Vertex Energy Inc (VTNR) 2012 Q2 法說會逐字稿

(Audio in progress) and welcome to the Vertex Energy, Inc., second-quarter 2012 financial results. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ben Cowart, Chairman and CEO. Thank you, Mr. Cowart. You may begin.

Thank you, Operator.

Joining me today on the call is Mr. Chris Carlson, our Chief Financial Officer; Mr. Matt Lieb, our Chief Operating Officer; and Michael Porter, our Investor Relations Consultant at Porter, LeVay & Rose.

Before we begin the business portion of this call, and on behalf of the Company, I would like to inform you that the Company expects to make forward-looking statements during today's call. Statements including words such as believe, anticipate, expect, statements in the future tense are forward-looking statements. These statements involve known and unknown risks and uncertainties and are based on management's current view and assumptions regarding future events, operating performance, et cetera. A number of factors could cause the Company's actual future results to differ materially from its current expectations.

Thank you to everyone for joining us on our Q2 2012 earnings call for Vertex Energy. This call coincides with the filings of our 10-Q for the quarter ending June 30, 2012.

I want to start off by giving you a few highlights from Q2 of this year, and then we'll turn the call over to Chris Carlson, our CFO, so that he can walk you through our second-quarter 2012 financial performance. Following Chris's presentation, I'll comment on our announcement of our acquisition of Vertex Acquisition Sub, LLC, which is comprised of substantially all the assets of Vertex Holdings L.P., that was outlined in our most recent 8-K filed this morning with the SEC, and I'll provide some thoughts on our plans for the remainder of 2012. We will then open the line for questions.

Q2 2012 was a positive quarter from a revenue perspective, but disappointing from the margin and earnings perspective after our strong performance in the first quarter of this year. This decline in margin was due primarily to a rapid decline in commodity prices that have somewhat stabilized at the end of the quarter. Chris will address the margin decline in more detail during his portion of the call.

Here are a few quick highlights from the quarter. We grew our revenue by 13% in the second quarter compared to the second quarter of 2011. Consolidated revenue was $31.3 million for the quarter.

For the first six months of 2012, our revenue increased by 37% to $61.1 million, compared to $48.1 million in the first six months of 2011.

We reduced our SG&A costs by 9% relative to the second quarter of last year.

Overall sales volumes, which is products sold in terms of barrels of finished product, are an important metric -- which is a very important metric of our business. As illustrated, our ability to reach the market and grow our footprint and our volume itself. That volume increased by 14% for Q2 over Q2 2011. For the first six months of this year, we increased our overall sales volume by 24%, compared to the first six months of last year, in 2011.

Before discussing the acquisition and our outlook for the remainder of 2012, I'd first like to turn the call over to our CFO, Chris Carlson, for a more detailed review of our financial performance in the second quarter of this year. Chris?

Thank you, Ben.

For more information, please refer to our most recent press release, our latest form 10-Q for the fiscal quarter ending June 30, 2012, as well as our other filings made with the Securities and Exchange Commission. I also want to mention before we proceed that all financial numbers are prepared, unless noted, in accordance with generally accepted accounting principles.

I'd like to now discuss our results. Revenue. For the quarter ended June 30, 2012, we reported consolidated revenue of $31.3 million, compared to $27.8 million in Q2 2011. This represents a 13% revenue increase. The revenue increase was due primarily to increased sales volumes that Ben mentioned in his opening remarks.

For the first six months of 2012, our revenue increased 37% to $66.1 million, compared to last year's first six months revenue of $48.1 million. Our Black Oil division revenue for Q2 2012 was $9.9 million, as compared to $4.4 million in the second quarter of 2011, an increase of roughly 123%.

For the six months ending June 30, 2012, Black Oil division sales were $18.5 million, an increase of 109% over the first six months of last year. Strong growth in sales volume drove our revenue increase in this division.

The Refining and Marketing division, which includes TCEP, produced revenue of $21.4 million in the second quarter of this year versus $23.3 million in the same period last year. This represents a decrease over the prior year of 8%. This decrease is a result of lower sales volumes in both our TCEP and non-TCEP portions of the Refining and Marketing division.

For the first six months of 2012, our Refining and Marketing division revenue grew by 21% over the same period in 2011 to $47.6 million.

TCEP, which, again, is a business unit within our Refining and Marketing division, generated $12.4 million in revenue for Q2 2012 versus $12.7 million in Q2 2011. This 2.5% year-over-year decrease was driven primarily by lower sales volumes.

For the first half of 2012, TCEP generated revenue of $27.9 million, which represents a 32% increase over the $21.2 million in TCEP revenue from the first six months of 2011. You can find more detailed information on the various pricing benchmarks that are most applicable to our business in our 10-Q for the quarter ending June 30, 2012.

Gross profit decreased in the second quarter of 2012 to $751,000, compared to $2.47 million during the same period last year. This 70% decrease was primarily attributed to reduced sales volumes in our Refining and Marketing division and, more importantly, a steep drop in our benchmark commodity prices that occurred during the quarter.

