Benjamin Cowart - CEO and President Christopher Carlson - CFO and Secretary John Strickland - COO

Michael Hoffman - Stifel, Nicolaus & Company Eric Stine - Craig-Hallum Capital Tom Bishop - BI Research Gerard Sweeney - Roth Capital Partners Scott Levine - Imperial Capital

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Vertex Energy Incorporated 2017 Third Quarter Financial Results Conference Call. [Operator Instructions]. Please note this conference is being recorded. I will now turn the conference over to your host, Ben Cowart, Chairman and CEO of Vertex Energy. Thank you. You may begin.

Good morning, everyone, and welcome to Vertex Energy's Third Quarter Financial Results Conference Call. Joining me today on this 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 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. Before we review our financial results, I'd like to discuss some key points about our business operations and the future of the company. On September 5, we issued a press release, stating that our business was affected by Hurricane Harvey and the resulting flood conditions throughout Texas. We suffered some damage at our facilities and experienced interruptions to the business operations. We were able to mobilize our collection business on a limited basis from August 25 to September 1 in the Houston and Corpus Christi, Texas and Louisiana markets. However, there was no third-party supply to our Houston facility and limited movement to Marrero due to supply constraints across the Gulf from Texas to Florida during this period. Additionally, our Refining & Marketing business was most affected because production was halted in our third-party facility and the facility was unable to receive feedstock supply from local plants due to the storm. But Hurricane Harvey and Irma affected our business operations, resulting in $1.5 million impact to our financial results in the third quarter. Overall, business operations remained open during the quarter, despite the limited activity due to the storm. Our Heartland facility, which is located in Columbus, Ohio, and our Marrero facility located in Marrero, Louisiana were safe from the storm. However, we continue to be affected by the prevailing market conditions, and spread compression experienced in the second quarter. The price compression between WTI, or West Texas Intermediate crude price index, and #6 Oil price index was still prevalent in the third quarter. We witnessed #6 Oil pricing, which is the benchmark used for our feedstock purchases move above WTI crude price for a period. Therefore, our feedstock cost was at a premium. Today, we reported our Third Quarter 2017 financial results. Our revenues for the quarter rose 14%, compared to the third quarter 2016 to $32.5 million. Our earnings per share for the quarter was $0.12 loss. Our gross margin was 12.5% at the end of the quarter. Chris will later discuss our financial results in more detail. We witnessed a steady increase in energy prices as demand for fuels escalated during the quarter. This had an impact on the improved revenue for the quarter. Our quarter was negatively affected by an operational issue at our Heartland facility. The facility was down for approximately 8 days. Despite then for some downtime, we will be ahead of our production targets at the end of the year at the Heartland facility. Despite the impact of the storms on the financial performance, we're pleased with the overall state of our business. I will now highlight some key positives from the quarter and discuss some operational updates that will have a positive influence on the company's future. First, we continue to work on the development of our Gulf presence in the Marine fuel markets. We have made remarkable strides as we have penetrated local markets for our products, resulting in significant freight cost savings heading into the fourth quarter. Second, we remain committed to our import business operations. The storm did create a higher demand for our Group III base oil imports, which we have sold out and have already received purchase orders for the incoming shipments for the remainder of 2017. Current buyers of this product are small to large independent packages and blenders as well as major oil companies. Third, we are steadfast in building our collection volumes. We are on track to collect an excess of 20 million gallons at the end of 2017, although we've seen a decline in our charge for oil, our contribution margin was higher as our volumes increased. This initiative makes us less dependent on third-party oil and reduces our exposure to #6 Oil price volatility. Fourth, we want to provide an update on our Myrtle Grove facility. We've made significant progress to monetize this facility. Myrtle Grove is located on a 41-acre industrial complex along the Gulf Coast in Belle Chasse, Louisiana, with existing hydroprocessing and plant infrastructure assets, which include 9 million gallons of storage. As mentioned on our last conference call, we engaged a consulting firm to help us explore the best strategic options for the development of this facility. We're happy to report that the assessment is completed, and we have created a report that is being reused in our conversations with potential strategic partners, including private finance sources. We have secured multiple nondisclosure agreements, regarding investments, a key initiative for this facility will need to produce high purity based stock for the U.S. manufacturer markets. Our business is strong and will continue to improve. Our objectives for 2017 were to penetrate the marine fuel markets, build a high purity base oil network throughout Group III base oil import business and grow our collection volumes. We have achieved those goals and are opportunistic with our business model, as we focus on monetizing our TCEP in Myrtle Grove facilities. I'll now turn the call over to Chris, our CFO.

