Michael Porter - IR Consultant at Porter, LeVay & Rose Ben Cowart - Chairman, President and CEO Chris Carlson - CFO Dave Peel - COO

Walter Liptak - Global Hunter Securities Chad Bennett - Craig Hallum Scott Levine - Imperial Capital Brian Butler - Stifel Myles Wittenstein - UBS Scott Redmond - Redmond Asset Management

Greetings, and welcome to the Vertex Energy 2015 Second Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ben Cowart, Chairman and CEO. Thank you, Mr. Cowart. You may begin.

Thank you, operator. Good morning and welcome everyone. Joining me today on the call is Mr. Chris Carlson, our Chief Financial Officer; Mr. Dave Peel, our Chief Operating Officer; and Michael Porter, our Investor Relations Consultant at Porter, LeVay & Rose. Before we begin our business portion of this call, and on behalf of the company, I expect to inform you that the company expects to make forward-looking statements during today's call. Statements including words such as believe, anticipate, expect, statements in the future tense are forward-looking statements. These statements involve known and unknown risks and uncertainties and are based on management's current views and assumptions regarding future events and operating performance. A number of factors could cause the company's actual future results to differ materially from its current expectations. I want to thank everyone for joining us on Vertex Energy's second quarter 2015 earnings call. We filed our 10-Q for the quarter ending June 30, 2015 yesterday after the market closed. I'll start with a brief statement about our business and then Chris Carlson, our CFO, will discuss our second quarter financial performance. When Chris is finished with the numbers, I'll provide additional thoughts on our business. We're stronger today having weathered the storm run by the instability of the old markets in previous quarters. We took some key steps that have helped us navigate through that adverse environment. Consequently our operating business and financial performance has improved. Our team embraced the challenge and worked diligently to keep us on the right track. I want to express my gratitude and admiration for those efforts. Thanks to those efforts and other factors, our financial performance surpassed a majority of our internal targets in the core business and it highlights the progress we've made today. We remain cautious yet vigilant, given the market uncertainties. At this time, I'll turn the call over to Chris Carlson, our CFO who will go through our second quarter 2015 financial results, Chris?

