Ben Cowart - Chairman and CEO Chris Carlson - CFO

Eric Stine - Craig-Hallum

Greetings, and welcome to the Vertex Energy Inc.'s 2018 Third Quarter Financial Results. [Operator Instructions] 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 2018 Third 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 Marlon Nurse, 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 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. Before we review our financial results, I'd like to discuss some key points about our business operations. We're happy with the operational performance of our business. Our cost-effective strategy of building a regional collection and aggregation system has proven successful. Our strategy alone with the capital improvements we've made are making our facilities function much better and will continue to benefit our operating performance going forward. Additionally, we will continue to grow our collection volumes through acquisitions and organic growth. As for our performance, we reported improved quarterly revenue and EBITDA. Our revenue for the quarter increased approximately 56% to $50.6 million. Our gross profit grew 113% to $8.0 million, and our EBITDA rose 157% to roughly $300,000. Our overall volume was up 6% in the third quarter over same period a year ago but was down 2% year-to-date. The increase in volume was attributed to the improvements of production at our facilities during the quarter. Our refining production at the Heartland facility has continued to improve since our capital investments and turnaround in early second quarter 2018. We have witnessed a 41% increase in the third quarter over the last year and 16% increase in production volume year-over-year. We are seeing a strong demand in higher-purity base oils due to the needs in the automotive industry, which is seeking higher-performing lubricants. During the quarter, we had a turnaround which was initially planned for the second quarter at our Marrero facility. The turnaround had a negative impact of approximately $1.5 million to our financial results in the third quarter. Our UMO collection volumes continue to show strong double-digit growth, tracking ahead of projections both in volumes and contribution margins. This improvement is despite the shift of pay-for-oil by the industry. Our collected volumes rose 14% in the third quarter over the same period in 2017 and increased 19% through the 12 months ending September 30, 2018. We're still on target to collect 30 million gallons by the end of 2018. As discussed on our prior calls, our focus was to secure a partner for our private capital development projects by the end of summer. We have made significant progress in our private capital efforts related to the Heartland and Myrtle Grove development projects. We hope to provide you with additional updates by the end of 2018. Over the past few years, the company has pivoted a large portion of its production at our Marrero facility to the Marine Fuel market. This has now positioned the company to take advantage of the future market opportunities related to the IMO 2020 regulatory changes that are coming for ship fuel. We expect to start seeing the IMO 2020 impact in the second half of 2019 as the marine industry transitions to lower-sulfur fuels for these ships. We believe that the capital improvements made towards this business can yield higher margins on our low-sulfur fuel products. In addition, we have improved production capacity at both facilities that will allow us additional leverage. 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 third quarter and the 9 months ended on September 30, 2018. All of our financial statements, unless otherwise noted, are prepared in accordance with generally accepted accounting principles. For the third quarter, consolidated revenue was $50.6 million, which was 56% higher than the $32.5 million reported for the third quarter ended September 30, 2017. For the first 9 months in 2018, consolidated revenue was $138.9 million, 33% higher than $104.2 million for the first 9 months in 2017. Our total overall volume for the business was up 6% for the third quarter over the third quarter of 2017 and decreased 2% for the first 9 months over the same period in 2017. For the third quarter, our gross profit was $8 million, an increase of approximately 113% from a gross profit of $3.8 million during the same period in 2017. For the 9 months, our gross profit was $24.4 million, compared to $13.3 million for the same period in 2017, an increase of 84%. For the third quarter, gross profit margin was approximately 15.8% compared to 11.6% for the same period a year ago. For the first 9 months of 2018, gross profit margin was roughly 17.6% compared to 12.8% for the same period in 2017. Our consolidated per-barrel margin increased 