Ben Cowart – Chairman and Chief Executive Officer Chris Carlson – Chief Financial Officer

Eric Stine – Craig-Hallum Michael Hoffman – Stifel Tom Bishop – BI Research

Good morning, ladies and gentlemen. Thank you for standing-by. Welcome to Vertex Energy’s 2016 Third 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] Please note 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 everyone and welcome to the Vertex Energy’s third quarter 2016 earnings call. 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. The company expects to make forward-looking statements during today’s call. Statements including words such as belief, anticipate, expect and statements in the future tense are forward-looking statements. These statements involve known and unknown risk 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. The third quarter results are mostly inline with our expectations. The exceptions were the down days at Heartland and at Marrero, which I would explain in a moment. However, our business operated as anticipated. If we did not have these production interruptions, our numbers for the third quarter would have better reflected the soundness of our operations. Fundamentally, we met our internal targets on spreads charge for oil and cost associated with our day-to-day operations. These were in line and improved over last year. Production at and Marrero was affected when the power grid failed our operations were down for eight days while we repaired a failed heater and restarted the equipment. We utilized this downtime to take care of our scheduled November turnaround. So we will not have any further turnarounds at Marrero during the fourth quarter, which should benefit our fourth quarter results. In addition Heartland experienced a failure of hydro system and exchanger internally failed which put our hydrotreated system out of commission for 21 days. However, we were able to continue running the front-end of our plant to produce VGO for the fuel market. Despite these two interruptions we exceeded our internal EBITDA targets for the third quarter. I’ll now turn the call over to Chris Carlson, our CFO.

Thank you, Ben. Vertex Energy prepares its financial statements unless otherwise noted in accordance with generally accepted accounting principles. For the third quarter ended September 30, 2016, we reported consolidated revenue of $28.5 million compared to $39.3 million in the third quarter 2015 a decline of 28%. During the quarter, WTI ranged from $42 to $48 per barrel. For the nine months of 2016 consolidated revenue was $67 million, which was lower than the $126.1 million reported for the nine months of 2015. In our Black Oil Division, which includes our Marrero, TCEP and the Heartland business units, revenue was $22.9 million for third quarter 2016 as compared to $27.6 million in the third quarter of 2015. A decrease of approximately 17%. The decline was driven by lower commodity prices and lower volumes. For the nine months ended September 30, 2016, the division reported $52.9 million compared to $86.9 million for the same period in 2015. The Refining and Marketing division produced revenue of $4.4 million in the third quarter of 2016 versus $8.8 million for the third quarter of 2015. Revenue for the division in the nine months ended September 30, 2016 was $10 million versus $28.5 million for the same period in 2015. For the third quarter 2016, Vertex Recovery division generated $1.1 million in revenue, a decrease of 61% from $2.9 million a year ago as volumes were down approximately 90% third quarter of 2016 over third quarter of 2015. For the nine months ended September 30, 2016, Vertex Recovery reported $4.2 million compared to $10.7 million a year ago. For the third quarter ended September 30, 2016, our gross profit was $6 million compared to $5.2 million during the same period last year, an increase of 16%. Gross profit margins were 21% for the three months ended September 30, 2016, compared to 13% during the same period a year ago. Gross profit for the Black Oil Division was $5 million during the third of quarter 2016, which was a 103% improvement over $2.5 million in the third quarter of 2015. Per barrel margins increased 148% for the third quarter of 2016 over the third quarter of 2015. Refining and Marketing’s gross profit increased 76% to $826,060 in the third quarter of 2016, compared to a gross profit of $470,382 a year ago. Per barrel margins increased 224% for the third quarter over the third quarter of 2015. Vertex Recovery generated gross profit of $83,496 in the third quarter of 2016, compared to a gross profit of $2.2 million a year ago, a 96% decrease. However, Vertex Recovery had a non-recurring pipeline transaction that contributed roughly $1.4 million in the third quarter of 2015. For the third quarter of 2016, Vertex Recovery had a 48% per barrel margin decrease over the same period a year ago. Our consolidated per barrel margin for all products improved 63% in the third quarter of 2016 compared to the same period a year ago. Selling, general and administrative expenses were $5 million in the third quarter of 2016, compared to $6.1 million for the third quarter 2015. The 18% improvement of our SG&A year-over-year was because of a reduction in headcount and a continued focus on reducing expenses. For the nine months of 2016, SG&A was $15.2 million versus $17.1 million a year ago. We’ve reported a net loss of $1 million or $0.03 per share end of the third quarter of 2016 compared to net loss of approximately $3 million or $0.11 per share in the third quarter of 2015. Our shares outstanding for the quarter were 30.6 million shares. Our cash and cash equivalents were $3.8 million as of September 30, 2016. Our long-term debt and capital leases is approximately $12 million including $4.8 million owed to Goldman Sachs. Our long-term debt was approximately $23 million a year ago. Now I will turn the call back over to Ben Cowart, our CEO.

