Benjamin Cowart - CEO and Chairman Chris Carlson - CFO John Strickland - COO

Eric Stine - Craig Hallum Brian Butler - Stifel Tom Bishop - BI Research

Greetings and welcome to the Vertex Energy Incorporated 2018 First 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] 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 and good morning and welcome to Vertex Energy's 2018 first quarter 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 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, which are filed yesterday evening with the SEC, I would like to discuss some key points about our business operations. We met or surpassed many of our internal targets for the first quarter 2018. We have improved revenue and witnessed strong demand in our finished products in the first quarter. In addition, we managed to protect our spreads during the quarter maintaining our charge for oil for collected volume. There were however, some production issues at both our Marrero and Heartland facilities which impacted our net income by approximately $0.05 per share. We missed production slightly at our Heartland facility because of failing heater. During our recent annual full turnaround we replaced the heater and made some additional capital improvements to the process that will allow us to improve the original plants production capacity going forward. At Marrero we had a planned turnaround that extended five more days than anticipated. Some of that unplanned downtime was recovered during the quarter but still created negative impact on production. Despite the negative impact of our turnaround, our consolidate revenue jumped 19% to $41.4 million. Our gross profit rose 67% to $6.8 million and our gross profit margin was approximately 16%. We remain opportunistic as we focus on building our collection volume organically as well as through acquisition. Our volume grew 17% in the first quarter of 2018 over the first quarter of 2017 and jumped 27% for the 12 months ending March 31, 2018 over the 12 months ending March 31, 2017. Our UMO collection volumes are trending and tracking ahead of projections. Our contribution margin was also ahead of our internal expectations despite the Street shifting to a pay for all model. We completed the trial of our one barge, the UMO [ph] in our TCEP facility to produce a product that would meet the new IMO 2020 marine bunker field regulations. We are confident that the facility is ready for 2020 and we'll also explore in the interim other market opportunities for products, produced at the TCEP facility. Volume in the Vertex Penthol Group III base oil import business was on target for the quarter and we anticipate being head of volume for the second quarter. As for the product capital funded projects, we have no major updates at this time, however, we are comfortable with the progress and still maintain a summer timeframe to secure funding. Further, we do expect to recover some of the capital invested in the projects to this point back into our balance sheet. We remain opportunistic in our outlook and performance for 2018. We have the ability to capture and recapture capacity to get back to our targeted production volumes in 2018. The turnarounds at our facility have allowed us to make additional adjustments to our equipment that will yield significant improvement in production volume and financial performance going forward. I'll now turn the call over to Chris Carlson our CFO.

Thank you, Ben. I will now review our financial results for the 2018 first quarter ended on March 31, 2018. All of our financial statements unless otherwise noted are prepared in accordance with generally accepted accounting principles. For the first quarter of 2018 consolidated revenue was $41.4 million higher than the $34.8 million reported for the first quarter ended March 31, 2017. Our total overall volume for the business was up 1% for the quarter over our first quarter 2017. Our gross profit was $6.8 million, an increase of 67% from a gross profit of $4.1 million during the same period in 2017. Gross profit margin was approximately 16.4% for the quarter compared to 11.7% for the same period a year ago. Our consolidated per barrel margin increased 65% in the quarter 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 and spreads. In our Black Oil division which includes our Marrero and the Heartland business units, revenue was $32.2 million for the quarter as compared to $24.8 million in the same period a year ago, an increase of approximately 30%. Volume increased 10% for the first quarter over our first quarter 2017. Gross profit for the division was $5.7 million during the quarter which was a 95% increase over $2.9 million in the first quarter 2017. The refining and marketing division produced revenue of $5.7 million in the first quarter of 2018 as compared to $5.4 million for the same period a year ago, an increase of 5.2%. Volume for the quarter was down 7% over the first quarter of 2017. The division's gross profit decreased 42% or $436,000 for the quarter compared to $746,000 a year ago. Per barrel margin decreased 37% for 2018 over the same period a year ago. For the first quarter 2018 Vertex recovery division which includes our Group III base oil import business generated revenue of $3.5 million, a decline from $4.6 million a year ago. Volume was down 33% for the quarter over first quarter 2017. Gross profit was $620,000 in the first quarter of 2018 compared to $388,000 a year ago, which was an increase of 60%. Selling, general, and administrative expenses were $5.7 million in the first quarter 2018 compared to $5.2 million for the same period a year ago. Our SG&A was impacted by increased operational expenses and compliance costs related to the additional facilities acquired during the second of 2017. Depreciation and amortization expenses were $1.7 million compared to $1.6 million a year ago. As of March 31, 2018 our term debt was approximately $15.9 million. At the end of the quarter our working capital was approximately $4.4 million compared to working capital of $3.9 million at the end of March 31, 2017. Our reported net loss which includes the accretive cost of our preferred stocks was $3.5 million or a loss of $0.10 per share in the first quarter 2018 compared to a net loss of $4 million or a loss of $0.12 per share in the same period a year ago. Without the accretion of the preferred stock, our net loss for the quarter 2018 was $2.3 million or a loss of $0.07 per share compared to a net loss of $3.2 million or a loss of $0.09 per share for the first quarter 2017. Our EPS was calculated using an average of 33 million shares outstanding in first quarter 2018. Before we take questions, I want to the listeners know that if you have any followup 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 July 31, 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-Q. Remember, we are unable to discuss any information or business plans which are not publicly available. Thank you.

