FutureFuel Corp (FF) 2015 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the FutureFuel 2015 first-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, May 12, 2015.

I'd like to turn the call over to Mr. Paul Flynn, Executive Vice President of Business and Marketing for FutureFuel Corp. Please go ahead, sir.

Good morning, this is Paul Flynn. Thank you for participating in today's call to review FutureFuel's first-quarter financial results. Joining me on today's call is our CFO, Rose Sparks.

I plan to cover some highlights of our first quarter, and then turn the call over to Rose for a more detailed review of our financial results. We have prepared a short slide deck which should appear automatically with the webcast. For those of you dialing in, the slide deck can be downloaded from the investor relations section of our website.

Turning to slide 2, I would like to remind listeners that comments made during the call will include forward-looking statements within the meaning of 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 these risks and uncertainties, please review FutureFuel's 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, May 12, 2015. FutureFuel disclaims any intention or obligation to update, revise any financial projections or forward-looking statements, whether as a result of new information, future events or otherwise.

With that, I would like to turn our attention to our first-quarter highlights on slide 3.

We started out with a pretty good year. Our earnings per share increased 27% to $0.19 per share. This was predominantly driven by improved operational execution in our chemical business segment and a favorable change in LIFO reserve. Despite some headwinds in our legacy chemical business, our chemical segment revenues grew 13% versus 2014. This overcomes significant declines in our legacy bleach activator business and original herbicide business to select business we used to produce.

Q1 is typically the challenging quarter for our biofuels industry -- for our biofuels orders. We had a 62% decline in biofuels, driven by continued regulatory uncertainty and worldwide decline in energy prices. On a more positive note, our biodiesel has been approved for California Low Carbon Fuel Standard, which permits sale of our product in California and avails of some additional credits.

We also improved the quality of our glycerin production and have commenced sales of refined glycerin to different parties.

We also have finalized a new $150 million credit facility after quarter-end, which positions us better to adopt a more complementary acquisitive growth strategy.

With that, I'd like to turn it over to Rose for a more detailed review of our financial results.

Thank you Paul, and welcome to today's call. Please turn to slide 4 for consolidated financial results.

For the first-quarter 2015, revenue was down 34.2% to $54.1 million from $82.2 million in the first quarter of 2014. This reduction was driven by a $32 million decline in biofuel revenue, which was slightly offset by a $3.9 million increase in chemical revenue. Net income was $8.1 million, an increase of 29.6% or $0.19 per diluted share versus $6.3 million or $0.14 per diluted share in the prior period.

Turning to slide five for our chemical segment, for the first-quarter 2015, revenues increased 13%, driven by increased sales volume across multiple product lines, including our new herbicide intermediate, antimicrobials, other custom chemicals and performance chemicals. Reducing revenue was the 27% decline in the bleach activator. Our bleach activator customer informed us during the quarter that it would be terminating our supply contract at the end of the year. While termination of our supply contract will adversely affect future revenue, discussions with our customer to extend our business relationship are ongoing.

Gross profit increased 20.1% or $1.9 million from the first quarter of 2014 to $10.9 million in the first quarter of 2015. This increase included a net benefit of $2.5 million from a net favorable change in the LIFO reserve for the first quarter of 2015. This LIFO benefit was minimized by higher uncapitalized operating costs stemming from reduced bleach activator and the biodiesel plant production rates in the first quarter of 2015. Also note from this slide that our chemical sales revenue was 63% of consolidated revenue, as compared to 37% in the prior-year quarter.

Now turning to slide six for our biofuels segment, first-quarter 2015 revenue was $19.9 million versus $51.9 million in the first quarter of 2014. Sales revenue was down on lower average selling prices and reduced sales volumes, driven by continued federal regulatory uncertainty and the worldwide decline in energy prices.

Gross profit was $2.5 million versus $0.6 million in the first quarter of 2014. Of the $1.9 million improvement in gross profit, $0.5 million was from a favorable change in the LIFO reserve. This LIFO benefit was minimized by higher uncapitalized operating costs stemming from reduced biodiesel plant production rates in the first quarter of 2015.

I would also like to point out that we have some other slides in our appendix, which you can refer to. But the one that I would like to mention is that our adjusted EBITDA was $12.8 million versus $10.1 million for the first quarter of 2014. That was 24% margin in the first quarter versus 12% margin on EBITDA in the prior-year quarter.

And with that, Paul, I will turn the call back over to you.

