income tax provision benefit of $2.6 million as a result of recently issued technical guidance from the United States Internal Revenue Service that resulted in a change in our tax position related to excluding the $1.00 blenders' credit for taxable income for the years 2010 through the current year, reducing the provision for income taxes by $11.6 million, with $7.8 million related to 2010 through 2012 and $3.9 million related to the current year. This benefit is not expected to recur in the future, as the blenders' credit expired December 31, 2013, and has not been renewed.

For the 12 months ended December 31, 2013, and with all comparisons against the 12 months of 2012, revenues increased 26% to $44.9 million from $351.8 million, a record year. Biofuels revenue increased 48% from $191.4 million to $283.4 million. Gallons sold increased, as did the average selling price.

Chemicals revenue increased from $160.5 million to $161.5 million. Revenues from the bleach activator decreased 7% and revenues from the proprietary herbicide decreased 35%. This decrease was attributed to reduced volumes for both products and was partially offset by increased sales prices.

As previously noted, the proprietary herbicide contract ended September 1. We are unable to predict with any certainty the revenues we will receive from these products in the future.

Revenues from other custom chemical products continued strong, with a 36% increase year over year with the addition of two new products and the volume growth of three existing products. Also improving sales revenue was the recognition of the shortfall payment from the anode battery material. Slightly offsetting the increase was reduced sales from two products we no longer make.

Biofuels segment gross profit increased to $45.5 million in 2013 from $8.6 million in 2012. Market conditions were more favorable, partly as a result, again, of the $1.00 blenders' credit in effect for 2013 and not in effect last year, and the continued renewable fuel mandate. Further improvements in gross profit resulted from adjustments in our inventory carrying values, determined utilizing the LIFO method of inventory accounting, and increased hedging gains.

Chemical segment gross profit increased 12%, from $48.7 million to $54.7 million. This improvement was from, one, the change in product mix as the proprietary herbicide contract ended, and we sold increased volumes in the other custom chemicals throughout the year and added two new products; two, the recognition of a shortfall payment from the anode battery materials; and three, adjustments in our inventory carrying value, as determined utilizing the LIFO method of inventory accounting and increased hedging gains. These improvements were slightly offset by an impairment charge we took in the third quarter 2013 on the anode battery material and the loss of two chemicals we no longer produce.

Income before interest and taxes increased to $90.3 million from $46.1 million. Net income totaled $74 million or $1.71 per diluted share for 2013 as compared to $34.3 million for 2012 or $0.83 per diluted share.

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

Thank you, Rose; I appreciate it very much. We had felt that 2013 would be a good year for biodiesel with the reinstatement of the $1.00 blenders' credit, and we were able to capture the value that our quality operation brings to the marketplace.

We also knew that 2013 would be challenging as the lifecycle of a couple of our products ended, but we were successful in picking up a couple of new contracts. That's just the reality of the specialty chemical business.

We did sign a new contract with another herbicide intermediate customer, completing the construction and repurposing of that portion of our plant in the fourth quarter. Sales will begin with that customer in the first quarter of 2014.

We will continue to work to utilize the plant's equipment, evaluate opportunities for new products in the acquisitions to optimize the value for our shareholders. And I think that there are numerous opportunities that continue to present themselves on that front. The biodiesel industry continues to be somewhat uncertain with the expiration of the blenders' tax credit and continued pressure on the EPA to modify the renewable volume mandate.

With those comments, I would like to open up the call to questions. Operator?

(Operator Instructions).

Just a couple more comments as we wait for people to queue up. The Bill has been introduced in Committee, or it is in Committee in the Senate. Maria Cantwell has introduced it. She's a Democrat from Washington state. Her cosponsor is Chuck Grassley from Iowa. Cosponsors, additionally, continue to be two other senators, Jeanne Shaheen and Amy Klobuchar from Minnesota.

And the changes that are proposed in Committee that are being talked about have to do with it being changed from -- the credit billing -- from a blenders' credit to a producer credit, which would actually be great for us. It addresses some of the issues with the imports and some of the funny business that is played there. So I think that is a positive as well.

