Good day ladies and gentlemen and welcome to the Vertex Energy Second Quarter 2019 Earnings Conference Call. All lines have been placed in a listen-only mode and there will be a question-and-answer session after the presentation. [Operator Instructions] As a reminder, this conference is being recorded. At this time it's my pleasure to turn the floor over to Mr. Noel Ryan. Sir, the floor is yours.

Thank you, John. Good morning, and welcome to Vertex Energy's second quarter 2019 results conference call. Leading the call today are our Chairman and CEO, Ben Cowart; CFO, Chris Carlson; COO, John Strickland and I'm Noel Ryan of Vallum Advisors, the company's Investor Relations counsel. We issued a press release before the market opened this morning detailing our first quarter results. In conjunction with this release, we also posted a conference call presentation that is posted in the Investors section of our website at vertexenergy.com. We will reference this presentation throughout the remainder today's conference call. Please note that we recently updated the Investor Relations portion of our corporate website to provide increased accessibility to key resources while allowing users to sign up for real time email orders. We encourage you to sign up for this real time order if you've not done already. I'd like to remind you the management's commentaries and responses to questions on today's conference call may include forward-looking statements, which, by their nature, are uncertain and outside of the company's control. Although these forward-looking statements are based on management's current expectations and beliefs, actual results may differ materially. For a discussion of some of the factors that could cause actual results to differ, please refer to the risk factor section of Vertex Energy's latest annual and quarterly filings with the SEC. Additionally, please note that you can find reconciliations of the historical non-GAAP financial measures discussed during our call in the press release issued today. Today's call will begin with remarks from Ben Cowart, followed by a financial review from Chris Carlson. At the conclusion of these prepared remarks, we will open the line for questions. And with that, I'll turn the call over to Ben.