100% in the quarter compared to the same period a year ago and rose 87% for the 9 months 2018. This improvement is a result of the capital investments we made at our facilities, which have resulted in increased production. In addition, we have been able to drive down our feed costs and continue to maximize the value of our finished products. In our Black Oil Division, which includes our Marrero and Heartland business units, revenue was $40.4 million for the quarter compared to $25.4 million in the same period a year ago or an increase of 59%. Gross profit for the division was $7.8 million for the quarter, which is an improvement of 135% over the $3.3 million reported in the third quarter of 2017. Volume increased approximately 6% for the quarter over the same period in 2017 while our overall production volume at Heartland and Marrero was up 9% year-to-date over the same period a year ago. The Refining & Marketing Division produced revenue of $7.3 million as compared to $4.9 million for the same period a year ago, an increase of 51%. Gross profit was $269,000 for the quarter compared to $6,000 a year ago. Per-barrel margin increased substantially for the third quarter of 2018 over the same period a year ago. Volume for the Refining & Marketing Division was down 7.5% from the same period of 2017. The decline is attributed to management being more selective on product mix in order to increase margin as the business tends to be somewhat lumpy based on the timing of production runs. For the third quarter of 2018, Vertex Recovery division, which includes our Group III base oil import business, generated revenue of $2.9 million compared to revenue of $2.3 million a year ago. For the third quarter, we had a gross loss of $79,000 compared to gross profit of $426,000 a year ago. The decline is due to the decisions we made during the quarter to bring our metals facility offline for some facility improvements during a period when the metal market values were down. Total volume for the division was up 165% for the quarter over same period in 2017. Selling, general and administrative expenses were $5.7 million in the third quarter of 2018, in line with SG&A reported for the same period a year ago. For the 9 months ended September 30, 2018, SG&A was $16.7 million, above the $16.3 million reported for the same period in 2017. For the third quarter, depreciation and amortization expenses were $1.8 million, slightly higher than the $1.7 million a year ago. As of September 30, 2018, our term debt was approximately $16.7 million compared to $15.1 million at December 31st. The increase has demonstrated that our capital investments have yielded improving returns. Our working capital was approximately $7.8 million compared to working capital of $3.5 million at December 31. Working capital has more than doubled, showing that we made the right decision last year in order to increase profitability. Our reported net income or loss usually includes the impact of the warrant liability. This is a noncash item and is affected by the direction of the stock price and can have a positive or negative impact on our net income or loss. Additionally, our reported net loss includes costs related to our preferred stocks. These noncash costs are influenced by the movement in our preferred stocks activity. For GAAP, we must report this change to net income or loss. However, we differentiate on the call net income with and without the cost. Without the cost, net loss for the third quarter was $118,000 or a loss of $0.01 per share compared to a net loss of $4.3 million or a loss of $0.13 per share for the third quarter 2017. For the first 9 months ended September 30, 2018, net income was $108,000 or a profit of $0.01 per share compared to a loss of $10.7 million or a loss of $0.32 per share. With the cost, our reported net loss for the third quarter was $4.6 million or a loss of $0.13 per share compared to a net loss of $3.8 million or a loss of $0.12 per share in the same period a year ago. For the first nine months of 2018, our reported net loss was $6.7 million or a loss of $0.20 per share. This compared to a loss of $10.6 million or a loss of $0.32 per share for the same period a year ago. Our EPS was calculated using an average of 35.1 million shares outstanding in third quarter 2018. We remain confident in our guidance for full year 2018. Revenues should be between $170 million and $180 million. Adjusted EBITDA should be between $10 million and $12 million. And net income should be between $1 million and $2 million. 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 March 31, 2019. 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're 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 comes from the line of Eric Stine from Craig-Hallum. Please proceed with your question.

