Vertex Energy Inc (VTNR) 2020 Q2 法說會逐字稿

Ladies and gentlemen, hello, and welcome to this Vertex Energy Q2 2020 Earnings Conference Call. (Operator Instructions)

And now for opening remarks and introductions, I am pleased to turn the floor to Mr. Noel Ryan. Good morning, Noel.

Good morning, Jim. Thank you for that introduction, and good morning, everyone, on the line today. Welcome to Vertex Energy's Second Quarter 2020 Results Conference Call. Leading the call today are our Chairman and CEO, Ben Cowart; our CFO, Chris Carlson; and our COO, John Strickland.

We issued a press release before the market opened this morning detailing our second quarter results. In conjunction with this release, we also posted a conference call presentation that is posted in the Investor Relations portion of our corporate website at vertexenergy.com. We will reference this presentation throughout the remainder of today's conference call. I would like to remind you that management's commentary and responses to questions on today's conference call may include forward-looking statements, which, by their nature, are uncertain and outside of the company's control. Although these forward-looking statements are based on management's current expectations and beliefs, actual results may differ materially. For a discussion of some of the factors that could cause actual results to differ, please refer to the Risk Factors section of Vertex Energy's latest annual and quarterly filings with the SEC. Additionally, please note that you can find reconciliations of the historical non-GAAP financial measures discussed during our call in the press release issued today.

Today's call will begin with remarks from Ben Cowart, followed by a financial review from Chris Carlson. At the conclusion of these prepared remarks, we will open the line for questions. And with that, I'll turn the call over to Ben.

Thank you, Noel. Good morning, and thank you for those joining us today. Early today, we posted company presentation materials on the Investor Relations section of our website that I will refer to throughout this call. As expected, our second quarter performance was impacted by a combination of low feedstock availability, extended downtime at our Marrero refinery in Louisiana and a year-over-year decline in both refined products' demand and refined products' margins, all of which were attributable to the historical slowing and economic activity caused by the COVID-19 pandemic.

COVID-19-related decline in economic activity resulted in a reduced driving activity during the second quarter. The decline in driving activity contributed to fewer oil changes, thereby reducing available supply of used motor oil for collections. Given the lack of feedstock availability, UMO prices remained at elevated levels, well above historical correlations to product pricing, particularly impacting our spreads.

During May, we were forced to reduce utilization across our refining system as UMO collections declined. To that end, we took the Marrero refinery off-line for 34 days of extended maintenance during the second quarter, while at Heartland, the refinery operated at reduced rates. Commercial demand for refined products was weak in the period, also contributing to a decline in product spreads. Our business bottomed in May and showed indication of gradual improvement, existing -- exiting the second quarter as shelter-in-place orders were eased and economic activity began to improve. While U.S. vehicle miles traveled increased more than 25% on a month-to-month basis between April and May 2020, the VMT remains 25% below the May 2019 levels.

During April and May, direct collections declined 34% and 29%, respectively, versus the prior year. However, in the month of June, total collections increased 1% year-over-year. In July, we continued to see improvement and stabilization in our UMO collection operations. As UMO volumes have recovered, we've increased utilization at both Marrero and the Heartland refinery. During July, our refineries operated near peak capacity, spreading fixed cost across more barrels of production. Our team has done an outstanding job of ensuring the safe and viable restart of our Marrero refinery while ensuring continued plant reliability at the Heartland facility. Operationally, our business is moving closer to where we want to be. However, the spreads between diesel and high-sulfur fuel oil values versus crude oil remained well below historical levels. Should economic activity recover meaningfully, we would expect to see refining margins to recover. That said, we are assuming that suboptimal margins will be here today over the near term.

As indicated on Slide 6 of our presentation materials, contraction in product spreads represented 85% of the year-over-year decline in our adjusted EBITDA during the second quarter, with the other factors being lower volumes and losses in our metals business, offset by lower interest expense. We expect the second quarter will be our weakest quarter of the year with sequential growth in adjusted EBITDA expected in both the third and fourth quarter of 2020.

During the second quarter, our total cash burn was approximately $2 million, assuming that our refineries operate on plan and spreads continue to mirror the forward strip, we would expect to burn $1 million to $2 million of cash per quarter in the third and fourth quarter of 2020, respectively. We expect to return to positive free cash flow generation beginning the first quarter of 2021. Looking ahead, our management team remains focused on several key areas as we transition into the remainder of the current year. First, we remain focused on aggressively growing our UMO collection business. We have expanded the geographic radius of markets where we collect while continuing to evaluate a number of small tuck-in opportunities that have the potential to grow our direct UMO collections. Second, we remain focused on operating our plants at our near peak capacity throughout the remainder of the year, assuming normal planned maintenance, positioning us to capture improved operating leverage in economies of scale throughout the organization. Third, we remain focused on cost reductions.

