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

Chad Bennett - Craig Hallum Walter Liptak - Seaport Global Brian Butler - Stifel

Greetings, and welcome to the Vertex Energy 2015 Third Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ben Cowart, Chairman and CEO. Thank you. 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. John Strickland, 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 must inform you that the company expects to make forward-looking statements during today's call. Statements including words such as believe, anticipate, expect, and statements in the future tense are forward-looking statements. These statements involve known and unknown 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 third quarter 2015 earnings call. We filed our 10-Q for the quarter ending September 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 third quarter financial performance. When Chris is finished with the numbers, I'll provide additional thoughts on the business. The oil markets remain challenging albeit less dramatic than what we witnessed last year. We have undertaken numerous initiatives to manage these challenges. And we will continue to do so as the need arises. Diversification of our products has proved to be a key factor in maintaining overall margins. As the third quarter ended the main issue for everyone and our industry was the decline in base oil prices, which will weigh on everyone in the coming months. This has created a situation on which we must become even more aggressive than our charge for oil operations. We have been at the forefront in replacing pay for oil with charge for oil and the rest of the industry is following. We need to be more aggressive in the fees we charge for collected services as we go forward. Although the fall in base oil prices pressure revenues from the Heartland facility, it also reduced our cost in purchasing third party feedstocks for other refineries. This speaks to the value of diversification and excellent effort of our team to increase our street collection volumes and manage our spreads. With last year's demonic price changes year-over-year comparisons have become tricky and before that reason we want to stress the importance of the volume figures. We are moving greater volumes in the market, we will continue to grow our business by managing spread but the unchanged measure of our success is gaining market share which is reflected in total gallons moved. Recently, we announced the promotion of John Strickland to the position of Chief Operating Officer. John has been with Vertex since 2007. Working with our management team to grow our Black Oil division and help addressing industry challenges. We anticipate his leadership and are excited about him as part of our part executive team. Also want to thank Dave Peel for his commitment in Omega's turn to past 18 months. Dave has been instrumental in the integration of both our Omega and Heartland acquisitions. We are happy that he will continue his employment with the company in a support leadership role while having more flexibility in his personal schedule. At this time, I'll turn the call over Chris Carlson, our CFO who will go through our third 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 third quarter ended September 30, 2015, we reported consolidated revenue of $39.3 million compared to $76.9 million in the third quarter 2014, a decline of 49.9%. For the nine months ended September 30, 2015, revenues were $126.1 million, compared to $196.3 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 $27.6 million for third quarter of 2015 as compared to $82.4 million in the third quarter of 2014, a decrease of approximately 47.3%. For the nine months ended September 30, 2015, revenues for the business segment were $86.9 million, versus $124.9 million a year ago. The Marrero facility reported $15.9 million in revenue for third quarter 2015, compared to $32.9 million in the third quarter 2014. TCEP generated $3 million in revenue for the third quarter 2015 versus $14.4 million in third quarter of 2014. The Heartland facility produced revenues of $6.9 million for third quarter 2015. As indicated in the past we acquired Heartland in December of 2014. The Refining and Marketing division produced revenue of $8.8 million in the third quarter of 2015 versus $19.7 million in the third quarter 2014. The division reported $28.5 million for the nine months ended September 30, 2015 which is down 50.9% from the $58 million reported a year ago. For the third quarter of 2015, Vertex Recovery division generated $2.9 million in revenue, a decrease of 39.6% from approximately $4.8 million a year ago For the nine months ended September 30, 2015, the division had revenues of $10.7 million compared to $13.4 million a year ago. For the third quarter ended September. 