Vertex Energy Inc (VTNR) 2020 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to this Vertex Energy Q1 2020 Earnings Conference Call. (Operator Instructions) As a reminder, today's session is being recorded. Now to get us started with opening remarks and introductions, I am pleased to turn the floor over to Mr. Noel Ryan. Mr. Ryan, please go ahead, sir.

Thank you, Jim. Good morning, and welcome to Vertex Energy's First Quarter 2020 Results Conference Call. Leading the call today are our Chairman and CEO, Ben Cowart; CFO, Chris Carlson; COO, John Strickland; and I'm Noel Ryan of Vallum Advisors, the company's Investor Relations Counsel.

We issued a press release before the market opened this morning detailing our first 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 call.

Please note that we recently updated the Investor Relations portion of our corporate website to provide increased accessibility to key resources while allowing users to sign up for real-time email alerts. We encourage you to sign up for these real-time alerts if you've not done so already.

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 good morning to those joining us on the call today. Earlier today, we posted accompanying presentation material on the Investor Relations section of our website that I'll refer to throughout this call.

Since our last quarterly call, we've been -- we've all witnessed one of the most horrific public health crisis in modern history. The rapid emergency of the novel coronavirus or COVID-19 has led to an unprecedented disruption in the global economy with far-reaching consequences that are not fully understood at this time. During this period of uncertainty, we've heard many stories of sacrifice and courage as first responders, plant workers, truck drivers, grocers, delivery people and others have worked to ensure that the food, medicine and other critical items are delivered to those most in need. On behalf of our entire leadership team, I want to thank these brave men and women for their unwavering courage and fortitude during this time, including our team that's been in the market and on the road, servicing customers, running plants and taking care of the operations of Vertex Energy.

Before we move into a discussion of our first quarter results, I want to begin by sharing the actions we've taken in recent weeks to help ensure the safety of our people, our continued access to capital and the continuity of our business operations throughout this crisis.

Turning to Slide 4. First, we want you to know that Vertex is open for business given that our operations are deemed essential and critical infrastructure by the U.S. Department of Homeland Security. We have implemented our emergency response protocols while adopting all CDC guidelines to ensure the continued safety and well-being of our employees who remain on site.

Second, we want you to know that we have adequate liquidity to support our operations at this time. As of March 31, 2020, we had more than $20 million in cash and available liquidity on our revolver, not including recent $4.2 million in funding that we received from the SBA PPP program on May 5, 2020.

Further, we have taken decisive actions to reduce both fixed and variable costs throughout the business while deferring discretionary capital investments until such time that we see markets stabilize. To that end, we expect to cut approximately $1.8 million of planned costs from the business by year-end 2020, which includes deferral of discretionary spending, reduction in travel, salary freezes and hiring freezes.

Third, we want you to know that in response to the sharp decline in UMO feedstock availability, we've chosen to conduct planned maintenance at our Marrero Refinery that began on May 10. While the Heartland Refinery is operating, it is currently operating and producing at a reduced rate, given the shelter-in-place orders, vehicle miles traveled declined significantly from normal levels resulting in a lower supply of used motor oil available to process at our refineries. In recent weeks, we've already begun to see a recovery in the availability of used motor oil as shelter-in-place orders are lifted and regional economies reopen.

Turning to Slide 5 and 6. We generated strong collection growth during the first quarter, while continuing to operate both of our refineries near-peak capacity. Entering the first quarter, our business was on track for a strong full-year performance with the future markets implying sustainable growth in refined product margins following the IMO 2020 transition.

In the months leading up to the emergency of COVID-19, we entered into a derivative contract that allowed -- contracts that allowed us to lock in favorable margins, evident in our market at the time, effectively shielding much of our business from the volatility that followed. We recognized $4.2 million in gain on these derivative instruments during the first quarter, contributing to near-record quarter profits of $2.8 million.

Turning to Slide 7. We generated $1.6 million of adjusted EBITDA during the first quarter 2020 versus a negative $500,000 in the prior year period. On a TTM basis, through the first quarter, Vertex generated $9 million of adjusted EBITDA or nearly double that of the prior year TTM period. We generated $5.5 million of TTM free cash flow, defined as adjusted EBITDA less CapEx versus $2.6 million in the prior year TTM period.