Thank you, Ben. As usual all of Vertex Energy's financial numbers are prepared unless noted in accordance with generally accepted accounting principles. For the second quarter ended June 30, 2015, we reported consolidated revenue of $49.1 million compared to $72.1 million in the second quarter 2014, a decline of 31.7%. For the six months ended June 30, 2015, revenues were $86.8 million, compared to $119.4 million for the same period a year ago. In our Black Oil division which includes our Marrero, TCEP and Heartland's business units, revenue was $34.3 million for second quarter of 2015 as compared to $48.9 million in the second quarter of 2014, a decrease of approximately 30%. For the six months ended June 30, 2015, revenues for the business segment were $59.3 million, versus $72.4 million a year ago. The Marrero facility reported $14.7 million in revenue for second quarter 2015, compared to $18.1 million in the second quarter 2014. Our performance was affected by the fact that the plant was operating below capacity as we took strategic steps to manage the supply constraints. TCEP generated $9.3 million in revenue for the second quarter 2015 versus $22.9 million in second quarter of 2014. The Heartland facility produced revenues of $6.3 million for the second quarter 2015. We continue to see solid improvements for these facilities since our acquisition in December 2014. During the quarter we made some modifications at the facility that should further improve our performance. The Refining & Marketing division produced revenue of $11.4 million in the second quarter of 2015 versus $18.5 million in the second quarter of 2014. Production volume increased 15% during the quarter. For the first six months of 2015, revenues were $19.7 million compared to $38.3 million for the same period a year ago. For the second quarter of 2015, Vertex Recovery division generated $3.3 million in revenue, a decrease of 29% from approximately $4.7 million a year ago. For the six months ended June 30, 2015, the division had revenues of $7.8 million compared to $8.6 million a year ago. Gross profit for the company in the second quarter 2015 was $5.5 million compared to $8.2 million during the same period last year, a 33% decline. Gross profit for the six months of 2015 was $5.1 million compared to $13.2 million for the same period in 2014. Our gross margins for the second quarter of 2015 was 11%, which was one basis point lower than a year ago. Our per barrel margin during the quarter was down 44%. The decline was due to lower oil prices and our continued challenge managing the business as a result of working capital constraints. Gross profit for the Black Oil division was $3.4 million during the second quarter of 2015 down from the second quarter of 2014 of $5.9 million. For the six months ended June 30, 2015, gross profit for the division was $1.2 million, versus $8.2 million for the same period a year ago. Marrero had a gross profit of $907,905 for the second quarter of 2015 compared to $2.4 million in the second quarter 2014. TCEP had a gross profit of $1.4 million in the second quarter of 2015 compared to a gross profit of approximately $3.8 million a year ago. Heartland produced gross profit of $1.3 million in the second quarter 2015. Refining and marketing's gross profit declined by 21% to $1.5 million in the second quarter of 2015 compared to $1.9 million a year ago. The gross profit for refining and marketing was $2.5 million for the first six months ended June 30, 2015, compared to $3.5 million for the six months ended June 30, 2014. Vertex Recovery produced gross profit of $567,000 in the second quarter of 2015, compared to a gross profit of $439,156 a year ago. Gross profit for the six month ended June 30, 2015, was $1.5 million compared to $1.5 million for the six months ended June 30, 2014. Selling, general and administrative expenses were $7.2 million in the second quarter of 2015 relative to $7.4 million a year ago. For the first six months of 2015, our SG&A was $14.2 million compared to $11.4 million a year ago. The increase year-over-year were attributed to acquisitions, additional facilities and more employees. However, we have continued to lower SG&A each quarter through workforce reductions and other cost cutting initiatives. Depreciation and amortization for the second quarter ended June 30, 2015, was $1.5 million compared to $1.1 million in the second quarter 2014. For the six months ended June 30, 2015, depreciation and amortization was $3.1 million compared to $1.8 million in the same period a year ago. I want to note that the warrant issued in our recent offering are accounted for as a liability at their fair value at each reporting period. The value of the derivative warrant liability will be re-measured at each reporting period with changes and fair value recorded against earnings. During the period ended June 30, we reported a gain in value of $1.8 million. We reported a net loss of $445,195 or a loss of $0.02 per fully diluted share in the second quarter of 2015, this compared to net income of $7 million or $0.28 per fully diluted share in the second quarter of 2014. For the six months of 2015, we reported a net loss of $17.4 million or $0.62 per fully diluted share compared to $7.8 million or $0.33 per fully diluted share. Our shares outstanding for the quarter was 28.1 million shares. I would like to turn the call back over to Ben Cowart, our CEO.