Thank you, Ben. I will now review our financial results, 2017 third quarter ended on September 30, 2017. All of our financial statements unless otherwise noted, are prepared in accordance with Generally Accepted Accounting Principles. Our third quarter 2017 consolidated revenue was $32.5 million, higher than the $28.5 million reported for the third quarter ended September 30, 2016. For the 9 months of 2017, consolidated revenue was $104 million, compared to $67 million for the same period in 2016. Our overall volume in the business was up 1% and the crude market prices were up approximately 10% for the third quarter 2017 over third quarter 2016. Our volumes were not as strong as anticipated, mostly due to the weather in the Gulf region of the U.S. during the third quarter, which caused delays in our collection facilities and in railcar and bard shipments to our Marrero facility. A halt in production and interruptions at our third-party facility also affected our overall performance, especially at our Refining & Marketing Division. In our Black Oil Division, which includes our Marrero TCEP and the Heartland business units, revenue was $25.3 million for the third quarter 2017 as compared to $22.9 million in the same period a year ago, an increase of approximately 11%. Volume decreased 4% for the third quarter over third quarter 2016, and increased 16% for the first 9 months of 2017 over the same period a year ago. The Refining & Marketing Division produced revenue of $4.8 million in the third quarter of 2017, as compared to $4.4 million for the same period a year ago, an increase of 9%. Volume for the quarter was up 21% over the third quarter 2016 and 28% for the first 9 months of 2017 over the same period a year ago. For the third quarter 2017, Vertex recovery division, which includes our Group III base oil import business, generated $2.2 million in revenue, an improvement of 102% from $1.1 million a year ago. The increase was driven by opportunistic trading and an overall improvement in our Metals division during the period. Volume was up 183%, third quarter 2017 over third quarter 2016, and increased 36% for the 9 months of 2017 over 9 months of 2016. For the third quarter 2017, our gross profit was $4.1 million, a decrease of 32% from a gross profit of $6 million during the same period in 2016. For the 9 months ended, September 30, 2017, gross profit was $13.6 million, compared to $11 million for the same period in 2016. Gross profit margin was 12.5% for the third quarter 2017 compared to 21% for the same period a year ago. For the first 9 months of 2017, gross profit margin was 13%. Our consolidated per barrel margin decreased 32% in the third quarter 2017, compared to the same period a year ago. As a result of one-time operational expenses during the quarter, as well as turnarounds and downtime experience, entire margins on our products, as a result, have increased demand for used oil, along with the spread compression between #6 and WTI. Gross profit for the Black Oil Division was $3.6 million during the third quarter 2017, which was a 28% decrease over a $5.1 million in the third quarter 2016. Per barrel margins for the third quarter 2017 decreased 25% as compared to the third quarter 2016. Refining & Marketing's gross profit decreased 99% to $6,000 in the third quarter 2017, compared to $826,000 a year ago. Per barrel margin decreased 99% for the third quarter over same period a year ago. Vertex recovery generated gross profit of $426,000 in the third quarter of 2017 compared to $83,000 a year ago. There was an 81% per barrel margin increase for the third quarter of 2017 over the same period a year ago. Selling, general and administrative expenses were $5.7 million in the third quarter 2017 compared to $5 million for the same period a year ago. For the first 9 months of 2017, SG&A expenses were $16.3 million compared to $15.2 million for the same period in 2016. Our SG&A is up, as a result of the 3 recent acquisitions completed during the first 9 months of this year and the refinancing completed at the beginning of the year. Depreciation and amortization expenses were $1.7 million, compared to $1.6 million a year ago. We reported a net loss of $3.8 million or a loss of $0.12 per share in the third quarter 2017, compared to a net loss of $1.1 million or a loss of $0.03 per share in the same period a year ago. For the 9 months ended September 30, 2017, we reported a net loss of $10.6 million or a loss of $0.32 per share compared to a net loss of $9.5 million or a loss of $0.32 per share. Our quarterly EPS was calculated using an average of 32.7 million shares outstanding in third quarter 2017. As of September 30, 2017, our term debt was approximately $15 million at the end of the quarter. Our working capital was approximately $1.1 million compared to a working capital deficit of $1.3 million at the end of 2016. I would now like to provide an update on our guidance for 2017. We expect our revenues for 2017 to be between $138 million and $140 million, which is revenues between $35 million and $37 million for the fourth quarter. Gross profit will be between $20 million and $22 million, which is gross profit between $7 million and $8 million for the fourth quarter. And gross profit margins between 14% and 15%. Before we take questions, 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, Investor Relations representative Marlon Nurse at 212-564-4700. I also want to mention that a digital replay will be available by telephone, approximately 2 hours after the call's completion until February 28. Details on how to access the replay can be found in our recent press releases and on the 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 in our 10-Q. Remember, we are unable to discuss any information or business plans, which are not publicly available. Thank you.