Thanks, Chris. Just to revisit the situation at Heartland and Marrero briefly. I’d like to reiterate that, we have corrected issues and believe that each facility should contribute to our future performance. As for Heartland, the new investments are having the desired effects on production and these benefits should be apparent when we report our fourth quarter results. At Marrero the new permit will allow us to produce more consistently at improved production levels. Also we will not have to do the previously scheduled turnaround for November. That will be pushed into next year because of the recent downtime. Overall our spreads were good and are improving and all markets were stable compared to quarters in the recent past. These factors helped us exceed our internal expectations and resulted in a positive EBITDA of $1.8 million. As previously stated this is a spread business and I’m very pleased with the way we have managed our spreads in the third quarter as shown by our gross profits. As we look ahead $45 to $50 crude is a nice spot for us because we can manage our spreads at this price level affectively. I’m particularly encouraged by the way our collection operations held on the street charges for oil. Our charges and stock fees were $1.2 million for the quarter compared to $90,000 during the same period in 2015 and $3.5 million for the first nine months of 2016. Our trailing 12 month collection volumes grew at a rate of 3% and we expect to grow to continue and improve beyond 2016. Concurrently we are looking for further expansion of our collections and we’ll opportunistically pursue these opportunities especially around our operating assets. We will be making substantial investments next quarter in six new collection trucks, which will boost our collection efficiency and our volumes. A brief update on our marine fuels, the market is improving and we should expect better spreads in the fourth quarter. We’re hopeful that this represents the beginning of a positive trend. Although it is early in the fourth quarter we are seeing a $0.03 to $0.05 per gallon improvement in our marine fuel sales from Marrero. And we are optimistic that this trend will continue for 2017 where we anticipate the improvement over third quarter of 2016 to total $0.08 for the coming year. As it relates to our Heartland operations the fire in February was a real setback, but based on the experience we have had in this quarter, we anticipate that the investments we made during that downtime will boost our 2017 results. By the end of 2017 the model we have been working on at Heartland will be finalized and we intend to use it as a platform to grow and develop our other operations. We believe it is a very powerful model that we want to replicate across our footprint. A perfect example of leveraging our Heartland model is our new Group III import business. Using our existing customer base and marketing team we have completed our initial quarter of operations for our Group III Base Oil business which is off to a great start. We now have been approved by the four major additive companies at different formulation levels. We will finalize all the required formulations as we move forward in 2017. We also took another step in our efforts with the hiring of Michael Sommer’s as Marketing Manager – Product Sales Development. Michael brings 30 years of experience including 23 years of safety clean where he developed the markets for their Base Oils and finished lubricants. These steps highlight our focus on growing our new Group III Base Oil business. Before we take questions, I wanted 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. I also want to mention that digital replay will be available by telephone approximately two hours after the calls completion until November 30, 2016. Details on how to access the replay can be found in our recent press releases or on the Investor Relations section of our website at www.vertexenergy.com. Operator, we’re now ready to take a limited number of questions pertaining to the matters discussed on this call and our 10-Q. Remember we’re unable to discuss any information of business plans which are not publicly available. Thank you.

Thank you. At this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Eric Stine from Craig-Hallum. Please proceed with your question.

Good morning everyone.

Good morning.

Good morning.

I just wanted to start with marine fuel, good color there on the pricing side. I’m just curious if you can talk about maybe on the volume side or percent of mix that you are seeing currently out of Marrero maybe how we should think about that over the next few quarters. And do you have a target in mind exiting 2017?

Yes. First of all, this year for 2016, we’ve only sold 140,000 barrel barge to the feedstock market which was sold as VGO to a refinery. The balance of the production has been sold into the marine fuel business. The challenge so far this year was the transportation cost where we had to ship the product in order to get into those markets. And we are working on closer markets to our production that that should improve our netback and we are seeing good progress. So I think in 2017 we should be 100% sold into the marine fuel market and unless for some reason the VGO market outpaces the marine fuel market in value. So we’ll obviously play in both markets wherever we get the best price.