Thank you, Chris. Before we move on to the question-and-answer portion of this call, I want to make some comments about our business. As mentioned in my opening remarks, we're encouraged by the significant progress in business. Our team continues to execute our business plan while remaining cautious and vigilant during these uncertain markets. Here is some thoughts on our performance to date in 2015. Market share at our Black Oil division increased as volumes grew 10% quarter -- second quarter 2015 over second quarter 2014, a 31% for the six months ending June 30, 2015, over six months June 30, 2014. As mentioned on our June 30 call in 2015, our Business Update Conference Call, we raised $25 million in private placement and paid down $15.1 million or 32.5% of our debt with Goldman Sachs bringing our outstanding debt to $24 million owed to Goldman Sachs. Further information on this transaction is available in our SEC filings including our S1 filed on July 27. 2015. We've invested in two of our plants that have resulted in improved ratability and reduction and feed stock cost. Our street collection volumes driven by both our H&H collection and Heartland collection operations increased 53% year-over-year. We've reduced our adjusted we paid for oil to less than zero with implementation of our service fee model for the collections of used motor oil and environmental services. We continue to focus on growing our street collection volume. There is a significant margin contribution related to UMO collected by our collection operations versus what we buy from third party collectors. At this point, I want to talk in some detail about our Marrero facility. We continue to ramp up productivity at the Marrero facility. Working capital constraints made it difficult for us to purchase more UMO and operate at full capacity. However, we've moved from 2500 barrels a day to 3500 barrels a day currently. Our goal is to process 4200 barrels per day by the end of the third quarter. Marrero was drag on our performance in the second quarter owning to a shortage of feed stock given the capital issued as mentioned. Our production is improving, but the current price suggest that challenges remain for the near term. In the long term, we believe Marrero is going to be a significant contributor to our future profitability. The second quarter we submitted all our requisite applications and documents to increase the permit capacity at Marrero to 6,000 barrels per day. We should hear from the State and local authorities during the third quarter. One of the keys to the Marrero's future success will be the reduction of our feed cost to the plant, which has been our practice at our other facilities. We also do not need to invest any additional capital at Marrero. During the third quarter 2015 we closed on the acquisition and a collection platform in Louisiana around our Marrero facility. This was a major step in building our collection business and reducing our reliance on third party collectors. The acquisition reduces our cost of feedstock to the facility and has an immediate margin contribution impact to our financial performance. Now in addition to having our street collections around the facility is evident at the TCEP and Heartland facilities. Further information is available in our 10-Q filed yesterday. We're encouraged by the noteworthy progress we're seeing at the Heartland facility. Heartland made a positive contribution to our financial performance in the second quarter because of the stable base oil prices. Lower feed cost due to its street collection operations, the exceptional efforts of our staff and operational improvements to the facility. Subsequent to the end of the second quarter 2015, we've implemented a heading program that we expect will reduce our inventory exposure to volatility of oil prices. The program is designed to minimize the cost exposure to the downside on commodity prices from the time we purchased our raw materials to the time we sell our finished products. We've come through these difficult moments because of our management team and staff and their expertise and knowledge of our industry. They've done a tremendous job. We will continue to work and improve shareholder value as we navigate this uncertain environment. We're ready for questions at this point, but I want to let the listeners know that if you have any follow-on questions or comments, please feel free to contract Porter, LeVay & Rose, our Investor Relations representative Marlon Nurse at 212-564-4700. Also I want to mention that a digital replay will be available by telephone in approximately two hours after the call's completion until September 30, 2015. Details on how to access the replay can be found in our recent press releases and on the Investor Relations section on our website at www.vertexenergy.com. Operator, we're now ready to take a limited number of questions pertained to the matters discussed on this call and our 10-K. Remember, we're unable to discuss any information or business plans, which are not publicly available. Thank you.

Thank you, Sir. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Walter Liptak with Global Hunter. Please state your question.

Hey, good morning, guys. Congratulations on a nice quarter.

Thank you, Walter.

Wonder just firstly about inventory and was there an impact on the inventory during the second quarter?

No, no impact on inventory. I assume you're referring inventory values from the markets.

Right so your hedges were in place in the second quarter.

No the hedges didn’t get put in place until the third quarter, but there was no market impact on the inventory in Q2.

Okay. Got it. Okay, and oil prices have come down since July 1. Will the hedges I guess negate or offset any hit to inventory in the third quarter?

Well, definitely help, there is no 100% offset or guarantee, but we’re very happy and pleased with what we've got in place today. So it's going to help in our Q3 results.

Okay. And then along those lines, how does the service fee with the price of oil having gone down since July 1 have you been lowering or have you been increasing the service fee on the collection side?

Well, we've been making some adjustments. So we’ve operated so far this year to negative number so that’s good. A lot of our street pricing was set in January at $42 crude oil number. So we do think that more price adjustments are in order at this point based on that the expectation that oil prices will come off. We’re seeing that in all the commodity products as well. So we are moving two additional charges at a collection level.