And furthermore, it extends it out to 2017, which is something we have long argued -- if you are going to have a credit, you have got to have some visibility to it. So I think all those things are positive.

But my comment really is: we don't have any insight any better than anybody else on whether this is actually going to be reinstated. We operate our business day-to-day as if it is not; and if it does, we will respond accordingly. But again, that is where that bill stands as of today. And I wanted to head that off early, because I'm sure that is going to be one of the concerns.

Jon Tanwanteng, CJS Securities.

Congratulations on a fantastic quarter. Obviously you had a huge quarter on biofuels. How much of that was actually obligated parties and blenders' piling into the credit before it expired? And does that actually leave them with a lot of inventory in their hands heading into Q1?

You are talking about the industry in particular?

Yes, and particularly your customers, obviously.

Yes, I would say it looks as if the best data we have is this 1.8 billion gallons was produced. And the $1.00 credit, obviously, had a lot to do with that. At the end of the year, I would imagine many were producing to make sure they grabbed that $1.00.

We are going to be in this business day in and day out. We have to respond to market conditions as anybody else would; but again, you have got to go back to 2011 and 2012. Both of those years we were kind of at 1.1 billion gallons, just under that in 2012 without the credit.

So it looks very different in 2014, is my sense. Without the credit it takes a lot of the inefficient and marginal producers out of the marketplace. But I think your comment about 2013 -- certainly, the industry probably produced more than it otherwise would have without that $1.00 existing, and kind of that cliff date coming up of January 1, the uncertainty on whether the credit would be extended.

But my question is: did that kind of pull demand in from Q1?

Oh, it could. I mean, I don't see it in terms of the numbers for the industry. The numbers that I have are for the end of February, and it looked like production continued to be reasonably robust for this time of year. There's a lot of cyclicality in the business, Jon, as you know. But I would imagine that there's probably some of that out there.

Okay, great. And then, ex the potential for new credit, which you discussed, how should we think about the profitability of the biofuels segment this year, given the initial flat RVO and where RINs are trading right now?

Right. Well, the RINs are up about 50%, roughly, this year. And that is a reflection of the $1.00 not coming back and anticipated volumes that will be produced. As you have -- I think I have been pretty consistent, saying that I think the industry long-term is better without the credit, simply because it will take the inefficient producers and let the low-cost producers succeed in this business.

In the short term it has an effect on the business, profitability of the business. I can't imagine without the credit, with RINs where they are today, that there are a lot of producers that can produce profitably. And certainly not if you are using vegetable oils -- meaning soy, primarily, maybe canola.

I think you have got to get to lower-valued feedstocks and produce very efficiently to take -- you know, with a $0.65 RIN as it is today, without the $1.00, you had better be a very efficient producer to make money.

So I think that is the way we look at the business. We are operating as if that is going to be that way for the remainder of the year. Having said that, I think there's some anticipation as we move through the year, and you see a number of people drop out of the business because they can't produce profitably, that that will have an effect, maybe dramatically, on RINs.

Okay, great. And then on the chemicals segment, margins were pretty good. What went into them, and how sustainable is it?

Well, a couple of things. As you have heard me say before, Jon, when you have biodiesel running basically flat-out, it has an effect on the margins on chemicals. And I think we have done a -- I think our team has done a great job with increasing margins on the chemicals side, bringing in new products, being more efficient in the products that we make.

But again, we have moved those margins up pretty dramatically over time. Some of that is a reflection of biodiesel just taking more of the fixed cost. So when you kind of look at a jump from the high teens, to the mid-20s, to the 30s -- to the low 30s, in the custom chemical business that's a pretty robust margin. That's really performing and executing in a pretty efficient manner, if you will.

But again, some of that, a point or two, can be -- can modulate, if you will; not so much because of the chemical business, but the reflection of how many reactors are being used and how much revenue is being produced from biodiesel.

Great. Thanks a lot, and congrats again.