Thank you, Noel. Good morning everyone and others joining us today. This morning we have posted a company presentation materials that I'll refer to throughout this call. We'll begin with our overview of potential capital transactions that we first announced in our press release dated July 31, 2019, followed by a review of our second quarter results. With that, let's begin on Slide 4 of the deck. Last quarter, I provided a high level strategic roadmap for our business, a multiyear plan designed to expand our collection operations, optimize our refining and asset base, high grade or basal production slate and expand our production of IMO compliant marine fuels, the combination of which stand to position us for profitable growth throughout the cycle. With the Tensile transaction we have taken a very important step towards executing on this strategy. While the Tensile transaction was more than a year in the making, the net result is a low cost, mentally diluted funding source that provides us with the necessary capital to support our growth plans. We believe our partnership with Tensile achieves several important strategic objectives. First, the transaction further positions Vertex to become one of the leading producers and marketers and high-purity base oils in North America. Second, this transaction serves to significantly improve our liquidity profile adding to as much as 15.7 million in cash to the balance sheet between now and the end of 2019 subject to the successful completion of the pilot test. Third, we will continue to grow our UMO collection business while becoming a selective acquire of other collection operations. Turning to Slide 5, 6 and 7 for an overview of the Tensile transaction that has been structured in two distinct phases; Phase 1, which was closed July 26 places are Myrtle Grove assets in Belle Chasse, Louisiana into a standalone special purpose vehicle. In exchange for 15% interest in the Myrtle Grove SPV, Tensile invested $3 million in cash to the balance sheet of SPV and 1 million to Vertex that was used to repay debt. Vertex will retain an 85% interest in the SPV. Further under the terms of the agreement, Tensile acquired 1.5 million newly issued shares at a 10 day average volume weighted price between July 10 and July 23 of $1.48 per share providing cash proceeds to Vertex of 2.2 million. Separately, Tensile was granted 10-year cash warrants with a strike price of $2.25. This month we began pilot work to validate the production of high-purity base oils from used motor oil. This pilot is expected to reach completion by year-end 2019. Phase 2 involves the placement of our Heartland business and to a standalone SPV similar to what we have done with Myrtle Grove. Under the terms of Phase 2 closing, Tensile will acquire 65% interest in the heartland SPV, while Vertex will retain 35% stake. In conjunction with this portion of the transaction, Vertex will receive 13.5 million of non-recourse cash to our public balance sheet, together with 2.2 million of cash proceeds from the shares issued to Tensile in Phase 1 closing. Total cash proceeds to Vertex from the transaction is 15.7 million at the consummation of Phase 2 closing, not including the 1 million used to repay debt. Turning the Slide 8, we anticipate the full Heartland development project will require capital investments of between $20 million and $30 million. The JV has planned up to 22 million of capital for this project. Project scope includes an expansion of our UMO gathering business together with optimizing of the refinery to support the production of high-purity base oils. The development project is expected to begin in 2020 and reach completion by year-end 2022. We expect Heartland to operate normally during the development project period. At this time, we anticipate Heartland's development project will be on string by the first quarter 2023. Once the operational our model anticipates at Heartland would generate between 15 million and 20 million of incremental annualized EBITDA, multiples of the 2 million of EBITDA partly generated in 2018. On Slide 9, we highlight how our liquidity profile will improve pro-forma for the Phase 2 closing. As of June 30, 2019, we had cash and available equivalent of 2.9 million. Given the 2.2 million of cash proceeds resulting from the shares issuance to Tensile in Phase 1, the 1 million in debt repayment together with the 13.5 million of liquidity, we expect to receive at the closing of Phase 2 we anticipate total cash and liquidity to be 15 million to 16 million at year-end. This increase in our cash position puts us in a net debt positive position by year-end while providing significant balance sheet optionality to grow the rest of the business. In summary our JV with Tensile provides Vertex with the growth capital required to grow the business on favorable terms and minimum dilution. Importantly, the terms of the transaction allows us a call option to repurchase Tensile's joint venture interest once the Heartland development project is on stream in 2023 under predetermine formulas. Given the scenario, we are effectively granting capital for three years until the development projects are completed, which is a win-win and for all parties. Turn with me to Slide 11 through 13 for a review of our second quarter results. We generated record results in the second quarter of 2018, making for a tough year-over-year comparison. Increase sales volumes were more than offset by less favorable spreads, together with increased turnaround transportation and transaction costs resulting in an expected year-over-year decline in adjusted EBITDA. Product spreads were mainly impacted by higher fee cost in the second quarter versus the same period of 2018. Turning to Slides 14 and 15, direct collections of used motor oil increased 21% in the second quarter of 2019, when compared to the same period in 2018. Direct UMO collections represent approximately 42% of our overall feedstock process at are refineries in the second quarter versus 36% in the prior year, with the remaining feedstock being sourced from third party UMO suppliers. On a trailing 12 month basis, the per gallon cost of direct collections average $0.30 a gallon below the UMO feedstock sourced from third parties. Given that Vertex purchased more than 53 million gallons of third party UMO over the last year, the company remains focused on increasing this direct collections. Turning to Slide 16, the second quarter both Marrero and Heartland refineries operated in their peak nameplate capacity, given strong demand for company specially petroleum based products, including nine days of planned maintenance in June 2019, Heartland increased total refinery throughput by 5% in the second quarter given improved productivity results from the turnaround. As we look at the second half of the year, we anticipate a recovery in adjusted EBITDA when compared to the first half of the year. The price for high sulfur fuel oil continues to decline as marine vessels prepare to begin consuming bunker fuels with the sulfur content at or below 0.5% in compliance with the IMO standards. We believe this dynamic will over time put significant downward pressure on the UMO prices lowering our cost of feed. On Slide 17, we show the spread between WTI and high sulfur fuel. As you can see the future strip indicates that high sulfur fuel oil the benchmark for UMO feedstock pricing goes from $1 per barrel over WTI to $9 a barrel below WTI one year from now, a net benefit of more than $10 a barrel. Historically, high sulfur fuel is traded at a significant discount to WTI. So for the future strip it reflects a return to this market structure. While we were negatively impacted by this spread during the last three quarters, the future strip and Plaza reversal in the market structure as we transition into the back half 2019 and early into 2020. Should the Penthol markets be accurate Vertex could benefit from improved margin realization in subsequent quarters. With that, I'll turn the call over to Chris to discuss our operating segment capital structure and liquidity.

