Vertex Energy Inc (VTNR) 2015 Q4 法說會逐字稿

Greetings, and welcome to the Vertex Energy fourth-quarter and year-end 2015 financial results conference call. At this time, all participants are in a listen-only mode. A 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. Please go ahead sir.

Thank you operator. Good morning everyone, and welcome. Joining me today on the call is Mr. Chris Carlson, our Chief Financial Officer, Mr. John Strickland, our Chief Operating Officer, and Michael Porter, our Investor Relations consultant with Porter, LeVay and Rose.

The Company expects to make forward-looking statements during today's call. Statements including words such as believe, anticipate, 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.

I want to thank everyone for joining us today on Vertex Energy's fourth-quarter and year-end 2015 earnings call. We will file our 10-K this afternoon after the market closes.

I will start this call with a brief statement about our business and then Chris Carlson, our CFO, will discuss our financial performance for both the fourth quarter and the full-year 2015. After Chris discusses these numbers, I will provide some thoughts about our plans for 2016 and beyond.

Looking back briefly at 2015, the substantial drop in commodity prices tightened the spreads between what we have to pay for our inputs and the prices our products command in the market. Tighter spreads had a negative impact on our business, not least of which was a slowdown in our overall expansion plans.

We have to much -- we had to be much more deliberate in our integrating our recent acquisitions, and we work constantly at managing our feedstock costs. We believe that the industry in 2016 will continue to feel the pressures that made 2015 difficult. However, we have seen so far this year significant improvements in our margins and our spreads. The business climate we operate in should be turning more positive for the whole industry as we go forward.

I will now let Chris give you the financial results for the fourth quarter and the full-year 2015. Chris?

Thank you, Ben. Vertex Energy prepares its financial numbers, unless otherwise noted, in accordance with Generally Accepted Accounting Principles.

For the fourth quarter ended December 31, 2015, we reported consolidated revenue of $20.9 million compared to $62.6 million in the fourth quarter of 2014, a decline of 67%. For the year ended December 31, 2015, revenues were $146.9 million compared to $258.9 million for the same period a year ago.

In our Black Oil division, which includes our Marrero, TCEP and Heartland business units, revenue was $17 million for the fourth quarter of 2015 as compared to $46 million in the fourth quarter of 2014, a decrease of approximately 63%.

For the year ended December 31, 2015, revenues for the business segment were $103.9 million versus $170.9 million a year ago. The business was impacted by the decrease in commodity pricing, a drop in our volumes, and the fact that TCEP was not running during the fourth quarter. Commodity prices and overall volumes were also down.

The refining and marketing division produced revenue of $2.7 million in the fourth quarter of 2015 versus $14.7 million in the fourth quarter of 2014. The division reported $31.2 million for the year ended December 31, 2015, which is down 57% from the $72.7 million reported a year ago. Commodity prices and overall volumes were down.

For the fourth quarter of 2015, Vertex recovery division generated $1.2 million in revenue, a decrease of 33% from approximately $1.8 million a year ago. For the year ended December 31, 2015, the division has revenues of $11.9 million compared to $15.3 million a year ago, a 22% decline. Volume was down for the quarter, as were commodity prices.

For the fourth quarter ended December 31, 2015, our gross profit was $378,136 compared to a loss of $4.5 million during the same period last year, a 108% increase, a marked improvement in our margins.

Gross profit for the entire year of 2015 declined 10% to $10.7 million compared to $11.9 million for the same period in 2014. Our gross margins for the fourth quarter and full year 2015 were 2% and 7% respectively, which was 1 basis point higher than a year ago.

Our per barrel margin during the quarter was up 115% year-over-year. Gross profit for the Black Oil division was negative $239,277 during fourth quarter 2015, which was a 91% improvement over fourth quarter of 2014's loss of $2.7 million. For the year ended December 31, 2015, gross profit for the division was $3.5 million versus $7.2 million for the same period a year ago.

