Good day ladies and gentlemen and welcome to the Vertex Energy Third Quarter 2019 Earnings Conference Call. All lines have been placed in a listen-only mode and the floor will be open for your questions and comments following the presentation. [Operator Instructions] At this time it is my pleasure to turn the floor over to Noel Ryan. Sir, the floor is yours.

Thank you, Christy. Good morning, and welcome to Vertex Energy's third 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 third quarter results. In conjunction with this release, we also posted a conference call presentation that is available in the Investors Relations portion of our corporate 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 alerts if you've not done already. I'd like to remind you that 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 on 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. With that, I'll turn the call over to Ben.

Thank you, Noel. Good morning to those joining us today. Early today we have posted the company presentation materials on our Investor Relations section of our website that I'll refer to throughout this call. We'll begin with our overview of third quarter results on slide four through six of the conference call presentation. Our third quarter results benefited from a combination of strong growth in used motor oil collections together with an exceptional performance of our Heartland refinery, where we operated above nameplate capacity in the period. Direct collections of UMO increased 24.5% in the third quarter when compared to the prior-years' period. Direct UMO collections represent approximately 48.6% of overall feedstock process at the company's refineries in the third quarter, versus 38.7% in the third quarter of 2018, with the remaining feedstock being sourced from third party UMO suppliers. During the past four years, we have invested significant time and resources preparing Vertex to capitalize on the International Maritime Organization's low sulfur marine fuel mandate that comes into effect January 1, 2020. With the IMO transition now just weeks away, our facilities are now ready to execute on this opportunity. We have seen product spreads widen versus prior-year levels, supported by decline in feedstock costs together with a corresponding increase in distillate values as was expected. This month we plan to start our TCEP plant at Baytown, Texas for the first time since the third quarter of 2015, positioning us to begin converting surplus feedstock available in the market into a low sulfur marine fuel that can be sold into the new 0.5% low sulfur specification mandate under IMO 2020. With regards to our JV with Tensile Capital, we have made steady progress on the previously disclosed UMO to high purity basal pilot test, which is targeted to reach completion by year end 2019. Subject to the successful close of the pilot test Vertex will receive $13.5 million of non-recourse cash to our balance sheet under the terms of the agreement. Assuming receive of the $13.5 million we will move from a net debt to a net cash positive by year end or shortly thereafter. Turning to slide seven, here we provide an adjustment even that bridge that outlines key variances on a year-to-year basis. Clearly, Marrero had the most significant impact on our business again, while the cost impact from Marrero contributed to a $0.8 million year-over-year decline in the bridge. The actual opportunity cost in the period was an additional $1.5 million. Despite generally favorable market conditions, the planned turnaround at Marrero we referenced on our last call lasted longer than expected during July due to Hurricane Barry. Weather conditions resulted in the hurricane extended planned maintenance at the Marrero facility by 8 days to 121 days in total, resulting in higher turnaround costs and lower than anticipated production levels at the refinery. Turning to slide eight, beginning with a review of our Heartland business. Heartland came in $1.3 million ahead of budgeted EBITDA estimates in the third quarter, supported by a combination of reliable operations and continued stability in our base oil pricing. The refinery operated at 108% of capacity in the period, our performance made possible by maintenance activities completed earlier in the year. During the past year, Marrero has regularly operated with a utilization rate in the mid-to-high 90% range whereas in the third quarter, the refinery operated at 82% due to the extended maintenance we referenced earlier in the call. Currently, both Marrero and heartland are operating their peak capacity as planned. Turning to slide 9 and 10, we operate a facility in Baytown, Texas, where we have the ability to collect and process used motor oil and high value feedstock through our patented Thermal Chemical Extraction Process Technology or TCEP. During the past few years, a portion of TCEP has been used to pre-treat UMO feedstock prior to be in process at our company's Marrero refinery. However, given increased demand for low sulfur marine fields ahead of the IMO 2020 mandate, we intend to restart the facility this month. During the fourth quarter 2019, we expect to produce approximately 30,000 barrels of marine fuel using our TCEP technology the first such production since the third quarter 2015. We will ramp production as available surplus supply comes to market in accordance with our customer demands, once the 0.5% sulfur cap on marine fuel comes into effect in January. Turning to slide 11, as I indicated at the beginning of the call, product spreads have widened considerably in recent months as we get closer to the January 2020 IMO deadline. As you can see on slide 11, the spreads between 3% low sulfur fuel and NYMEX WTI crude first began to widen in August. Early into November spreads have widened further to $15 a barrel below WTI. What is not represented in the chart on slide 11 is the fact that the five year average discount to WTF for high sulfur fuel has been approximately $8 per barrel. Looking at the recent impact to the low sulfur fuel spreads versus WTI, between November 2018 and July 2019 this represents a negative impact to the historical price of more than $11 per barrel. To that end the spreads we lost over the past year have come back into the business beginning in the fourth quarter, giving us confidence in our outlook. Turning to slide 12, 13 and 14, to recap, we see several investment catalysts as we enter the fourth quarter into 2020. First, and foremost, we see the structural widening of our product spreads as a majority opportunity for Vertex, while the future strip isn't a guarantee of the future results. The data clearly supports the case for improved margin capture over the medium term. Second, we view the successful completion of the pilot tests related to Phase 2 closing with Tensile Capital as a liquidity event that has the potential to transform our business both reducing net leverage and by providing capitals for long term growth. Third, we anticipate some benefits resulting from a full year of TCEP related production subject to market conditions. Fourth and finally, we see the opportunity for continued growth in our collections, particularly as we look to grow our truck fleet into next year. For the fourth quarter 2019, we anticipate adjusted EBITDA in the range of $2.5 million to $3 million, which includes plans for seven days of scheduled maintenance at our Heartland refinery in November. For the full year 2020, we anticipate adjusted EBITDA in a range of $15 million to $20 million, driven by incremental year-over-year contributions from widening product spreads, contributions from TCEP and collection growth. Assuming we generate approximately $4 million to $5 million in adjusted EBITDA for the full year 2019, our 2020 forecast represents a major step change in our financials. We have baked in what we believe are achievable assumptions in this forecast including the impacted planned maintenance. With that, I'll turn the call over to Chris Carlson for a review of our third quarter financials.

