Vertex Energy Inc (VTNR) 2017 Q1 法說會逐字稿

Greetings, and welcome to Vertex Energy Inc. 2017 First Quarter Financial Results. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Ben Cowart, Chairman and CEO. Thank you, Mr. Cowart, you may begin.

Thank you, operator. Good morning, and welcome to Vertex Energy's 2017 First Quarter Financial Results Conference 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 and statements in the future tense are forward-looking statements. These statements involve known and unknown risk 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.

Before we review our financial results, I'd like to discuss some key points about our business operations. We're very pleased with our success in increasing throughput at our facilities, which drove revenues meaningfully higher during the quarter on a sequential basis. In addition, our collected volume was up 22% in the first quarter 2017 over first quarter 2016.

Furthermore, we continue to grow our collection business as we recently closed on a acquisition in Northeast Texas. This acquisition gives us a new branch location for used oil collections and additional oil field processing capacity in this region.

Our work towards capturing operating leverage on our assets put us on track to meet goals we set in the beginning of the year despite operational setbacks, primarily related to our early turnaround at Heartland refinery in the first quarter of this year, 2017. However, the turnaround at Heartland is now a bright spot as we are well ahead of our planned schedule. Our schedule's second quarter turnaround was completed first quarter and has put us on track to process more than our annualized 18 million gallons at the facility. In addition, we're able to benefit from the increase in base oil prices noticed early in the second quarter.

At Marrero, our year-over-year spreads were off due to an increase in feedstock pricing, while we were aggressively acquiring new volumes to meet the new production capacity. We believe that the increase in collected volumes and the improvements in our refinery are positive indicators of the progress we're making in our business.

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

Thank you, Ben. I will now review our financial results for the 2017 first quarter ended on March 31, 2017. All of our financial statements, unless otherwise noted, are prepared in accordance with Generally Accepted Accounting Principles.

For first quarter 2017, consolidated revenue was $34.8 million, higher than the $14.1 million reported for the first quarter ended March 31, 2016. Our overall volume in the business was up 43% and the crude market prices were up approximately 75% for the first quarter 2017, over first quarter 2016. The rise in volume is attributed to the increased production capacity at our facilities.

In our Black Oil Division, which includes our Marrero TCEP and the Heartland business units, revenue was $24.8 million for first quarter 2017, as compared to $10.1 million in the same period a year ago, an increase of approximately 145%.

Volume increased 50% due to the higher production at the Marrero and Heartland facilities. The Refining & Marketing Division produced revenue of $5.4 million in the first quarter of 2017 versus $2.6 million for the same period a year ago, an increase of 105%. Overall volume increased 14%.

For the first quarter 2017, Vertex Recovery division generated $4.6 million in revenue, an improvement of 233% from $1.4 million a year ago. The increase was driven by higher volumes during the period.

For the first quarter in 2017, our gross profit was $4.1 million, an increase of 1,806% from a gross loss of $238,524 during the same period last year.

Gross profit margin was 12% for the first quarter 2017 compared to 0% for the same period a year ago. Our consolidated per barrel margin improved over 1,300% in the first quarter 2017, compared to the same period a year ago.

Gross profit for the Black Oil Division was $2.9 million during first quarter 2017, which was a 375% improvement over a loss of $1.1 million in the first quarter 2016.

Per barrel margins increased over 280% for the first quarter 2017, over the first quarter 2016.

Refining & Marketing's gross profit increased 42% to $746,000 in the first quarter 2017 compared to $526,000 a year ago. Per barrel margin increased 25% for the first quarter over same period a year ago.

Vertex Recovery generated gross profit of $388,000 in the first quarter 2017, compared to $303,000 a year ago. There was an 11% per barrel margin decrease for the first quarter 2017 over the same period a year ago.

Selling, general and administrative expenses were $5.2 million in the first quarter 2017 compared to $5.5 million for the same period a year ago. Although our SG&A was lower year-over-year, it was impacted by the acquisition, legal and accounting costs related to the recapitalization in the first quarter 2017.