With the Marrero Refinery currently on the turnaround, we expect to be free cash flow negative in May. However, coming out of the turnaround, we would expect to see recovery back towards free cash flow positive.

Turning to Slide 8. Again, both Marrero and Heartland operated at near-peak rates in the first quarter. At Marrero, we generated near-record production of middle distillate in the period as we continue to supply our bunkering partner under long-term offtake agreement. At Heartland, we had a strong quarter operationally although global base oil demand remains well below historical levels at this time. Importantly, Vertex has multiyear volumes contracted with key base oil customers that have helped us to weather current market volatility at the Heartland Refinery.

Turning to Slide 9. While first quarter and the TTM collections growth was solid through March, we began to see a significant decline in travel late in the first quarter, leading to a reduction in used motor oil availability. According to the U.S. Department of Transportation, vehicle miles traveled declined nearly 20% year-over-year in March. At the end of the first quarter, we initiated an aggressive charge-for-oil program that compensates us for removing used motor oil and waste-related materials at the generators.

During April, collection volumes declined materially, but have since improved entering may back up to a 70% level over our normal volumes in most of our markets. As you can see from the bottom portion of this slide, lower gasoline prices are expected to stimulate increased road travel over the coming weeks as the summer driving season gets started.

Turning to Slide 10. Here, we bridge our EBITDA performance between the first quarter 2019 and the first quarter 2020, increased sales volumes together with improved margin realization more than offsets higher SG&A and continues -- and continued challenges within the metals business. Of the $900,000 year-over-year increase in SG&A, approximately $500,000 was related to the ERP implementation expenses under the company's digital transformation initiative. This initiative will -- which is scheduled for completion by the end of the second quarter 2020 is designed to streamline our accounting systems, improve inventory management and increase operating efficiencies throughout the organization. As I indicated earlier, we expect to remove approximately $1.8 million in current year-over-year expenses from the business between May and December 2020 as we continue to focus on capital conservation.

Turning to Slide 12. The spread between 3% high sulfur fuel, the historical proxy for used motor oil pricing and WTI, the proxy for product pricing, narrowed significantly in May 2020. Looking ahead, the strip is calling for a gradual improvement in spread as business conditions improve and economies restart. Bottom line, while the second quarter will be challenged, we would anticipate a recovery in the business as we look to the back half of 2020.

Turning to Slide 13. Base oil markets have been challenged in recent months following a lower WTI price per barrel. On the other hand, COVID-19 has reduced supplies of UMO as drivers have driven less. On the other hand, demand for base oils has also declined, given the near-term decline in economy activity.

In summary, while our company is both well-capitalized and well-positioned to weather the current environment, we will need to see base oil and product demand improve for current levels. Between the cash proceeds from the realized derivative gain and the PPP loan, we have been able to maintain full employment of our workforce. However, had we not had the benefit of these liquidity events, we would have had to reduce headcount throughout the business. Given that we have been able to retain our workforce, Vertex is better-positioned to restart key operations as market conditions return to some level of normalcy in the coming months.

With that, I'll turn the call over to Chris for a discussion of our first quarter financial liquidity and capital structure.

Thanks, Ben, and welcome to those joining us on the call today. For the 3 months ended March 31, 2020, the company reported net income attributable to Vertex Energy of $2.8 million versus a net loss of $5 million in the first quarter of 2019. Vertex reported adjusted EBITDA of $1.6 million in the first quarter of 2020 versus a $500,000 loss in the prior period. We reported near-record profitability in the first quarter, given strong demand for refined products, improved operating efficiency and a $4.2 million gain on derivative instruments. The Marrero Refinery operated at elevated rates during the first quarter, giving a more than 15% year-over-year increase in the production of middle distillates used in the marine bunker fuel market.

Turning to a discussion of our balance sheet and capital structure. As of March 31, 2020, we had total cash and availability on our lending facility of $16.4 million and $3.9 million, respectively. We had term debt outstanding of $6.1 million as of March 31, 2020, meaning we were net cash positive at the end of the quarter. In April 2020, we secured an extension on our $10 million credit facility with Encina from February 1, 2021 to February 1, 2022, ensuring that we have adequate liquidity to operate the business.

