Vertex Energy Inc (VTNR) 2016 Q3 法說會逐字稿

Good morning ladies and gentlemen, thank you standing by. Welcome to Vertex Energy's 2016 third-quarter 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) Please note 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, everyone, and welcome to Vertex Energy's third-quarter 2016 earnings call. 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 at Porter, LeVay & Rose. 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 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.

The third-quarter results are mostly in line with our expectations. The exceptions were the down days at Heartland and at Marrero, which I will explain in a moment. However, our business operated as anticipated. If we did not have these production interruptions, our numbers for the third quarter would have better reflected the soundness of our operations. Fundamentally we met our internal targets on spreads, charge for oil, and cost associated with our day-to-day operations. These were in line and improved over last year.

Production at Marrero was affected when the power grid failed. Our operations were down for eight days while we repaired a fouled heater and restarted the equipment. We utilized this downtime to take care of our scheduled November turnaround, so we will not have any further turnarounds at Marrero during the fourth quarter, which should benefit our fourth-quarter results.

In addition, Heartland experience a failure of a hot oil system and exchanger internally failed which put our hydrotreater system out of commission for 21 days. However we were able to continue running the front end of our plant to produce VGO for the fuel market. Despite these two interruptions, we exceeded our internal EBITDA targets for the third quarter.

I will now turn the call over to Chris Carlson, our CFO.

Thank you, Ben. Vertex Energy prepares its financial statements unless otherwise noted in accordance with Generally Accepted Accounting Principles. For the third quarter ended September 30, 2016, we reported consolidated revenue up $28.5 million compared to $39.3 million in the third quarter 2015, a decline of 28%. During the quarter, WTI ranged from $42 to $48 per barrel. For the nine months of 2016, consolidated revenue was $68 million, which was lower than the $126.1 million reported for the nine months of 2015.

In our Black Oil Division, which includes our Marrero, TCEP and the Heartland business units, revenue was $22.9 million for the third quarter 2016 as compared to $27.6 million in the third quarter 2015, a decrease of approximately 17%. The decline was driven by lower commodity prices and lower volumes. For the nine months ended September 30, 2016, the division reported $52.9 million compared to $86.9 million for the same period in 2015.

The Refining & Marketing Division produced revenue of $4.4 million in the third quarter of 2016 versus $8.8 million for the third quarter 2015. Revenue for the division in the nine months ended September 30, 2016, was $10 million versus $28.5 million for the same period in 2015. For the third quarter 2016, Vertex Recovery Division generated $1.1 million in revenue, a decrease of 61% from $2.9 million a year ago as volumes were down approximately 90% third quarter 2016 over third quarter 2015. For the nine months ended September 30, 2016, Vertex Recovery reported $4.2 million compared to $10.7 million a year ago.

For the third quarter ended September 30, 2016, our gross profit was $6 million compared to $5.2 million during the same period last year, an increase of 16%. Gross profit margins were 21% for the three months ended September 30, 2016 compared to 13% during the same period a year ago. Gross profit for the Black Oil Division was $5 million during third quarter 2016 which was a 103% improvement over $2.5 million in the third quarter 2015. Per barrel margins increased 148% for the third quarter 2016 over the third quarter 2015.

Refining & Marketing's gross profit increased 76% to $826,060 in the third quarter 2016 compared to a gross profit of $470,382 a year ago. Per barrel margins increased 224% for the third quarter over the third quarter 2015. Vertex Recovery generated gross profit of $83,496 in the third quarter of 2016 compared to a gross profit of $2.2 million a year ago, a 96% decrease. However, Vertex Recovery had a nonrecurring pipeline transaction that contributed roughly $1.4 million in third quarter 2015. For the third quarter 2016 Vertex Recovery had a 48% per barrel margin decreased over the same period a year ago.

Our consolidated per barrel margin for all products improved 63% in the third quarter 2016 compared to the same period a year ago. Selling, general and administrative expenses were $5 million in the third quarter 2016 compared to $6.1 million for the third quarter 2015. The 18% improvement of our SG&A year-over-year was because of a reduction in headcount and a continued focus on reducing expenses. For the nine months of 2016 SG&A was $15.2 million versus $17.1 million a year ago. We reported a net loss of $1 million or $0.03 per share in the third quarter 2016 compared to net loss of approximately $3 million or $0.11 per share in the third quarter 2015.