We incurred interest expense of $1.3 million, of which approximately $615,000 were a onetime expense for the retirement and restructuring of our debt during the first quarter. Based on our current debt levels, we expect our quarterly expense to be approximately $600,000 going forward.

Depreciation and amortization expenses were $1.6 million, right in line with our depreciation and amortization a year ago. We reported a net loss of $4 million or $0.12 per share in the first quarter 2017 compared to a net loss of approximately $2.2 million or $0.07 per share in the same period a year ago. Our quarterly EPS was calculated using an average of 32.9 million shares outstanding.

As of March 31, 2017, our term debt was approximately $12.4 million compared to $14.2 million a year ago. This is an approximate $2 million improvement year-over-year. At the end of the quarter, our working capital was approximately $4 million compared to a negative $1.2 million a year ago.

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

Thank you, Chris. We remain optimistic with our business and guidance for 2017. Capital investments and improvements that were made in 2016 and continued in 2017 yielded encouraging results in the first quarter and will have a positive impact for the year.

As mentioned in my opening remarks, our scheduled second quarter turnaround for the Heartland facility was completed in the first quarter. We're likely to process more than our annualized 18 million gallons at the refinery and should benefit from the rising oil prices -- the rising base oil prices, that is.

We have completed our scheduled second quarter turnaround at our Marrero facility as well, which includes capital investments that allow us to run the plant at new production rates and will improve our product output quality.

Our new feedstock volumes are in place for both refineries as we entered into the second quarter and for the rest of this year. This will allow us to maximize the fixed cost leverage on both refining operations. In the second quarter, we expect our spreads to be stable at the Marrero facility and higher at the Heartland facility.

We're very pleased with our volume growth and market penetration of our Group III base oil import business, which allows us to further our relationships as a high-purity base oil producer and marketer to the lubricant manufacturers in North America.

Our team across the board remains committed to driving value throughout our business. And I want to thank them for their efforts in the first quarter 2017. We continue to explore ways to leverage our current business operations, including reducing operating costs.

Before we take some 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, 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 until June 30, 2017. Details on how to access the replay can be found in our recent press releases and on the Investor Relations section of our website at vertexenergy.com.

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

(Operator Instructions) Our first question is from Eric Stine of Craig-Hallum.

It's Aaron Spychalla on for Eric. I guess, first, can you just maybe start off with guidance? Or are you kind of -- are you reiterating the revenue gross margin and EBITDA targets you provided last quarter?

Yes, Aaron. We're comfortable at this stage, as we look into the second quarter because of the improvements that we see. I would like to make the point that at the time of guidance, the WTI crude was around $53 a barrel. So it's considerably lower today. But there -- we've got the volumes at the refineries, the turnarounds are done, the plants are running good. We're seeing some positive things as we go forward.

Okay. And then secondly, can you just give an update on the operational initiatives? Maybe specifically on the charge for oil, you mentioned lower WTI prices. Has there been any impact there? And then maybe on the ECA marine fuel, kind of where that is as a mix, and when you kind of anticipate that getting to 100%?

Yes, Aaron, this is Chris. I'll address the charge for oil real quick. As Ben noted, we were aggressively growing volume, specifically on the collection side during the quarter. So our charge for oil did decrease slightly from year-end to the end of the quarter.

Our collection volumes, Aaron, are up 22%, first quarter to first quarter. So most of that is just new volumes off the street.

Right. And then how about on just some of those other kind of higher value finished products, like the ECA marine fuel and some of the lubricants?

Yes. So nothing as far as new lubricant sales for the first quarter. The facility at Heartland did meet a specification that allowed us to market the product as a Group II plus base oil. So we're pleased with the continued improvements at the site there. That has helped us garner better product values for the base oil, so that's good. Our initiatives on the import business, where we're bringing the Group III product in and moving it across the country, that's going very well. We just received our last major additive approval, so we're fully approved by the major additives for the Group III base oil. That will help us continue penetrating new markets with the lubricant manufacturers. That has a secondary positive impact to our internal base oil values and sales as well. So those initiatives are going well. Our marine fuel business is steady, some improvements. But when oil prices dip like they are today, it makes it more difficult to get shipowners looking at alternative fuels because of the fuel savings they get naturally from a lower WTI price. But we do have several new buyers in the pipeline that we're working on. So I would say no major improvements in percentage and volume over the second quarter. But keep -- I mean over the first quarter, but keep in mind, most of the product is going into the market. We're just trying to shift it where there is less freight cost. And we get more of that margin by selling closer to the refinery.