30, 2015, our gross profit for third quarter 2015 was $5.2 million compared to $3.1 million during the same period last year, a 64% increase. Gross profit for the first nine months of 2015 declined 37% to $10.3 million compared to $16.3 million for the same period in 2014. Our gross margins for the third quarter of 2015 were 13%, which was eight basis point higher than a year ago. Our per barrel margin in the quarter was up 59% year-over-year. Gross profit for the Black Oil division was $2.5 million during third quarter of 2015 which was a 58% improvement over third quarter 2014 of $1.6 million. For the nine months ended September 30, 2015, gross profit for the division was $3.7 million, versus $9.8 million for the same period a year ago. Marrero had a gross profit of $220,461 for third quarter 2015 compared to $2 million in the third quarter 2014. With WTI declining over 30% during the third quarter, we experienced a sharp decline in our gross profit at our Marrero facility. TCEP had a gross profit loss of $554,877 in third quarter of 2015 compared to a gross profit of approximately $430,000 a year ago. Heartland produced gross profit of approximately $2 million in the third quarter 2015. Refining and marketing's gross profit declined by 51.8% to $470,382 in the third quarter of 2015 compared to $974,943 a year ago. The gross profit for refining and marketing was $2.9 million for the first nine months ended September 30, 2015, compared to $4.5 million for the nine months ended September 30, 2014. Vertex Recovery produced gross profit of $2.2 million in the third quarter of 2015, compared to a gross profit of $580,000 a year ago. Gross profit for the nine month ended September 30, 2015, was $3.7 million compared to $2.1 million for the nine months ended September 30, 2014. Selling, general and administrative expenses were $6 million in the third quarter of 2015 relative to $4.7 million a year ago. Our SG&A included a carrying cost of $1.2 million during the third quarter related to our Nevada facility. For comparative purposes, SG&A of the operating businesses was $4.8 million for the third quarter of 2015. For the first nine months of 2015, our SG&A was $17 million or $15.8 million excluding the carrying cost on Nevada compared to $11.7 million a year ago. Depreciation and amortization for the third quarter ended September 30, 2015, was $1.6 million compared to $1.2 million in third quarter 2014. For the nine months ended September 30, 2015, depreciation and amortization was $4.7 million compared to $2.98 million in the same period a year ago. Fair value of the warrants issue which is accounted for liability provided a gain in value of $818,051 for the third quarter 2015. We reported a net loss of $2.9 million or a loss of $0.11 per fully diluted share in the third quarter of 2015, this compared to net loss of $1.9 million or a loss $0.08 per fully diluted share in the third quarter of 2014. For the first nine months of 2015, we reported a net loss of $20.3 million or a loss of $0.72 per fully diluted share compared to net income of $5.9 million or $0.24 per fully diluted share. Our shares outstanding for the quarter were 28.2 million shares. Now I'll 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. We continue to manage our business in these uncertain markets. As mentioned during prior calls, we are making strategic and operational decisions including reducing operational cost which would benefit our long-term value. We implemented our service fee model for the collections of used oil and environmental services in January 2015. Our average charge for the services at the end of the third quarter was $0.10 per gallon for the oil that we collect. The commitment of our peers to move to a charge for oil model will further benefit our efforts in increasing our average charge. Our third party oil purchase which is at a discount to the number 6-oil index improved 18% year-over-year at the end of the third quarter 2015. Our self collected oil compared to the same number 6-oil posting had an improvement of 15% year-over-year for the third quarter 2015. Market share at our Black Oil division grew as volumes rose 3% third quarter 2015 over third quarter 2014 and increased 19% for the nine months ending September 30, 2015 over nine months ending September 30, 2014. Driven by both H&H and Heartland collection operations, our street collection volume increased 59% year-over-year. Our Heartland facility remained a positive contributor in the third quarter even though we had to adjust our spreads for lower base oil prices. As mentioned, in the second quarter earnings conference call, this year we believe in a long-term value of our Marrero facility. Volumes at Marrero were up 12% year-over-year. Also I should point out that we have successfully ramped up production at Marrero to full capacity at the end of the third quarter with adequate inventory reserves. Because of our low carrying cost we continue to operate our TCEP facility as swing production for the business as we take steps to mitigate the cost of third party UMO purchase in the Gulf region and provide the needed feedstock for the Marrero facility. Our hedging program which was fully implemented during the third quarter helped us manage through volatility of oil prices during the third quarter. We met our covenants with our lender in the third quarter and are committed to remain in compliant during our relationship. Recently, we amended our credit agreement with our lender to allow for further operational flexibility. 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, our Investor Relations representative, Marlon Nurse at 212-564-4700. Also I want to mention that a digital replay will be available by telephone approximately two hours after the call's completion until December 31, 2015. Details on how to access replay can be found in our recent press releases and on our Investor Relations section of our website at www.vertexenergy.com. Operator, we are now ready to take a limited number of questions pertaining to the matters discussed on this call and our 10-K. Remember, we are unable to discuss any information or business plans which are not publicly available. Thank you.