Our shares outstanding for the third quarter were 30.6 million shares. Our cash and cash equivalents were $3.8 million as of September 30, 2016. Our long-term debt and capital leases is approximately $12 million including $4.8 million owed to Goldman Sachs. Our long-term debt was approximately $23 million a year ago. Now I will turn the call back over to Ben Cowart, our CEO.

Thanks, Chris. Just to revisit the situation at Heartland and Marrero briefly, I would like to reiterate that we have corrected issues and bubbly that each facility should contribute to our future performance. As for Heartland, the new investments are having the desired effects on production and these benefits should be apparent when we report our fourth-quarter results. At Marrero, the new permit will allow us to produce more consistently and improve production levels. Also we will not have to do the previously scheduled turnaround for November. That will be pushed into next year because of the recent downtime.

Overall our spreads were good and improving and all markets were stable compared to quarters in the recent past. These factors helped us exceed our internal expectations and result in a positive EBITDA of $1.8 million. As previously stated, this is a spreads business and I very pleased with the way we have managed our spreads in the third quarter as shown by our gross profits.

As we look ahead $45 to $50 crude is a nice spot for us because we can manage our spreads at this price level of effectively. I am particularly encouraged by the way our collection operations held onto street charges for oil. Our charges and stop fees were $1.2 million for the quarter compared to $90,000 during the same period in 2015 and $3.5 million for the first nine months of 2016. Our trailing 12 month collection volumes grew at a rate of 3% and we expect the growth to continue and improve beyond 2016. Concurrently we are looking for further expansion of our collections and will opportunistically pursue these opportunities especially around our operating assets.

We will be making substantial investments next quarter in six new collection trucks, which will boost our collection efficiency and our volumes. A brief update on our marine fuels. The market is improving and we should expect better spreads in the fourth quarter. We are hopeful that this represents the beginning of a positive trend. Although it is early in the fourth quarter, we are seeing a $0.03 to $0.05 per gallon improvement in our marine fuel sales from Marrero and we are optimistic that this trend will continue for 2017, where we anticipate the improvement over third-quarter 2016 to total $0.08 for the coming year.

As it relates to our Heartland operations, the fire in February was a real setback but based on the experience we have had in this quarter we anticipate that the investments we made during that downtime will boost our 2017 results. By the end of 2017, the model we have been working on at Heartland will be finalized and we intend to use it as a platform to grow and develop our other operations. We believe it is a very powerful model that we want to replicate across our footprint.

A perfect example of leveraging our Heartland model is our new Group III important business. Using our existing customer base and marketing team we have completed our initial quarter of operations for our Group III base oil business, which is off to a great start. We now have been approved by the fourth major additive companies that different formulation levels. We will finalize all of the required formulations as we move forward in 2017. We also took another step in our efforts with the hiring of Michael Sommer as marketing manager, product sales development. Michael brings 30 years of experience including 23 years at Safety-Kleen, where he developing markets for their base oils and finished lubricants. These steps highlight our focus on growing our new Group III base oil business.

Before we take questions 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, our investor relations representative, Marlon Nurse, at 212-564-4700. I also want to mention that a digital replay will be available by telephone approximately 2 hours after the call's completion until November 30, 2016. Details on how to access the replay can be found in our recent press releases or on the investor relations section of our website at www.VertexEnergy.com.

Operator, we are now ready to take a limited number of questions pertaining to the matters discussed on 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) Eric Stine, Craig-Hallum.

Good morning, everyone. Just wanted to start with marine fuel, good color there on the pricing side. I'm just curious if you can talk about maybe on the volume side or percent of mix that you are seeing currently out of Marrero, maybe how we should think about that over the next few quarters and do you have a target in mind exiting 2017?

Yes, first of all of this year for 2016 we have only sold one 40,000 barrel barge to the feedstock market, which was sold as VGO to a refinery. The balance of the production has been sold into the marine fuel business. The challenge so far this year was the transportation cost, where we had to ship the product in order to get into those markets. We are working on closer markets to our production that should improve our net back and we are seeing good progress. I think in 2017 we should be 100% sold into the marine fuel market unless for some reason the VGO market outpaces the marine fuel market in value. We will obviously play in both markets, wherever we get the best price.