Thanks, Ben. And welcome to everyone joining us on the call today. Please turn to Slide 18 for a discussion of our product segments. Our black oil segment which represented 90% of total gross profit in the second quarter experienced a year-over-year decline in gross profit margin due to compressed spreads related to lower finished product values, slightly increased feedstock costs together with planned maintenance at our Heartland facility. Within our refining and marketing segment, gross profit increase due to a reduction in low margin business within the segment coupled with improves spreads on existing business. Within our recovery segment, gross profit margin declined materially during the second quarter, given less favorable sales volumes and pricing on metals. The Marrero refinery operated above peak nameplate capacity during the second quarter, while total sales volumes declined 2% year-over-year. At Heartland utilization improved to 97% of capacity during the second quarter from 93% and the prior year period. Utilization at Heartland improved despite a nine day turnaround at the facility during June. In July, we completed 21 days of planned maintenance at the Marrero refinery. Rain and flooding related to tropical storm Barry extended planned maintenance at Marrero nine days longer than initially expected. Currently, both the Marrero and the Heartland refineries are operating at peak rates. Finally, turn into a discussion of our balance and capital structure on Slide 19. We're currently in compliance with all of our debt covenants under our term loan and other credit facilities. Net term debt to trailing 12 month adjusted EBITDA was six times as of June 30, 2019 verses 2.6 times as of June 30, 2018, mainly due to a decline in trailing 12 month adjusted EBITDA. On a pro forma basis, assuming completion of Phase 2 of the Tensile transaction, we expect to take net leverage to zero by year-end 2019. In connection with the Tensile transaction, our lending group agreed to amend and extend the company's existing asset based term loan. Under the terms of the credit agreement, the lending group agreed to extend the maturity date of the loan from February 1, 2020 to February 1, 2021. Assuming we close Phase 2 of the Tensile transaction, we intend to reduce outstanding indebtedness under the facility by up to $9 million. We continue to have cash and access to our banking facilities which are sufficient to support the operations of the business. With that, I will turn the call over to the operator as we take questions from those joining us on the call today.

Thank you, sir. And the question-and-answer session is conducted electronically. [Operator Instructions] We'll go first to Eric Stine with Craig-Hallum.

Good morning, everyone.

Good morning.

Hi, just may be starting on the collection side, the 42% mix in the quarter you made, it seems to have you on track to exceed your goal for 2019, which I think was 35 million gallons. So just maybe some thoughts given what you're seeing in Q2 and now here early in Q3, where you think that can ultimately go? And I mean, if you're able to ballpark on that either 2019, 2020 goal or long term goal, what it means for EBITDA?

Yeah. Good morning, Eric. This has Ben. We're very pleased with the performance of our collection business, looking at our trailing 12 contribution margin, $0.30, so obviously, it's very accretive. So you can kind of calculate from that contribution margin, kind of how that affects our bottom line. We definitely are ahead of our game plan. I don't want to lock all that in through the end of the year because we do see the collection market or the street requiring some adjustments in pay for all based on where oil prices are and just what we see I launched UMO market. So we got plenty of cushion to work from based on what we plan to do versus our run rates at the moment. So I think we're in a really good place from a collection standpoint and obviously, it's a real focus long-term for the company. And we do believe we can maintain these double digit growth rates on our organic platform, not to mention picking up smaller acquisitions as we get.

Got it and that's a good segue I guess to my next question. I mean, now with the Tensile transaction, I know that the Phase 2 needs to close, but provided that it does, I mean, is it something that you think accelerates that acquisition plan? I mean, are there acquisitions and I know they're small, but are there ones in the past that you've passed on because of your balance sheet that now you will be able to look at and maybe speed that growth in collections?

Yeah, that's a good question. And the answer is, yes. The development of the collection business in the Heartland region will fall under the new joint venture with Tensile. So we will have the capital and that's a big part of what our goals are for the Heartland growth over the next three years.

Got it, okay. Maybe last one for me, just thinking about Group III base oil and what you're doing. The Penthol agreement, I know, that's something that is there and is really helping set the stage for now, what you're coming with at Heartland and then eventually Myrtle Grove. I know there's not a lot of domestic production of Group III. So maybe how that fits in and how you think you're positioned as you move down the line here with Heartland and then at Myrtle Grove?