[Operator Instructions]. Our first question is from Michael Hoffman with Stifel.

You gave some indication about how the year ends with both revenues and gross profit, to - if you then back out of first 9 months, the profile of the fourth quarter is a pretty healthy improvement in profitability specifically how [indiscernible] black oil as when it can really move this needle that much. So, can you talk about how that happens? What has to happen for you in the context of capacity utilization, total volumes processed and sold and putting that in context with your spread compression?

Yes. Appreciate the question. We'll walk you through that. There's been a lot of work in the company, especially in the third quarter, in spite of the setbacks. The goals we set for the year, really come to fruition in the third quarter with our collection growth so our contribution margin on our collected gallons versus this higher third-party cost is very favorable, as we go into the fourth quarter. Second, we've been working to really move our Marine fuels in the local markets. So, a key component as we go forward now, is we've been able to accomplish that. We're not having to pay high transportation cost to move it to northeast markets. We're able to sell our products in the Gulf going forward. So that's going to play another key component. And then the overall plant operations. All our turnarounds are behind this. The plants are running good. There is a strong demand for base oils. We've got good spreads now at both locations that we are modeled up for the fourth quarter on into next year. So those are probably the 3 big drivers that we see. We also - our Group III import business has really come together well in the third quarter and we'll see a very strong surge from that business as we go in the - as we're in the fourth quarter now.

So, the keys out a little bit of that remind us at the beginning of the year, you are collecting how many gallons and how many are you collecting now, as you enter 4Q?

Yes. We were at 20.3 million gallons last year, 2016, and we're probably - we set a goal to be at $25 million for this year and we'll probably have an exit run rate at the end of the fourth quarter of 28 million to 29 million gallons. So, we've kind of more than exceeded that target.

And would you say you're still progressing to that so, I mean like the beginning of the quarter, you were at 25 and by the end you are at 28 or you are at 27.5 and you are at 28? I'm just trying to understand that?

We come out of the first part of the year already on track for that 25 million gallons. So, we're going to be ahead of target for this year.

Okay. So, the point of this is, there's about $0.12 a gallon savings, isn't that - is my memory correct? So, if you are internalizing?

Yes, it's a lot more than that right now because the third-party oil is so expensive because of this #6 Oil price compression with crude. So, we're mid-'20s in contribution margin over third-party cost.

That's a swing factor?

Yes, right.