Thank you, Jon.

(Operator Instructions). Craig Irwin, Wedbush Securities.

Good morning, and congratulations as well on a really solid fourth quarter.

Thank you, Craig.

Lee, I wanted to dig in, if we could, a little bit more into the biodiesel profitability. So in the fourth quarter, we saw RINs trade down about 60% sequentially. There was an adverse feedstock price move sequentially compared to the third quarter. And then your usual seasonality, where you see customers pull out -- not by as much biodiesel, because of the winter effect, where they can't really use it in as high of blends as they traditionally do.

Can you maybe give us a little bit more color on what contributed to the profit strength in the fourth quarter, and whether or not this was related to, maybe, pre-buying while feedstocks were at more attractive prices; or something else operationally that allowed you to deliver such strong results?

Yes. It is a really important question that you ask, Craig. And I think it goes to both efficiency of operation -- and this is the prior spend that we made on understanding the front end of the process to use the lowest-valued feedstocks in the marketplace. And, again, investment in the very large tank farm that we have that allows us to pre-buy if the opportunity presents itself on the feedstock side. So I think all of those things go into the profitability in the fourth quarter.

Again, I think good participation from our customers has helped us as well. But, again, there's a lot of seasonality to the business.

But I think the first two -- we run quite a substantial hedge book in our business as well, when we buy feedstocks, to trap margins, as we have discussed before. So I think all of those things added up to a really solid quarter in that business.

And again, I am very pleased with what the team has been able to do, both in holding and increasing the profitability on the chemicals side, but especially in a year like last year, where you had a number of moving parts as they managed the biodiesel side. But I think you have hit on some really critical points. I think they did an extraordinary job in the fourth quarter.

Great. And then when I just make an assumption on price, based on what the average price for biodiesel was in the fourth quarter, it looks like your production run rate was somewhere around 85 million gallons. Can you comment whether or not that's indicative of a sort of new capacity run rate we should be looking at, or if there was anything particular in the fourth quarter that allowed such strong throughput?

Well, again, I would have to sit down and go through the granular math with you, Craig. But our production remains 59 million gallons. We have not increased production.

And again, that would be a contemplation on our part. And you and I talked before, and I think I've been pretty public about this: if we do increase our production, it will probably go pretty dramatically over that 60 million gallon mark, if we were going to go. If we were going to jump, we wouldn't jump 5 million gallons or something. But we have not increased production. So we ran the business pretty hard last year and ran as close to maximum capacity as I think that the facility will stand.

Excellent. If we could move over to the chemicals business, you mentioned new programs coming on for 2014. So the preemergent herbicide contract, the one you referenced as pricing up the customer and moving them to purchase orders, that was around $18 million in revenue last year. Is it fair for us to think that in 2014, your new customer could be at a similar purchase level? Or are they likely to be directionally down from where your other customer was buying last year?

Craig, I don't think I am comfortable answering that question. I think it was a great win for us to win that customer. Again, we had to make an investment to repurpose some of our equipment that had previously been used from the customer that you are talking about -- which, by the way, we continue to do business with that customer; it is just on a different basis. It is a tolling basis on some intermediate product that we will do for them.

But the new business -- again, I don't think we are comfortable talking about the revenue level for that customer. But it is a very substantial win for us. I think our guys did a great job of earning that business, and again, we think that is a relationship that not only this contract, but future business from that customer is really a unique opportunity for us. So we are very pleased with the transition of that business.

Great. And then last question, if I may. You mentioned that you took in a shortfall payment for your battery anode customer -- obviously, the take-or-pay agreement that you had previously. Can you quantify for us precisely impact in the fourth quarter?

I think that was a third-quarter event, was it not, Rose?

Yes. It was $2.2 million for the third quarter 2013.

What about the outlook for a potential charge there as the true-up of the DOE subsidy that was shared between yourselves, and Conoco, and A1 -- how does that stand now? And is that something that will impact the Company in 2014, or is that a process that is now completed?