Thank you. [Operator Instructions] Our first question is coming from Eric Stine of Craig-Hallum. Please go ahead.

Good morning, everyong.

Hey, good morning, Eric.

I was wondering if we could just start with the collections, great to hear that you were able to hold the charge for oil and I know in late 2017 you noted that there were some in the market who were paying, but that that was really related to weather and just limited feedstock. I mean, any thoughts about what you're seeing in the market today and is there a price of oil that you think you know the industry as a whole may switch or have to go more in the pay for oil route or do you think long-term you can hold on to this charge for oil?

Well, good question and obviously a major driver to our industry. It is related to the value of products that the industry produces; one, because the industry will tend to take those margins or those increases and product value and apply it to more volume for you know volume growth sake. The second component is the supply and demand for used motor oil. So that's the wildcard. We certainly see more used oil today than we have in several years available and so we're not sure the demand is strong enough to keep driving this pay for oil model. So we’ve kind of just kept a hold in place position on our spreads and tried to maintain a charge for oil because we just don't see the demand out there. So you know, it's supply and demand and it's oil prices. Those are the two that the drive the pay for oil versus a charge for oil model.

Got it, so I mean at current levels you feel okay?

Yes, I don’t see that, you know if oil continue going up I do not see a charge for oil market. I think the industry will lose that.

Got it, okay, but here you know, I guess it remains to be seen when supply/demand comes into play, but okay. Maybe if we could just turn to the marine fuel market, I know right now you're producing fuel out of Marrero, which is compliant to the current standards and the TCEP would be for the 2020 standards and can you just talk about maybe the differences between the two fuels and looking out to 2020 should we view that as just TCEP or are there investments you can make at Marrero that mean that that fuel would also be IMO 2020 compliant?

Okay, so yes the fuel today at Marrero is going into the bunker [ph] market in different blends, so it's a distillate product that's being used in different ways, primarily in a low sulfur 0.1 fuel specification to meet the 2015 ECA fuel regulations. So that's where it's currently being used. In 2020 the sulfur own major engine fuel goes from 3.5% down the 0.5%. So this is a black fuel product that will have 0.5 sulfur, so it will be different than the markets that that we're selling into today. So that's what our TCEP plant is geared for and we also have opportunities around our Houston facility as well as the Belle Chasse, Myrtle Grove facility to enhance our production and supply of fuels both into the 0.1 and the 0.5 bunker fuel market. So it is one of our target markets for the company along with the high purity base oil market. Those are the two focuses that we have with our assets and our company.

Got, it. Okay, so Marrero then if we look out a year and a half, if you would use that potentially for other markets, I mean it wouldn't be 2020 compliant, but you will have volumes that will be 2020 compliant?

Yes, Marrero is more than 2020 compliant. It's 2015 ECA compliant, so it's ahead of 2020 already. So we're – yes we don’t see that changes.

Perfect, great to hear. Then a last one from me, just more to clarify. So Marrero and Heartland I know you had some operational days down there in the first quarter and they are up now, were those up at the start of the second quarter and does that do anything to change your turnaround schedule for the rest of the year?