All right, good color there. Maybe just turning to Heartland and Marrero, you touched on some of the things that occurred in the quarter but just wondering can you comment, I know you have the new equipment at Heartland and the new permit at Marrero, did you have --? I mean exing out some of the operational stuff but did you have any volume benefit from either of those in the quarter or is that something we should think about more fourth quarter and 2017?

Yes, I would think about volume improvements related to both operations for fourth quarter and 2017. We will still make some capital improvements at Marrero next year, first of next year that will help move our volumes up another notch.

All right, last one for me. I may be missed this, did you give a specific charge for oil metric for the quarter or is it something that we should think about given a stable oil environment that it was pretty much stable on a sequential basis?

Yes, it was pretty much stable on a sequential basis, it may have been down just slightly based on some growth initiatives that we expect to see in the fourth quarter.

Got it. Thanks a lot.

Michael Hoffman, Stifel.

Thanks, Ben, Chris. Hope you have allergies, not a cold, Ben. Can we talk about the utilization or the sort of plant reliability? What gives you comfort that you have your answer around that in both those two operations, Heartland and Marrero at this point? What is happening?

Yes, we will start with Heartland. We have a lot of new equipment in the facility. We have seen most of the issues I think that you can see there. Our engineering group has been very proactive this past quarter to really look deeper into these systems. This was an internal failure up their related to metallurgy in an exchanger that was poorly designed and so we can have replaced that exchanger. The plant state online the whole time so it is not that we didn't have operations rounding, we just weren't able to convert our VGO to base oil because of the one piece of equipment that did fail.

Going to Marrero, I think our consistency and track record there is very solid. We have not had many issues there over a three-year period. Our production has been very stable and consistent. We do plan to dial the production up at that site based on our Permian and the new equipment that we are going to install. Power failure at the grid outside our control, all it basically did is caused silage to break out in our heater that we would have typically had to remove during our turnaround. It didn't come out the way we would handle in a turnaround; it was a disruptive dislodging of that silage that caused us to have to spend more time to fix it. That is normal. There is nothing abnormal about that and that could happen down the road. We haven't seen much issue along those lines, but those kind of things happen and run in these plants.

But we did make use of the downtime where we don't have to shut the plant down in November and Marrero should run full throttle through the fourth quarter. Everything looks real well there.

So speaking of spreads and the outlook if you look at where the spread is today versus 2015 what is the percent change improvement of 4Q 2015? That is one part of that spread question and then if you took the current spread today and said that is your spread going into 2017, what is the percent change versus the full effect of what you know through the nine months plus the current spread year-over-year? How do I think about that?

I have some of those numbers. I'm going to give it to you in a couple of pieces. The improvement of spread between 2015 and 2016 is 63%. The improvement going into 2017 from Marrero we anticipate to be an additional $0.08 a gallon because it is going to come out on our sales price of our finished product.

Then we are talking about 45 million gallons?

Yes, conservatively. The Heartland operation with the investments we made into the asset this year we have realized some additional spread from that this year. We think that it will yield another $1 million, $1.2 million next year over our current EBITDA for the Heartland facility.

Okay. And then on the marine fuel market, the slow sulfur conversion has had fits and starts, more fits than starts. So what gives you comfort because I am assuming it is the low sulfur demand is what is your leverage point, your low sulfur alternative, what gives you comfort that that market starts really addressing the regulatory changes to the lower sulfur standard and therefore the demand goes up?

We are even with the target improvements for next year, we are still nicely discounted to number two diesel and the shipowners in this sector of the market has become under pressure as far as utilization, margins, etc. So they are looking for cost-saving alternatives. The key for this year was to get our product into that market so that it would be adopted. It is an alternative fuel and shipowners and bunker companies have to be comfortable that this fuel will perform and there is no issue. So we have a lot of correct record now and it is really just a transferring of sales from one market that we have a lot of freight today to a closer market related to our production is really the only step for 2017 that we have got to make, and we are making progress there.

And then at the current oil price and the stability you are seeing, is it getting good enough that TCEP gets restarted?