All right. Okay. All right good color there. Maybe just touching or turning to Heartland and Marrero. You touched on some of the things that occurred in the quarter. I’m just wondering, can you comment – I know you have the new equipment at Heartland and the new permit at Marrero. Did you have I mean ex-ing out some of the operational stuff? But did you have any volume benefit from either of those in the quarter or is that something we should think about more fourth quarter and 2017.

Yes. I would think about volume improvements related to both operations for fourth quarter and 2017. We will still make some capital improvements at Marrero next year, first of next year that will help move our volumes up another notch.

Okay. All right, last one for me. I may have missed this. Did you give a specific charge for oil metric for the quarter? Or is it something that we should think about given a stable oil environment that it was pretty much stable on a sequential basis?

Yes. It was pretty much stable on a sequential basis. It may have been down just slightly based on some growth initiatives that we expect to see in the fourth quarter.

Got it. Okay, thanks a lot.

All right. Thank you.

Our next question is from Michael Hoffman from Stifel.

Thanks. And Chris hope you got a, allergy is not a cold Ben.

Yes.

Can we talk about the utilization or the sort of plant reliability? What gives you comfort that you’ve got your hands around that in both those two operations, Heartland and Marrero at this point what’s happening?

Yes. We’ll start with Heartland. We’ve got a lot of new equipment in the facility. We’ve seen most of the issues I think that you can see there. Our engineering group has been very proactive this past quarter to – really look deeper into the systems. This was a internal failure up there related to metallurgy in an exchanger that was poorly designed. And so we’ve replaced that exchanger. The plant stayed on land the whole time. So it’s not that we didn’t have operations running. We just weren’t able to convert our VGO to Base Oil because of the one piece of equipment that did fail. Going to Marrero, I think our consistency and track records there is very solid, we’ve not had many issues there over a three year period our production has been very stable and consistent. We do plan to dial the production up at that site based on our Permian and the new equipment we’re going to install. So power failure at the grid outside our control – all it basically did is silenced the break out in our heater that we would have typically had to remove during our turnaround. It didn’t come out the way we would handle it. And in turnaround it was a disruptive dislodging of the solids that caused us to have to spend more time to fix it. And that’s normal, there is nothing abnormal about that, that could happen down the road. We haven’t seen much issue along those lines but those kind of things happen in running these plants. But we did make use of the downtime where we don’t have to shut the plant down in November. And Marrero should run full throttle through the fourth quarter is going to – everything looks real well there.

So speaking of spreads in the outlook, if you looked at where the spread is today versus 2015. What’s the percent change improvement 4Q 2015. That’s one part of that spread question. And then if you took the current spread today and said, that your spread going into 2017, what’s the percent change versus the annualized – the full effect of what you know through the nine months plus the current spread year-over-year. How do I think about that?

I’ve got some of those numbers I’m going to give it to you in a couple of pieces. The improvement of spread between 2015 and 2016 is 63%. The improvement going into 2017 from Marrero, we anticipate to be an additional $0.08 a gallon. Because it’s going to come out on our sales price of our finished product.

And you are talking about 45 million gallons.

Yes, conservatively. The Heartland operation with the investments we made into the asset this year, we’ve realized some additional spread from that this year, we think that it will yield another 1 million to 1.2 million next year over our current EBITDA for the Heartland facility.

Okay. And then on the marine fuel market the slow sulfur conversion has had fits and starts more fits than starts. So what gives you comfort because I’m assuming it’s a low sulfur demand is what’s your leverage point, you are low sulfur alternative. What gives you comfort that market starts really addressing the regulatory changes to the lower sulfur standard and therefore the demand goes up.

Even with the target improvements for next year we’re still nicely discounted to number two diesel. And the ship owners in this sector of the market has become under pressure as far as utilization margins et cetera. So they are looking for cost saving alternatives. The key for this year was to get our product into that market. So that it would be adopted that it is an alternative fuel and ship owners and bunker companies have to be comfortable that this fuel will perform and there is no issue. So we’ve got a lot of track record now. And it’s really just a transferring of sales from one market that we have a lot of freight today to a closer market related to our production is really the only step for 2017 that we’ve got to make and we’re making progress there.

Okay. And then at the current oil price and the stability you’re saying it is getting good enough to TCEP gets restarted?

We brought a person in that’s doing some development work around our TCEP technology with the idea that we may get the opportunity to do that. We’re really looking at supply and pricing of supply before we had more demand in the market. So we – the third quarter was a pretty tough market for feedstock because of so much export demand that took place not just in the third quarter but also in the second quarter. So there was a lot of inventory penned-up going into 2016. And today there’s not a lot of used oil inventory in the market. And we think that maintaining the current production levels for our operation is probably the right thing to do as we start-off in 2017 until we see available supply at these kind of prices. So that’s kind of how we’re looking at it.

