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

Eric Stine - Craig-Hallum Capital Brian Butler - Stifel, Nicolaus & Company, Inc. Gerard Sweeney - Roth Capital Partners Larry Lytton - Second Line Capital

Greetings and welcome to the Vertex Energy Fourth Quarter and Full Year 2017 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] And as a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ben Cowart, Chairman and CEO. Mr. Cowart, you may begin.

Thank you, operator. Good morning and welcome to Vertex Energy's 2017 fourth quarter and full year financial results conference 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 believe, anticipate, except and statements in the future tense are forward-looking statements. These statements involve known and unknown risks and uncertainties and 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 would like to discuss some key points about our business operations and the future of the company. We're pleased with the overall state of our business and are opportunistic about the company's future. We've made significant strides on our financial and operating performance in 2017 and are in good position to monetize the developments made at our facilities. Before I highlight our key initiatives for 2018, I want to revisit the goals we had set for 2017. Our objectives for 2017 were to penetrate the Marine fuel markets, build a high purity base oil network through our Group III, base oil import business, grow our collection volumes, and improve our production capacity. First, we continued to further the development and progress that we made during 2017 in our Gulf presence in the Marine fuel markets. We've increased our percentage of finished products being delivered into the Marine diesel market, which meet the 2015 ECA fuel specs. We have also made remarkable strides as we have increased our presence in the local markets for our products resulting in significant freight, cost savings going into 2018. Second, we remain committed to our import business operations. In 2016, we secured a new agreement with Penthol C.V. of the Netherlands to important Group III base oil from the UAE to the United States. This was an important development for us, because United States imports the majority of its Group III base oil. We have seen a shift in lubricant formulations away from lower grade Group I and towards Group II and Group III base stocks. The Group III base oil market is scheduled to grow 10% year-over-year until 2030. In the second half of 2017, there were an increase in our volumes along with higher demand for Group III base oil imports after the storms. Demand for the product remains strong. Current buyers of this product are small to large independent packagers and blenders as well as major oil companies. Third, we were steadfast in building our collection volumes, organically and through acquisitions. We've collected approximately 26 million gallons in 2017, which is up from 20 million gallons in December 2016. There was a slight decline in our charge for oil, but it remained in the mid-teens. Despite the modest drop in our charge for oil, we were able to maintain our contribution margins as our volumes increased. This initiative of building our collections volumes make us less dependent on third-party oil and reduces our exposure to the #6 Oil price volatility. Fourth, our production volumes at our refineries increased both at our Marrero and Heartland facilities by 17% during 2017 compared to 2016. We've been steadfast in our efforts to continually improve our year-over-year at our operating facilities. Fifth, we continue to be opportunistic with our business model, as we have made significant progress in the development of our Myrtle Grove and our TCEP facility. We've made noteworthy advancements at our Myrtle Grove facility. We now have a report that has been used in our conversations with potential strategic partners including private finance sources. A key initiative for this facility will be to produce high purity based stock for the U.S. manufacturers market. TCEP is a waterfront facility of approximately 20 acres, positioned adjacent to the Houston ship channel. This location provides supply and distribution advantages into one of the largest petrochemical markets. The second half of 2017, we made some improvements at the TCEP facility and completed internal test runs. In addition, at the Heartland facility, we've made significant progress through capital improvements and upgrades of our technology. These improvements will allow us to further leverage the high purity base oil markets. In 2018, we anticipate being able to benefit from the investments made at our facilities and will participate in improved market opportunities. In addition to accepting positive returns from the improvements at our Heartland facility, we will start commercial trials at our TCEP facility to produce a product that would meet the new IMO 2020 Marine bunker fuel regulations, continue to focus on the growth of our collection business organically and opportunistic acquisitions with a target of 30 million gallons collected by the end of 2018, expand our Group III base oil import business, focus on the growth and management of our third-party feedstock cost, and raise private capital to invest and monetize the development of our Myrtle Grove, TCEP, and Heartland facilities. We've made significant progress in our operation and financial performance in 2017 despite market conditions, weather-related impacts that were out of our control; however, we've made capital improvements in our facilities that, we believe, will benefit the company's operating performance in 2018. We're confident that the positive momentum from our 2017 fourth quarter financial performance will continue into 2018. I'll now turn the call over to Chris Carlson, our CFO.