During the second quarter, we reduced our SG&A by 10% from the first quarter to the second quarter. Looking to the second half of this year, we expect to realize approximately $1 million to $2 million in additional annualized operating cost reductions. We have also reduced discretionary capital expenditures, ensuring that nonessential investments are postponed.

Fourth, we're pursuing a series of initiatives intended to further optimize our asset portfolio. For example, as an established refinery and collector of used motor oil, we see an opportunity to apply a similar model through the processing of other automotive waste streams that we currently manage, such as used-oil filters and anti-grease. Together, these opportunities reflect our commitment to expand our total addressable market through process innovation and aggressive new business development activities.

Finally, during a period of historical volatility, capital discipline remains a top priority for our entire team. Now more than ever before, we have focused on conserving liquidity to support the long-term growth of the business. Chris and our finance team has done a great job of cleaning up our balance sheet in recent years, which has served us well during this difficult period for the business.

With that in mind, I'll turn the call over to Chris for his prepared remarks.

Thanks, Ben, and welcome to those joining us on the call today. For the 3 months ended June 30, 2020, the company reported a net loss attributable to Vertex Energy of $8.9 million versus a net loss of $400,000 in the second quarter of 2019.

Vertex reported negative adjusted EBITDA of $5.3 million in the second quarter 2020 versus $1.9 million in the prior year period. The year-over-year decline in profitability was due mainly to a decline in refined product margins resulting from a higher feedstock costs and lower finished product prices.

Turning to Slide 11 for a discussion of our balance sheet and capital structure. As of June 30, 2020, we had total cash and availability on our lending facility of $17.9 million and $1.8 million, respectively. Included in total cash amounts are cash held in the company's special purpose vehicles relating to our Myrtle Grove and Heartland assets, which are limited to use by each SPV, respectively.

Vertex had total term debt outstanding of $10.2 million as of June 30, 2020, which included $4.2 million related to funds received under the Paycheck Protection Program, or PPP, which is part of the recently enacted Coronavirus Aid, Relief, and Economic Security Act or CARES Act.

Under the terms of the Cares Act, the PPP loans, accrued interest and fees may be forgiven following a period of 24 weeks after PPP loan proceeds are received. If they are used for qualifying expenses as defined by the CARES Act, which are subject to certain exclusions based on the number of full-time equivalents retained and maintaining at least 75% of the level of compensation during the covered period.

We use the PPP loan proceeds to pay for payroll costs and other eligible expenses, consistent with the terms of the program and the plan to submit our forgiveness applications to our lending facility during the third quarter of 2020.

With that, I will turn the call over to the operator as we take questions from those joining us on the call today.

(Operator Instructions)

We will hear first this morning from Eric Stine at Craig-Hallum.

Just wanted -- just kind of a little bit about what you are seeing on the Street in terms of UMO pricing. I know in second quarter, a big objective to lower plant utilization, pushback volumes to generators, you did that. It sounds like some others in the industry did that as well. But it sounds like the pricing is still not necessarily reflecting that. Is that something that you think you kind of have to wait out? Or are you starting to see any improvement on that side of it?

Yes. It's a cycle you go through when the market drives up as far as UMO supply, then the first thing that has to happen is the oil has to come back into the market, then it has to come back into tankage and then from tankage back out to the end market, like, the refinery. So we have -- I think, we have cycled through most of that transition, and we are starting to see UMO availability that is at least in balance with the refining capacity that's operating today. So we do believe that UMO should become more oversupplied probably as we get further in the third quarter or into the fourth quarter because this is also the season where used oil is used as an alternative fuel for road construction, where they make asphalt for road. So with that, we do believe that we have seen the bottom. We see the supply. We've got good inventories at the refineries and we see new suppliers coming to the refinery looking for a market, early indications. Now as that translates to The Street and charge-for-oil, we also see charge-for-oil slowly picking up across the country. And so that's a positive sign as well. But it just -- it takes a little time for the whole to get back and fill everything up and get the industry percolating again, if that makes sense.