Yeah, good question. Our important business with Penthol is going really well. The market is growing really well. Our focus, as a priority is obviously, to place all of our available allocation from the Abu Dhabi refinery ADNOC through this Penthol relationship into the market. So we are covering the whole North American market from the US primarily, but in the Mexico and Canada. And we're gaining market share at a very solid pace. So we do believe that the market will outgrow our ability to supply strictly from that import opportunity. And so we will continue to develop high-purity base oil production. Even at the level we're operating today, we're able to substitute Group III molecules and a lot of lubricant blend. So we're seeing more and more demand for our production that we have in hand today. And that's a big reason why we're partnering with Penthol to continue expanding our ability to produce these high-purity base oils, obviously having the Myrtle Grove assets, a lot of capital already spend in that direction properties permit allows us to really stay ahead of the game as far as meeting these new market demands for these Group IIIs and high-purity base oils.

Got it, I'll jump back into queue. Thanks.

Thank you.

We'll take our next question from Michael Hoffman with Stifel.

Hi, thank you for taking the questions. If we could focus a little bit on the Tensile transaction, so your objective at Heartland is both that capacity throughput as well as an upgrading of the grade of the output. And is that going to – are we going to expand the capacity and the current level of grade and prove it and then upgrade to Group III or how's that all going to flow?

So Michael, the investment with Tensile is for the whole business. So building our collection business out at a much faster pace is a big part of that. Building out our infrastructure, so we acquired another four acres adjacent to the plant, we've already got it cleared and fenced off and so there's a need logistically inside the facility to streamline all our logistics, input output, expand our rail, we're going to do that. We've got plans, if we need to add more front end capacity; we're able to do that. We're working on back end capacity for more base oil production. We've already made capital investments in that direction. So this will help us round that out. We continue to improve the quality of our production. So that will be a continuation as well. And so Heartland really is just going to round out and be completed under the daily structure with Tensile and we're going to be able to accelerate that with their capital. So that's the plan there. And obviously, Myrtle Grove is the bigger play for us. So the Heartland and Myrtle Grove business, they're in there in the same box, if you will, so based on moving to more high-purity base oil to go into the market. Now Myrtle Grove will serve the bunker market as well. So it will be a much bigger facility that it really addresses both our market focuses.

So just to be clear, the current 1500 barrels a day at Hartland doesn't change or it does change?

Well, day one it doesn't change. And we really have to see if the market needs more front end UMO capacity. What we have changed is our base oil. So we believe that we can source high purity the BGO molecules straight to our Hydra trader, which we've already started to do. And so we'll fill the base oil capacity that way and then we'll assess what incremental returns are to expand more front end capacity if needed.

How's the accounting going to work from our standpoint, this is going to come through below the operating line as an equity or in other income line.

That is correct Michael. It will be below the line as the equity position in the SPV.

Okay and when that's only affected. So this is likely not to impact 2019 financials, this is going to be a 2020 probably financial impact as far as the moving of that EBITDA of above the line down below the line as on proportional basis.

Just that is what we anticipate at the moment that it would be a January 1 event.

Okay.

Would be nice if it was as clean as that, wouldn't it?

Yeah. Okay. Let's talk a little bit about how you arrived at the value of that business to put it into it. Can you talk a little bit about the process that was gone through? Why those are the right numbers to put 100% of that into the SPV?

Yeah, so a couple of things Michael, we did go out. We did talk to interested buyers of the heartland business just to have some kind of benchmark on what people thought the value would be if it was acquired because there's always an interest in that business and what we do, so that was part of the process. Second is that the cash flow of the business – we got a pretty good multiple on 2018 cash flow, so we looked at that. We looked at what we sold the Bango refinery for and how that transaction was valued. We did appraisals on the full asset, so we got a replacement cost value and then we looked at how we can monetize the business going forward in the structure that we were able to get in the transaction, so all of that led to the valuation of the existing asset. So keep in mind, when we acquired the asset, I think we paid $8 million, Chris, where the asset was purchasing distress, we had to invest some capital back into the plant and kind of really turn the business around. And so we felt like the transaction was very accreted to the shareholders and with the terms that we have to repurchase the business then we feel really good about the valuation. That is one thing that took time was to get the deal, right. So when we started the deal, we really were in need of cash and liquidity back to the public company and the businesses performed much better. And so the transaction today could require much less of private equity capital that we got to pay back in order to accelerate the growth. So that's good, and, and we're able to keep some of the value, as we indicated, there's $22 million set aside up front to start the growth process. So that's part of that consideration is our money as well. So we're well funded with this transaction at Heartland to really move it forward. And that's a long answer I hope I made that clear to you.