Thanks, Ben and welcome to everyone joining us on the call today. Turning to a discussion of our reporting segments, our black oil segment revenue declined 20% on a year-over-year basis to $32.3 million, while gross profit declined 41% to $4.6 million, due to a year-over-year decline in commodity prices, decreased production volumes on our Marrero facility, and the higher than plan maintenance costs related to our annual turnaround in July. Within our refining and marketing segment, revenue declined on a year-over-year basis by 58% to $3.1 million, while gross profit increased 110% on a year-over-year basis to $600,000. The year-over-year decline in revenue was due to a reduction in low margin business within the segment coupled with improved spreads on existing business. Finally, within our recovery segment, revenue declined 17% on a year-over-year basis to $2.4 million, while gross profit increased to $200,000. The year-over-year decline in revenue was due to less favorable pricing on metals. Turning to a discussion of our balance and capital structure, we are currently in compliance with all of our debt capital under our term loan and other credit facilities. 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. 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. [Operator instructions] And we'll take our first question from Eric Stine with Craig-Hallum. Go ahead, please.

Hi, everyone.

Good morning.

Good morning.

Good morning. So just wanted to start with collections, it looks like some 42% collections in the last quarter. I mean, that puts you well ahead of what I think your annual goal was in looking through some of the filings, it doesn't look like there were any acquisitions in there, driving that. So just maybe thoughts on -- I mean, obviously a positive trend but how we should think about that into 2020?