Okay. All right sounds great. And I want to ask about the third quarter, I wonder if you can help us with any kind of guidance on where you think revenues or EBITDA could come through for the third quarter? Do you expect for example to be EBITDA positive in the third?

Yeah, we expect to be EBITDA positive to speak to what that would look like. We're trying to find the new bottom. I think we’re still sliding as far as oil prices go. So we're moving with the market and making adjustments to the business, but obviously oil prices can drill the revenue for the company.

Okay. Great. Thanks.

The next question is from Chad Bennett with Craig-Hallum. Please state your question.

Yes, good morning, guys.

Good morning, Chad.

So Ben can you just speak to the demand environment for your end products and maybe you talked about Marrero kind of capacity usage and can you talk about the other plants, the TCEP plant in Heartland and so forth kind of what they’re running at right now from a utilization standpoint?

Yes like we just mentioned the Marrero production I think we were around 3500 barrels a day. Our normal production is 4200. We're working on our permit that will take that soon now. So we want to ramp up our Marrero production capacity at full throttle. So we’re moving in that direction for the third quarter. The TCEP plant operated not at full capacity but at our target for the second quarter. So far this quarter it’s been a little bit softer than that because we've had to use some of the oil in Houston to move over to the Marrero facility until we get Marrero at full capacity. So we anticipate that trade off to take place in the third quarter as a rule, but the Heartland plant is at full capacity. We're sold out on the product and it continues to ramp up its production capacity month-over-month. So we're really pleased with its operating performance. We do have the Nevada plant down, we’re doing some maintenance there in the third quarter. So we anticipate bringing the Nevada plant back online hopefully in the fourth quarter. So a lot of work that we're doing there to make that happen, but that -- and looks good as well. So as far as demand for products, oil prices come down the value of your finished products come off with oil prices and demand in the markets in general for these commodity products tend to get soft due to oversupply at the higher price inventory. So we're anticipating a drop in base oil. We definitely experienced a drop in the value of our VGO product as oil prices have come down and our TCEP product as well. So fortunately a lot of our feed stock that we purchased for the refineries are indexed to oil prices also. So our cost of feed stock has come down related to the decline in oil prices.

Okay. And then the kind of feed stock supply issues that you're talking about and kind of capital issues around the Marrero plant, is it truly working capital and you just kind of the ability to buy feed stock you want to increase capacity or is it more the supplier or suppliers of feed stock are just being unrealistic in price at this point around the Marrero facility?

Well I would say in the second quarter it was more of a capital constraint because we had supply that we could have purchased that didn't have the resources to meet the short payment terms that were required. So in the third quarter we don't have a capita issue. We can buy the feedstock that we're being there disciplined about the price. This is a spread business and we believe the market is long for used motor oil compared to the available end markets for the product and we believe that we've got to give the market time to adjust pricing. So we're kind of holding our position on our discounts and what we're reeling the paper product. That's one reason that we're not going to focus so much on all out full throttle capacity to get to refineries today because this is a time element is for adjusting the cost of use motor oil to new market conditions. So we have to do our part and just maintain discipline in a profitable purchase of feed stock. So I do think that sellers of VMO right now are dealing with much lower oil prices and they have to make some real adjustment on the street to make that work and we will avoid trying to subsidize those market conditions where we can.

Okay. And then Chris, so with all the puts and takes in the third quarter here and based on kind of what you guys talked about last quarter around gross margins, do we think gross margins improved again in the September quarter from the June quarter? And I think you talked, I am not putting words in your mouth, but I think you guys have talked about moving to mid teens gross margins kind of in the next couple of quarters is that still realistic?

Yes, I think with the recent drop for adjustments in crude oil prices, we all need to be aware of kind of the resetting that Ben mentioned that we're working through in Q3. One thing I want to note is as Ben mentioned, we've got the Nevada facility that we're still carrying the cost with no contribution on and then we've got the Marrero growth facility that we're also carrying the cost with little to no contribution on today. So with that, we're right at 11% margin as noted. And when I remove those it put us at a 15% to 16% gross margin just today. So going forward, in the next two to three quarter, yes I think 15%, 16% or 17% margins is achievable and a lot of it is predicated on stable oil price or commodity market, which who knows where the bottom is or we feel pretty comfortable that we're kind of there for the third quarter. And then going forward, we feel relatively confident about where prices are and everything we’re doing within the company to manage to those prices and get the spreads where we've committed to get them.