Yeah. And then last on this, just from an accounting standpoint, Chris, when will the game show up in the financials? Is that a 2020 event as well or is that actually a fourth quarter event?

It can be fourth quarter, but I would expect it to be Q1 2020.

Okay. Let's talk about the UMO market if we could. So earlier this week, there was a $4 barrel drop in number six. Everybody's got their fingers crossed and their toes crossed; hoping IMO is starting to have some impact that would seem to be some early sign of an impact. But what's it telling us also about sort of a state of used motor oil geographically like is, what are the conditions of the market in the gulf say in comparison to the Midwest or the Northeast or the West Coast?

Okay, so those are two good questions separate in themselves because high sulfur fuel for fuel oil pricing is a proxy to use motor oil values. So if high sulfur fuel for fuel index comes down then UMO that index will automatically come down in proportion so. Monday they'd fall $4 a barrel below WTI, so this is heading quickly back to historical levels. I will add yesterday it fell another two plus dollars a barrel. So a lot of folks think that once the supply and demand balance breaks the other way where high sulfur fuel for fuel is fixing to get over supplied in the global market that this number will fall fast. So that's a two day indication 6000 barrels a big move off of WTI where other products like the diesel market that we supply the finished product to didn't really move much on crude. So there may be an indication that things are starting to move, we'll see. Today's is kind of early. And in my opinion, what we've seen in the last nine months was as everyone moved away from manufacturing these high sulfur fuel oils and redirect those high sulfur fuels to other markets like utility markets, the market actually got short. So, so far IMO has done nothing, but hurt us for the first nine months because it's created a shortage known high sulfur fuel for fuel that caused the price to go up. But we do believe that it's going to come off hard and come off fast. So today's, again, is early, but it is an indication of what everyone expects to happen related to that index.

Okay. And then what about the UMO market itself? What's the supply demand balance geographically? Are we long oil short oil in any particular parts of the country? How's that trend playing out?

Yeah, our exposure related to IMO mode is primarily in the Gulf Coast. And most of your exports of high sulfur fuel for fuel that go to utility plants historically have left the Gulf Coast many times blended with a percentage of used motor oil. Those exports have been brought to a crawl. At best, they're still some, what they call tenders where the ships come in to buy fuel, primarily from Mexico, Mexico's close. So we can still supply Mexico with utility fuel at the moment because the Mexican refineries who produce a lot of high sulfur fuel oil are able to sail those high sulfur fuel barrels into the bunker market. We believe once the bunker market closes off the high sulfur fuels that the Mexican refineries, obviously, will be supplying their own utility demand before they're looking to the US for higher cost high sulfur fuel. We also see the refineries moving away from production of high sulfur fuel here in the US because they have the complexity or the hardware in the refineries to digest those high sulfur fuel molecules and convert them to low sulfur products that are in demand. Other refineries worldwide don't have that same complexity. And so I think what we've seen is a lot of these smaller refineries, moving those high sulfur fuel barrels into some of the utility markets that has yeah, preemptively closed this arbitrage off from the US to those field demands that are in third world countries islands that are now being supplied by smaller refineries. So that has put a very bleak demand for you UMO blend stock to go into these high sulfur fuel for utility glands. So what we've seen – now, we've been saying that all year is that there's less and less of UMO being purchased for blending, for utility and that that business has changed drastically so far this year. So that's caused UMO to start to back up in the Gulf Coast first. And we see that across the market, both – now we see it in inventories. So it's affected our inventories. We've tried to overbuy so far, for the last nine months beyond our refining capacity and then resell if there is spot demand. We're not seeing any spot demand that can take slack off our inventory, so we're having to slow even for ourselves, we're having to slow down to purchasing UMO. And that's causing it to back up at the supplier's locations at this point.