Given current volatility in the marketplace and the terms of our current credit facilities, which prevents such redemption, we do not anticipate being in a position to redeem the $23 million of outstanding series B and B1 stock until June 30, 2021, at the earliest. However, the original preferred stock terms contemplated our potential inability to redeem such preferred stock on the June 24, 2020, redemption, and provide that the dividend rate payable on such preferred stock automatically increases from 6% to 10% per annum from June 24, 2020, until such time as the preferred stock can be redeemed.

Pursuant to the terms of our outstanding credit facilities and applicable law, we anticipate that the dividends will continue to be paid through the issuance of in-kind equity, as we seek to conserve cash and liquidity to support our operations.

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'll hear first from the line of Eric Stine at Craig-Hallum.

So I know the majority of the impact here is COVID-19 and the low -- or limited feedstock availability. But would just love to get your thoughts, the oil price drop, I guess, 2 parts, industry response and then your spread management. Industry response, it seems like it's been much quicker than it was in that 2014 to 2016 time frame, where it was pretty difficult to get movement in the industry. So would love your thoughts on the industry, but also what you're doing internally?

Okay, Eric, good questions. I see the industry responding somewhat in line with what happened in '14, to be honest, as far as making adjustments at a street level. We are moving quickly. I think we did pretty good in '14 also. The biggest challenge is demand for products, and that has really backed up base oil. Fortunately, with our Marrero offtake agreements, we're able to move all of our production into the marine fuel market. So the real challenge is available UMO and base oil markets to -- in a broad level. Pricing for the finished products related to crude pricing is a continued challenge. So in order to manage your spread, you've got to adjust your cost of raw material, you got to adjust any operating costs that you can and pass that back onto the generator of the waste material that we're collecting and processing. What's taking place in the market related to the downturn in pricing as many suppliers of this used oil really don't have their pricing adjusted at a street level, and they have chosen to go to inventory with a lot of this oil, which we completely understand. We've taken the opportunity to adjust our maintenance at our Marrero Refinery today, and we've throttled the Heartland Plant back in the interim. So the inventory build and the lack of used oil availability both, they have to find their balance and we believe inventories are quickly filling up in the market. There's been a lot of refining capacity or I would say the majority of U.S. used oil refining capacity has shuttered and taken the same window to maintenance of the facility. So we anticipate the availability of UMO and a favorable price on that product to come back to the market here, hopefully by the end of the quarter, so it is a long answer.

In outright, it was a long question, too. Obviously, collections, secondary to just the availability right now, but a big strategic focus going forward. I mean, is this something where you think just given that you've now got the balance sheet in place that whether it's small acquisitions or just actions you can take in the street? Is this something that you think you potentially take the current environment to accelerate that?

Yes. No, we're looking at different opportunities in general. And we really need to just give this market some time for recovery, is the way we're looking at it. We think second quarter -- as we go into the third quarter, we have a very good view on what those opportunities look like. The good thing is we've got good, solid end-markets really for both refineries, and we see our product markets recovering quickly, and we do believe that UMO is going to recover quickly as the economy is reopened. We were down probably as deep as 60% all of our normal volumes at the beginning of the quarter, the second quarter. And we think by the end of this week, we'll be back up to 70% of our normal volume. So that's a big swing. So the market is moving well at a generator level. And fortunately, for us, we had very good inventories going into the first quarter that allowed us to run the refineries really at almost full throttle through the quarter and on into the second quarter. So we've been -- we've really been working at full pace. So we're just now slowing down. We're going to take our turnaround, which is really scheduled for this quarter already, and we're going to take advantage of having all our people, and we'll do most of the turnaround ourselves, taking more time than we normally would, allowing our feed tanks to build so we can get a strong restart coming -- going into the third quarter. So that's the thing.

Got it. Yes. Last 1 for me, just -- I mean, I know that it's -- on the demand side, you've got Bunker One out of Marrero and then in Heartland you've got the offtake agreement. So are there any penalties or anything if you don't meet? Are there minimum volume requirements or anything along those lines?

No. No. A good long-term relationship and a lot of coordination with our bunker partner in our decisions around the turnaround, the extended time. The good thing is that we've actually performed exceptionally well in volume to that relationship. It's up 15% year-over-year and that's good. Their inventories were good. This is -- it all kind of goes hand-in-hand. The bunker market is slowing down a little bit at this point in time anyway, and most of the major refineries are oversupplied. So there's plenty of product in the market, resupply opportunities for the bunker company that doesn't hurt them in the near-term while we take advantage of this downtime.