Thank you, Ben. I will now review our financial results for the 2017 fourth quarter and full year ended on December 31st, 2017. All of our financial statements, unless otherwise noted are prepared in accordance with generally accepted accounting principles. For fourth quarter 2017 consolidated revenue was $41.3 million, higher than the $31.1 million reported for the fourth quarter ended December 31st, 2016. For the full year 2017, consolidated revenue was $145.5 million compared to $98.1 million for the same period in 2016. Our total overall volume for the business was down 1% and the crude market prices were up approximately 12% for the fourth quarter 2017 over fourth quarter 2016. For full year 2017, our total overall volume was up 14% over full year 2016. In our Black Oil Division, which includes our Marrero, TCEP, and the Heartland business units, revenue was $30.4 million for the fourth quarter 2017 as compared to $23.8 million in the same period a year ago, an increase of approximately 28%. For the full year 2017, revenue was $108 million compared to $76.6 million a year ago, an increase of 41%. Volume increased 4.6% for the fourth quarter over the fourth quarter 2016 and increased 13% for the full year 2017 over the same period a year ago. The Refining & Marketing Division produced revenue of $4.7 million in the fourth quarter of 2017 as compared to $3.2 million for the same period a year ago, an increase of 47%. For 2017, revenue was $20 million compared to $13.2 million a year ago, up 53%. Volume for the quarter was up modestly over the fourth quarter of 2016 and 21% for the full year 2017 over the same period a year ago. For the fourth quarter 2017, Vertex recovery division, which includes our Group III base oil import business, generated $6.2 million in revenue, an improvement of 51% from $4.1 million a year ago. For 2017, revenue was $17.4 million compared to $8.3 million a year ago, an increase of 110%. Volume was down 35% for the fourth quarter 2017 over fourth quarter 2016 and increased 7% for the full year 2017 over the same period a year ago. For the fourth quarter of 2017, our gross profit was $8.5 million, an increase of 61% from a gross profit of $5.3 million during the same period in 2016. For the 12 months ended December 31st, 2017, gross profit was $22.1 million as compared to $16.3 million for the same period in 2016, an increase of 35%. Gross profit margin was approximately 21% for the fourth quarter of 2017 compared to 17% for the same period a year ago. For the 12 months of 2017 and 2016, gross profit margin was consistent at approximately 15%. Our consolidated per barrel margin increased 62% in the fourth quarter 2017 compared to the same period a year ago. The growth was attributed to improvements in market conditions throughout the year, continued focus on finished product value enhancement, and the management of our costs. Gross profit for the Black Oil Division was $6.6 million during the fourth quarter of 2017, which was a 44% increase over $4.6 million in the fourth quarter 2016. For 2017, gross profit was $17.6 million compared to $12.9 million for the full year 2016. Per barrel margins for 2017 increased 21% as compared to the same period a year ago. Refining & Marketing's gross profit increased 59% to $437,000 in the fourth quarter 2017 compared to $275,000 a year ago. For the 12 months of 2017, gross profit was $1.7 million compared to $2.4 million for the same period a year ago. Per barrel margin decreased 43% for 2017 over the same period a year ago. Vertex recovery generated gross profit of $1.4 million in the fourth quarter of 2017 compared to $388,000 a year ago, which was an increase of 267%. For the 12 months of 2017, gross profit was $2.8 million compared to $1 million for the same period a year ago. Selling, general and administrative expenses were $5.4 million in the fourth quarter of 2017 compared to $4.8 million for the same period a year ago. For the 12 months of 2017, SG&A expenses were $21.7 million compared to $20 million for the same period of 2016. Our SG&A is up as a result of the refinancing completed in early 2017, expenses related to our acquisitions, expansion of additional facilities, and the increases in employees' wages and benefits for these facilities. Depreciation and amortization expenses were $6.6 million compared to $6.3 million a year ago. Our reported net loss, which includes accretion and dividend on our B and B-1 preferred stock, was $1.3 million or a loss of $0.04 per share in the fourth quarter 2017 compared to a net loss of $6 million or a loss of $0.18 per share in the same period a year ago. Without the accretion and dividends on our B and B-1 preferred stocks, our net loss for the fourth quarter of 2017 was $385,000 or a loss of $0.01 per share compared to a net loss of $2.4 million or a loss of $0.07 per share for fourth quarter 2016. For the 12 months ended December 31st, 2017, we reported a net loss of $11.8 million or a loss of $0.36 per share compared to a net loss of $15.5 million or a loss of $0.51 per share. Our EPS was calculated using an average of 32.7 million shares outstanding in fourth quarter of 2017. As of December 31st, 2017, our term debt was approximately $15.1 million at the end of the quarter. Our working capital was approximately $3.5 million compared to a working capital deficit of $1.3 million at the end of 2016. 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 two hours after the call's completion until May 31st, 2018. 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-K. Remember, we are unable to discuss any information or business plans which are not publicly available. Thank you.