Okay. Sounds good. Thanks guys.

Thank you, Chad

The next question is from Scott Levine with Imperial Capital. Please take your question.

Hey, good morning guys.

Hi, good morning.

So, can you elaborate a little bit further Ben on this operation you acquired in Louisiana, how large in terms of your total collection, remind us where you guys stand today in terms of your total direct collection capabilities? And maybe little bit more color regarding any additional plans you may have to acquire direct collection or grow it organically and maybe a little bit of a sense of what the price differential is on what you collect directly versus what you obtain through aggregators would be helpful.

Okay, yeah we're tracking probably 22 million to 24 million gallons from our legacy collection businesses that’s the Texas market and the Ohio, Central Ohio region. And so as we indicated its important for us to collectively our refining assets with those that’s the cheapest oil into the gait, into the refinery. And this acquisition in Louisiana was very strategic in that the company we acquired collection, actually the collection footprint we acquired from the company and is the closest oil to the refinery. It's in the New Orleans in South Louisiana market and it I guess represents about a million and half gallons today and it has a very solid 15-year, 18-year operating history in that market with some real growth potential that would spread throughout the State of Louisiana and in fact matching up with our Texas footprint, our H&H footprint. So we like the platform that this business brings to the Marrero operation because it helps us discipline our cost into the refinery.

Got it. And is there a material differential you guys -- so that puts you guys I guess close to 25 million gallons, is there a meaningful difference in the price paid per gallon there versus what you guys are obtained through aggregators or third-party? A - Chris Carlson Yes there is no question about it. I think it has probably $0.45 distribution margin. So it's significant.

Got it, and one follow-up I guess, thank you on the SG&A you came a little bit below what we were expecting for the quarter there and I think previously you guys had been pointing to a $30 million number for the year, is that number down now versus prior due to cost reduction efforts and what's a good number to think about for SG&A going forward?

We were very aggressive in the second quarter about getting that number down. I think we’re still looking to at $28 million to $30 million number going forward. But we’re not done. We’re going to continue working the rest of the year at achieving the goal we set out at the beginning of the year was around $3 million to $3.5 million that we wanted to see cut. So that continues to be the target and I would say based on Q2, we’re little bit ahead of that target and feel good about reaching that.

So 2Q numbers are good number to use going forward number in the mid to high five?

That’s correct.

Got it. Great, thanks.

Thank you, Scott.

The next question is from Brian Butler with Stifel. Please state your question.

Good morning and thanks for taking my question.

Good morning.

Hey Brian.

Just on the cash flow side and you talked about the working capital swings, so it was a big negative swing in the second quarter, what's the right way to think of how that goes through in the third quarter and fourth quarter for '15?

As Ben mentioned Q2 was a challenge from a working capital standpoint. We've now with the recent raise, got the additional cash in the company for working capital and we'll be putting that to work with the right price inventory. So the inventories were a little bit on the lower side at the quarter. They tend to be lumpy in some of the business units, but I would expect going into Q3, we're going to build up some of that inventory definitely at the right price, but that's where the working capital is going to get put to work if you will.

So as you ramp up that working capital the right way to think about the second half is that you'll probably be free cash flow negative than as that working capital increases and then when you look to 2016, does that then just flatten out or does it just swing back the other way?

I would say, it will probably flatten out as we get into 2016 and with the oil prices where they are right now, it takes less dollars to get the right amount of inventory. Now as oil prices and commodity markets go up it's going to obviously take more working capital to building inventory needs of the company.