Refining and marketing's gross profit increased 148% to $417,623 in the fourth quarter of 2015 compared to a negative $875,239 a year ago. The gross profit for refining and marketing was $3.3 million for the year ended December 31, 2015 compared to $3.6 million for the year ended December 31, 2014.

Vertex Recovery produced gross profit of $199,789 in the fourth quarter of 2015 compared to a gross profit of negative $921,847 a year ago, a 122% improvement. Gross profit for the year ended December 31, 2015 was $3.9 million compared to $1.2 million for the year ended December 31, 2014, up 229%.

Selling, general and administrative expenses were $7 million in the fourth quarter 2015, relative to $7.3 million a year ago. Our SG&A included a carrying cost of $1.5 million during the fourth quarter related to our Nevada facility. For comparative purposes, SG&A at the operating businesses was $5.8 million for the fourth quarter 2015. For the full year 2015, our SG&A was $24 million, or $18 million excluding the carrying costs of Nevada, compared to $19 million a year ago.

As of February 2016, we no longer have the cost of the Nevada facility. We now have a savings of $1.5 million per quarter in 2016 relative to 2015.

For the fourth quarter ended December 31, 2015, depreciation and amortization was $1.6 million compared to $1.3 million in the fourth quarter of 2014. For the year ended December 31, 2015, depreciation and amortization was $6.6 million compared to $4.3 million in the same period a year ago.

Fair value of the warrants issued, which is accounted for as a liability, provided a gain in value of $2.8 million for the fourth quarter of 2015. We reported a net loss of $3 million or a loss of $0.11 per fully diluted share in the fourth quarter of 2015. This compared to a net loss of $11.5 million or a loss of $0.08 per fully diluted share in the fourth quarter of 2014. For the full year 2015, we reported a net loss of $22.5 million, or a loss of $0.86 per fully diluted share, compared to net loss of $5.5 million, or $0.23 per fully diluted share.

Our shares outstanding for the quarter were 28.2 million shares. As of 12-31, we booked a $6,069,000 reduction in contingent liability that had been recorded on the balance sheet related to the earnout on the Heartland acquisition. Based on the current performance of Heartland and projections for all covered future periods, it was determined that it was unlikely this potential earnout payment would be realized.

We also had a goodwill impairment within our Black Oil division as well as our Recovery division specifically as it relates to TCEP and E-Source. The total amount of the impairment was $4.9 million.

Our cash and cash equivalents were $765,000 as of December 31, 2015.

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

Thank you Chris. We are almost through the first quarter of 2016 and we believe that the used oil market is now oversupplied and inventories are being built. This is going to continue for some time as these low crude oil prices -- at these low crude oil price levels.

As we move further into 2016, the limited refining capacity for the US will become more important to the generator of used oil at the street level. Currently, the refining capacity of the US can handle about 42% of the used oil being generated. That strengthens our hand in managing our spreads.

Also, we believe this low oil price environment and the charge for oil model will have another beneficial effect for Vertex. We believe that generators of used oil are going to mandate their oil be sent to re-refining facilities where their cradle-to-grave reliability is better addressed. We can help them close the liability loop in ways that other methods of disposal do not. This paints a bright future for the assets we own and our business in 2016 and beyond.

Before we take questions, I want to revisit some of the points raised in our January 19 letter to shareholders, which highlighted our goals for 2016 and beyond. I want to spend just a moment and provide an update.

First, we wanted to leverage our asset portfolio. We have a very strong asset portfolio, and when properly leveraged, we can use it to help us grow. On February 3 of this year, we took steps to enhance our balance sheet, and we sold our Nevada facility located in Churchill County. That brought in $35 million while eliminating $1.5 million in quarterly costs. The sale and related transactions brought our cash position to more than $10 million at the time of close. We also used $16 million of those proceeds to pay down our term debt. We have lowered the amount owed to Goldman Sachs to approximately $6 million today, and our total long-term debt to approximately $13 million.