Right, okay. And then maybe last for me. Can you just talk about a little -- give us an update on Myrtle Grove and the Cedar Marine Terminal, any kind of next steps we should be looking for from there?

Yes, so we are in R&D at the Cedar Marine Terminal facility, our TCEP operation. We've got new technology that we're working on that could give us a lower operating cost. Our key focus for this year was to lock in all the new volume, add another 15 million gallons of feedstock to the 2 operating refineries, Marrero and Heartland. We've got that volume contracted and looks ratable through the rest of this year. So any additional volume will allow us to expand our Black Oil business in general. And hopefully, provide additional feedstock to start running pilot work and doing some runs on this new chemistry with our TCEP plant. So that's not in our guidance, but it is one of our expenses. And we believe will really yield some interesting opportunities for us. So we're encouraged by what we're doing at CMT. Our Myrtle Grove operation is moving forward, there's site work and development work being done, engineering work. We're modeling and preparing our book for that site. So we can get into the market for strategic conversations that could yield some interesting opportunities for us. So we're just steady as we go there as well. So both are moving in a positive way.

Our next question comes from Michael Hoffman of Stifel.

Ben, when we think about the operating leverage of the business at this point and sort of your expectations as you came into the year, you had this sense of, sort of, a midpoint about 30% increase in revs and looking at about a 60% increase in gross profit. That should have swung you to be positive free cash flow generator this year. So how do you rate where you are, given 1Q complete and in the bag, and knowing what you know now about where WTI is, your spreads, asset utilization?

Yes. I think everything's very close to what we had planned for and budgeted. We did have the turnaround for Heartland in the first quarter, we had some recapitalization expenses. All of this was somewhat of a drain on our net income and cash flow for the first quarter. But we had to build these volumes up, we had to get the volume first into these refineries and kind of lock all that in. And then margins will temper backwards in our favor as we go through the rest of the year. I think it was played well in the first quarter. We did get -- we finished the quarter with the run rates of the additional 15 million gallons of feedstock. And we got the turnaround work out of the way so we can benefit from the higher base oil prices that are seen in the market today. So I'm very comfortable that [all weight] given where crude prices end up going, obviously that has a short-term direct impact to our spreads and we have to adjust accordingly. And we have seen crude come off considerably in the last quarter. So -- but there's some positives that we didn't see and those are offsetting for the moment to what we think is going to play out for the rest of the year.

So having used up some working capital to drive this volume in 1Q. Do you -- are you comfortable that you're going to get it back and be free cash flow positive in 2017?

Yes, yes.

We're all positive and believe we'll be cash flow positive for '17.

And can you frame how you think that -- is that sort of $2 million to $4 million or $5 million to $10 million?

No, our guidance, Michael, last call, we provided a $6 million to $8 million EBITDA target, our guidance for 2017. And we're standing firm with that today.

Right. But how do you think that will convert into free cash? Sort of a couple million out of that becomes free cash during the working capital consumption?

No, I agree with that, Michael. You're probably $2 million to $3 million of free cash based on that, those targets.

All right. And then, Ben, where are you now in total volumes collected on a run-rate basis? And what's that look like as a percent of total of your need?

Yes, our need is, John, what? 90-something million gallons for the 2 refineries? 65 and 18.

I think about 82 million.

Okay, so we've got a 82 million for the 2...

85 -- 84 million.

84 million for the 2 refineries. Our target for this year in our guidance was 25 million in total collected volume. We did 20.3 million in 2016. And we're already on a run rate to that volume and maybe a little more.

Of the 20.3 million or the 25 million?

25 million.

(Operator Instructions)

Okay, operator. I assume no more questions. So thank you, everybody, for dialing in to the call and we appreciate everybody's interest in our business and we look forward to our call soon here for the second quarter results. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.