[Operator Instructions] Our first question comes from Chad Bennett with Craig Hallum.

Hey guys. Good morning. So, Ben, can you give us an update and where internal flections are versus third party on the feedstock side today percentage wise?

Yes. I think we are probably about 25 million gallons that our collection operations account for in total volume. So it is definitely growing and picking up pace. We are really -- the collection market is tricky right now. So there is more of focus on margin than there is volume but there are still opportunities for us to pick up business and they have been able to do that as well.

Right. And then nice job on the gross margin side considering that the price reduction in the base oil market this quarter. Based on kind of where spreads are today and how your hedges look, do you think this 13% gross margin is something that should be fairly stable looking into the next quarter or two or potentially you could improve upon that?

Yes. So on a ratable base is I would say that this should be a new norm for the company. Now I'll say that this quarter the fourth quarter is when we do our turnarounds at our facilities because of the winter weather so we actually have both our Marrero facility and our Heartland facility in turnarounds today but outside of that the normal operating margin should be in this range or better.

Okay. And then last I guess how is the demand picture across your diversified kind of product mix? Can you kind of characterize kind of where demand is not only for base oil but for your other products?

Yes. I think that's a good question because it does vary for us from refinery to refinery. So I'll start with base oil and say that there is no secret that the base oil market is long and challenging. We've done real good to keep all our products sold. I think the demand results in bigger discounts to the base oil index in order to compete in the market. So we don't see a problem selling our finished product in general. It is just how the discounts play out over time. The TCEP market is really a market based on exports. So exports are way down specifically residual fuel exports just because of oil prices. So that's made that market somewhat soft and those discounts have been historically are lower compared to historical levels. But that's allowed us to take some pressure off the UMO part of the business. So we've been able to operate TCEP as needed but swing production on and off and move the UMO to Marrero just to make sure that we keep the Marrero facility at fully capacity. So on the VGO side I think we are giving continued interest on our fuel program with our product there so that's encouraging. And we also have all our VGO products sold so the market on VGO is little bit volatile than the other products that we sell so it -- you have to look at VGO pricing more on a 12 months type basis. It has highs and lows but we are sold out on the VGO product.

Our next question comes from Walter Liptak with Seaport Global.

Thanks. Good morning, guys. And congratulations too on the gross margin and being EBITDA positive. Kind of similar to last question on the EBITDA level, with the spreads you maybe more under control. Are we at a point where you no longer see EBITDA losses if we are in EBITDA positive position?

Yes. So I think Chris will speak, I can't answer question. I don't want to jump ahead and worry Chris.

Yes. I mean from -- as Ben mentioned from a long-term standpoint just like with the margins. We would expect to be EBITDA positive. However, going into the fourth quarter with the turnarounds and the downtime expected, it is going to be close in Q4.

Okay, that's perfect. I want to ask about which of your operations you plan to have downtime for -- in the quarter ahead. I think there are fewer selling days in the fourth quarter as well. How is that going to impact the business?

Yes. So the two big turnarounds are going to be actually what's underway right now. The Marrero facility is down and Heartland facility both. The TCEP facility is already been turnaround so there is nothing major schedule there in Houston and the Fallon, Nevada facility is -- it will be do for a turnaround when we restart the plant.

Okay. So when do you Marrero and Heartland start up again?

If they -- can they turnaround so I think we are probably three days in so we probably got another seven days.