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Eric Stine from Craig-Hallum. Your line is now live.

Good morning everyone.

Good morning. Good morning Eric.

Yes. So, just wanted to -- I mean clearly from your commentary in the release, you're feeling great about the state of your business. Just curious -- I know in the past, you have provided guidance for the year. I mean should we view this as simply -- it's hard to call where oil prices, energy markets are going, a lot of variability to that? Or maybe you could just give us some high level thoughts on your expectations for 2018?

Yes, Eric, in general, when we look across 2018, I think the fourth quarter is a good guidance if you look at annualized type of year for us. I think we'll provide a little bit more color on that in our next call, our first quarter call, but that's kind of how we're looking at it at this point.

Got it. Okay, all right and I guess that call is coming up here pretty soon anyway. So, I'll stay tuned for that. Just to clarify. So, I think you gave your -- what you are able for charge for oil in the mid-teens, just wanted to clarify was that what you saw exiting the year? Or is that a number that you're seeing today? And just maybe some thoughts on what that number potentially looks like in 2018?

Yes, we were real pleased. That was our average for the fourth quarter, so feel like our team has performed really well maintaining its operating margins. The -- we definitely think that's changing quickly and there is a pay for oil drive in the market today. I think a lot of that's related to the re-refineries in the Midwest, maybe shorter feedstock, I assume. We definitely ran short at our Heartland facility to some degree. And that tends to put a pressure on the street. You don't want to run these plants without the full feed for the refinery. I do think that's a temporary issue related to cold weather and a lot of oil being burned in space heaters and small nurseries and small BTU markets. And so at least in our facility, we're back where we wanted to be and actually gaining inventory at our Heartland facility. So, we didn't see a need to really go out and press the street to transition to a pay for oil model. We spent a lot of time in the Gulf where the utility markets are the next biggest market for used oil and we see those markets actually long and we've got plenty of supply are in the Gulf, more than we've had in several years. So, I don't quite understand the supply and demand balance that justifies moving from a charge at this point, but we're going to continue watching the market and we've somewhat budgeted the industry taking a turn here. So, we'll see how it goes.

Okay. When you say taking a turn are you -- so you're viewing this as temporary in that it may come into the market from time to time, if there was a supply/demand imbalance, but by and large, that it would still be a -- either a breakeven or a charge for oil market?

Well, that's not the turn that we're anticipating, and unfortunately. We think there is not much transparency in the market related to the value of used motor oil or supply and demand, et cetera. So, a lot of the pricing at a street level is driven by the industry itself. So, there's just not a lot to look at when you're making a decision of whether you charge a generator or whether you pay them for the oil. So, supply and demand is the true driver, but if there's no transparency, a lot of the decisions about pricing at a state level gets made at a very small level. Small companies, little collection companies will somewhat dictate pricing and so we're anticipating this to continue just because there's not a lot of knowledge about whether the supply and demand is there or not and we end up as a industry reacting to pricing. We've tried not to do that as a company, and so far, we've been able to operate our refineries and keep them full and maintain our spreads and margins. And so we're going to -- we'll see how the discipline plays out in the market with the rest of the industry.

Right. Okay. Maybe last one for me, just more for bookkeeping, but can you just give a rough turnaround schedule for Marrero and Heartland as we think about 2018?

This is John Strickland. On our turnarounds, we've got a one planned in the second quarter for Heartland and got one planned today for the beginning the third quarter at Marrero. We had a little, mini-turnaround at Heartland in mid-January and we had a mini-turnaround in February at Marrero. So, the big turnarounds, like I say, it's going to be in April at Heartland of the second quarter and Marrero plant would do one the first month of the third quarter, is the plan today.

Okay. Thank you.

Thank you, Eric.

Thank you. Our next question today is coming from Brian Butler from Stifel. Your line is now live.

