Vertex Energy Inc (VTNR) 2018 Q2 法說會逐字稿

Greetings, and welcome to the Vertex Energy 2018 Second Quarter Financial Results Conference call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to host, Ben Cowart. Thank you. You may begin.

Thank you, operator. Good morning, and welcome to Vertex Energy's 2018 Second Quarter 6-Month 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 Marlon Nurse, our Investor Relations Consultant at Porter, LeVay & Rose.

The company expects to make forward-looking statements during today's call. Statements include 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.

Before we review our financial results, I'd like to discuss some key points about our business operations. We remain optimistic and encouraged by our performance as our capital investments are yielding returns.

For the quarter, our revenues grew 27% to $47 million. Gross profits grew 86% to approximately $10 million, and we reported net profit of $0.03 per share. Overall, we expect our positive financial year-to-date to continue to perform and carry over into the second half of this year.

The industry has transitioned into a pay-for-oil model as a result of an improved commodity market and higher prices of finished products. Despite this shift, our contribution margin has remained strong and has improved year-over-year. Our spreads at both Marrero and Heartland refining operations has been solid and were slightly better than our initial expectations.

As we discussed on our last call, we expected our performance to be strong in the second quarter, which is evident in our financial results. In addition, we anticipate our second half of 2018 to be a continuation of good performance.

We have completed the major turnaround for Heartland. In general, our refining volumes for the quarter were strong, and the spreads were ahead of target. Our refining production across both facilities was much improved over last year. We have witnessed higher production volumes and better sales for both Heartland and Marrero. We continue to see a strong demand for both base oil and marine fuels.

Our gross profit has increased substantially as it tracked -- as it's tracking ahead of last year and is in line with our expectations thus far for this year. Our UMO collection volume continues to show strong double-digit growth, tracking ahead of projections both in volume and contribution margins despite the shift in pay-for-oil by the industry. Our collected volumes rose 17% in the second quarter over the same period in 2017 and increased 22% for the 12 months ending June 30, 2018.

We're on target to collect 30 million gallons by the end of 2018. Concurrently, we continue to leverage our current collection platform and made an acquisition in the Texas region during the quarter.

The spreads for our Refining & Marketing business were good, but volumes were down as a result of major supplier feedstock being down due to an extended turnaround. And again, this is for our Refining & Marketing business. Our trading volumes in our Vertex Recovery business were off for the quarter due to market conditions. Our Group III volumes continue to be very strong but have been impacted by delays in current base oil approvals.

We have nothing definitive to announce on our ongoing private capital efforts. However, we hope to provide an update soon.

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

Thank you, Ben. I'll now review our financial results for the 2018 second quarter and the first 6 months ended on June 30, 2018.

All of our financial statements unless otherwise noted are prepared in accordance with generally accepted accounting principles.

For the second quarter, consolidated revenue was $47 million, which was 27% higher than the $36.9 million reported for the second quarter ended June 30, 2017. For the first 6 months, consolidated revenue was $88.2 million, 23.2% higher than $71.7 million for the first 6 months in 2017.

Our total overall volume for the business was down 7% for the second quarter over the second quarter of 2017 and decreased 5% for the first 6 months over the same period in 2017.

For the second quarter, our gross profit was $10.1 million, an increase of 86% from a gross profit of $5.4 million during the same period in 2017. For the 6 months, our gross profit was $16.4 million compared to $9.5 million for the first 6 months ended June 30, 2017.

For second quarter, gross profit margin was approximately 22% compared to 14.6% for the same period a year ago. For the 6 months, gross profit margin was roughly 19% versus 13.2% for the 6 months ended June 30, 2017.

Our consolidated per barrel margin increased 102% in the quarter compared to the same period a year ago and rose 83% for the 6 months 2018. The growth was attributed to improvements in our production, continued focus on finished product value enhancement and management of our costs and spreads related to improved market conditions.

In our Black Oil division, which includes our Marrero and Heartland business units, revenue was $38.5 million for the quarter as compared to $27.4 million in the same period a year ago, an increase of approximately 40%.

Volume increased 2% for the second quarter over second quarter 2017, while our overall production volume in Heartland and Marrero was up 5% year-to-date over the same period a year ago.

Gross profit for the division was $8.7 million during the quarter, which was a 98% improvement over $4.4 million in the second quarter 2017.