For example, we saw the average monthly benchmark index of our TCEP end product decline 22% from March to June. In March, the average price for #6 oil was at $111.58, but the average price in June was only $86.87. This impacted the Company negatively because much of the feedstock we procured and processed during the second quarter of this year was purchased at prices prior to the rapid decline in this benchmark price.

Overall, our Company-wide per-barrel margin declined 73% in Q2 2012 versus the same quarter in 2011, despite reducing our operating cost per barrel by 6% during the same period. Essentially, the relatively rapid drop in our key pricing indices caused our per-barrel margins to be temporarily squeezed to an extent that it offset our improved per-barrel operating efficiencies.

For the first six months of 2012, our gross margin was $3.6 million, a 23% decline relative to our gross margin during the first half of 2011. This drop is a result of the second-quarter gross margin drop that I mentioned previously, as our gross margin for the first quarter of this year was 27% greater than Q1 of 2011.

Gross profit for the Black Oil division was just over $600,000 for the quarter, a 44% increase over last year's second-quarter gross profit of approximately $418,000. For the first half of the year, our gross profit in this division increased 65% to $1.4 million.

The Refining and Marketing division as a whole generated gross profit of roughly $150,000 in Q2 2012, a 93% decrease compared to 2011's Q2 gross profit of $2 million. The first six months of 2012 generated gross margin of $2.3 million, which represents a 42% decline versus the first half of 2011.

TCEP had a gross margin loss of approximately $395,000 during the second quarter of this year, compared to last year's Q2 gross profit of $777,000. For the first six months of this year, TCEP produced a gross profit of nearly $635,000, which is a 50% decline relative to the first six months of 2011.

Selling, general, and administrative expenses decreased by 9% in the second quarter of 2012 relative to Q2 2011. Our Q2 2012 SG&A expense was $919,000 versus $1 million for Q2 2011. For the first six months of 2012, our SG&A costs increased 4% to $2.1 million.

We had a net loss of roughly $159,000, or $0.02 per fully diluted share, in Q2 2012. This was a 111% decrease compared to 2011's second quarter net income of roughly $1.4 million, which represented a per fully diluted share figure of $0.10.

Net income for the first half of 2012 was $1.4 million, or $0.10 per fully diluted share. This represents a 46% decline to the first six months of 2011's net income of $2.6 million, or $0.19 per fully diluted share.

I'd like to now turn the call back over to Ben Cowart, our CEO.

Thank you, Chris.

As the numbers Chris presented illustrate, the second quarter of this year was a challenging one from a margin perspective. As Chris highlighted, the rapid decline in commodity prices important to our business compressed our margins.

Because of the relationship between our feedstock costs and our end product shale prices, a rapid decline as opposed to simply low prices did cause our margins to get squeezed.

Conversely, a rapid increase in key pricing indices can expand our margins dramatically. More recently, we have seen a stabilization in the relevant commodity prices, which is a positive sign for our business.

I now want to discuss our acquisition of Vertex Acquisition Sub, LLC, which is comprised of substantially all the assets of Vertex Holdings L.P. that was outlined in our most recent filed 8-K.

We're extremely excited about the acquisition, and I'll provide some more detail momentarily. We really believe that this is an important financial and strategic step for the Company.

Vertex Holdings is a holdings company with a number of distinct operations. Cedar Marine Terminal, or CMT, is a terminaling operation in Baytown, Texas, located on 19 acres with barge and truck access adjacent to the Houston ship channel. Cedar Marine Terminal provides throughput services, both domestic and international customers at this location. CMT is also home of the TCEP facility.

As part of this deal, we will also be acquiring H&H Oil, which is a used oil collection company in Texas. Other pieces of this acquisition include intellectual property, physical assets related to TCEP, a trucking business -- this services Vertex Energy's Refining and Marketing division, as well as third parties in a distressed hydrocarbon trading business.

These are companies that we have built over the years as we founded the Company in 2001 and have been a key part of the overall Vertex organization, and provides a lot of growth opportunities as we look forward. Obviously, it's been a future goal of the Company to vertically integrate into the collection and the lower tier part of our market where we can actually touch a lot of customers and control our raw material at a smaller level, and this is very important when we have the larger refining capacity in Houston.

So we're looking to several opportunities to grow and expand the business around these assets in this acquisition, and we're excited about the growth opportunity that this acquisition brings for the public company.

I want to give you a short financial snapshot of the Company, consolidated, based on our calendar-year 2001. Vertex Holdings generated revenue of over $31 million with gross profit in excess of $10 million and operating profits of approximately $6 million. For the first half of 2012, our acquisition target had revenues of $19 million and a gross profit of $5 million and operating profits of $3 million. In the future, we will obviously be reporting combined figures, but we must first have the inter-company transfer payments audited before we can speak to the combination numbers specifically.

