Vertex Energy Inc (VTNR) 2013 Q1 法說會逐字稿

Greetings and welcome to the Vertex Energy Incorporated first-quarter 2013 financial results. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (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. Good morning. Joining me today on this call is Mr. Chris Carlson, our Chief Financial Officer, Mr. Matt Lieb, our Chief Operating Officer, and Marlon Nurse, our Investor Relations consultant, Porter LeVay and Rose.

Before we begin the business portion of this call and on behalf of the Company, I'd like to inform you that the Company expects to make forward-looking statements during today's call. Statements including words such as believe, anticipate, or expect and 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 views and assumptions regarding future events and operating performance. A number of factors could cause the Company's actual future results to differ materially from its current expectations.

Thank you everyone for joining the call with us for our first-quarter 2013 earnings call for Vertex Energy. This call coincides with today's filings of our 10-Q for the quarter ending March 31, 2013.

I want to start off by giving you a few highlights from Q1 and then I'll turn the call over to Chris Carlson, our CFO, so that he can walk you through the first-quarter financial performance. Following Chris's presentation, I will provide some thoughts on our plans for the remainder of the year and I'll take some closing remarks and questions. We'll then open the line for further questions as we go forward.

The first quarter of this year showed an improvement in every area consolidated -- every consolidated area relative Q4 2012 as the expected results from our recent acquisition have begun to take hold.

Here are a few quick highlights that we will touch on in more detail during this call. Our gross profit increased by approximately 20% relative to the same quarter last year. This improvement is related to the fact that we are now able to source an increased amount of feedstock for TCEP via our own collection network rather than having to purchase this bulk of the raw material from third parties.

Overall volumes of products sold also are a very important matrix for our business as it illustrates our reach into the market. That overall product sold increased by 10% for the first quarter versus first quarter 2012. This increase in sold product volume is largely the result of continued throughput improvements at TCEP in Baytown combined with our increased ability to source feedstock to support the business.

Our overall per-barrel margin increased by 9% relative to the same quarter last year. This ties into our improved gross profit overall and illustrates our ability to drive down feedstock costs across our business.

Before we discuss our outlook for the remainder of 2013, I'd like to first turn the call over to our CFO, Chris Carlson, for a more detailed review of our financial performance during Q1 2013. Chris?

Thank you Bee. For more information, please refer to our press release issued today, our latest Form 10-Q for the fiscal quarter ending March 31, 2013, 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. Note that the acquisition Ben referenced was completed in September and we have integrated these new operations and our business.

I'd like to now discuss our results. Revenues. For the quarter ended March 31, 2013, we reported consolidated revenue of $33.3 million compared to $34.8 million in Q1 2012. This represents a 5% revenue decrease. The revenue decrease was due primarily to decreased commodity prices that were somewhat offset by our 10% increase in volumes that Ben mentioned earlier. You can find more detailed information on the various pricing benchmarks that are most applicable to our business in our 10-Q that was filed today.

We generate revenue from two existing operating divisions, Black Oil and Refining and Marketing. Historically, our TCEP results have been reported within the Refining and Marketing division. With the acquisition of the Vertex acquisition sub, the Company is now reporting TCEP results within the Black Oil division. The figures I reference on this call take into account the change in reporting so that last year's Q1 figures represent an appropriate comparison to this year's Q1 figures.

Our Black Oil division revenue for Q1 2013 was $24.4 million as compared to $24.2 million in the first quarter of last year. This increase in Black Oil revenue is attributable to a 20% increase in volume, which was offset by a decrease in commodity prices.

During the quarter, we saw increased production from TCEP as well as increased volume sales to third-party re-refiners and fuel oil blenders. TCEP, which, again, is a business unit within our Black Oil division, generated $15.2 million in revenue for Q1 2013 versus $16 million in Q1 2012. This 5% year-over-year decrease was driven by lower commodity prices.

The Refining and Marketing division produced revenue of $8.8 million in the first quarter versus $10.7 million in Q1 2012. This represents a decrease over the prior year of 17%. This decrease was primarily attributable to a 15% reduction in volume which resulted largely from planned operational turnarounds at two of our largest feedstock suppliers.

Gross margin. Gross profit increased in the first quarter to $3.47 million compared to $2.89 million during the same period last year. This 20% increase is primarily attributed to our ability to source feedstock at a lower cost which Ben mentioned earlier in the call.

Gross profit for the Black Oil division was $2.86 million for the quarter, a 60% increase over last year's Q1 gross profit of approximately $1.79 million. Gross profit as a percentage of revenue was 11.7% versus 7.4% for the first quarter of last year.