The Refining & Marketing Division produced revenue of $4.4 million as compared to $5.2 million for the same period a year ago, a decrease of 15%. Because of the extended turnaround at a major supplier, volume for the quarter was down 40% over the second quarter 2017.

Gross profit decreased 26% to $358,000 for the quarter compared to $482,000 a year ago. Per barrel margin increased 30% for second quarter of 2018 over the same period a year ago.

For the second quarter 2018, Vertex Recovery division, which includes our Group III base oil import business, generated revenue of $4 million compared to revenue of $4.3 million a year ago.

Volume was down 36% for the quarter over second quarter 2017. For the second quarter, gross profit was $1 million compared to $548,000 a year ago, which was an increase of 86%.

Selling, general and administrative expenses were $5.4 million in the second quarter 2018, which is in line with the $5.4 million reported for the same period a year ago. For the 6 months ended June 30, 2018, SG&A was $11 million, slightly higher than the $10.6 million reported for the same period in 2017.

For the second quarter, depreciation and amortization expenses were $1.7 million compared to $1.7 million a year ago. As of June 30, 2018, our term debt was approximately $15.4 million compared to $14 million for the same period a year ago. The increase is demonstrated in our capital investment that had yielded improving returns. Our working capital was approximately $6.5 million compared to working capital of $4.7 million at the end of June 30, 2017.

Our reported net income for the second quarter, which includes the accretive cost of our preferred stocks was $1.4 million or a profit of $0.03 per share compared to a net loss of $2.7 million or a loss of $0.08 per share in the same period a year ago. Without the accretion of the preferred stock, our net income was $2.5 million or a profit of $0.07 per share compared to a net loss of $1.9 million or a loss of $0.06 per share for the second quarter 2017.

For the first 6 months of 2018, our reported net loss, including the cost of the preferred stocks, was $2 million or a loss of $0.06 per share. This compared to a net loss of $6.7 million or a loss of $0.21 per share for the same period a year ago. Without the accretion of the preferred stock, net income was $322,000 or a profit of $0.01 per share compared to a loss of $5.1 million or $0.16 per share. Our EPS was calculated using an average of 37 million diluted shares outstanding in the second quarter 2018.

We expect a positive momentum to carry into the second half of 2018. Therefore, we want to provide the following guidance for full year 2018: Revenues should be between $170 million and $180 million. EBITDA should be between $10 million and $12 million. And net income profit should be between $1 million and $2 million.

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 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 July 31, 2018. 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 www.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 are unable to discuss any information or business plans which are not publicly available. Thank you.

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

Obviously, you're positioned to do well either way, but I -- just longer term, when you think about the pay-for-oil versus charge-for-oil, I mean, how do you think that plays out, i.e., there's a little bit of differing opinions in the industry whether pay-for-oil is a short-term dynamic or is something that lasts a little bit longer or normalizes and it kind of goes back to modest charge-for-oil?

Eric, good question. Let me just explain a little bit about pay-for-oil. It's definitely moved by the market's related products in crude oil, but it also is tied very much to 2 things, the re-refining capacity in the U.S. and the utility fuel oil market that is, I guess, represented by offshore utility companies that are stranded, non-natural gas utility markets. So if you can get natural gas, the cost of that BTU is pretty low. If you can't, then you have to use a heavy black oil that will power the utility markets. So we deal with that utility component probably more than most in the industry. And so we think that, that has a major or has had a major influence on used oil values.

And as we approach the new 2020 fuel oil regulations for ships, the ships are the major consumer of 6 Oil, this heavy resid. And when the sulfur change goes into effect in 2020, all of those heavy resids onboard the ships will have to go to other markets. And we believe the utility market will see an oversupply of these heavy molecules, and we definitely believe that, that residual fuel price will come down.

And so if that happens, it will reset the value of used motor oil based on the utility demand and the indexing that prices used motor oil. So at that point, we think that the market could move back to much lower levels and back to a charge market if oil prices generally kind of stay where they are today. So that's (multiple speakers)

Got it. Yes, that's what I was -- yes. No, that's what I was kind of looking for, but that is great color there. But I mean, well, collection volumes, you've made great progress there, and I know you're on target for 30 million gallons, and that really helps you even if it is a pay-for-oil market. I mean, ultimately, where do you see those going long term? And maybe just a little color on the acquisition you made.