All right. Just to be clear supply in this case is the feedstock supply they are running in the plant to produce – you’re saying the demand is there for a finished goods but can you find the feedstock.

We can get the feedstock but what kind of price and what will those spreads ultimately look like across our business.

Got it. Okay. And then lastly, based on your view of the fourth quarter. How do you feel about the leverage covenants that you have that start to kick-in on an annualized basis of off your next reporting cycles?

Yes. I’m going to come right back to that. Michael, let me add one more thing to the supply standpoint and what we just – the question you just asked. This is really important, keep in mind that we expect to process an additional 15 million gallons at Marrero in 2017 versus what we anticipate doing this year in 2016 based on the permit and the improvements that that we’ve made and we’ll make it to first quarter. So that we’re taking the oil from the Houston market to the Louisiana market that’s half of what the production was at Marrero – I mean at our TCEP operation. So that’s another reason why we’re hesitant on the TCEP facility. We’re getting a lot of leverage at Marrero by maximizing our production that way.

Got it.

Now back to covenants and Chris can add to this. But we’ve got Goldman Sachs down to $4.8 million and we’re well within our covenant requirements and we don’t see any issues meeting those requirements everything is very good. I think we’re fine.

Yes. Just to add to that Michael. I’m very comfortable with where we’re at especially based on the third quarter and then what we see in the fourth quarter. And just to reiterate those start at the end of Q1 2017.

All right. Okay. Thank you so much for taking my questions.

Thank you, Michael.

Feel better.

All right.

Me too.

Our next question is from Tom Bishop from BI Research.

Hi, good morning.

Hey, good morning.

Its sounds like from everything I’m hearing that Q4 should be greatly improved actually from Q3 and perhaps that might even mean profitability is that a fair assessment.

Yes, it’s very likely we’re early in the fourth quarter but with the turnaround that was scheduled for Marrero that will not have to be done, the plant is running great, we’ve got good spreads. Our Heartland facility is at full throttle its is running great. And we do have a schedule in planned turnaround for the Heartland facility just to change our catalysts out on a hydrotreater. So we see the fourth quarter being a very solid quarter. And we hope to be profitable as a result.

Great. What’s happening with the Marrero growth facility? And part of that question has there been no opportunity or demand to use the facility there for storage your petroleum products.

Yes. Good question. We are working on infrastructure at that site and there is going to be some rail improvements made and some barge dock improvements made. Maybe as early as this quarter or going into first quarter of next year we’ve recently negotiated a favorable intercompany transfer rate by rail between our Marrero facility and that facility. So we’re making progress there. This is a market issue Tom, as it relates to Base Oil because that facility is equipped with the hydrotreating assets and the fractionator and all the things that we need to do to take the VGO from Marrero to Myrtle Grove and convert that to high-purity Base Oil like we’re doing at the Heartland facility. We don’t believe the market is ready for this additional Base Oil volume. But the market appears to be improving as we go in 2017. So we’re going to continue doing the things that we can do to further prepare us for that opportunity, while we perfect our model at the Heartland facility. So that there is no question about the economics and our ability to execute that strategy at a much higher level using the Myrtle Grove assets. So I don’t anticipate us bringing Myrtle Grove on 2017. But I do anticipate making significant progress towards our long-term utilization of that site and development of that site this coming year.

Okay. So it sounds like you’re playing this to hang on to that. The company referred a little while ago in a release or some sort that Myrtle Grove, well that the company was looking to monetize some assets I thought something of that nature. And I guess I thought you we’re referring then to Myrtle Grove but perhaps you we’re referring to something else?

Yes. Well I will say this Myrtle Grove has a lot of value and a lot of valuable equipment. And if it’s more valuable to someone else I’m having discussions on a continuous basis related to that. As well as our CMT facility in Houston I’m more than willing to have those discussions also. But we still have our own game plan and we’ll continue marching forward as we evaluate other opportunities. So nothing’s off the table.

Okay. Also could you just give us the production by facilities and even the capacity? Because I’m getting a little lost on that.

The feed capacity at our Heartland facility is 18 million gallons, so that’s input. And the feed capacity today at our Marrero facility is about 69 million gallons.

So that’s what you could process and then what has production been or kind of what rate are you at now.