TCEP had a gross profit of $2.7 million in Q1 2012, a nearly 80% increase over last year's first-quarter gross margin of approximately $1.5 million. TCEP's gross profit as a percentage of revenue was 17.8% for this most recent quarter versus 9.4% during the same quarter a year ago.

The Refining and Marketing division generated gross profit of $608,000 for the quarter, a 44% decrease compared to Q1 2012's gross profit of $1.09 million. As discussed earlier, this decline is primarily attributed to lower volumes resulting from the operational turnarounds that took place at two of our key suppliers during the first quarter.

SG&A. Selling, general and administrative expenses increased in Q1 2013 relative to the first quarter last year as we have significantly increased our staff from 12 to 102 employees as a result of our acquisition. Our first-quarter SG&A expense was $2.26 million versus $1.19 million for Q1 2012. On a go-forward basis, we anticipate SG&A being higher than in previous years because of the additional scale of the Company following the acquisition, and we are actively working on reducing our SG&A expenses. It is our belief that improved gross margins associated with the benefit of collecting our own used oil for processing will more than offset the increased SG&A associated with these collection efforts as we move forward.

Net income. We had net income of roughly $1.08 million or $0.05 per fully diluted share in the first quarter of this year. This was a 31% decrease compared to 2012's Q1 net income of roughly $1.57 million, which represented a per fully diluted share of $0.10. Overall, the decrease in year-over-year net income was a result of increased SG&A that more than offset our increased gross profit.

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

Thank you Chris. As we look ahead to the rest of this year, I want to share some of our thoughts on what transpired in the first quarter and where we see the business heading for the rest of the year. We are now seeing the benefits of our acquisition play out in the form of our margins. We increased both our Black Oil division gross margins and our TCEP gross margins substantially relative to last year. As we continue to grow our ability to collect our own used oil for processing, we expect these margins to improve.

We've taken steps to drive down our SG&A costs as evidenced by the fact that our Q1 2013 SG&A expense was 9% lower than our SG&A in the fourth quarter of 2012. We did underperform in our Refining and Marketing division relative to the first quarter of last year due largely to the planned operational turnarounds at two of our key suppliers. We believe this area of our business will return to more historical levels now that the turnarounds are complete.

While it is still early, we believe that a new process improvement recently implemented at our TCEP facility in Baytown will begin to show results in the second quarter. Our intent is to improve both operating efficiency and product quality through this change in our process.

We see three areas of growth in the near term for our business that could play out during the remainder of 2013. One is the improved performance via our process changes in Baytown at the TCEP facility. Number two is continued development of our used oil to fuel opportunities. As the market conditions have changed for the used oil outlets and what needs to happen with used oil, we feel like the Company is positioned very well to continue our used oil to fuel strategy as we move ahead.

Number three is acquisitions that we continue to pursue. So, we are very active right now in discussions with multiple targets that will improve our supply into our Baytown facility as well as other opportunities that we believe are very strategic for the Company.

Before we move on to our 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 our Porter, LeVay and Rose investor relations representative Marlon Nurse at 212-564-4700. Also, I want to mention that a digital replay will be available by telephone approximately 2 hours after the call's completion for two weeks. Details on how to access the replay can be found in our recent press releases. Operator, we are now ready to take a limited number of questions pertaining to the matters discussed in this call and our 10-Q. Remember we are unable to discuss any information or business plans which are not publicly available. Thank you.

(Operator Instructions). Joe Fadgen, Craig-Hallum.

Hey guys, on here for Chad today. A few questions. One, it looked like the Company-wide product volume sold seem to decelerate a little bit in Q1 from fiscal 2012. I mean, was that duet o changes in the markets? Was that more of a kind of Company-specific thing? Can you give a little bit of color around kind of what drove that?

Yes. I think it's largely related to the sales volume from our Refining and Marketing division for the first quarter. These were -- we have several large suppliers that we buy raw material from that goes through our process there in Port Arthur. And so our volumes were down about 15%. So when those down volumes are added to our Black Oil volumes, then it kind of waters it down a little bit. But we were 20% volume growth on the Black Oil side of the business. So, we are still trending into in the 20s% as far as our year-over-year growth rate, which personally I think is very noteworthy, considering our capacity at the refining operation is -- has been incrementally improved to this point. So, we continue to gain ground on raw material, and a lot of that is actually going in and out of our Black Oil division today. Debt margins are incremental in those volumes today but we fully plan to monetize those volumes as we go forward. So, I think we are making good ground and things are better than what they appear on a consolidated basis.