Meanwhile, we are exploring various options in order to optimize the value of our Myrtle Grove and CMT facilities. We are satisfied with the situation at the Marrero facility where we are running at full production levels and where our feedstock supply is more than adequate.

Second, we want to manage the feedstock costs. We told you that the industry needs to move to a charge for oil model to maintain spreads in this uncertain commodity market. Vertex has been at the forefront of this change. Our charge for oil was at $0.12 a gallon at the end of the year, and currently is at $0.27 a gallon at the end of February 2016. So just in the last few months, we've made significant headway as the industry began to charge starting January 2016. So we continue to take steps to improve our charge for oil and we will continue to make progress as the industry continues to make progress.

Third, we wanted to develop our finished marine fuel. Our vacuum gas oil produced at our Marrero facility can be sold into the marine fuel market at improved pricing relative to traditional VGO values. We intend to aggressively pursue this market this year. The relatively new eco-fuel requirements fit well with our existing process capabilities, particularly in the Gulf Coast, and we anticipate gaining market share throughout 2016.

Fourth, we want to be part of the consolidation of the used oil collection sector. We believe that the current depressed commodity markets will result in consolidation in the use oil collection space similar to the consolidations that occurred in the re-refining sector over the past two years. We intend to be a participant in this anticipated collection consolidation as we seek to grow our own collected volumes for further processing at our various facilities. We believe that this consolidation combined with our shift away from pay for oil and the continued shrinking of alternative markets for used motor oil will have the overall impact of reducing feedstock costs into the future.

Fifth, we wanted to pursue alternative product markets. We will continue to work to improve margins by potentially creating additional finished products such as marine fuel, finding new buyers of our intermediate products, and generally moving our products to higher-margins uses across our product categories.

Sixth is launching a finished lubricant product line. Much like our marine fuel development, given our significant base oil processing capabilities, our collection footprint, the next logical step for Vertex Energy is to produce our own line of finished lubricants that can be sold into our geographic collection footprint. By doing so, we believe we can improve margins as well as capture the spread between base oil pricing and finished lubricant pricing while creating additional value with the generator relationships that we serve.

In summary, we continue to face a challenging commodity price market. However, we have survived the decline in crude oil prices from over $100 per barrel to less than $30 per barrel. We have done so by being diligent in our business operations, reducing our costs, leveraging our asset portfolio, leading the shift to a charge for oil model, and exploring new markets with our flexible technologies. I'm thankful for our management team and employees for their persistence and tireless efforts.

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

(Operator Instructions). Eric Stine, Craig-Hallum.

Hi Ben. Hi Chris. Maybe just sticking with the charge for oil model, you mentioned where you stood at the end of February. Is that a trend you expect to continue? Maybe how do you see that trending throughout the year? And then I think now what you are paying aggregators, is actually cheaper than the collection side. When do you see that flipping versus your collections on a net basis?

Good question. We do expect our average charge per gallon to continue improving through March and on into the second quarter. I think the industry is working really hard collectively now to get their spread back. That's helped us this year move quickly. As we stated, we were about $0.12 a gallon average charge at the end of 2015, and from January 1 to February, we moved that to $0.27. So that's because the industry is also moving on the same initiative, so that's going to help us continue to expand our charges.

We price our third-party supply into the refinery off of index. So as oil prices come down, the index comes down immediately. And so with the discounts we apply to our index for the purchase of third-party oil, the pricing today at our gate is less than our oil coming from our own collection operations. We know that's temporary, and over many years, our collection volumes have always been a -- provided good contribution margin to the business. So that gives you an idea of how fast the industry is moving and the pressure the industry is under just in that alone. So, we have work to do on our collection business, and I think we are making great progress, but there is still more work to do.

Got it. Could you just -- I know it's early on, but you have a swap agreement in place. What kind of impact has that had thus far, and what kind of impact can that have through 2016?