So they follow that thread that's putting that much more pressure on independent UMO collection, which is advantageous for you because if you're buying them they're weaker. And if you're taking it away from organically it's making that a more favorable scenario.

Yeah, I don't like to say it that way, but there's just a lot of us all out there, which makes a better buying opportunity for our refinery demand. I think we need all these guys as far as collecting the oil and so we're working hard to create more capacity. That's why we're looking at our plant in Houston where we can hopefully bring that back home towards the end of the year and take some pressure off the market. But all right, but basically it is in our favor.

All right, last thread on this and then I'll hand it off. You said your spread narrowed on the front end because of some of these issues around UMO being disrupted by the title number six market and the relationship that's reversing. So by definition, we should see the spread move in your favor in the second half plus high utilization rates and that all combines to produce better EBITDA in the second half.

Yeah, I agree.

Okay, thanks.

Yeah. Thank you.

We'll take our next question from Tom Bishop with BI Research.

Good morning.

Hey, good morning, Tom.

Let me just get a quick fix on what's the latest as far as the capacity. So the two facilities are Marrero and Heartland?

Yeah, nameplate we're using the 65 million at Marrero and 20 million at the Heartland facility annually. These are million gallons on annual basis, so 85 million in refined capacity.

And I miss the – what's the pay for oil or whatever that figure is now?

What we're putting out there Tom, is the contribution margin of $0.30 a gallon for what we collect versus what we're having to pay for third party supply.

Yeah, but I meant – as far as your own collections, what are you paying or getting paid for used oil?

Yeah, I mean – I don't think we have that number, but it is – I mean, we're paying something it's not a charge. So we're in a low pay for oil Chris, probably single digits.

Yes.

Okay, something like that. So when you're keeping – okay, go ahead.

And as far as IMO 2020, that's a big pipeline to fill a fuel tank and then ship by January 1. So are you seeing any signs of this low sulfur fuel oil being – the inventory of that going up?

Well, early signs Tom. As we were just discussing, that high sulfur for fuel price plummeted in the last two days. And commentary from Platts which tracks that industry, just says there's no buyers in the market for that high sulfur fuel. So that's an indication that things are starting to transition. We know in other parts of the world that's been the case. We just hadn't heard or seen much out of the US at this point as far as ships switching over.

Okay. As far as far as my memory goes, that extended shutdown that 21 days, that was unusually long, I guess because of nine days due to weather, flooding. What kind of impact did that kind of have on earnings?

Yeah, we did have a turnaround planned. And we've kind of communicated that for the Marrero facility. What we've done and John can elaborate on this, but we did some 10 year to maintenance, just getting ahead of IMO 2020 and we had some metallurgy that that we thought could cause some issues in the near term, next two or three years. So we made some big moves on this turnaround, such as replacing the top of our column and replacing several heat exchangers and several things that insurers are right ability, we've done a great job, the plants run almost at nameplate for the last 18 months, I guess. And so we want to maintain that that level of safe operating performance at the refinery. And we think that with the UMO market being low that refinery is going to be in need and with the IMO market being short of low sulfur fuel that refinery is going to be in need and so we decided to go ahead and do some big some overhaul in the refinery. We were in the middle of that when Barry hit the Gulf Coast. So the problem is, when you're doing these long leads, you got big cranes, you got lots of people there and safety's always first. We had to shut down those operations’ multiple times during the week of that storm. And it really just kind of hung around for a week. So that's the story of the additional time and why? We just had more exposure to that storm than we normally would under regular maintenance turnaround.

Well, part of my question is, was there a similar or at least shorter maintenance a year ago in the same quarter? Are we going to see a year-over-year hit to EPS?

Well, you're not going to – you didn't have the nine days. That's the difference in comparison to last year, right.

Our normal turnaround down there is 10 days. We planned this in for 13 days, that's what it was because we had the tower replaced the top of it. We spend we spend some CapEx money putting new heat exchangers in, so we can run higher rates. And the weather did not allow us to do layoffs because of 30 mile an hour winds constantly. Contractor employees that live in the New Orleans area, some of them were told to stay at home. So we had several days there, they kind of interrupted this huge 10 years, like Ben said this is a 10 year turnaround.