Okay, great. Then the TCEP expansion, I mean is that -- how close to being done are you? How much additional CapEx do you have yet to pour into that? How much, basically how much is left on that?

Yes, I'm not sure what's going to land on the balance sheet for the second quarter. But we are in start-up, we are in test phase today, so the units are running everything as working and started up on schedule, and we are very pleased with the preliminary results that we are seeing from the unit start-ups. So that's good to report that we are up and running. We hope to have everything dialed in and fully functioning by the end of the month, end of May, maybe a little bit into June. But we'll be well on our way by the end of the second quarter with those improvements. So we don't see a lot of money left to spend. Like I said in our last call, we carried a lot of expenses related to this expansion last quarter and the quarter before that, so not a lot left ahead of us.

Okay, great. And then a couple of questions on the Q. One, it looks like year-over-year there have been some pretty significant changes in customer concentration. Can you give me some color on kind of what's driving that shift? I understand you probably don't want to give who the customers are, but why one is becoming much more significant and another is less?

Yes, good question. A lot of that is due to the acquisition. Now that we've brought in these other entities, we've got a little more diverse base of customers. In addition, we've had some minor changes in some of our -- where our TCEP product goes, so that has changed the mix a little bit quarter-over-quarter when you look at 2012 versus 2013.

Yes, we make all-take contracts or decisions very specific to individual companies. We like to have all the products sold and accounted for so that someone is obligated to lift our finished product on schedule so the plant don't back up. And we've moved from one buyer to another buyer, and I think we were actually doing some business with that new buyer prior to moving our TCEP product into that company as well. So, it's really based on getting the best market, the best price for our finished product and having a ratable outlet with commitments that keep the product moved out of our way. So the four years we've been producing TCEP, we've never been out of contract for the offtake of the finished product, which is very important to us. And that's probably what you see.

Okay. And then one last one and I'll let you go. It looks like you also drew some additional funds on the line of credit. Real quick, can you tell me what the funds were used for?

The funds are -- with our line of credit, we strictly use those funds for inventory and just day-to-day operations. So in the first quarter, with the Refining and Marketing division slowing down somewhat operationally, we did draw into the line a little bit more recently as we are building inventory to get ready for runs.

Okay, all right. I really appreciate it, guys. That's all for me, thanks.

Philip Shen, ROTH Capital Partners.

The first question here is on the TCEP facility. I know you guys are bringing the units online and you're making some nice improvements there, and you showed a nice margin in your TCEP facility at 17.8% in Q1. And this is likely before a lot of these process improvements were put in place. As the units come online, where can we see gross margins go for the TCEP facility?

I think we are early in the game to try to draw that picture or forecast it. I will say this, that as we prepared to start the units, there was a lot of debottlenecking in the existing process that got done in the fourth quarter. And we've actually had, even prior to the unit starting up, we had I guess a record February and March production year over -- historically for those two months. So we've seen some of that benefit -- obviously we'll be seeing more to come. But to try to put a number out there today on this call I think would be -- not the thing we need to do. But we like those margins that you see there, and very comfortable with them. We believe we can improve as we go.

Great. And you talked about acquisitions in your prepared remarks. As you increase your collection volumes via acquisition, I expect you might displace some of your aggregated Black Oil with the new collected oil. Given that, what would you do with the extra aggregated oil, assuming the TCEP facility input volumes are maxed out?

We've set an internal I guess goal and target that we are not going to back our third-party suppliers out. We're going to increase and expand our throughput, our footprint at the facility to accommodate new volumes like we've seen in February and March. So, we believe that, as we grow our street collections through acquisition and organic growth, that we are going to accommodate that with new throughput at our TCEP facility. That still has a lot of questions for us. So obviously a fall-back position is to back some of the third-party oil out and so we are just I guess optimistic to believe that we can continue the business that we have, and grow our street collections and our throughput capacity in parallel.

Great. One quick housekeeping question and I'll jump back in queue. I think Chris talked about SG&A increasing potentially going forward although you guys are definitely making efforts to decrease the spend. So it sounded like -- I guess my question is, as we go through the year, how do you expect -- where would you expect SG&A to be per quarter? Should we kind of think about in our model this $2.3 million level, or do you definitely expect that to go up, and if so by how much more could it go up?

I'll let Chris answer.

Good question. $2.3 million to $2.4 million is where we expect it to be quarter-over-quarter going forward. As noted, Ben and I and the rest of the team are looking at areas of improvement for SG&A for the rest of the year. But again, $2.3 million to $2.4 million is a good level to look at.