Good morning. Thank you for taking my questions.

Hey, good morning Brian.

Just a quick follow-up on the charge for oil. Can you give a little color on the sensitivity on that for margins? I mean when you think about the swing from high to low of where it may or may not go, just how much does that really move gross margins either within the segment or with just within the company?

Yes, that's a good question, Brian, because we are getting much better base oil prices in the market and our fuel markets are good in the Gulf as well. Not sure that the pricing of the refined product should translate back to the street as far as pay for oil. I think it does in some cases, but there's room for a pay for oil market and still maintain decent spreads in the industry. My personal opinion is pricing at a street level for the pickup and removal of used motor oil, which is a waste, should be dependent on demand for that oil not based on the spread or the pricing we get for finished products. So, I think we're okay, even if you do transition to a pay for oil model, but I guess everybody's got different view on that.

Okay. I mean one way to think about that is that market is being fairly rational, right? I mean, they're seeing a higher selling price for their product, so that's where you are able to see the pay for oil potentially get pushed out, but spread-wise, as I think you just said, there's still -- you haven't seen any, I guess, irrational compression there and people taking -- making it really, really narrow?

No, I think it's too early to make that call at this point.

Okay. On the Black Oil segment, can you give a little color or maybe a breakdown, kind of, by business on the revenues, kind of, split out either fourth quarter or for the full year?

Yes, I mean we broke it out by segment. The Black Oil has everything kind of packaged up. So, I'll say in general, our main driver is the Marrero refinery and then Heartland being second to that just by volumes and overall production, but we can do that. We can provide you a breakout separate of this call.

Okay, that'd be great. In the fourth quarter, did you get any catch-up revenues from, kind of, the hurricane impact that you saw in the third quarter, was that -- if any, what, kind of, was the size?

No, not that would be meaningful. I think we did press our volumes after the storm, because in the third quarter, we were running short of feed in the Gulf at the Marrero facility. And so we took advantage of some large cargo volumes of feedstock and brought it in the fourth quarter that allowed us to make up production or some production, but it wasn't material. What it did do is position our tanks with plenty of inventory going into the first quarter. And so as I said, we see the market somewhat long on used oil in general, and most of that is in the Gulf right now, but it should make its way back up to Midwest. We're already oversupplied at our Heartland facility also. So--

All right. I got one or two more. Just on the Group III, in the past you've kind of talked about what kind of a demand situation has been over the -- looking forward. I mean is that still in fully contracted out in the first quarter or in the near-term? Kind of what's that outlook I guess near-term or for 2018?

Yes, it's continuing to grow. The demand for that molecule is expanding, as new cars come out in 2018. They're -- most of them are going to require full synthetic oil change. Full synthetic is the formulation that the Group III base oil is useful. So, as that requirement permeates the market from new cars and what the new engines look like, then the market will continue to grow in total demand. We see that on a probably 10% year-over-year growth for quite a while, so we're seeing that this year. We're also finalizing our approvals. The -- you got it be approved by the engine -- the additive companies and the OEMs, and so dexos is a General Motors' credential or our approval requirement in order to put the formulated synthetic oils in new General Motors automobiles. So, that's a huge market. We've gone through that process. We expect those approvals here very soon and as a result, we expect our volumes to continue to ramp up into those new formulations and new buyers.

Okay, that's helpful. And the last one for me. Just when you talked about fourth quarter being a kind of reasonable proxy, looking forward, is that a true statement on the gross profit line? So, gross profit margin in the fourth quarter are, kind of, at 20.5%, 20.6%. Is that the right level looking forward through 2018? Or kind of what might be the puts and takes over the next 12 months?

Yes, again. We'll provide a little more color in our next call, but I would just use around 18% to 21% type of range at this point. We're still sorting a few other things out that are very positive, but I think it's -- that's just a good working range at this point.

Great. Thank you very much for taking my questions.

Appreciate it.

Thank you. [Operator Instructions] Our next question today is coming from Gerry Sweeney with Roth Capital. Please proceed with your question.

Hey good morning Ben and Chris. How are you?

Hey Gerry. Good morning.

I know you don't want to give too much detail on the sort of breakdown on how Heartland and Marrero did, but I think one of your competitors talked about having a tough go in early first quarter because of extreme cold weather in the Midwest, et cetera. Did you face any of those issues? And would -- is that any of a headwind in the quarter?