Okay. But it had been - historically, it has been in middle double digits. And then what's the sort of cents per gallon kind of leverage to not having to ship Marine fuel? Trying to understand where the leverage is in these 3 pieces between internalization, localization and capacity utilization?

I want to be - since we're just starting to see the spreads, I want to reserve a little working room, but I'm going to say about $0.08 right now a gallon.

Okay. And then what was your past utilization sort of throughput in 3Q and what you'd expect to be in 4Q? So, we understand sort of how much flexion you have from that?

Yes, so, let's see. John, you want to answer that as far as the utilization? What our volume - production volume for the two plants are for the fourth quarter?

Yes, fourth quarter, our production volumes down at Marrero, we're looking at 275,000 barrels of VGO being made and at Heartland, we are going to be looking at around 3.6 million gallons of base oil made. That's where we're going to be.

So those are our primary finish products. Obviously, we've got the coproducts that tail off of that.

And to put that - and can you put that in perspective to 3Q, so we can see the - that helps us understand that leverage, clearly you are less because of the weather, and unplanned downtime and disruption of feedstocks?

At Marrero plant in September, our production was down almost 20% because of the feedstock.

Right, so in 3Q, you did 200,000 gallons per barrels?

What was your quarter volume production?

Once I have been here.

They're adding it up right now, Michael. Yeah. I'm just going to ...

And why they're doing that? Ben, most of the other companies who are in the oil collection side talked about $0.04 to $0.06 sequential drop in the charge for oil. Is that about what you are experiencing as well?

Yes, that's probably the same for us. We may have been a little bit better, but I would just keep it in the same ZIP Code.

Okay. And if I take your fourth quarter, can - am I making a mistake by multiplying it by 4 as a starting place for 2018?

Yes. We are getting our budgets finalized but we do have a turnaround in this fourth quarter that we've already factored in. So, I think, we will be able to provide guidance soon on the new year. But we feel like the fourth quarter is a real indicator of where we're going.

I'll jump back in here. At Heartland, we had our turnaround in August. We've had 3.2 million gallons of base oil production in the quarter. [indiscernible] in fourth quarter, we're predicting at least 3.6 million to 3.7 million gallons. And down at Marrero, we did 2.85 million gallons in the third quarter. It's what we did. Still [indiscernible] production.

Production. So, the real leverages here is, you've got higher selling prices in 4Q and I have got better asset utilization at Heartland?

That is correct.

That is correct, yes.

All right. And then Lastly on Myrtle Grove. The language says you're selling it, right. That's the ideal is, sell a plant, take the cash and pay down the balance sheet and put yourself in a competitive position to maybe further consolidate collection in 2018?

Well, let's think about it in multiple terms. If we move that asset into a private entity, then we maintain ownership in control of, then that's a partial answer of yes, but we plan to develop the asset with private capital to monetize the cash flow that, that facility should be able to bring to the company.

Okay. So again, using private capital, so you - basically you are going to get off of public company's balance sheet, develop it, but retain some minority position in it?

That is correct.

Okay. Just trying to find, and below a consolidating level, so below 20%?

Well, we're going to see. It's hard to say exactly how it's going to play out until we get term sheets and we just got our first term sheet to look at. So, it's a little early to say how we're going to structure that.

Our next question is from Eric Stine from Craig-Hallum.

Just to clarify those, so on Myrtle Grove, your - you will finance - private finance the development of that project. Is it safe to say then that once that's up and running, you will maintain that ownership? Or is that something that you potentially finance and then sell it and get that percentage in the proceeds? Or how should we think about that?

Yes, we intend to stay involved and continue as the operator of the project and I think the rest of the answer to your question is still undetermined until we finalize how we're going to finance and structure the transaction completion. Our goal is to maintain as much as ownership as we possibly can and maintain operations and I would like to be able to get all of the ownership back so I'm negotiating every way that I can in favor of our shareholders.