We have brought a person and that is doing some development work around our TCEP technology with the idea that we may get the opportunity to do that. We are really looking at supply and pricing of supply before we add more demand in the market. So the third quarter was a pretty tough market for feedstocks because of so much export demand that took place not just in the third quarter but also in the second quarter so there was a lot of inventory pent up going into 2016 and today there is not a lot of used oil inventory in the market and we think that maintaining the current production levels for our operation is probably the right thing to do as we start off in 2017 until we see available supply at these kind of prices. So that is kind of how we are looking at it.

Just to be clear, supply in this case is the feedstock supply? They are not running the plant to produce --? You are saying the demand is there for finished good but can you find the feedstock?

We can get the feedstock but what kind of price and what will those spreads ultimately look like across our business?

Got it. Lastly, based on your view of the fourth quarter, how do you feel about the leverage covenants that you have that start to kick in on an annualized basis off of your next reporting cycles?

I am going to come right back to that. Michael, let me add one more thing to the supply standpoint and what we just -- the question you just asked. This is really important. Keep in mind that we expect to process an additional 15 million gallons at Marrero in 2017 versus what we anticipate doing this year in 2016 based on the permit and the improvements that we have made and will make at the first quarter.

So we are taking the oil from the Houston market to the Louisiana market. That is half of what the production was at Marrero -- I mean at our TCEP operation. So that is another reason why we are hesitant on the TCEP facility. We are getting a lot of leverage at Marrero by maximizing our production that way.

Now back to covenants and Chris can add to this but we have got Goldman Sachs down to $4.8 million and we are well within our covenant requirements and we don't see any issues meeting those requirements. Everything is very good and I think we are fine.

Just to add to that, Michael, I am very comfortable with where we are at, especially based on the third quarter and then what we see in the fourth quarter. Just to reiterate, those start at the end of Q1 2017.

Thank you so much for taking my questions. Feel better.

Tom Bishop, BI Research.

Good morning. It sounds like from everything I am hearing that Q4 should be greatly improved actually from Q3 and perhaps that Mike even mean profitability, is that a fair assessment?

It is very likely. We are early in the fourth quarter but with the turnaround that was scheduled for Marrero that will not have to be done, the plant is running great. We have good spreads, our Heartland facility is at full throttle. It is running great and we do have a scheduled and planned turnaround for the Heartland facility just to change our catalyst out on our hydrotreater. But we see the fourth quarter being a very solid quarter and we hope to be profitable as a result.

Great. What is happening with the Myrtle Grove facility? As a part of that question, has there been no opportunity or demand to use the facility there for storage or petroleum products?

Yes, good question. We are working on infrastructure at that site and there's going to be some rail improvements made and some large dock improvements made maybe as early as this quarter going into first quarter of next year. We have recently negotiated a favorable intercompany transfer rate by rail between our Marrero facility and that facility. So we are making progress there.

This is a market issue, Tom, as it relates to base oil because that facility is equipped with the hydrotreating assets and the fractionate are and all of the things that we need to do to take the VGO from Marrero to Myrtle Grove and convert that to high purity base oil like we are doing at the Heartland facility. We don't believe the market is ready for this additional base oil volume but the market appears to be improving as we go into 2017 so we are going to continue doing things that we can do to further prepare us for that opportunity while we perfect our model at the Heartland facility so that there is no question about the economics and our ability to execute that strategy at a much higher level using the Myrtle Grove assets. So I don't anticipate us bringing Myrtle Grove on in 2017 but I do anticipate making significant progress towards our long-term utilization of that site and development of that site this coming year.

Okay, so it sounds like your plan is to hang onto that. The Company referred a little while ago in a release of some sort that the Company was looking to monetize some assets I thought something of that nature and I guess I thought you were referring been to Myrtle Grove but perhaps you were referring to something else?

I will say this, Myrtle Grove has a lot of value and a lot of valuable equipment and if it is more valuable to someone else I am having discussions on a continuous basis related to that as well as our CMT facility in Houston. I am more than willing to have those discussions also but we still have our own gameplan and we will continue marching forward as we evaluate other opportunities. So nothing is off the table.

Okay. Also could you just give us the production by facility and the capacity? Because I'm getting a little lost on that.

The feed capacity at our Heartland facility is 18 million gallons so that is input and the feed capacity today at our Marrero facility is about 69 million gallons.