Yes, it makes sense. I mean, you are -- but obviously, you see it, given that you've got Marrero and Heartland running pretty full out right now. Okay. Maybe just turning to -- you mentioned that you are looking at other waste streams that make a lot of sense, given it would be things that are related to UMO. I'm just curious if -- I mean, is there a lot of investment needed in that to get into those markets? Or is it more just a case of focusing more on those and just making that a part of your outlook going forward?

Yes. I would say the majority of investments have been underway and pretty much made towards the end of the third quarter. So nothing that was not planned in our capital utilization, and so that's somewhat behind us. So we have spent this whole COVID period, the last 3 months, deep inside the business, trying to really optimize the utilization of our assets and stretching the return on the different waste streams that we are committed to at a Street-level to collect to make sure that we can optimize the value of those materials. And we have made a lot of adjustments and changes in the business that really gives us some long-term runway to grow not just the used motor oil collection part, which has been a big focus for us, but also handling properly the waste antifreeze and processing that material internally and then also the used-oil filter process and really taking a lot of costs out of that process and optimizing the value of our metals. And so we've seen in May the tremendous amount of headway during this COVID period that I think that will be very helpful as we go forward in the business.

Next, we will hear it from the line of Amit Dayal at H.C. Wainwright.

So Ben, with respect to sort of the gross margins, how should we expect recovery on that front to take place? Do we see maybe 5%, 10% gross margin levels in the third quarter and perhaps further improvements as you go through the year?

Yes. I would agree with that, Amit. You are going to see 5% to 10% in Q3 and then maybe 15% improvement in Q4. I mean, again, market conditions right now, we are seeing improvement. It's small and incremental, but we do see improvement.

Understood. Any change in the competitive environment for UMO collection because of COVID-19?

Yes. It's a tough business on the Street today, just because of the cycle of the market going short of supply and then oil prices collapsing. And so there's -- it's very difficult as a small collector today. And so we do see a lot of strain there. We've picked up a lot of good organic growth over the last 70 days that is due to this major change to the used oil market. So I do believe that, that's in the favor of our business model. And so we're going to just continue to monitor those opportunities as the market continues to play out. So...

Understood. Any revenue concentration coming from changes in the business dynamics? I mean, are we sort of more dependent on the Bunker Ones now? Or does that -- has that picture not really changed as much for you?

No real change to the offtake of our products. Bunker One, obviously, is a big offtake for our Marrero facility. And then we've got dedicated offtake for the majority of our production at Heartland as well. So I don't see any kind of material change there in the business at all.

Mr. Michael Hoffman at Stifel.

My goodness, mister. I think I'd really ask smart questions. Ben, Chris, just so I'm clear, what was the total you expect to get from the PPP for 2020? And did you take advantage of payroll deferral as well -- the cash tax payroll?

Yes. We received $4.2 million from the PPP, and that was it. That's right.

Okay. And then are you deferring cash tax -- payroll taxes, the cash tax part of payroll taxes for the paying?

No. Not at the moment. No, we are not.

Okay. Is that still an option?

We are talking with our payroll provider about that at the moment. But as of right now, we haven't done it.

Okay. And then, Ben, on the demand side for your product, how sensitive are you to the fact that the cruise industry basically is all the ships are in the harbor and not going anywhere for probably until the beginning of '21?

Yes. That's a very good question, Michael. And the cruise industry has definitely had impact on the overall bunker fuel demand. And so the demand for bunker fuel probably is down worldwide in the neighborhood of around 40% at the end of July. So it also has some kind of tail to the economy. So it was fairly strong in the early part of the second quarter, and then it just kind of fell out of bed recently. Now for us, fortunately, we have got a full commitment of offtake and so our product has been a priority to Bunker One prior to going to other refineries for additional blendstock or resupply. So it's not affected our business, but the bunker business has clearly been impacted by the cruise lines as well as just general economic activity and shipping. And to add insult to injury, this is typically the slow part of the bunker business, it starts to pick up in October.

Okay. And then are there -- I'm not sure how to ask this question. So I'm trying to figure out if there's a disruptor effect happening in UMO collection. Like, are parts of that market behaving badly in this environment per se, particularly with the oddity of where the spreads are with relationship of diesel and high-sulfur fuel versus crude? Or is the market, in fact, behaving okay, and this is just ugly and the macro is the disruptor?