Great.

Yes, and a counterbalance to that -- and we kind of plug that into our models -- right now is the acquisition effort. So obviously we are going to be deploying more SG&A cost into the growth of the business. So there's going to be some trade-offs as we go out and turn over a lot of opportunities to expand the business. There's bandwidth required, travel, all kind of other expenses that goes into growth and specifically acquiring another company.

Great, thanks very much.

Brian [Denyeau], Global Hunter.

Good morning Ben and Chris. So I assume it's 100%, but I'll ask. What percentage of the TCEP nameplate capacity have you guys pretty much seen this first quarter? And then also if you could maybe briefly speak on traditional margins kind of seen within the Black Oil compared to market-making activities as opposed to pushing it through TCEP?

Nameplate, we'll go there first. The original nameplate of the commercial engineered design of the facility was 45,000 barrels a month. We started that in late 2009, so really 2010 was our first full year. And we struggled to hit those capacities in 2010. We've been working internally with our engineering group and our operations on site to find ways to debottleneck the process, which they have done through 2011, 2012. We actually have averaged around 53,000 and 54,000 barrels of monthly production or throughput at the facilities. So with the new expansion, we are still waiting to see where this is going to take us. So that's a real key number, and when we bring that number out, it's because we really developed a lot of confidence around that capacity.

I will say that February and March capacity, throughput capacity, February was 57,000 barrels and March was 65,000 barrels. So we are pretty excited about that because that does represent a significant change in our overall throughput capacity for the plant. I hope that answers the question.

The margins are still being developed. Obviously, a big part of the margin is what we pay for feedstock. Our operating costs for the first quarter are down, I wouldn't say significantly, but they've improved quite a bit in the OpEx and cost per barrel to run the product. The higher throughputs play a part of that.

But the real key is how we buy raw material for the plant and what kind of margin we can capture on the purchase of that raw material and why we believe that collecting a portion of our feedstock going into the TCEP plant at a lower cost is very important to the overall game plan for the Company. And so with the acquisition in September, we got our collection business in the public company, and we've seen significant margin enhancements, 80% improvements year-over-year, marginally due to the lower-cost feedstock coming in.

Now, when we measure our street collection volume, we are organically up with -- I say organically. We had one tuck-in acquisition at the end of the year, and today we are probably a 5% improvement overall year-over-year in street volume.

One thing that the market and the investment community needs to understand is we are working in a space at a street level where the volume is shrinking significantly. So, our same-store volume year-over-year from our current customers was down probably 10%, possibly 15%, and so we are making a lot of headway through our sales efforts and just in our market space year-over-year to be up 5% and the markets being down 10%, 15%. So I'm real pleased with the effort at a street level.

Now, that's not come without some costs, so our cost at the street level to grow at that pace is we are up $0.09 a gallon year-over-year in pay for oil at the street. And so that's about an 8% increase in cost. Our sale price overall, because the market declines and the index, just commodity prices, are down about 10%. So we've got work to do in restoring the spread at the street level, at collection level. But even with that in mind, it's still much lower cost in our feedstock, and that's part of the improvements that we are seeing at TCEP. So we are very diligent on driving those pay for oil spreads back into proper order. And when you're dealing with thousands of generators, it takes more time to do that versus our third-party purchases that go into TCEP.

Now, this is a good opportunity to I guess put a much higher value I think than the market gives our third-party business. The third-party oil, in comparison, we've actually improved our margins by 3% year-over-year. So as demand on the used oil, the street side, has pulled back, it's allowed us to pull back on our purchase prices from the third-party market and capture more margin on that front in the short-term. So that gives us the time to chip away and pull our street pricing back as well.

So with all of that being said, we've seen an 80% margin improvement year-over-year at TCEP because of the merger, because of our ability to source raw material at lower cost. That's exactly what we intended to do by acquiring and bringing these business units in.

So if -- had we hit our normal production and targets on the Refining and Marketing business, we would be way ahead or significantly ahead of our overall gross margin targets for the Company. So looking at the effectiveness of the merger and the margin enhancements that we anticipated, we are very pleased with the results that we got.

Very good. Thank you.

Since there are no further questions at this time, I'd like to turn the floor back over for any additional comments.

I do apologize. We do have one more question here. Chris Doucet, Doucet Asset Management.

Hey guys, good morning. Thanks for taking my call. Congratulations on the improvement over the last couple of quarters, by the way, on the operations. Chris, I guess this first question is for you. Can you tell me how much in CapEx the Company spent for the TCEP expansion in the first quarter?