I am going to let Rose answer the math. But, again, we have never disclosed who that customer was or who their customers are, because we don't know who their customers were. But again, Rose, why don't you run through the math on that? I think most of that has already run through, other than the payment coming in August of this year.

You are correct, Lee, yes. In third quarter we took an impairment charge that is fully disclosed there. But it netted to $1.4 million, where we recognized deferred revenue; and also, an impairment against the assets; and took a charge for what we believe could potentially be our liability there. We don't have any additional information to share there.

We obviously will continue to work through the information with the Department of Energy in resolving that and with our customer. As Lee mentioned, there's a shortfall payment for the ending of that contract that we will recognize in the third quarter of this year.

Great. And I did say last question, but I promise this will be my last question. M&A activity. You have got $200 million on the balance sheet. Obviously, the market's rewarding your impeccable execution with a nice multiple right now.

What do you see as the landscape out there for potential targets? Are you more focused on the chemicals side or the biodiesel side? Have you made offers for any assets? Do you expect to make offers over the coming months? If you could please just give us that color, we would appreciate it.

Sure, Craig. I think I can answer yes to everything you just asked. I think of the opportunities as they exist today -- our larger opportunity is on the chemicals side, both in the -- we will call it the spin-outs or portions of other companies; companies our size or larger, smaller. A number of opportunities that we are seeing. Again, maybe the prices aren't exactly what we would like, but we will probably see more activity there than we have seen in the last couple of years, certainly.

On the biodiesel side, I think those opportunities are yet to come. And I think as we move through this year, if the -- now going from a blenders' credit to a producers' credit, if that comes through, that changes the landscape. But if no credit comes through, I think you'll see a substantial amount of opportunities on the biodiesel side.

But, again, until that works its way through the system, and guys aren't able to produce without the credit, and they have to look for other opportunities for their substantial investments, I think it gives us a lot of opportunity. And, again, $200 million in cash is quite a bit of money for a company of this size that produces this kind of cash.

So even though we have been very shareholder-aware and shareholder-friendly, again, we would like to put that money to work, because it is a drag in my return on equity, obviously, to have $200 million sitting there. So we would like to be aggressive, but we want to pay the right price for the right asset. So we continue to be disciplined, but there are a lot of opportunities, and I think more to come on the biodiesel side.

Great. Congratulations again on the really impressive quarter.

Thank you, Craig.

We do have another question in queue, and it's the follow-up question from the line of Jon.

It is just a quick follow-up. Can you give us an update on your glycerin refining initiative? How and when would that impact or improve the profitability of your biofuels segment?

I think glycerin, at the end of the day -- and I am going to let Rose -- maybe she has got more current information than I do. That is in process of completing for us. We are not complete on that project, and that will take glycerin from basically being marginally revenue-enhancing. It is not certainly not the tail wagging the dog.

But again, it takes something that at times is -- it doesn't produce any cash, to very small, to up-charging that business pretty dramatically. But remember the math, everyone. For every gallon of biodiesel that you produce, you produce a pound of glycerin, roughly. And what you do with that can have an effect on your profitability, and we are in the construction phase of that.

But, Rose, anything you want to add to that?

Just that we hope to be production early to the middle of next quarter.

Okay, great. Thank you.

(Operator Instructions). At this time I am currently showing no additional phone questions in the queue. I would like to turn the program back over to Mr. Mikles for any additional or closing remarks.

Thank you very much. Obviously, it was a very exciting year for the transition of the business. All businesses are in transition, but I think our team has done an extraordinary job on the chemicals side. I think we continue to perform exceedingly well on the biodiesel side. So I am very, very pleased and want to congratulate our team for all of the efforts that they have done.

And thank you all for joining this morning and expressing your interest in FutureFuel. We look forward to keeping you apprised of our progress and talking to you at the end of next quarter. Thank you.

Thank you, Mr. Mikles, and thank you, Ms. Sparks. And thank you, ladies and gentlemen. This does conclude today's call. Thank you for your participation and have a wonderful day. Attendees, you may log off at this time.