Okay, got it. And Chris I want to ask about some of the hedging programs which seemed to be working, in the income statement you got a couple of advancement derivatives in futures contracts. Is that the full benefit or was there some benefit also in the gross margin?

No. That's a fully benefit reflected at face value on the income statement.

Okay, great. And then I want to ask about overhead cost. The SG&A coming down and controlling your cost. Are there more benefits from cost reduction that will show up in the fourth quarter or we add kind of the normal run rate for SG&A?

I think we probably seen the largest portion of the reductions during Q3 but there are still going to some more things that we continue to work on especially on operational level going forward. So there maybe a little bit more in Q4 and Q1.

Okay --

Let me just add to that. Just add little color on SG&A because I think our teams worked extremely hard internally to reduce cost. When comparing those numbers to 2014, we have new carrying cost for the Nevada facility because we just brought that into the business. This is the first quarter that we had all of those additional SG&A cost and then also Heartland is a new acquisition with its carrying cost. So when you net those two back against our legacy business in comparison to last year, we are actually about $1.5 million below our legacy operating levels for the quarter. So I think to just kind of keep that in a perspective.

Okay, yes. That's a good point. So it has been a nice reduction in cost. And then Ben I just want to ask one more about the service fee model. It appears that the industry have been more constructive and being rationale about collections and charging the service for the work being done. Are we at a point now where the $0.10 is the number that do you think sticks or there still more work to do to try and improve that service fee model?

No. I think there is more and at the end of the third quarter base oil prices fell pretty hard. I think industry seen about $0.30 reduction in base oil value so my assumption is the industry now will start moving as an industry towards more of a charge for oil model just tries to recapture some of the sell price loss. That's going to make -- it is going to make things little bit easier for us to continue to improve on our charge for oil program for our collections.

[Operator Instructions] Our next question comes from Michael Hoffman with Stifel.

Hi, good morning. This is actually Brian in for Michael this morning. Thank you for taking my questions. Just on the pricing just kind of thinking of as you saw the step down at the end of third quarter on base oil and prices in general. I mean is that level off now or we seeing kind of stable pricing there or is there still -- or the discount kind of to the closest price been creeping down or can we talk about that trend into the first part of the fourth quarter here?

Yes. I think the step down obviously is driven by the index that's represents the major oil companies and their posted price. The discount to the index has -- it is softened up a little bit. It is not as good as it was probably in the second quarter. There is a lot of oil in the market and so that over supply is creating lot of competition between refiners and producers of the products. So we think that may continue to play out that way. There is no really way to look at it differently. So I will say I am pleased that Heartland is only base oil production today and is not a great volume for us and we will continue to play those barrels and manage our spread. We -- our team did a really good job in the third quarter even with that base oil decline, I think Heartland was our best producer and that's not because of base oil price. So just a good hard effort on collection cost and collecting more gallons and what we are able to pay for third party oil right now, the base oil prices, they are resulting in our ability to pay for the UMO fee for the refinery.

Okay. And when you think of the charge for oil that you have, the $0.10 to be clear what you exited the third quarter. Do you have an average for what the third quarter was in kind of I guess what's looking like right now in the fourth quarter?

No. I don't. Not here on the call but we are constantly working to a higher charge number. I'll say that we had incremental improvements through the quarter. And so whether that was $0.09 or $0.08 I couldn't tell you today.

Okay. But you are still at $0.10 kind of in the fourth quarter that is still the right way to look at it.

Well, hopefully it is much better as we get to the end of the fourth quarter. I mean we are at $0.10 as we entered and we should get better or we should improve that just to keep up with just the impact of base oil prices so --

Okay. And then when you talked about gross margins kind of 13% be in the new norm going forward. But there is headwind from the turnaround. Can you quantify that? I mean is that 50 basis points in the fourth quarter. How do we think about those 10 day turnarounds impacting gross margin?

Yes. It is hard to say exactly just because when you go down for the turnaround you expect a certain amount of days and if those days line out then everything is perfect. But if they don't then you are going to be off a little bit. I would say I expect 3 to 4 basis point adjustment from that 13%.