That's something that we've really not been able to execute on to date because obviously the Mango refinery is in a startup mode so there's been no oil delivered in. And we will continue to wait for those opportunities to arise. So not a lot to report related to the swap agreement at this time.

Okay. Maybe last one from me, just on the ECA compliant marine fuel, if you can talk about mix in the quarter and maybe where you see that headed throughout 2016. Are there steps you need to take so that you are able to -- that all your VGO goes to the marine market?

Yes, so we are real pleased in the progress we've made in 2016. We've got an extended process for this fuel that comes off our VGO line. And it's limited in its production capacity at the moment where we are working on expanding that beyond where it is today. We are close to being sold out with our production capacity at this point, and the expansion is not difficult. We definitely see more growth in 2016, and we hope, by 2017, that the majority of our VGO product will find its way to the ship engine based on this initiative.

Okay, thanks a lot.

Michael Hoffman, Stifel.

Good morning Ben, Chris. What's your thoughts about TCEP this year? At these prices, do you just keep it shuttered for the time being?

Yes, I think that's our view based on the low oil prices. TCEP is a great technology. It has a high variable cost. And so as oil prices collapsed, the spread got very thin. And we felt that demand, additional demand, in the Gulf for the used motor oil kept pricing very, very tight for used oil. And so we see a bigger benefit by less demand in the market. So, we feel like that will continue and fill the spread where TCEP is strong enough to put more pressure on the used oil supply.

Okay. And then at the current price, selling price, environment for the things you do sell today, what does the charge for oil number need to be for that business to be profitable at the operating line and generate free cash, positive free cash?

That's a big question that varies by location. So, charge for oil in a remote market where we've got high freight costs needs to be much higher than charge for oil right outside the door of the refinery, obviously. So I think the whole industry is working with the same general cost of transportation from a collection standpoint, but I think the aggregation cost differs. So it just depends on where you're pulling the oil in from and what the cost is.

So, if I just had to pick a number, I would say the industry -- we've got to get past $0.50 a gallon, and in some cases, you're $0.70 to $0.90 out to remote locations in order to handle all of the logistics costs to get that product in. So it's --

Okay. Fair enough. And I appreciate that given that only about 10% of all oil gets direct haul to an end market. So all of it's got to get hauled and there's logistics costs. What's the probability based on what you are seeing as behavior that we see $0.50 as an industry in 2016?

I think we're going to get there. I think those remote markets may be challenged, and I believe that you could see local markets open back up that are currently closed off. These would be small burners and different utility or end users that can look at the BTU value of a used oil gallon and try to burn it on a lower cost BTU basis than natural gas. We haven't really seen a lot of switching from natural gas back over to used oil at this point, but I've got to believe that there's going to be some pressure way out in these markets that that could happen. So --

Okay. When you think about the aggregator and their role and then your comment that the market is oversupplied, when are you in a position to say to the aggregator I'll take your oil but you are paying me something? Or at a minimum it's zero?

Yes, I'm amazed at where we are at today, and I believe, if oil prices continue in these low numbers and the oil has no other markets, or a portion of oil has no other markets available, then that could be a reality. I would have had a difficult time saying that six months ago. But we do believe that there's not enough market for the used oil and markets are efficient. And so it could get to that point. We are not paying very much today, but I would say that those times could be ahead of us if we see more pressure on the crude oil barrel, the finished product pricing. And I know in California for instance, they are already at that level where third-party oil has been dropped at facilities at a charge.

Okay. And then for Chris, based on the macro environment today, all the things you've done with the balance sheet and decisions around costs, can Vertex, if the business conditions are what they are right now and they don't change, does Vertex break even or generate positive cash this year on a free cash flow basis? So cash flow from ops less all capital spending?

Yes, I think, with all the initiatives that we put in place during Q4 and Q1 and the changes that you just referenced and cost on the go-forward environment, yes, that's what we are targeting.