Our next question will come this morning from Amit Dayal at H.C. Wainwright.

We'll give just another moment for Amit. You may have us on mute, sir. And hearing no response from the line, gentlemen, I'll move forward to Tom Bishop at BI Research.

With regards -- I had a number of questions. But with regards to the hedges, well, how does that look in Q2? I mean, that seemed to kind of save the first quarter, but is there anything like that coming up in the second quarter?

Yes. So we continue to protect all the product purchases as we buy feedstock. And so any downside, we've done a pretty good job of holding that cost in place and not having a lot of inventory exposure, right? What really benefited us, Tom, in the first quarter was just looking at foresight when the forward curves related to IMO 2020, the high sulfur fuel was much lower and our product pricing was much higher. So beyond hedging our inventory, we actually took the crack spread that was better than what we had budgeted. So we took a very conservative approach instead of waiting to see how the market played out. We went ahead and locked those index spreads. We locked them up. And that was a really big decision, as it turns out. So we will continue to do that. Today, high sulfur fuel is real tight to WTI and to our product pricing. So that opportunity doesn't exist for the second quarter. But we do see it open and back up as we go forward. The spread appears to be coming back pretty quick, so.

Okay. You mentioned that about $10 million of your cash -- of your $16 million of cash is limited to use by each SPV, respectively. So my question there is for what, I mean, if you're operating at a loss, for example, just lately, is it available for that? Or what does that mean?

Well, I'll answer it, and then Chris can clean my answer up if I don't get it right. The SPV is with our relationship with Tensile. So we have cash in those entities that are earmarked for the development of those SPV businesses. And so we will use that cash, specifically for those areas of the company, and then we have cash in the public company for the remaining areas that we believe is sufficient to fund the business, so.

I thought Tensile was paying for the improvement. So you have to kick in those 2 amounts for the improvements?

No, they have their capital in as well as we had retained capital from the transaction that we left in to those SPVs as well.

I see. Okay. And then when you say that at Heartland you have surety of offtake. But if you're producing at a loss, is that a good thing or a bad thing that there's an offtake agreement? Or they'll take less if need be?

No. It's a good thing because if we were not producing at all, our losses would be much higher, right? So having...

Your costs in contributing something to further down the income statement, but not as much as you normally would.

That is correct. That's right. And that's really because the market came to a dead stop as far as base oil consumption. Most all our customers just could not buy any product other than the contracts that we had in place that carried the business at a much more favorable financial results. Now the market is coming back. And so it may take a month or 2 or a quarter to get the economy back going and lubricated, if you will. And so we feel that we weathered from a base oil demand standpoint that situation pretty well. So I'm very pleased with the financial results under the market conditions that we're under.

Yes. Yes. I noted that SG&A was up 25%, and you also made some comments about the ERP system. And I was just wondering, it's an unfortunate time to see that SG&A go up.

Well, these were decisions we started in the fourth quarter. And actually implementation of a major overhaul of our ERP system. It will complete in the second quarter -- this quarter and be implemented. And the cost, yes, probably not the best timing, but certainly those decisions were made long before COVID-19. But the window and having the team available to us during this second quarter has really been perfect timing in implementation and allowing these systems to get seeded into the business before the markets and the volumes and the activity starts picking back up. So I think we -- it's really been great to be able to launch this ERP system without the full pressure of the customers and the demands for the company. So I think it's going to work out really well.

Were there some other factors that increased -- that was about $0.5 million in Q1, did you say?

Yes, that's correct.

And were there some other factors that increased the selling and general admin by $1.4 million, $3 million?

Yes. There was a few others. The Tensile transaction, which closed at the beginning of the quarter. There were some remaining costs related to that.

And the Bunker One transaction as well.

Right, those 2. So that maybe will go down a little bit?

Yes, we would expect it to go down.

Okay. And when you said the $1.8 million of cost savings, I didn't know if that was the aggregate amount or an annualized amount? Or what was that?

That's the aggregate amount of what we expect to see during the rest of this year, 2020.