Thanks, Rose; really nice job covering that. I just wanted to close with a couple of points as we wait for additional questions. The first one is the bleach activator. As you know, a bleach activator is a key differentiated product used in dry powder laundry detergent.

When the site was acquired from Eastman, this represented approximately half the Company's -- 50% of the Company's sales. We have been on record repeatedly communicating our anticipation that this volume would continue to decline, driven by consumers' preference for liquid over powders. Our contract with P&G was due to expire the end of 2016, and had contract minimums in excess of what our customer could use in 2015. This is what resulted them in exercising the early term -- provision term of the contract. As a longtime supplier with P&G, we have a very good relationship. And we continue to explore opportunities to extend business beyond 2015, more aligned to the market conditions of this market.

Closing out on chemicals, we are very pleased with a 13% growth. We had a lot of headwinds, managing through the decline of our bleach activator business and also the other legacy business we had when the Company was acquired, one of our herbicide business which we have discontinued producing and selling this quarter. So overall, we are very pleased with the performance in the first quarter of our chemical business.

Turning over to biofuels, Q1 is typically our most challenging quarter for the biodiesel industry. Continued regulatory uncertainty around the RVOs, softened market conditions in the early part of the year -- margins were tight over raw materials, even with FutureFuel's advanced advantaged flexible feedstock capabilities. It's a tough environment for just about every one of the biodiesel producers, with the industry knowing numerous plants idling capacity. We anticipate, just like other years, an improvement in our biofuel industry are conditions later in the year.

So, having that, I will turn it back to the operator to facilitate Q&A.

(Operator Instructions). Craig Irwin, ROTH Capital Partners.

Good morning, and congratulations on the strong result. Rose, I wanted to ask a little about the bit about the costing of overhead between the segments. The 60% drop in biofuels revenue in the quarter is a material swing. And I know that you cost your overhead based on revenue. Can you maybe quantify for us what the incremental overhead was in the chemical segment so that we can better understand the operating performance, ex- this short-term headwind, and then obviously ex- the LIFO reserve?

Actually, let me correct you. Our overhead is not strictly allocated off of just revenue. Our overhead is allocated based off of the usage of the equipment to the plant. Now, having said that, the excess overhead, the idle capacity overhead is allocated based on revenue.

So, first and foremost, as I mentioned in my script, the biodiesel plant did not operate the entire quarter. So we did have some allocated costs that did swing to the chemical plant for the first quarter. The magnitude of that, we have never disclosed what the magnitude of that dollar amount is. I will just have to leave it there.

Is it fair to say that it was actually a real contribution, as far as a headwind in the quarter?

Absolutely, Craig. It was a real contribution. And I will also remind you that we had volume in tanks that we shipped in the first quarter of 2015. So we did get the benefit of the dollar credit on the volume that was shipped in the first quarter.

Okay, excellent. My next question is related to your herbicide intermediate business. Really nice growth there, up 125% year-over-year. Can you comment whether or not you're meeting the full demands of this customer yet? Or whether the de-bottlenecking that has been going over the last couple quarters, the challenges that have impeded the delivery of this product are behind you, and we might be looking at something more consistent with what the natural run rate of that demand for that product would be?

I can address that, Craig, and thanks for the question. Some of these herbicide intermediates are complicated chemistries. Obviously we were a little bit surprised, and anticipated we would come up a little bit quicker. Today we are at around 95% design rate, and we are continuing to explore areas to even exceed design rate.

Okay. So it sounds like there is potential for growth in that product line. Is that fair? Am I looking at that correctly?

I think that's a fair statement.

Okay, excellent. And then, Paul, from your prepared remarks it sounds like you have a degree of optimism that there could be further sales of your [knobs] -- or the bleach activator product to P&G. I know you are also pursuing sales of this product to other potential customers in 2016, obviously.

Can you frame out for us the approximate number of alternative customers that you are speaking to? And whether or not you see anything fundamental changing as far as P&G's actual sales of powdered detergent using this -- if you are concerned that maybe it will be dropped from the products that they have been selling -- or if we see those continue to be on the shelf, that there would be an expected FutureFuel component.

That's a great question. Unfortunately, I don't have all the answers, but I can frame it up in a couple of ways, just to give you a little bit better insight. I think the first important one is that on a macro level, consumers are driving towards liquid detergents. They like the convenience, and the industry has shifted from hard-core detergent cleaners to more components like fabric softeners and scented detergents. It's kind of the industry will continue to move in that direction, and everybody anticipates it continue to do that. So the overall pie will be -- continue to decline.