The consideration to be paid for the acquisition is made up of the following components -- $14.8 million in cash and assumed debt, roughly $4.55 million in restricted shares of common stock, $1.7 million cash consideration for real estate, a performance-based earnout covering three one-year periods following the closing date of the transaction that could total $2.23 million per year over a three-year period if the combined company achieves EBITDA targets of $10.75 million the first year, $12 million the second, and $13.5 million during each -- $13.5 million for the third year.

The final purchase price is subject to a working capital adjustment, and $1 million of the purchase price will be held in escrow for 18 months to satisfy indemnity claims.

We are finalizing a commitment from Bank of America, our current lender, for financing and to fund a portion of this acquisition. We believe this acquisition presents a number of benefits. First and foremost, Vertex Energy will now be a more vertically-integrated company.

This deal allows us to participate in the full range of the used oil value chain from the collection of used oil with our own assets all the way through the processing of that collected used oil at our TCEP facility. We believe that the combination of a vertically-integrated company with a strong presence in a strategically-important Gulf Coast position on our company well for the future.

This is a business we know well. Given the Vertex Holdings was a related party prior to the acquisition, we are intimately familiar with the business management and operation, so we are not anticipating any challenges with integrating this acquisition into Vertex Energy. By bringing Vertex Holdings into Vertex Energy, we have effectively eliminated the related party issues between the companies and believe we can paint a clear picture for Vertex Energy's growth plans and opportunities for the future.

In summary, this acquisition adds scale to our business, creates a vertically-integrated company. Within our industry, it simplifies the communications of our business to the market. We are actively working on closing this acquisition as soon as possible and estimate the final closing will take place prior to the end of September.

Before we move on to the question-and-answer portion of this call, I want to let the listeners know that if you have any follow-up questions or comments, please feel free to contact Porter, LeVay & Rose or Investor Relations Representative Marlon Nurse at area code 212-564-4700.

Also, I want to mention that a digital replay will be available by telephone approximately two hours after the call's completion for the next two weeks. Details on how to access the replay can be found in our recent press releases.

Operator, we're now ready to take a limited number of questions pertaining to the matters discussed on this call and on the 10-Q. Remember, we're unable to discuss any information or business plans which are not publicly available.

(Operator Instructions). [Kevin Martin], Source Capital.

Hi, guys. With the volatility in the commodity prices, obviously that decreased the margins, but now that they've seemed to return to more manageable or on the upside, would that enhance the margins for the next quarter?

And my second question is, the acquisition that is proposed, would that also help control the margins going forward?

Yes, two good questions, Kevin.

The first answer is we believe -- yes, we are expecting to see improved margins in the third quarter because the market has moved up, and you know, we just got caught in a very sharp and quick decline in commodity prices in the second quarter where, within a seven-week period, prices really plummeted. So, things have firmed up, and the markets are moving back up well, and we have a good expectation on how that's going to affect the Company.

The acquisition will certainly provide a real balanced portfolio, so our cost basis in the raw material that we're collecting will be with much better margins than what we're used to seeing in the public company. So it provides a lot of stability and helps reduce the volatility in the business.

(Operator Instructions). Justin Putnam, [Solanthe Investment Group].

Hey, good morning. Thank you for providing the extra detail on the financials of the Vertex Holdings company. I just had one other question about that. What's the capital expenditure picture for this business? What was it in the period you gave earlier, and then, also, kind of what's your expectations going forward for that part of the business?

The capital is pretty ratable right now as far as there's no real pressing needs within the Company.

We took a big capital leap in 2009, both when we went public with part of the business and the investments we made in assets and infrastructure. We acquired several of the collection branches during that period, and so now it's really incremental and maintenance type of CapEx to maintain the current business. We do have a good game plan to expand and grow the Company, and we'll speak a little bit more in detail about that as we go forward in the months to come.

But just to continue our operations, I think that we're set very well. The facilities are in great condition. We went through every part of these facilities, and other than upgrading some rolling stock as they age, that's kind of what we expect today.

So you expect the maintenance CapEx to be under, what, a $1 million level, or just kind of a ballpark?

You know, I don't really have the details in front of me to specifically answer the question, but we can certainly get back to you on that.

Okay, okay, good. And then, one other question, about the earnout payments for the acquisition. Now there's no sliding scale associated with that, right? It's just they meet the targets, then they get the earnout, or you don't. Is that right?

That is correct.

Okay, good. Okay, all right, I appreciate you taking my questions.

Yes, sir.

(Operator Instructions). It appears there are no further questions at this time. I would like to turn the floor back over to management for any closing comments.

Okay. Thank you very much, and I appreciate the callers going easy on me with the second-quarter numbers.

We are very positive about our third quarter and the future for the combined business. We are very excited about the opportunity to be in this market and in this space.

I do want to thank the team, Matthew here and Chris Carlson and our legal counsel on all sides, our investor relations firm. A lot of work, a lot of time was invested in bringing this merger together and having it done the right way. I'm very proud of our Board and the integrity that they operated in.

I think everyone should see now that this is a very positive step for the public company and its shareholders. We're very excited about growing this business and moving ahead.

Thank everyone for being on the call, and if we can answer any more questions, feel free to reach out to Marlon Nurse. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.