So then that would suggest, given the cash on hand from the transactions done in February, you'd have resources to participate in the industry consolidation as it begins around the collection time?

Well, as far as consolidation in the industry, we would have to look at other resources outside of our current balance sheet to do anything further.

Okay. So would that include possibly selling other assets?

It could, Michael. It could include a recapitalization of the assets that we have. We think there are some significant opportunities at the bottom of this market that we are going to be very creative about. But we do have capacity in the assets, or in some less strategic assets, where we can get the liquidity that we need to take advantage of the expansion opportunities.

Okay. Thank you very much.

(Operator Instructions). Walter Liptak, Seaport Global.

Thanks. Good morning guys. I wanted to ask about the fourth quarter. It looks like you've made some adjustments to the gross margin, that there might have been some addbacks. And I wondered if you could help us get from the annual number to the fourth-quarter gross profit number.

Are you referencing I guess just the improvement in gross profit to a positive $378,000?

No. When we back into -- because there's no fourth-quarter income statement that we saw, maybe it will be in the Q. But when we try to back into it, we're coming up with a gross profit loss. So I'm wondering if there is an adjustment in there to get to the statement that you've got in the press release about the profit.

No, there's no major adjustment. And as you noted, at the end of today or the close of business, we will have the K filed and all of the details for the fourth quarter will be in the K to see or show how we get to or how the gross profit is $378,000.

Okay. Fair enough. Just thinking about next year, just some numbers like what are you expecting for CapEx and D&A in 2016?

You know, as of right now, we've met with our team, and what we are looking at as of today for 2016 CapEx is around $2.5 million to $3 million. Depreciation and amortization should be fairly consistent, so annualized it should be just over $6 million, about $6.2 million. Interest with the current debt that we've got annualized will be about $1.4 million.

Okay, great. And that SG&A number adjusted to $5.8 million, is that the run rate that you think you'll have per quarter, or are there some changes to it throughout the year?

We've implemented some changes during Q1, so our expectation is that that's going to start to come down as we get to the end of the year.

Okay. And in the first quarter, given the work that you've done on the spread, are you expecting gross margin to be positive in the first quarter?

There's been a lot of work done on the spreads and we are continuing to work on them. The challenge that we've seen during Q1 is that oil prices took another leg down and came down again further, even from Q4. So that's going to be a challenge on Q1. Now, at the end of Q1, we've seen oil prices come back a little bit, which will help, but it's going to be a challenge nonetheless against the entire quarter.

Okay, fair enough. And then, Ben, I wanted to ask about the consolidation of the collectors. Given how bad this downturn has been, does it make sense yet to start using capital or cash to make acquisitions, just because it's an uncertain world and where things, oil prices, six months or a year from now -- wouldn't it be a better strategy to hold off and just see where we are in six months or a year?

Yes. So Walter, I think that's a very fair question. And that has been our tact for the last 12 months. We've been in discussions and working on certain opportunities and we will continue to pick the right time to make that move. But I do believe we are getting closer to getting some things done as opposed to putting them off much, much longer. So I just think we see a lot of light at the end of the tunnel related to the business, the spreads. Just following our trailing 12 recovery of EBITDA, and just the opportunities that are presenting themselves, we are pretty positive that we're going to get the timing right on that and not overplay. So --

Okay. How much capital do you expect to put to work like in the next year for the consolidation?

Other than just the maintenance CapEx that Chris indicated, and anything else is going to be dependent on the decisions we make and the timing of those decisions, which we are not really prepared to speak to.

Okay. Fair enough. All right, thank you for taking my questions.

Thank you. We have reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

Thank you, operator, and thank you, everyone, for dialing in. We really appreciate everybody's interest in the business and we look forward to our first-quarter call. I think we'll be able to shed some additional light on the business as we've discussed today. So have a good day and thanks again for dialing in.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.