Long term it's good just to look at our overall refining capacity. So we're probably good for around 135 million gallons to 140 million gallons in the refinery. So I want to make sure that you look at current crude oil prices and commodity prices associated with crude and that name plate capacity for the assets that we have because that is the goal. So volumes increase and they should, then that will put more demand on working capital as will in addition to what Chris said.

But the working capital use in the second quarter of almost $4 million, you're going to see that again in the third quarter potentially similar level maybe in the fourth, I am still just trying to get a sense of magnitude of that build?

Yes, just think in terms of the Nevada refinery if we bring it online in the fourth quarter, that's an additional 23 million gallons a year of feed capacity that we didn't fund in the second quarter.

Okay. So Nevada was offline in the second quarter, still offline in the third, but it will be up in the fourth?

That's right.

And then Myrtle Grove, that was no contribution in the second or the third, but that potentially come down again as well in the fourth.

No Myrtle Grove has never been on we're looking at how we deploy that asset, that asset is something that we need to divest. We're making lot of headway in developing that to a decision.

So Myrtle Grove coming online is not needed in order to reach that 15% to 16% gross margins?

No, not at all.

No.

And on the Marrero expansion going from -- has gone from the 3500 to 4200, that's in the fourth quarter as well because that's getting to 4200 is going to happen in the third quarter, is that the right way and how big of an impact is that?

That's right. Again you're dealing with a permit issue, so it's whether absent in the fourth quarter or the first quarter, we're very dependent on and subject to state and local authorities and their approvals and support.

All right. And last one on the TCEP with the volumes being kind of shifted over to Marrero in the short term, does that correct itself in the fourth quarter as well?

It should. We did that in January this year early on. This is just a mechanism that we have in place where if we don't get feed stock at a number at Marrero that is what we believe is a market number where we can make our spread, then we will refuse to buy the product and then we will shift volumes from TCEP over until we find additional feed stock at the right market number. So if the market is long, this is just a function of time and TCEP allows us to maintain and manage our spread in a down market. So we're preparing at this point to exercise some of that volume there in Houston to make sure that the Marrero plant is at full flow.

All right, great. Thank you.

The next question is from Myles Wittenstein with UBS. Please go ahead sir.

Yes, could you -- I don't have any paper in front of me, data for me, if you just discuss your balance sheet for a moment?

Yes, I guess it's a high level recap. Cash at June 30 period was $5.7 million, receivables were right at $13 million, which is somewhat up from the 12/31 period. Inventory was $9 million. So about $3 million down. So total current assets was 31% versus 33%. The big change from the prior period was the long term liabilities and the current liabilities with the pay down against the Goldman debt we were able to sort that back out in the long term got put in the appropriate category and the current got put in this category.

Thank you.

And then just to add to that, we've got a draw on the revolver of $1.8 million at the facility with mid cap and at 12/31 there was nothing drawn at that time.

Thank you.

Operator, any more questions?

We have a final question from Scott Redmond with Redmond Asset Management. Please state your question.

Hey, good morning, guys. I was wondering if the change in accounting firm gave you any ability to manage your business a little bit differently. Do you have for example, maybe more real time or closer to real time and more accurate accounting information and were they helpful in the hedging that you've undertaken?

Yes, good question. Thus far and we're only two quarters in, but we've not seen any material change from an accounting standpoint or from a reporting standpoint with the new firm. The hedging strategy was something that we've been looking at for a while. So they've obviously looked at that. They've seen it. They understand it. They agree with it, but really no impact because of the new auditors.

Thank you.

Mr. Cowart, gentlemen, there are no further questions at this time.

Okay. Thank you, operator. Thank you, everyone for joining us today on the call. We appreciate your interest in the business and in your support. If you again need further assistance or have follow-on questions, please feel free to reach out to Marlon Nurse with Porter, LeVay & Rose at at 212-564-4700 and again thank you for dialing in.

Ladies and gentlemen, thank you for joining. The conference is now over and you may disconnect your telephones. Thank you.