Yes. The recent TCEP expansion was about $1.3 million over the last three to four months.

Really? That much. Okay. And can you give -- go ahead.

Let me comment real quick on that, because it comes back to some of the expenses that we've seen in the fourth quarter. And another reason that our SG&A is back in line we've improved by 9% quarter-over-quarter, is obviously as I alluded to last call, we did a lot of the work internally. So a lot of our labor costs, pipefitting, electrical, a lot of the contract work out there we actually internalized and shouldered in an expense category. So as I've talked about expanding TCEP and that improvements continued to -- in recent months as I made my presentations, it's always been a $3 million type of CapEx project. So for us to be where we are with a $1.3 million balance sheet entry on CapEx for this expansion is noteworthy. I just want to make sure that you see there is more to it than just the money that hit the balance sheet.

Exactly. And Chris, you're expensing all these items, you're not capitalizing any of these. Is that correct?

No, a majority of that $1.3 million is capitalized, or will be in the second quarter.

And when will we realize the full benefits of the TCEP expansion? In Q3 do you think?

Yes, I think so. I think Q3 is a fair window to really see those improvements underway. We are working hard to bring that through by the -- towards the end of this second quarter. But optimistically, that's our goal. But I would not have an expectation of those improvements to materialize until the third quarter.

And Chris, this question is for you, I guess. You've seen -- or investors have seen improvements in gross margins in the fourth quarter over the third quarter, and of course the first quarter over the fourth quarter. Do you expect this trend to continue in the second and then again in the third quarter?

Yes, I mean especially in the second quarter. As Ben mentioned earlier and we talked a little bit about our Refining and Marketing division being somewhat down, that's going to normalize again here in the second quarter and going forward, so we would expect to see some improvement there.

And can you give us a range of what you expect the gross margins to be in the second and maybe the third quarter?

I don't want to comment at the moment just because we've got a lot of moving parts, especially with the enhancements with TCEP.

And oil prices.

Yes, and oil prices. But overall, we are confident we're going to see improvement.

Okay. And Ben, you mentioned in your opening comments about the desire to acquire collectors. Clearly, we haven't seen any prints that you've acquired collectors, but how much of your efforts go to trying to acquire collectors, and what are the possibilities of us perhaps seeing an acquisition of a collector in the second quarter?

I would say unlikely in the second quarter as it relates to our time and effort in the market, talking to different targets and developing relationships and bringing some things to the table. We've been very active in the first quarter. We spend a lot of our time, personally I spend a lot of my time strategically looking at the business, looking at the markets, and looking at potential targets that really play into where we are at and where we are trying to go.

We've identified three expansion models that we are pursuing in parallel. One obviously is to build in supply at a street level to the assets in Baytown, so that's more of a local outreach to the collection markets and even organic growth. So, we are moving on some new markets organically that we anticipate gaining ground in.

The second is additional markets where we can take our model and replant in another part of the US this underserved or what I would consider an unaddressed market. So, we are looking at those opportunities.

And thirdly, we believe there are some diversification opportunities around our core competency in other hydrocarbon recovery opportunities. So, I don't want to go too far down that path, because we are really just in an exploration stage at this point. But one of the things that we want to do is build a very diversified hydrocarbon recovery business. We don't want to be stuck strictly in a used motor oil recycling business. And obviously our Port Arthur business is an example of diversification and how that benefits the business.

So we are looking at three different areas of growth. We are developing a funding model to support those acquisitions, so we're bringing some consultants in to help us architect our funding plan, and how these three areas will have to meet certain criteria in order to be funded and for us to move forward. So we've made a lot of headway, we've got a lot of planning already behind us, and we've made a lot of contacts in the market to stimulate these opportunities as we go forward.

Okay, very good. You mentioned in the last couple of calls your desire to have an additional TCEP facility. Have you guys decided on a location, and the timing of a new location?

We've not made a decision on a location specifically, nor the timing of that. We have been working on our engineering for that plant, and we have several locations under review that we are doing due diligence on. Each of those locations would have a different timeline. So as soon as we can settle in on that next location, then we can bring it to our investors and start talking about it.

All right, thanks guys. Congratulations on the progress and I'll step back in the queue.

It seems there are no further questions in the queue at this time. Did you have any additional comments?

No. Thank you operator, and thank everyone, specifically for the questions and also your interest in Vertex Energy. We look forward to updating you on developments with the Company as they unfold, and we anticipate you joining us -- we appreciate you joining us on the call today. Thank you.

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