Yes, so, we actually did and we still got the fourth quarter to build into these numbers, but our growth was higher than planned. I think we're on a run rate right now of 40 million gallons annually, and I think we were planning for 35 million gallon volume. So things have worked out much better. I think a lot of that's been driven primarily by high third-party supply costs, with low sulfur fuel being as high as it was over the past 12 months. It drove our ability to expand our collections as an alternative lower cost feedstock. So that was the big driver. As we go forward, we've got a lot of momentum. We see high sulfur fuel tempering third-party supply costs, so we may give our gas some breathing room as far as getting assimilated with all the growth that we've tacked on. But we do see an opportunity to continue growing our collection business and that's a key focus for the coming years.

And then -- and I know part of this is kind of tied to Tensile and strengthening the balance sheet as that plays out, but I mean, does that change kind of your acquisition strategy at all? I mean -- and I know, it's kind of small roll up acquisitions, or is this something that you think, you've got the opportunity to expand that number, but it would be more organically?

Yes. It's going to happen in both organic and acquisition growth, especially in the Heartland region where Tensile will be coming in to help us accelerate the development of that business. So we won't have any real capital limitations up there. It's just making good decisions and building business on the platform we've already got in place. So we see that growing rather quickly in both organic and acquisition and in the Gulf, we see some opportunities to do some acquisitions, as well, once our balance sheet improves with the liquidity that would get back into business.

Got it. And then maybe just lastly on TCEP great to hear that you're starting that up. I mean, it would seem with IMO 2020, that availability of feedstock might be pretty good. Is there -- I mean, is there a reason to think that that wouldn't be running at pretty high levels? And maybe just a reminder, because it's been four years, what does that look like, if it is running at full levels?

Yes. So we have full tanks across the whole Gulf Coast. So inventories are as much as we want today, we see available supply. Now, how much supply and how fast it's really going to be a step-by-step process we -- what we're not going to do is go out and put a press in the market own feedstock, we believe that the market is over supplied and as the oil is available, we’re going to take it in and convert it to low sulfur fuel for our marine market. We really just -- we're not going to try to strike out some production levels at the moment until we get further into 2020, and just see what is available as far as supply at the current market prices. So, the production capacity, when we left in, in 2015, the plant was running really well. It can go up there pretty good 80,000, 90,000 barrels a month on the top end. So we got plenty of room and we do believe that the feed will be available and we’re looking in that direction, but that’s something we got to wait out and just kind of let the market kind of do its thing and let the feed come to the plant. That’s our goal.

Right, understood. And then, I mean, in terms of the guidance it sounds that since you are taking more of a kind of a measured approach to TCEP, that that step up in EBITDA or projected EBITDA for 2020, it sounds like it doesn’t -- it includes some of TCEP, but it certainly is -- I mean, it’s far from a full contribution from TCEP?

Yeah, absolutely. I think the big step up is just getting the market straightened back out on high sulfur fuel values, as it relates to WTI. As we indicated and on slide 11 on the deck, you can see that this run up on IMO 2020 where I think that the world really knows the ships aren’t able to use this product, there’s a lot of hassle for fuel redirect to other markets that left the shipping industry short, calls in high sulfur fuel to trade abnormally high. All of that’s I guess, we’ve gotten through that. That had about a -- Chris, $10 million or $11 million impact on our numbers, right. And so that’s behind us as we see it if you look at August going in, out of way to November things are improving and if you look at the forward strip on slide 12 you can see it’s going to open up even more and then overtime it’ll start to tighten back up a little bit. So, five years of history showed high sulfur fuel trading around $8 below WTI, before this took place. So, we’re not sure where high sulfur is going to land long-term with this ship change, but we feel very confident that high sulfur fuel is back to historical levels. And then there’s more there than historically because of the ship change with IMO, and the demand for these high sulfur fuel molecules. So, that’s going to impact cost of feedstock, get back what we lost and then, seeing some opportunity on upside. That’s what we really see in our assumptions going forward.

All right, thanks for all the details.

Thank you. Appreciate it.

And our next question comes from Brian Butler with Stifel. Please go ahead.

Good morning. Thanks for taking my questions.

Hey Brian, good morning.