Yes, the acquisition was small, it was a tuck-in with our branch operations in Fort Worth, Texas. So it was another small company that was collecting in that market that we were able to acquire and roll their routes and equipment and drivers into our business. So not material, but it does reflect the type of work that we are doing to expand our self-collections. So we believe our growth -- we're in our third year of sustainable growth, most of which has been organic, and we think we'll continue that forward.

Again, even in a pay-for-oil market, our contribution margins are much better than our cost of third-party supply. So one thing for Vertex is we still depend on a large amount of third-party oil that we purchase again off of the 6 Oil index. And so it allows us to reach out and grow that collection business at a pretty aggressive level because our costs for third-party supply is much more than what it costs us to collect with our trucks.

Right. So I mean, 30 million is -- there's a lot of upside. That will take time, but that's by no means kind of the top end. You've got a lot more room to go there.

Yes, maybe another 60 million gallons of refined capacity.

Okay. Fair enough. Yes, and then last one for me, just maybe an update on TCEP and the testing. I know you've been doing some testing, been working to get the cost down there all with an eye towards IMO 2020, but just maybe where you stand right now on that.

Yes, nothing further to update on TCEP. We really finished all our work, all the R&D and the work we did last year and finished up in the first quarter. So the plant, we actually tested and produced the barge load of product. So we're really waiting on this 2020 market to get here. We also are prepared if things change sooner that we can dial that refining capacity back into the market.

So we have really focused on our refining capacity with the 2 existing refineries, Marrero and Heartland. And as we discussed last year, we -- that was a major goal. So we increased that capacity by 17% last year, and at the end of the second quarter, as Chris indicated, we've added another 5% over last year's production rates. So we've got a lot of leverage out of the existing refineries, and we think that's more important to keep this refining capacity tight until we see these 2020 opportunities open up.

Our next question is from Gerry Sweeney from ROTH Capital Partners.

I think you did touch a little bit upon this, but from a capacity standpoint, are Marrero and Heartland running at full capacity in the quarter? It sounded like you also added capacity. Just want to double check that point.

Yes. Our Marrero plant -- this is John Strickland -- is at -- running at the capacity we budgeted for, and with the new CapEx projects we did in the -- our early second quarter, in Heartland, in our turnaround, has allowed us to raise our capacity at that facility, and everything looks good going forward there.

Is there opportunity to continue to add some CapEx to expand capacity at either facility -- outside major CapEx, maybe at a smaller amount that you can keep expanding?

Yes, they are. There's an opportunity there that we're working on today.

And then, Ben, maybe you can talk about maybe just the acquisition field a little bit. Obviously, the collections business is highly fragmented. You have a localized footprint, I think, down in the Louisiana, Texas area and maybe, I think, Alabama even. What's that look like? Is there opportunity to -- how many little tuck-ins could you do, especially now that you're starting to turn a little bit of a profit? And then the follow-up to that would actually be, is that a key focus for capital investment? And if not, where would it be?

Yes, I think it ranks at the top of our priority list for use of capital. As you indicated, we really needed to work the investments that we made in the refineries and get them really producing, which I think, you can see the leverage that we've created at the refinery level. We work real hard to grow the collection business, and 22% on a trailing-12 basis is pretty good considering the amount of capital that we actually deployed into that space. So we've added very little debt to the company in the last year, and we've continued to grow our collection business.

So we will -- as investable capital becomes more available to us, we will continue to step into that collection vertical and try to build synergy around our footprint, as you said, both in the Gulf and up in the Midwest. And so we're doing that, but we hope we'll be able to do more of that. And we do think the targets and opportunities are there, and we've just been limited a little bit on our available capital and the priorities of how we chose to invest the capital at this point. So collections will be front and center as we go forward.

Got you. And then I know you mentioned Myrtle Grove in the prepared remarks. But yes, any more details on how things are progressing on that front or if anything has changed?

Yes. No, it's very positive on all 3 of our projects. So our Myrtle Grove project for high-purity base oil is certainly moving forward. There's a lot of activity in that general area as far as development goes, and so we're very encouraged by the prospects of what we see with the Myrtle Grove asset. We're well on our way. As John indicated, we made some big investments at our Heartland facility to dial our throughput capacity up further. So they're just now getting into some of that new capacity, and we still have more to do there.