Yes, so Marrero, I'll tell you what, I'm going to turn this over to John, he was working through these issues, I'll let him explain both the turnarounds and answer your question.

Yes, so our planned turnarounds for a year have not changed even though the down days were there. At Marrero we were down like I say five days longer than normal, but we came back up doing production a little bit about production and are still that way today. At heartland the heater issue that too was there. We already planned to replace that heater and create more production for us in the back end of the hydrotreater there and that hydrotreater today is doing production budgets a day in and higher production of close to 20% today.

Okay, so really Q2 I mean there's very little impact, okay.

Yes on the budget, yes.

Thanks a lot.

Yes, thank you, Eric.

Thank you. Our next question is coming from Brian Butler of Stifel. Please go ahead.

Good morning. Thanks for taking my questions.

Hi good morning.

Just the followup on that, that kind of margin impact that happened from the down days and the heater issues, that was $0.05 in the quarter so about I'm guessing $1.7 million to gross profit just kind of rough calculation? Is that right?

A little bit lower than that, but I mean really right around the $1 million impact to the bottom line.

$1 million impact to the bottom line, okay. And I guess on a margin basis how does that look on gross margin? I mean, when I did it kind of backing it out $0.05 to with the 33 million shares I got margins excluding those two items, gross margins in around 20.5% of that, is that the right way to look at it or is it really sub 20 I guess if it's only a million dollars on the gross profit line?

It’s about sub 20 and keep in mind there is no SG&A impact. We would have still had the same SG&A just missed production opportunities.

Okay, and then so this is a little bit even with – even excluding those items, margins were slightly down from fourth quarter kind of in that 18% to 20%, 21% range you had talked about. Thinking about going forward for the remainder of 2018, how should we think about margins? I mean is it going to be back over 20%, kind of like what we saw in the fourth quarter 2017 or does it kind of run more in this adjusted, call it 18% to 19% range?

I think you're in – and this, call it 16% to 19% range and a lot of that has to do in part to the shift in the market from a charge for oil to now a lower charge and what we think will become a pay for oil on the street. And then of course you've got higher oil prices that factor into that.

Which should be an offset, correct? I mean that should be benefiting you guys? Okay and then just talking about that charge for oil PFO trend, I mean has that slowed down that swing or the decline of charge for oil and kind of bottom out of current level or is that's still trending towards pay for oil or higher pay for oil depending upon where you I guess on the range?

Yes, so Brian, we've planned for a pay for oil market just based on what behaviors and what we've seen in the industry kind of coming into 2018, so we don't see that changing too much. We've hung in there pretty well. We do see an opportunity to grow our collection volumes in a pay for oil market and actually improve our overall contribution margin to what we have to pay for third party supply. So we've been as disciplined as we could be in managing that charge for oil, but the industry has just gotten way out there. And so in order to really try to figure out where this is going, our assumption as it was when we came in 2018 is that the industry is going to give up the charge for oil to a pay for oil type of model. Fortunately, we have 60 million gallons of third party supply that we can displace and so far contribution margins as we've grown our collection volume has been ahead of our targets.

Okay, that's helpful. And on the collected now you've mentioned it, do you have a number for how much you collected out of the 104 million in that you aggregated?

I mean it's around 30 million to 32 million.

Yes, 30 million to 32 million, we don't have that number right here with us.

Okay and then just last one from me, on the refining gross profit which was down year-over-year, do you have any color on what was kind of behind that, is that attached to the issue you had at Heartland and Marrero or is that something else?

Yes, I think the only thing that we've seen in the whole quarter from our operating performance, we kind of exceeded every other area other than our production volumes. So we were 95.5% utilization at our Marrero facility and we were 92%, John, 92% at our Heartland facility and so our call center spreads were a little bit ahead of target, so we definitely managed the spread well through the quarter.

In first quarter of ’17 did you possibly have something that benefited that I've forgotten or just missed in the refining and marketing because it’s going from $700,000 to $440,000 in gross profit seems kind of like a sizable swing?

Yes, I think it was volume related. So that, if you recall the refining marketing business will come in lumps, it just depends on the cycle of the sales of product when they get booked and we've seen that in the first quarter, we have stuff fall over in the second quarter, we expect second quarter to be better than the first quarter in refining and marketing, so it's a lumpy business.