Let’s just -- the chart you guys provided on slide 14 there where the kind of the waterfall up to the guidance is super helpful. I just want to kind of understand some of the details behind this so, on the collection growth, $1 million to $2 million is that you guys just benefiting from the ramp up to the 40 million kind of gallons you already guide, or is that assuming another big step up in your efforts to increase that collection?

Yes, there’s some growth built-in to that obviously, we’re going to take new earned gallons this year with us. So it’s a combination of the impact of these lower cost gallons, feedstock gallons. So I think that’s how we’ve got it modeled at the moment. But we’re somewhat tempered on our growth, collection growth for next year just because we think that we’re going to have plenty of breathing room with third party supply and we really just want to get our cash flow called up, I mean, 25% growth in one year in collections is a lot of work. And our guys have done a fantastic job to simulate all that volume and stretch the business like we’ve done on an organic basis. So, we’re going to make sure that this is done extremely well and that we don’t get too far ahead of ourselves as we see it.

Okay. So, I mean, if you were to see another supply -- you beat your by 5 million gallons this year, I mean that would be incremental to that 1 to 2, I understand you’re kind of taking a breather to get everything set.

Yes, I mean, we got a lot of momentum that it’s going to be difficult to slowdown and so I think these assumptions are -- we're pretty comfortable with them. I'll just say, yes.

Right. And that's a multiyear opportunity where you can continue to grow that right. I'm not thinking about that incorrectly?

No, no, I mean, just with the two refineries running we've got about 50 plus million gallons of third party supply that we're -- historically at least in the last year or two at a much higher price than our cost to collect, that's going to come down I believe, and then we bring TCEP on and ramp it up, that's more refining capacity. And we need to have a healthy amount of collections with the third party supply that we depend on and we've got a lot of good relationships across the country that we work with, we support their business, and we don't anticipate that changing. But for us around the refinery specifically collecting volume into the plant is part of our strategy.

Okay. And talking about pricing kind of on the used motor oil, what was that trend in third party. Are you in a charge for oil scenario where you're charging on your trucks? I mean, -- and what are the pay for oil for the third party guys kind of trend like?

Yes, remember, Brian, we're a little bit different. Two thirds of our feedstock comes from third party and when you've got high sulfur for fuel like it's been in the last 12 months driving that third party cost up, our ability to collect at a street level is much different than the major market where people collect most of their oil for their refining capacity. So, all that being said, we probably are in the low-teen zone on pay for oil at the moment, as far as where we stand. We've had a lot of pressure in the market from other third party suppliers, that’s put a lot of pressure on the street cost to go up and so we've responded to that. But we feel like our collection cost in comparison to our feed cost is very attractive and has added a big part of our value to the business.

And that's been improving, though in November here. You may have seen that or has that not flowed through when you think about the spreads that are out there are coming down?

Yes, we're first seeing it on third party supply. So it is coming down it's flowing through and in a very positive way. And obviously just how the mechanics of the industry work, third party pricing for used oil sets the value of charge or pay for oil on the street, it just works -- it trickles that way. So we hope to see street pricing come off, which is another reason it doesn't -- at least we’re now putting a lot of pressure on the street is probably not necessary now that high sulfur for fuel is bringing the values used motor oil back in line with where it was and then where it's going to go it could be less going forward.

Okay. And then on TCEP, I know you started it up so I'm guessing you have pretty good confidence that there's buffers out there. Is that -- when you look at that 3 million to 4 million impact for 2020 how much of a stretch goal is that versus how much is kind of if you're going to do 30,000 gallons in the fourth quarter? Is that kind of the annual pace that's kind of built into that 3 million to 4 million or is it really ramping up much higher?

No, just keep in mind the plant is not running today, it's going start this month and we're going to put out 30,000 barrels just in short order by the end of the year, and then we're going to run the plant based on available supply in the market that’s coming to us not that we're chasing and pressing for. So we think that this number is in line with what we think we see at the moment and that could be much improved to the upside, all based on supply and managing the costs of that supply so far. Yes and it's also -- so as John said, we have a buyer.