So we're going to digest that obviously in the third quarter. And we got some big momentum on the other side at Heartland and even what we're doing going forward at Marrero that we don't see that being hugely disruptive to our operating performance for third quarter.

Well Plus you'll have IMO 2020 starting to benefit you to offset this as well right during Q3?

Yeah, well, you'll get it back trust me when this starts to settle down. This refinery is going to have to run with its tongue hanging out just to meet the needs on both sides of the refinery, take the supply at the market as best we can and supply as much high sulfur fuel back into the new market.

But that's music to my ears. And I think it's great idea that you got this maintenance done out of the way and cleared the decks off for what's coming with IMO 2020. One thing I'm a little unclear about at Myrtle Grove, you're having this pilot test? That's the only thing that's certain. Is that in preparation for the changes you want to make? I mean, I don't see a Phase 2 at Myrtle Grove. So is this pilot something to do with what you're going to do up in Heartland or what's going on here?

Yeah, think about this one. We've got a high purity base oil partner. Our big play is Myrtle Grove is kind of where the assets are setting that can really make a difference in the market. We need to get the pilot work done. Heartland is already in the market and it's already making progress. So it's the lead indicator of where we're going to end up at the Myrtle Grove site. And so it just kind of all ties together. And so we will be using some of the pilot data at the Heartland facility, but its biggest impact will be at the Myrtle Grove development. And so there's no second phase to Myrtle Grove in the current transaction, other than Penthol's first right to invest up to $50 million to develop that Myrtle Grove site. So that's all they need at this point.

Okay, I didn't see that. Well, so – but that would be the plan is to then whatever your pilot plant concludes there at Myrtle Grove to eventually take that to get that facility up and running.

Yes, yeah. Myrtle Grove is a long-term development opportunity for the company and our shareholders.

Okay, would that pilot plant continue to produce revenue or is it just kind of a test that that's going to be an ongoing source of some minor amount of revenue?

Yeah, it's going to be a test that will have not – it won't have any ongoing revenue.

Okay. And I have a problem with adding back depreciation with the determination of adjusted EPS. A lot of people do back out amortization, but I'm not clear if I understand your adjusted EPS calculation? So how much is depreciation also?

Depreciation is right at about 1.3 million on average. And an amortization makes up the balance getting it to that 1.7.

Got it, so why are you backing out depreciation? I don't think most people do that.

It's just been consistent with our presentation and how we've been doing it.

Okay, and finally what's going on with metal prices? That was a very big drop. I mean, percentage wise how much of a drop was it?

Yeah, that's a good point in Tom. I think anybody has been – it's exposed to the metals market has seen seeing this take place. Year-over-year it's about 40%. And for the second quarter – over the first quarter it recovered and then it fell very fast like 40%, 38% to 40% in the second quarter. So we do have a small exposure related to our oil filter business and that continues to grow as our used oil collection business grows. So that affects our metals pricing for the filters until we can adjust our charges for that raw material coming off the street. So that's in process as far as picking that margin back up. But the bigger thing is, we've got a barge or marine scrap business in Louisiana that we just had to slow down. We had some fixed costs there that we chose to carry. And we just weren't going to get into the market and work on thin margins and take on a bunch of exposure until the market bottomed out. And as metals are all our – we already have seen increases in metal prices that are picking back up. This is primarily related to the tariffs on Turkey and at first that served good and then what it's done is it flooded the scrap market with steel and so the price has come down and now the manufacturers have soaked up all that availability and they're starting to pay back up for product. So I think it was just a bubble or hoping in the metals market related to a major change with Turkey on the steel tariffs.

Let's say there is a lot of intertwining factors that affect your business like no other that I can't cover.

I agree. Yeah, the good thing is everything we do, we can back it back up, we're actually – we charge to take all filters off the street. And we recently increased our charges for that. And so again, that's a little bit – it's kind of like used motor oil, you can't just – it's not crude that you can just turn off into ground it doesn't make money, it has to be moved. So just give them the time we can make our adjustments standing market conditions. And that's primarily, the way we look at it in the metals as well, but you're correct. You got to be on your toes in this business.