Got it. I'll stay tuned on that. Just maybe turning to TCEP. I believe you're in the process of doing the third test run there, I guess, number 1 an update on that and then secondly, I know feedstock was an issue in 3Q, so probably not progress there during the quarter, but is that something that this prospect is looking good depending on how that testing played out, prospects good that you've now got the feedstock in place that you could potentially restart then?

Yes, we're waiting on the final report on our third pilot run. We know the first 2 were acceptable and anticipate the third one to be in line with the first 2. So, this is going to be a slow play out because the real goal is for the 2020 Marine fuel market and so this technology will provide a very valuable fuel to meet that new requirement. And so, we will ease into the feedstock and ease the refinery back into production. As far as our schedule, we haven't said a time to restart the plant but we - I would anticipate that would be some time in this coming year.

Got it. Okay, and last thing and I know you talked about the Group III base oil business and how that's trending, and I guess that kind of goes hand-in-hand for just setting the stage for lubricants eventually so just maybe some discussion of how that's coming together and what your future plans are?

Yes. I think our focus on base oil development is our primary focus. And the lubricant development will come with surplus cash flow and investable capital. So, we're not going to jump out there too fast on developing the - our lubricant business. We think that the return on capital probably is going to serve us much better, making additional improvements around our base oil product lines, specifically in our Heartland facility and with Myrtle Grove, there are some real upside to reach the higher level of base oil quality and attain a higher price. And second, is we already see the need for more collection. So, we're going to continue our focus on building our collection footprint and then from there, obviously, the lubricant opportunity will dovetail with our collection business and, so we will continue working on that but not stake a claim on where we are going from a timing standpoint.

[Operator Instructions]. Our next question is from Tom Bishop with BI Research.

You mentioned at one point the $1.5 million impact to financial results, the hurricanes I guess in the quarter and I wasn't clear if that was revenue or bottom line result?

Yes. That would be bottom line, EBITDA and net income. So, we had several, several delays, I'd speak a little bit to the impact to understand that - the numbers. A lot of our feedstock from Marrero comes from our Houston terminal. So, when the Houston market got hit, our terminal was closed for an extended period of time. We couldn't receive any third-party oil into the site, nor could we get our own oil from our branches into the site because Houston was inaccessible. And then we had just outage. So, the whole Houston market stopped changing oil, the Corpus market was affected, everyone started change oil as well as Florida when Irma come through, Florida is a big market for our supply and we had some outage and downtime from that market as well. The railcars got stranded so there's difficult to move rail back to the facility. So, the plant was throttled back in production and there was - there were just some delays in getting everything moving back to the Marrero plant. That was one issue. Second, is our third-party refining business with Chemtex and Port Arthur was completely shut down, took a while for the plant to come back up and the plants that we buy our feedstock from, are all in the Gulf. So, we had a complete outage for that business, for an extended period of time in the Texas, Gulf region. So that played another key component. So just body of...

A perfect storm?

Yes, you just can't make up. You can't go make that up because nothing happened. Everything was shut down.

Okay. And so, has all the hurricane garbage settled out here in Q4? Is it - everything kind of back to normal as of October 1?

Yes, I think everything seems to be moving forward. We did get some backlog of feedstock. So, our refinery in Marrero is set for a little bit as far as having plenty of inventory. And I feel like we're looking pretty good. Our facility suffered a little damage, but it was nothing compared to the amount of lost opportunity or lost business because of the downtime.

Okay. And last time you mentioned, it seems like it's one thing after another that has impacted. Your hopeful return to profitability. Primarily low oil prices but then there has been fire in the refining in Mexico and a fire in Heartland and more demand in the Caribbean because it's temperature is hot for the used motor oil to burn directly? And you know, we're still trying to get back to profitability. Do you see that, that coming at some point here now that this thing's up? And then is Mexico still a problem, for one and?