So that is what you could process and then what has production been or kind of what rate are you at now?

Well, other than the downtime I think we are operating at that full production level at the Heartland facility and we anticipate increasing our production at the Marrero facility by 15 million gallons for 2017.

Beyond the 69 million or is that in the 69 million?

No, that includes the 69 million.

So it is the 15 million is in the 69 million?

Yes, so 55 million roughly is what our target looks like for 2016, 55 million.

Okay. You hope to be at that level and you hope to be kind of flat out there, 69 million?

Yes, I think we have the ability to do that. So I don't think our budgets are calling for that but we can operate at those levels. So I actually think our 2016 finish will be more close to 50 million, 52 million and then let's say an annualized target of 65 million for 2017.

That is full-year, right?

That is right.

All right. I will get back in queue.

(Operator Instructions) Tom Bishop.

I was unclear about the cost relating to the Bango sale. It says $10.8 million and I imagine there is a commission in there but that is a big number and I was a little surprised by that. I found that number in the cash flow statement. I guess you sold it for $30 million and then there was a cost of $10.8 million, a cash cost of $10.8 million dollars.

We had a lease-to-purchase option on the site and some of the assets, leaseholder assets. So we had to take that out when we sold the facility.

Okay. Also I'm struggling to uncover what the underlying income is. I mean, there is a lot of stuff going on here in 2016 as I am sure Chris can attest but with the preferreds and the derivatives and some of them are cash and some not maybe but can you help us get down to underlying earnings in Q3?

Yes, good question, Tom. So looking at the Q3 income statements, if you look at loss from operations at negative $586,024 that is really the operating income or loss if you will and then obviously below that you have the interest expense and then the big item that we have had for about three quarters now is the change in value of the derivative liability that is related to the warrants. So that gets repriced every quarter just based on market.

So operating income you can figure about $880,000 as far as operating EBITDA, cash-generating.

I guess I'm trying to get that to the bottom line there.

That is the best way to look at it. As Ben just mentioned, it is about $800,000 to $1 million in the bottom line if you take out all of that noise.

Okay.

From a cash flow perspective.

Okay. Can you explain liquidation preference in the preferred B and B-1? I think a little recap on that would be helpful to everybody here. I mean it is convertible, right?

It is convertible. However they were priced at $3.50 roughly on the B and then $1.60 roughly on the B-1 so the turn based on where the stock price is that our date of filing is the adjustment that we have to put on the income statement. So they were to convert, there would be a benefit to the Company at the time of conversion if the stock price is lower than the strike price.

But they would never do that, right?

You wouldn't think that they would, that is correct. However, we have to book that according to GAAP in our P&ML.

And the $3.50 to $1.60, you're talking about the conversion prices, right?

That is correct.

Okay. What percentage of the business is marine fuels? If Q3 wasn't representative let's talk theoretical of Q4.

We talked about the feed production, 18 million at Heartland and 65 million at the Marrero facility. Marrero is the marine fuels, Heartland is the base oil.

There was new legislation about using marine, a lower-polluting marine fuel within 200 miles of the coast. Is that helping?

Yes, that is correct. That is the market that we are selling our product into. Our product is meeting those new fuel standards, those requirements.

And you expect all of Marrero to go to marine fuel pretty much?

Yes, so far this year all of our product has gone to marine fuel other than one bargeload that we sold to a refinery.

It sounds like things are heading in the right direction at last.

Yes, I know it. I appreciate everybody support and hanging in there. We have got lots of work to do but it feels good to be playing offense and making headway again. So we hope these markets will just kind of stay put. Any lift in crude is a big positive for us but $45 to $50 crude oil is something that we are geared for and even though the price is low, the things that we are able to do at $45 and $50 crude sets our Company up for a better long-term outcome than a higher crude price today. So we are really running our business with a long-term perspective and we see a lot of value that we can create now and into the future. But we are not going to be disappointed if we get a little shot on crude prices, everybody will enjoy that as well.

Great.

Ladies and gentlemen, we have reached the end of the question and answer session. Now I would like to turn the call back to Ben Cowart for closing remarks.

Thank you, operator and thank you, everybody, for joining us today on the call and if you need additional help with questions feel free to reach out to Marlon Nurse with Porter, LeVay & Rose. Thank you again.

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