I'm glad you understand it all. Thank you.

Thank you, Tom.

We'll take a follow up question from Michael Hoffman with Stifel.

Yeah, just one last one for me, thank you. You did change your calculation of adjusted EBITDA. It's actually more conservative and I was curious if that was driven by this refinancing going on?

I think the presentation and the press release might be a little bit different. Last quarter what we started doing was a trailing 12 months. So you've got a three month comparison and then a trailing 12 months. I'm wondering if that's the difference that we're seeing.

I think you also added – I want see here, I got to get it open, bear with me. I think you added something to it as well – is that your – hold on. I might not get to this quickly. I'll have to follow up with you. But I'm pretty sure you added something to the calculation.

Yeah, we can look.

Yeah, no problem Mike, we can certainly look at it with you and clarify anything.

Okay.

No, problem.

Thanks.

Alright, thank you.

I think you have a question coming through from Sean Marconi with Hurdle6 Capital.

Hey guys, how you doing?

Hey, good morning Sean.

Hey, good morning. Hey, can you guys talk a little bit more about the pilot test that you have to run basically get Phase 2 close?

Not any more, Sean than, obviously, it's pretty proprietary in the technology that we're developing. What we're doing at Heartland and what we plan to do there as far as what that means. It's just in general, it's a threshold pilot related to throughput yields, taking all our equipment that we got on the ground and the equipment we use at Heartland and there's some equipment we plan to add that all has to be factored into the pilot test. We've already run a lot of our own pilot. So this is what you would call a very formal process that has certain backing to it. So I think it's just putting some certainty around the future business plan which is wrapped around like in high-purity base oils.

Yeah and going into that real quick. Currently, you're selling a Group II+ product at Heartland. Can you talk about the spread between the Group II+ versus selling a Group III product?

No, not really because it's all market driven. So whatever I say on the call now could change materially a week from now. There is a spread between Group II and Group III because there's a threshold between Group III that is required for full synthetic lubricants and other full synthetic products that you can't get to with a Group II product. But there's a lot of Group III product that's blended down in other formulations that a Group II+ plus can substitute. So that spread between our product and Group III can narrow quite a bit and can open up. It's just trying to pin that down would be misleading at this point.

I can respect that. And then one last quick question. Do you have any updates on getting t set fired up?

No more updates other than our works done. We haven't seen a spec from IMO that seems different than the high sulfur spec, right. And we're in ready mode and we're going to have to ease into the market once the market opens up. So trying to forecast volume, spreads and all those things until the vehicle is back on the highway and back running, we'll have more handle on how quick all that integrates into the new spec. But we feel positive assuming that the specs for the fuel don't change other than sulfur and we're pretty confident we're ready to go. So capital – we got a little bit of work that we're doing at the plants but nothing material.

Sounds great guys.

Yeah, we're just ready to go and waiting for the 0.5 specs to come out. So we can go into market. Yeah.

Sounds great guys, thanks.

Thank you.

And that does conclude our question-and-answer session today. Mr. Cowart I'll turn the call back over to you for any closing comments.

Okay, thank you, Tom. And please turn to Slide 20. In conclusion, Vertex is well positioned to benefit as we look ahead for the remainder 2019 and 2020. The impact of IMO 2020 is already evident in the future markets serving to reduce UMO feed cost, while increasing demand for IMO compliant middle distillates entering the fourth quarter of this year. Looking at the end of this year Phase 2 closing of the Tensile transaction represents a major transformational event for us, with the potential to add significant liquidity to our business, while also allowing us to pursue highly accretive development projects at our Myrtle Grove and Heartland facilities. Over the next several weeks, our management team will be attending the D.A. Davidson Diversified Industrials Conference in Chicago, together with Craig-Hallum's sponsored marketing events. In the interim, should you have any questions please contact Noel Ryan at Vallum Advisors at 720-778-2415 or at ir@vertexenergy.com. Thank you everyone for joining us on the call. This will conclude our call for today.

Thank you, ladies and gentlemen. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time and have a great day.