Yes, I mean that refinery is still out, and #6 Oil prices are still really high compared to WTI crude. In fact, in the third quarter, #6 Oil prices went over WTI crude prices. So, if used oil is a comparable product to #6 Oil then the price of used oil goes up as well. And so that's been a challenge. Second quarter, it really weighed heavy on our economics and the third quarter, it did not get any better. But we kind of made some adjustments to our guidance, based on that spread compression and we've been dealing with that. So, we did see the same thing in the third quarter, but given the storm impact, if we had those dollars back in the business, we would be tracking ahead of our second half guidance forecast, which means that the fourth quarter and going forward, even with the #6 Oil compression, we're comfortable with a good positive cash flow EBITDA going forward and who knows, we may get close to a positive net income.

Well, that would surely be nice. It's been a struggle getting back there. By the way, in your adjusted EBITDA calculation, you add back noncash stock-based compensation. But I think to be fair on the EBITDA's value to remove the gain on the change in the value of derivative viability of $1.4 million would be worthwhile adjustment there, especially since that gets bigger when the stock was down.

I agree with that. I understand that.

Yes, as far as communicating the adjusted EBITDA.

Our next question is from Jerry Sweeney with Roth Capital.

Just a quick question on the Marine fuel. It sounds like as you said in the commentary moving more and more to the Gulf Coast as opposed to the Northeast, how much of your production out of Marrero is Marine fuel now a days, going into the market?

Well, we're budgeting 75-plus percent going forward. We're leaving ourselves a little bit of room internally just because we continue to refine the process and from time to time, the product may not hit a certain speck so. So far so good. We've been a lot higher percentage than that on a go-forward basis. So, the market is there. So, we're not concerned about being able to move the product, it's just leaving a little room for something that we may not see at this point. So, there are 2 different markets inside the Marine fuel market where our product is used. One is a much higher value, and then the other is a little bit less. So, it's all going to be in the Marine fuel market, as far as our target.

I mean quickly for market, sometimes to the Marine fuel market moves around a little bit and at times it's much more valuable than the VGO market but sometimes, the VGO market lifts up. Is that correct? How much - the real question is how much variability is in that Marine fuel market and do you have any - these contracts or these all spot pricing that you're selling it to?

Yes, it's a little, I would say, it's probably more contract than spot. And the flexibility is still in there to where we can move out to a VGO market if it makes sense. The VGO market is driven more by gasoline. So, there is a big premium on diesel fuel today, which, you know, makes the VGO market much less attractive, compared to the Marine fuel market. So, I think we're in the right place. And we don't see that changing for next year.

[Operator Instructions]. Our next question is from Scott Levine with Bloomberg Intelligence.

So, I may think you have said in response to Michael Hoffman's question, in $0.04 to $0.06 of erosion I think in a charge for oil. Just kind of wondering, I heard your comments on spread compression but how would you characterize competition within the collection markets and pricing for direct collection versus third party and is the rational for consolidating the collection market become any more less compelling, not just this quarter by the last few quarters?

Yes. So, it's a challenge out there. There are still a lot of independent collection companies. And even some of the bigger companies have gotten very aggressive to a pay-for-oil type of model versus a charge for all type of models. So, we're maintaining, what I would consider, a very competitive charge for oil average and we have to defend our business on a daily basis for those that are looking for market share to the point they'll pay a generator again for that oil. So that's always the part of the business. We're as an industry, we're our own worst enemy. So, when oil prices - used oil prices go up, then there is more spread in the pockets of the collector and the first thing they want to do with that extra money is go build market share.

And the answer of the question differ region to region? Or is that could - market trend is kind of similar throughout your entire footprint?

Yes, it does change by region because the biggest driver for used oil prices is #6 Oil values and those are typically found in coastal markets, whether it's West Coast, East Coast or Gulf Coast. Interior markets depend more on re-refining assets and then local RFO burner markets. And, of course, natural gas is a major sealant on burner fuel prices. So, you're not going to get as much competing with natural gas these days.

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

Thanks. Well, thank you everyone. We appreciate the call, and your interest in the company. If you'd like any more information related to the information on this call, feel free to call Marlon Nurse, our Investor Relations Representative at 212-564-4700. And, again, thank you for dialing in.

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