No. Again, I think cold weather put a short-term demand on used motor oil which could leave refineries short of feed. We definitely ran very tight to short in the third and fourth quarter of this past year. We were able to take advantage of supply that typically would go to the Gulf, repositioned that to our Heartland facility and we're in a inventory build in the first quarter, so we haven't had -- we hadn't seen any cold weather-related issues from our standpoint.

Is that short of feed also trying to hold down pricing a little bit on, let's say, pay for -- or charge for oil, trying to hold the line a little bit?

Well, obviously that's what we've tried to do so far, and it's just about landing the lowest cost feed to the refinery. And at a street level, we are basically in the market with everyone else, so we have to compete to maintain our customer base and we plan to do that. That may require a shift somewhat from a charge for oil to a pay for oil, that's where the industry is heading. We definitely, I guess, haven't such a big hole at both our refineries where we depend on third-party oil. We're more sensitive to that and just try to -- we try to make the best markets we can for everybody. We certainly have the ability at the cost of third-party oil to be more aggressive on the street if we choose to do so. We've not taken this position at this point.

Got it. And I don't want to beat a dead horse, but with Group II base oil's -- the pricing is accelerated, looks like over the last couple of months. I mean that should give you a little bit more flexibility on the street?

Yes, yes. If we need to be more aggressive, we definitely have the ability to do that with the base oil prices that we're getting. So, that's really positive. We're going to grow our collection business and continue moving forward. We believe doing the small acquisitions like we've done, it's just better way to get there. But if the industry switches to a more instead of a margin approach at a street level and go for more volume, then we certainly can compete at that level pretty well.

On the -- speaking of the third-party or on the self-selected business targeting, I think you said, 30 million gallons this year, how much of that is acquisition versus, well, say potential organic growth?

Yes, I think it's probably half and half maybe. That's about right, Chris.

Yes, yes.

Yes, our growth at the collection level organically last year was around 20%, so we'll supplement small acquisitions in -- with that.

Okay, 20%. And then finally, just on maybe Marrero and the end markets. I know it's -- there's some VGO market and there was Marine fuel, and the VGO market shifts around a little bit in terms of I guess your profits depending on pricing. I haven't really dug into those numbers, but curious as to how much of Marrero was target of VGO versus Marine fuel? And you did talk about, I think, the TCEP plant and making some adjustment there and going after the Marine fuel later with that, but how about Marrero and that end market for that fuel?

Yes. Our plan is that 100% of the production will go to the Marine distillate market. We do watch the VGO market, so here recently in the market got short with certain closures at the refineries or maintenance really, and so we've seen an opportunity to pick up some extra margin and sell to one of the Gulf refineries, a margin out of feedstock. So, we'll do that as an exception to the rule, but the rule is that the product will go as Marine distillate to the fuel market.

Got it. And then one final question. I assume, Myrtle Grove, there's still some drag in terms of expenses there. How much are they and -- I'll just leave it at that, how much, kind of, were they in the quarter?

Yes, we've worked hard on reducing cost at Myrtle Grove as far as our carrying cost and I think we've got it down just a little more than $1 million a year for Myrtle Grove. We have carrying costs at the CMT, the TCEP facility as well, and so our plan for that facility to ramp-up production as we get close to 2020 and we'll be running trials even this quarter. So, that's how we're going to deal with carrying cost. We're in the market for private capital to develop the Myrtle Grove site. And as we've looked at our journey over the last three years, our CMT, TCEP facility has been in development, our Heartland facility, from the time we acquired that facility, we've invested a lot of capital at Heartland, and we see great results from that. But it's been a journey at all three of those locations being tight on cash flow from the collapse of the market. So, we're really -- we're excited, one, about where these three projects are and all of that we've put into them, and then really looking at outside private capital that would complement the investments that we -- our shareholders have made into these facilities. So, over the next three to six months, we anticipate really bringing these opportunities forward with a very positive impact to the public company.

Got it. Great. I really appreciate it. And I'll see you in a few days.

Right. Thank you.

Thank you.

Thank you. Our next question today is coming from Larry Lytton from Second Line Capital. Please proceed with your question.

Thank you. My question's been answered.

All right. Thank you, Larry.

Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

Well, we appreciate everybody's interest this morning and dialing in. And we look forward to our first quarter call that we can continue this positive dialogue. Thank you for dialing in.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.