Well, I would say, the macro is clearly a disruptor because low oil prices make the industry very difficult unless you can backup deep charges through the generator. I don't believe that the deep charges through the generator have happened yet. I think the industry is on the way. And -- but you got to go through some bad actors in the market that clearly operate on a different business model. Maybe private and have chose to prop up street prices to gain market share. We have a lot of third-party oil dependency. So we can -- for us, we can grow our collection business against our third party cost, and so that helps us. But it takes time, and I think that, that's the biggest issue. There's those 2 disruptions, I think, that are prevailing at the moment in the space.

And are there geographic aspects of where you are able to influence the CFO and others where you are not because of what you are talking about? Or is this kind of the CFO limits on -- and pushing CFO or just broad based?

No. I think it is geographic. I think if you take our Heartland footprint, our ability to charge-for-oil up there is much different than our ability in the Gulf. And so -- but you got a lot of refining capacity and -- between the southeast market and that hold you -- I always say Eastern Mississippi River, it's a challenge there. Our team has done a good job. We've got charges, and we got volume growth there, but it's -- it should be better. I wish there was a magic wand that aligns everybody's interest, but that's what the pre-market is all about. The markets are efficient, and they will make the adjustments given time.

And then as you have seen the supply recover, what's the quality of the oil look like?

No. I think we are pretty pleased with oil quality. We've not seen any real material change from pre-COVID to post-COVID from a quality standpoint. It's just really volume-related is what we have seen. But most of our supply is kind of baked in and fixed into our refineries. And so we have just kind of weathered this dip. Nothing has changed on quality. John, do you agree?

No quality change there as we see.

Okay. So -- I think, you have some question.

And then in the nature of the maintenance it's been done would pretty much, barring something that you just can't plan, touchwood, you should run through the rest of the year uninterrupted?

Yes. The Marrero facility, I think our -- we paid the price in the second quarter to shut the plant down. We certainly reduced our turnaround cost. And it was that the scheduled turnaround time as well. So we just -- we really drug it out. And we did all the work internally which saved us a lot of money, but we did not restart the plant until our feed tanks were full. And we were really pressed by third-party suppliers pricing-wise, and it just -- you couldn't make the numbers work. And so we just stood down and ate the downtime. And it served us -- it served the business really well because the plant restarted full. We've been able to run our rates, and it gave the market time to store used motor oil. And then the oil came back into the business and has continued to come in at no additional cost. So it's not a seller's market, and it's not really a buyer's market at the moment. So I think we're doing pretty good, and the strategy worked out kind of scary at the time, but I believe that it was the right thing looking back, and it worked out well. So I think we're set up pretty good for the rest of the year. At Marrero, I don't see any real maintenance. I think there's a couple of days, 2 or 3 days for heater cleaning towards the end of the year, which was planned. In Heartland, we will have their planned turnaround, I think, in September. It's normal. So nothing abnormal. I think we are set with what we see to run the plant.

Yes. And then the tough question. Why can't you take out incremental cost so you at least run breakeven on a cash burn basis?

Well, it's really the spread. So you got your fixed costs, obviously, to run the refineries. And Marrero is more sensitive to crude prices and specifically diesel prices and there's no way to change the price for diesel fuel or ULSD that our sale price is tied to on a Platts post. So before COVID, we were -- our spreads were $0.28 a gallon better than what they are today. When you look at diesel to crude, the demand for diesel and the collapse or the demand destruction around diesel fuel, that impacts our sale price. So what I can say is, we are $0.28 all and -- just on our diesel, and we've made up $0.08 on our feed costs so far when you look at, like, June and July, against that -- just that diesel loss from historical used-oil prices. So we are making headway on the used oil side, which is positive. That's something that we have more control of, and our team is seeing better results in getting used-oil prices down compared to crude than diesel prices going up. But it's -- we're comfortable with the rest of this year as far as cash flow and free cash flow and what liquidity we have for the business. I don't see a concern that we are facing.

And that concludes our question-and-answer session. I'll turn it back to the Vertex leadership team for any additional or closing remarks.

Okay. Thank you, Jim. Thank you, everyone, for joining us on the call today. We look forward to executing on our profit improvement plans. As we've discussed here today, while most upcoming Investor Relations events having been rescheduled from live to virtual formats, so we remain active and engaged with our investors and our coverage analysts.

During September, we will be attending both the LD Micro 500 Conference and the H.C. Wainwright conference, all in virtual format. We encourage you to contact your institutional salesperson at these firms should you have any interest in attending. In the interim, should you have any questions, please contact Noel Ryan of Vallum Advisors at ir@vertexenergy.com.

Thank you, everyone, for joining us today. This concludes our call.