All right. You have a buyer for that 30,000 that you're going to be producing at the end of the month or end of the quarter?

Yes, and all the production going forward so.

Okay. And then the IMO spread impact is that 7 million to 9 million kind of assuming you get back to that historical five year $8 discount? Or is that assuming it's going to be at the forward rate of $22 discount?

That pretty much assumes we're just getting our historical spreads back in the business. And, we see good margin going forward. But again, that's less out of our control. And we think there's a good view and a good picture for the business. But the majority of what you're looking at is just getting our money back.

Right. So that's back to that $8 spread. So if I mean, if the spreads really stay at discount of $22 that the future strips imply, than you can be materially above that seven to nine. That's the right way to look at that.

Yes, I mean -- I think that's a market way of looking at it today. If you look at the forward strips on slide 12, there's some upside there.

Okay. And then just maybe one last one, just on your working capital when you think about kind of the expansion you have kind of going forward here, how should we think about working capital, I guess, in the fourth quarter, but more importantly, kind of into 2020? Is that going to be a big use or is that going to kind of flatten out?

Yes, I think the plants are in excellent shape. I mean, obviously, this turnaround in the third quarter in July had a major impact on what we're looking at third quarter results. But it was very necessary. We did some really big stuff on this turnaround to prepare the plant for IMO 2020. We replaced the top of our column, we put new exchangers in. So things that we normally do on a 10 year basis, 10 year turnaround stuff. So we got all that done in July, plants came up, it's been running great no issue. And we feel really confident that the asset is prepared for the opportunity. So we want to -- we just didn't want to have to bump around once we get into these better spread opportunities for IMO. So that was done. Obviously, we had a storm that kind of slum this down while we were in the middle of these heavy lifts and a lot of stuff going on, on turnaround that's just part of it. So that's behind us. So heavy capital for the refineries Heartland, the same it’s in really good shape everything's good. So most of our capital is going to be around, rolling stock and equipment as we look into next year, and we’ll probably stay around the same range Chris,$3 million or $4 million -- $3 million for CapEx -- maintenance CapEx. So not much changed.

One last one I'm sorry, on the Heartland investment when you think of that $15 million to $20 million that it could add by 2023 other than execution risk can be successfully kind of getting through all the stuff within your control. What's the kind of market risk or the environment out there that would potentially slow that down? Or I guess speed it up, but I guess really, it'd be more slow that down reaching kind of those targets?

Yes, base oil prices probably is the variable that we don't have as much control of. Our collection volumes are growing, we're going to build our collection volume out probably into the full capacity and add some new capacity potentially that's part of the strategy. A lot of synergies around the facility with the new property we own that’s going to debottleneck things and get more margin and production capacity on the unit. That's another -- so that's in our control. And the majority of the oil that we produce today is stamped on contracts that still go out quite away. So we feel good that as far as not being a distressed seller of base oil is been a real positive for us. So we’ve not had to go to the market and give our product away. And the quality of the product is increasing really well. So everything's working for us at Heartland. What's going to slow that, John? I mean, do you see anything.

Today, I don't, I think that basal market is -- today we have better I'd say that we’re control of what we're doing with the contracts we have and the production out there it’s run 100% nameplate. So we got it dialed in with all the maintenance CapEx we've spent in the last year. We have it ready to go today.

Yes, so those investments will ratchet the value of the product out there's some hoops like things that we going to do you know long term.

We don't think we’ve gone up there the collection for that refinery this year 58 will come collections will be 50% of the volume, which we need at the plant compared to 35% a year ago.

Yes, a lot a lot of collection growth out there. So that's a view that we've spent a lot of time working on and obviously it's been looked at tested and checked very carefully by our JV partner, as they've made their decision to come alongside of that business. And so we think we are pretty comfortable with what we got.

All right, great. Thank you very much for taking my questions.

Thank you.

And our next question comes from Tom Bishop with BI Research. Please go ahead.

Good Morning.

Hey, good morning, Tom.