Okay. And last question. You said that free cash flow was $1.2 million. But if I turn to your cash flow statement, I see that net cash provided in operating activities was $3.1 million and cash flows for investing activities was $0.5 million, which to me is $2.6 million. So I'm wondering what I'm missing, free cash flow. Maybe you're not giving yourselves them enough credit there.

No, you're correct, Tom. When you look at it from the cash flow statement perspective, it is higher. We were looking at it from an EBITDA against CapEx perspective just in our presentation.

Okay. But is $2.6 million technically more correct?

Yes. That is right.

Next, we'll go to the line of Sameer Joshi at H.C. Wainwright.

Can you hear me, guys?

Yes.

Yes.

Good morning.

Okay. Good morning. I hope everyone is staying safe. Just had a few questions on given the macro environment, how are AR and inventory going to look like going forward? Are you building inventory in anticipation of demand coming back? And how are those 2 items going develop?

Yes. As far as inventory, the value, of course, is coming down just because of the market conditions and the commodity pricing. We do expect to build some inventory while the plant is in a turnaround mode. So I would expect at the end of the second quarter, we would have a little more inventory than we do at 3/31.

And any problems with receivables?

None?

We've actually been pretty aggressive on collections, Sameer, to stay ahead of that potential issue. So we've drawn receivables in pretty tight from an administrative level.

Okay. The scheduled maintenance, which you began on May 10, when do you generally have this? Is it still a second quarter event normally? Or have you preponed it from the 3Q into 2Q?

Yes. John, I'll let you answer that.

Yes. Yes, it's a normal long turnaround, and Marrero was always scheduled in the second quarter.

Okay. You just preponed it to capitalize on not much activity.

That's true. And we can use our people, which will cut costs doing it also to give us time to build some inventory. So we thought this was the best way to do it to take a little bit longer and use our people and cut costs there.

Right. Right. And I think, Ben, you mentioned UMO recovery is -- you're already seeing the turnaround back to 70% of normal. Is this 70% of year-over-year like -- relative to last year? Or what is the 70% relative to?

Yes. I'm speaking of our 3/31 closing volume, kind of our run rate, let's say, it's around 38 million gallons a year. And so it fell off from there to these lower levels as we discussed. And then we see it -- this week, we estimate it to be back close to 70% of our historical run rate at 3/31.

Okay. And in terms of utilization or availability of your plant, given the maintenance schedule, your -- the 70% is a comfortable level as of now?

Yes. So the 70% really applies to our collection. So this is the volume that we collect and sort with our own trucks. But to your question, as far as the refinery, yes, that's a very comfortable capacity. We definitely are looking to see the availability of third-party supply, which is something that we rely on at a larger degree than our collections. And so that is something less in our control when it comes to commodity pricing and how much inventory people choose to feel before they ship all to the refinery, which we understand that as well. So that's going to be something that we got to play out as we go into the third quarter.

Understood. One last 1 from me, actually. On the convertible, were there any other covenants that were breached? Or this was just the automatic extension with the increase in the interest rate?

Correct. It was just an extension.

Yes, that was provided in the agreement.

Right.

And thank you to all of our callers for their questions today. In the interest of time, I will turn the floor back over to CEO, Mr. Ben Cowart, for any additional or closing remarks.

Thank you, operator. Please turn to Slide 15. In closing, we see 3 near-term investment catalysts for Vertex: first, we see the return of the UMO supply to the market, as the single biggest opportunity for us, positioning us to return to normal utilization rates at Marrero; second, we see the opportunity to supply as much middle distillate into the marine fuel market as we can produce once Marrero is back online, given our long-term offtake agreement with our bunker fuel partner; and third, we see a continued stable demand for a significant portion of our base oil production at our Heartland Refinery, given multiple year volumes under contract that remain in force.

In summary, after a strong first quarter, we expect that our business will experience COVID-related softness in the second quarter, followed by what we anticipate will be a gradual recovery into the third and fourth quarter of this year. While most upcoming Investor Relations events having been rescheduled from live to virtual formats, we remain actively engaged with our investors and coverage analysts. During May and June, we will be attending both the Craig-Hallum Annual Institutional Investor Conference and the Stifel Cross Sector Insight 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.

Ladies and gentlemen, again, thank you all for joining us today. This does conclude our session. You may now disconnect your lines, and we hope that you enjoy the rest of your day.