Well other than the downtime I think we’re operating at – at full production level at the Heartland facility. And we anticipate increasing our production at the Marrero facility about 15 million gallons for 2017.

Beyond the 69 million gallons or is that in the 69 million gallons.

No that includes the 69 million gallons.

So the 15 million gallons is in the 69 million gallons.

Yes. So 55 million gallons roughly is what our target looks like for 2016, 55 million gallons.

Okay. And you hope to be at that level. I mean you hope to be kind of flat out there at Marrero 69 million gallons.

We’ve got the ability to do that. So I don’t think our budgets are calling for that but we can operate at those levels. So I actually think our 2016 finish will be more close to 50 million gallons, 52 million gallons and then let’s say, a annualized target of 65 million gallons for 2017.

That’s full year right.

That’s right.

Okay. I’ll get back in the queue. Thank you.

Okay. Thank you, Tom.

[Operator Instructions] We have a follow-up question from Tom Bishop from BI Research.

Okay. I was unclear about the costs relating to the Bango sale, it says $10.8 million I imagine there is a commission in there but that’s a big number. And I was a little surprised by that. I found that number in the cash flow statement. I guess you sold it for $30 million and then there was a cost of $10.8 million a cash cost of $10.8 million.

Yes. We had a lease to purchase option on the site and some of the assets, leaseholder assets. So we had to take that out when we sold the facility.

Okay. And also I’m struggling to uncover what the underlying income is, I mean there is a lot of stuff going on here in 2016 – as I’m sure Chris can attest but with the preferreds and then there is derivatives and some of them are cash some not, maybe but – can you help us get down to underlying earnings in Q3.

Yes, good question, Tom. So looking at the Q3 income statement, if you look at loss from operations at negative $586,024 that’s really the operating income or loss if you will. And then obviously below that you’ve got the interest expense. And then the big item that we’ve had for about three quarters now is the change in value of the derivative liability that is related to the warrants. So that gets repriced every quarter just based on market.

So operating income you can figure about $880,000 as far as operating EBITDA cash generated.

I guess I’m trying to get that to the bottom line there.

That’s the best way to look at it as Ben just mentioned its $800,000 to $1 million in the bottom line if you try to do – if you take out all of that noise.

Okay.

From a cash flow perspective.

Okay. And can you explain the liquidation preference in the B – the preferred B and B1. If mean take a little recap on that would be helpful to everybody here.

Yes that’s…

And it is convertible, right.

It is convertible. However, they were priced at $3 and roughly $0.50 on the B and then a $1.60 roughly on the B1. So the term based on where the stock price is at our date of filing is the adjustment that we have to put on the income statement. So if they were to convert there would be a benefit to the company at the time of conversion if the stock price is lower than the strike price.

They would never do that. Right.

You wouldn’t think that they would that’s correct. However, we’ve got to book that according to GAAP in our P&L.

And in the $3.50 and the $1.60 you are talking about the conversion prices, right.

That is correct.

Okay. What percentage of the business is marine fuels?

Yes, 60 to 70….

If Q3 wasn’t representative let’s talk theoretical Q4 or whatever.

Yes. When you talked about the feed production 18 million gallons at Heartland and 65 million gallons at the Marrero facility, Marrero is the marine fuels, Heartland is the Base Oil.

There was new legislation about using marine a lower polluting marine fuel within 200 miles of the coast was that – does that help you.

Yes, that is correct. That is the market that we’re selling our product into. Our product is meeting those new fuel standards those requirements.

Okay. And do you expect all of Marrero to go to marine fuel pretty much.

Yep. So far this year all of our product has gone to marine fuel other then one barge load that we sold to a refinery.

Okay. Good, all right. Well it sounds like things are heading in the right direction at last.

Yes. I appreciate everybody’s support in hanging in there. We got lots of work to do and but it feels good to be playing off [indiscernible] and making headway again. So we hope these markets would just kind of stay put. Any lift in crude is a big – big positive for us. But $45 to $50 of crude oil is something that we’re geared for. Even though the price is low the things that we’re able to do at $45 and $50 of crude sets our company up for a better long-term outcome than a higher our crude price today. So we’re really running our business with a long-term perspective, and we see a lot of value that we can create now and into the future. But we’re not going to – we’re not going to be disappointed if we get a little shot on crude prices. Everybody will enjoy that as well.

Great.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I’d like to turn the call back to Ben Cowart for closing remarks.

All right. Thank you, operator. And thank you everybody for joining us today on the call. And if you need additional help with questions feel free to reach out to Marlon Nurse with Porter, LeVay & Rose. And thank you again.

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