Hey. The 1.5 million impact at Marrero was that relative to EBITDA or what was the…

Yes, that was -- that's a EBITDA impact on the business, that was extra eight days of downtime that wasn't really planned. And then of course, we had some OpEx cost that came with the delays at the turnaround.

Okay, so it's EBITDA.

That's right.

Looking ahead to better times here in 2020, I'm wondering, what will be the diluted share count once net income turns positive and hopefully the stock price improves? I mean, are we going to be able to use $42 million or is it set to climb based on some mechanics of the calculation?

I mean, it potentially could climb a little bit, as preferred Bs convert, but as of right now, it should be right in that $42 million to $45 million range.

Okay. It’s currently around $42 million. What's the $45 million going to relate to?

Well, I mean if some starts to convert in the near-term.

I see probably wouldn't get above $45 million you're saying but…

Potentially, yes.

And what is the conversion feature there that would trigger?

Well, they have the ability to convert at their discretion, but the B1 can convert to $1.56, which we are not too far from.

And how many shares is that relate to?

Approximately 15 million, it's in the financials in the notes you can get the details in there.

Okay. Now will the interest line go to zero or will that just temporarily go to zero and then, as you make acquisitions and other investments, will that go right back to $13 million?

I wouldn't anticipate it going to zero because we will want to maintain our revolver, for inventory. So we'll definitely have interest going forward. As far as how far that goes down, it's going to depend on Ancina [ph] and how much we pay down on the term debt.

Okay. Do you have an estimate of roughly what it might go to?

Well, right now -- and we’ll finalize that, but there's a $9 million pay down that they've asked for at least as a placeholder. So that gives you an idea, but we'll decide all that after the second close and finalize that with the bank.

With regards to the TCEP, I didn't understand the volume being conditional on availability of supply we think you could get as much supply as you want. You've been able to fuel your other two plants, so what am I missing there?

I mean, you're exactly right. We can go get the supply and put a big press on the market, but today the market is over supplied we know that for sure. We just not sure how much and it's not a good -- I’d say the market is over supplied. Can you hear me?

Yes, with what?

With used motor oil.

Right, okay. So…

Right. But we don't know how much…

…thinking you would be able to run the TCEP plant as much as you want.

Yeah, but again -- yes we don't know how much that is over supplied it today's price, Tom. So we're going to temper the production at least as we're discussing it today based on the oversupply volume that's out there that's undetermined. So this is going to take a lot of time before we go getting in a hurry and pressing the markets just to run production up and create a false demand on the value of the used oil. We're not going to do that.

Okay. Is there a max capacity though if everything played out correctly?

That's what I said the plant in 2015 when we shut it down was capping out at 80,000 to 90,000 barrels a month.

Understood. And finally the white paper that was put out a while ago based on assumptions from other parties at the time for the IMO 2020 impact, how is it looking today versus that?

I think if you look at slide 12 and you look at the forward view on high sulfur fuel it played out pretty well. I think the only thing that those early assumptions on IMO really missed was the run up on high sulfur fuel leading into IMO 2020 that really hurt us this year.

That’s right. Yes that should go -- that run up should go away, right?

Yes. It's already going away. If you look in August on slide 11, you can see that we've already returned back to a deeper discount of high sulfur fuel of WTI.

Okay. All right, thank you.

Okay. Thank you, Tom.

And that does conclude our Q&A session for today. So I'll turn it back over to management for any closing remarks.

Okay. Thank you, Christy. Please turn to slide 15. In conclusion, it's a very exciting time for our business widening product spreads together with the many opportunities afforded by our Tensile JV have the potential to transform our business over the next 12 to 36 months. We appreciate your ongoing support at Vertex and look forward to hosting investor meetings at Craig Hallum, Alpha Select Conference in New York this month and at the LD Micro Conference in California in December, as well. In the interim should you have any questions please contact Noel Ryan at Vallum Advisors at 720-778-2415 or reach him at ir@vertexenergy.com. Thank you everyone for joining us today. This concludes our call.

And that does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time and have a great day.