Having said that, the product put in the powder detergent market is a premium differentiated product. So there are other tier 1 companies that really would like to use the product and are evaluating it. So that is all I can say at this time.

So we probably open it up, and we are much more aggressively pushing it into the hands of other companies to use. We have had some challenges that prevented us from moving it into other customers that we are actively working through.

Excellent. And then a last question before I jump back in the queue: more than $240 million in cash on the balance sheet is a fantastic position for any company to be in. In the small cap space particularly, your new $150 million credit facility just gives you even more firepower. What's the appetite for acquisitions right now? How should we look at the new credit facility? It seems you almost didn't need it, given the cash position.

So, a couple of comments on that, Craig, is our primary focus over the last six months has really been internally focused on executing better. The $150 million secured credit facility (technical difficulty) really go after a more complementary acquisitive growth strategy. So I think we are prepared, and we've got everything, when we find the right opportunity.

But we don't want to rush into not finding the right opportunity. We want to find something that is complementary to our existing business, preferably downstream. We are looking for near-term, accretive-type companies that complement what in the chemical sector.

Now there are distressed assets in the biofuel industry that might be opportunistic fits that we could maybe convert to something else and make them much more viable. But we don't want to rush into something and make -- a lot of acquisitions that are made in the industry are not successful, so we want to do the right one. But we are positioned very well and with a strong balance sheet, and this additional secured credit facility, to make a play.

Great, thanks again for taking my questions.

(Operator Instructions) Craig Irwin.

I know there's been a lot of different reports about what to expect now that OMB is reviewing a role for approval -- hopefully, final approval. Can you share with us what FutureFuel is looking for in the renewable fuel standard, the RVOs that we are hopefully going to see -- whether or not you believe we are going to see some significant growth in the biodiesel volume mandates, and if you can comment about whether or not you have been participating in the lobbying process?

Craig, I'm not sure the first part of your question came through. Do you mind repeating it?

Sorry. I guess the line is a little choppy. So, the renewable fuel standard, the rule is now at the Office of Management and Budget according to several sources. And I think it has been there since the 7th. And the expectation is that we are going to see some fairly significant volume growth in the mandate levels for biodiesel. Grundler, a key executive in EPA, has said in public that we could see 2014 volumes based on 2014 production, which would be very nice.

I was hoping you could share with us your perspective about what you would like to see in the rule, what you expect to see in the rule, and how you have participated in the lobbying process.

We would fully support the requested National Biodiesel Board RVOs of $2.1 billion, $2.4 billion; $2.1 billion in 2015, $2.4 billion in 2016, and $2.7 billion in 2017. But having said that, it's like we just have to wait for what the government and the EPA firm up. This industry has been disappointed a lot over the last couple of years of mandate, so don't want to speculate what the EPA will do. We will obviously be fully supportive of whatever lobbying efforts we can do to advance these mandates.

It would really be helpful for the industry, because there are a lot of companies who are not feedstock flexible and don't have offtake markets for their glycerin that are really struggling right now.

Great. My second question is your biodiesel gallons that you produce, historically FutureFuel has not structured it contracts in a way that had a clawback if the blender's credit is reinstated. Now, some of us that follow this industry very closely looked at the blender's credit in a very similar way to the R&D tax credit, where the R&D tax credit is going to be back pretty much every year. You're going to hear a lot of noise from all the big technology companies out there.

I know the blender's credit is tiny in comparison. It sits in the exact same bucket. So from my perspective it is logical to expect it to be reinstated, pretty much every year. Can you share with us what FutureFuel has been doing to increase the share of gallons where you have a clawback on the blender's credit, if and when it is reinstated this year and in the future?

Rose, do you want to take that? I can't comment on that.

Sure. FutureFuel has positioned itself well with every contract that we have for a clawback provision. Keep in mind also that FutureFuel sells our fuel on a retail basis, and so there are several instances where we will maintain the benefit of the blend credit as well as the value of the RIN.

Okay, excellent. Thanks again for taking my questions.

Thank you. There are no further questions at this time.

I would like to turn the conference over to Mr. Paul Flynn for any closing remarks.

I'd like to thank everybody for participating in today's call. And overall, we are very pleased with how the quarter ended. We had some headwinds to contend with in both our chemicals and our biofuels business, but I think we ended up in a really good place. And our operations team really worked hard to kind of come through this quarter, and we are looking forward to having a good year.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.

Thank you.