Like 300 to 400 basis point?

Yes.

Okay. And then can we talk about the covenants and the targets for -- or the revised target I guess for EBITDA in the upcoming quarters? The EBITDA that you reported on the press release, is that the right EBITDA that's been used for the covenants?

Actually it is not. Good question. The Nevada facility does not get included in the covenant calculation which basically removes about $1.5 million from that number. So it would actually be improved from a covenant standpoint. So --

So Nevada was the negative $1.5 million?

That's correct.

On a trailing 12 or was that just for the third quarter?

Just for the third quarter and keep in mind those covenants start off at a quarterly basis and then build forward.

Right. It is now been changed that the target is $1.75 million in the first quarter. Do you have a target for the fourth quarter?

No. What the fourth amendment did was a waive Q3 and Q4 and then just started off with 2016 with the EBITDA targets and let me just add it also brought Heartland into the business which is now giving us additional availability with our ABO lender.

Okay. And then just to make sure I saw these rights if you exclude Nevada then you are somewhere around $1.8 million or I am sorry, yes, $1.8 million in covenant calculated adjusted EBITDA, is that right?

That is correct.

So you are currently above -- I mean if this was the first quarter 2016 you would have met the covenant or just spend over it?

That's correct.

Okay. And on the fixed leverage or the fixed charge coverage. What was the fixed charge in the third quarter 2015 and on a trailing 12?

You know I didn't run those calculations so I don't have them here handy just because they were waived in; we are starting over in Q1.

Okay. What's typically in the fixed charge? Because I couldn't find a decent definition on that.

You know I would have to go back by Q and go to the original agreement then read through the definition. As you have noticed, they are fairly lengthy and extensive in defining all their terms.

Yes. I was hoping I can -- someone else would have to -- would know that before I have to go through at all. But I thought I would ask. Okay. That the covenant -- last part, it was the Nevada facility up and running now in the fourth quarter? I think that was a target.

Yes. Now it is not running as of today. I think the team is there ready for marching orders. Our hesitation right now in restarting the plant is just getting off take agreements for the base oil. As I have indicated even with the Heartland facility the base oil market is long so it doesn't do us any good to ramp that production up and fill our tanks up and then have to distress sale the base oil at bigger discounts and what the market is already demanding. So we are really -- we've made a lot of headway with the recent ELMA conference and we are going to -- be at ISS conference in the next month 1st of December and so we are diligently working on our off take for just getting commitments for the products itself. So we can restart the plant. We feel comfortable that there is plenty of UMO feed in the west for the refinery so that's a very positive thing. We just got to make sure that product is all sold.

Okay. So no contribution at the fourth quarter though.

No.

Okay. And then just one on the -- I am sorry on the charge for oil, I forgot to ask. Is that for your collected volumes or is that including third party as well?

That's shortly what we collect, the third party is indexed off number 6-oil and as indicated earlier we've reduced that discount to the index by 18% year-over-year on third party oil which is kept up with the decline in overall oil prices. So the biggest challenge on our spreads overall is just in product markets and discounts to markets related to lower oil prices. I think our team has done a great job on managing UMO cost and keep in pace with the lower oil prices.

Okay. And one last one. Is there anything out there that you guys will be looking to maybe divest or sell?

Well, I mean we have a lot of very valuable assets, very strategic assets, some that are not been utilized today. So we have to look at those assets and make sure that the carrying cost that we are paying obviously would be rewarding if you choose that wisdom, I am not advocating that's our game plan but we have to always look at that. So we are in a mode right now of maximizing the shareholder value of the company and just being a good steward of all these assets and if divesting something is the right thing to do then we will address that as we go.

[Operator Instructions] There are no further questions at this time. I'd like to turn the floor back over to Ben Cowart for closing comments.

Okay. Thank you, operator. And thank you everyone for joining us today on the call. We appreciate everybody's time.

Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your line at this time. Thank you all for your participation.