So we believe that we'll get some private capital around both those opportunities, and we we've got plans around our 2020 Marine Fuel business that we're working on also. So there's still a lot of opportunity in the assets that, that we already own.

Got it. Did you ever break out, or can you -- how much of your, I guess, Marrero product is heading to the Marine Fuel market today versus the maybe the VGO market?

I think we sold one barge to the VGO market, which was probably one for the quarter, and the balance had been going to the Marine Fuel market. So we're pretty much in full swing with the ship fuel business.

Okay, and that's been pretty consistent with previous quarters. There is definitely [building]...

Yes.

(Operator Instructions) Our next question comes from Brian Butler from Stifel.

Just when you think about the strength that you had in this quarter, is there any way to give some color or maybe break out how much of that is a benefit of higher fuel and base oil prices versus kind of some of the changes and improvements that you've made to the assets?

Yes, a good question, Brian. I would say it's a combination. Definitely, we recognize that the market enhancements and improvement has helped. But the -- from a production perspective, what our engineers and our -- the people at the plants have done has been amazing from an improvement in the ratability of the plants and the quality of the product that is being produced. So you've heard us the last couple of quarters talk about really focused on value enhancement of our finished products, and I really believe we're there.

So that's what we're seeing in this quarter. In addition to the improvement on the collection side, and the more we can collect ourselves at that street level, you're seeing that come through in the margins.

Okay. And when you think of the charge-for-oil, pay-for-oil kind of market, I mean, you've already given a lot to good color there, but it was slow to react when fuel prices went down and it seems to be faster as fuel prices come back to more shift to the pay-for-oil. Is there a structural change there that if we were to see fuel prices or crude prices come back in, that you can move quicker this time around to a charge-for-oil and kind of keep those spreads -- that lag between the spreads catching up much shorter than in the past?

Well, Brian, I think that's the -- the biggest challenge is you're dealing with an industry that's not very sophisticated. So we don't have indexing for used motor oil values like we do on finished product values. So that has actually worked to the industry's favor here in the short term as oil prices have gone up because used oil prices are not tracking as fast.

So -- but when oil prices go back down, it happens quick on the sell side, and you've got thousands on top of thousands of generators that you have to go and reprice, and that's done at the pace of the industry. That's really what took us so long before was with no indexing for the value, then it's -- it kind of watersheds from the top of the industry and the bigger companies. As they start charging, everyone else starts charging, and it just kind of cascades down. So I would hope that we've learned something and we would move sooner than later.

And that's what it takes, and I wish I had a better answer for you other than we really need to raise the sophistication of the industry and have some way to index the value of used oil so it can move as quick as the markets does as well. So there's some work going on in that area, but we aren't there yet.

Okay. No, that's helpful. On -- and then on the refining piece, the third-party volume issues you have, has that been resolved in the third quarter, or is there still some residual issues with getting the feedstock?

Yes, that was on our Refining & Marketing business in Port Arthur. And our largest supplier went down for a turnaround, which was routine, but they had major problems, and they were down probably an additional 6 weeks. So the plant is back online, and we are back at full production with them. So it is behind us, but our quarter was affected because of that.

So sequentially, we should see some improvement on the margins there and less of a headwind from what you saw in the second quarter?

Yes, correct.

Okay. On the gross profit, on the first quarter call, you had talked about a range of kind of in that 16% to 19%. And then based on second quarter results and the guidance that you gave, it sounds like you're probably towards the high end of that on the gross profit side, that 19%, maybe a little better. Is that the right way to look at this?

Yes. I would agree with that.

Okay. And then last one here on capital spending, kind of the $2 million to $2.5 million in '18 as a target. Is that -- does that continue at that pace or grow when you think about going into 2019?

(inaudible)

(inaudible) over CapEx.

Does it grow?

Yes.

From a CapEx side, I don't think it's going to grow more at our refineries. We've already did the CapEx project we had planned the last 1.5 years. We'll do a little bit more CapEx in the next year but not like we have in the last 1.5 years.

So that pace of $2 million to $2.5 million is kind of sustainable?

That's consistent, yes. That will be consistent.

(Operator Instructions) And if we've no further questions, I'd like to turn the floor back over to management for any closing comments.

Okay. Well, thank you, everyone. We appreciate you dialing in to this quarter's call, and if you need any further assistance, again, you can reach Marlon Nurse at (212) 564-4700. Thank you for calling.

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