So in your prepared remarks, you were talking about what's going on in the industry in the transition from charge-for-oil to pay-for-oil. And I know one of your large competitors is talking about that they've been able to keep it at 0, and I took that as maybe an indication that the industry is acting rationally on that. So just curious, your thoughts on that, maybe what you saw in the quarter. And do you see that being impacted by IMO 2020 as that approaches?

Yes. I think that's a very good and valid question because IMO 2020 should have a significant impact to used motor oil prices. We were starting to see the UMO supply chain getting low. So there is an abundance of UMO already on the market. IMO 2020 is more than a year out. I think part of that impact is the fact that all the high-sulfur fuel that comes off the ships, related to the IMO 2020 regulation, are going to have to find their way to hustle for utility markets. And I believe a lot of that is transitioning much sooner than IMO 2020 because a lot of smaller refineries worldwide will have to have a new home for those high-sulfur molecules. So there's not a lot of export taking place from the Gulf region as it normally would be. So we're seeing the shift and the change now. The pricing at a street level, to me, has somewhat stabilized. We haven't seen it really start to drop at this point, but we don't see a lot of street pressure like we did for most of the year, in first -- certainly, in first and second quarter of this year. So I think we are heading in a direction where used motor oil pricing could come down.

Okay. And are you, I mean, basically kind of in that 0 pay-for-oil, plus or minus? I mean, is that kind of where we stand right now?

No, our cost -- the way we look at cost is we buy 65 million gallons of third-party oil from suppliers that's indexed to this number 6 fuel oil number. So our collection cost is measured as contribution margin against that third-party cost at our refineries. So we have a pay-for-oil that's in the low teens on average because of the growth that we're putting up for collections at the moment. So we certainly anticipate keeping our street pricing competitive. But obviously, our cost of third-party oil is much more expensive today to the company, so our contribution margins are much improved even with our pay-for-oil.

And then just sticking with IMO 2020, just thinking more about the spreads. I mean, is -- any thoughts? I mean, I know it's a year away, though the market will likely start to show the impact as you get into the second half next year. Just what kind of spreads do you think are possible there? And also curious -- just an update on TCEP since I know that's something you're likely going to bring online in advance of IMO 2020.

Yes. So what we've done, to try to answer the spread question, I won't get in much detail here. We published a white paper on our website. So if you go to www.vertexenergy.com, you'll see an IMO white paper. What we did is compile, I think, 4 different research reports that referenced the future index pricing for diesel fuel, which is how we sell our product from our Marrero refinery. And we -- and it references the future index for high-sulfur number 6 oil, which is how we buy our UMO for the refinery. So the change in those indexes going into 2020, which actually will start probably midyear in 2019, is significant, and we think, it will have a significant impact to our bottom line for not just our Marrero production but also the cost of UMO for our Heartland facility. And we also believe that base oil prices will go up because the feedstock for base oil is the same feedstock for diesel fuel, which is vacuum gas oil, and diesel fuel is expected to be quite short as a result of these IMO regulations. So, we believe that both our refining facilities will be impacted. And to the question about TCEP, TCEP is standing by, ready to enter back into the market. And we're really looking at the supply chain of UMO to see what the right timing is for us to bring UMO into TCEP and start the plant back up.

So I mean, all the testing has been done there. That's ready to go. That's really about you judging the market, you judging feedstock availability and then just greenlighting that?

Yes. And lastly, we're waiting on the 0.5 specifications actually to be published. We think that's going to happen first part of 2019. So obviously, we got to make sure that we understand all the new specs and make sure our TCEP product will meet those requirements. We anticipate that it will.

[Operator Instructions] There are no further questions at this time. I would like to turn the call back over to management for closing comments.

Okay. Well, thank you, operator. And Eric, thank you for the questions. I'll just close by saying that the business ran really well through the third quarter. Operationally, we did have a turnaround for our Marrero facility, as we discussed in our remarks. That had a negative impact to our gross profit. But it really was scheduled for the second quarter, so our run times on our refineries are getting better. We're pretty excited about that. We also took some downtime at our metals recycling plant, and I guess we invested $1 million this quarter, half in capital and half in cost, to make some improvements and expand the capacity for processing oil filters. So that's already done now and back up and running. So we're planning for good growth around our collection business next year, which this facility will support in how we process the filters. And with those 2 improvements, our operating performance was really, really strong for the third quarter. So we -- as Chris said, we're holding steady with our guidance. Things are trending very positive for the fourth quarter, as we anticipated, and we look forward to closing a really strong year. Thank you for everyone, their time on this call and your interest in the company.

This concludes the Vertex Energy 2018 Third Quarter Financial Results Teleconference. You may disconnect your lines at this time. Thank you for your participation.