I mean to say in the current environment should we be expecting refining to be up year-over-year though, I mean just on the gross profit side, I mean it seems like it's an attractive fundamentals with higher oil but…?

Yes, no I think refining and marketing has a good outlook for the rest of the year.

Okay, great. Thank you for taking my questions.

Yes, thank you, Brian.

[Operator Instructions] Our next question is coming from Tom Bishop of BI Research. Please go ahead.

Hi, Good morning.

Hey, good morning, Tom.

This is probably more for Chris. You mentioned in the commentary that you were disappointed in the EBITDA for the quarter and actually this also applies, this comment also applies to adjusted EPS. But I think most people would eliminate or add back in the increase or decrease in the fair value of derivative liability and the increase or decrease in futures contracts, the non-cash one, I think that was $465,000 to adjusted EBITDA, as well as to adjusted net income, as these were impossible for analysts to project and for the companies to project we think?

Yes, definitely as far as managing and reporting on a quarterly basis with the stock price being an impact and the number of B and B1 out there and potential for exchanges it is a very hard number to predict. So that number does tend to move around. They've both always been in the $450,000 to $500,000 range quarterly, so it's currently been…

I'm looking at the Consolidated statement of cash flows a year ago, they were markedly different both of them especially the decrease in futures contracts.

Well, that's a different line item. The futures contracts is related to our hedging activities which with the high oil price market we've put on a few more hedges to protect our margins.

Okay, well again I would not look askance at you for including those two items in your adjusted EBITDA and net income calculations so you might just want to consider that. The TCEP facility being converted to 0.5% range sell through for 2020 does that go into effect on January 1 or when in…?

Yes, it goes into effect January 1, 2020.

So, you would start producing and perhaps getting revenue from that even before 2020, and if so, roughly when?

Yes, we're certainly capable of doing so. As I said in the second or the first quarter we produced 13,000 barrels of finished product from the plant just from all the R&D work that we had done last year and so everything went fine. We're going to be looking for additional niche markets for that spec product, but we certainly believe 2020 will take the product with no issue, it's a 0.2 sulfur finished product. So today it would go into a cutter market and the residual fuel trade is pretty weak at the moment and has been so far this year. So we don't anticipate operating the plant until we see good market conditions for the specs for the finished product.

Well, okay when in 2020 does the – will go into effect?

January 1, 2020.

Okay, so I missed that and okay, so I mean you would have to start building the people's pipelines or oil change or whatever with that product in 2019?

The markets looking out around September, yes 2019 where people start transitioning to the new regulatory requirement.

Okay, good. Just even on this preferred stock, I have a little trouble with the terminology I'm a little rusty, I graduated from – a long time ago, can you on the temporary equity is that temporary because it's convertible in the preferred?

Yes, that is correct.

Can you read through one of those lines and just explain it to us? For example, what's the difference between designated authorized, are there 10,000 shares of Series B outstanding or…?

That - there's 10 million that are available to be issued, so they are designated. We've only issued the 3.4 million that's listed there as of March 31, and December 31.

Oh, designated, so it equals authorized here?

Yes, that is correct.

Okay, and then the liquidation preference, is that larger than the 7.5 million because of the accrued dividends?

The liquidation preference is larger because it is at a stock value of $1.56 for the B1 and $3.90 for the B, so it is higher.

3.9 times the value that you received, is that what you're saying?

Well, when we did the initial B issuance back in June of 2015 the stock price was quite a bit higher than it is today.

Can you remind us where the convertible is on those two? At what price they are convertible?

Yes, the B is again I want to say it’s around $3.90 and the B1 is $1.56.

Okay, and the liquidation preference only matters if the company was liquidated right, I mean it's just a number you supplied, but?

Well, it would be viewed as a debt obligation two years from today, in the event they did not convert.

If they did not convert, oh okay. Well, I hope we get the stock price up then. All right, thank you.

Thank you.

[Operator Instructions] At this time, I'd like to turn the floor back over to management for any closing comments.

Okay, thank you, operator. Thank you everyone for dialing in. Again, if you have any further questions, please feel free to reach out to Marlon Nurse at Porter, LeVay & Rose at 212-564-4700. Again, thank you for dialing in to our call.

Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may disconnect your lines at this time and have a wonderful day.