Vertex Energy, Inc.
Q1 2020 Earnings Call Transcript

Published: 15 May 2020

[Operator:]

Good day, ladies and gentlemen, and welcome to this Vertex Energy Q1 2020 Earnings Conference Call. As a reminder, all phone participants are in a listen only mode, but later you will have the opportunity to ask questions. As a reminder, today's session is being recorded. Now to get us started with opening remarks and introductions, I am pleased to turn the floor over to Mr. Noel Ryan. Mr. Ryan, please go ahead, sir.

[Noel Ryan:]

Thank you, Jim. Good morning, and welcome to Vertex Energy's first quarter 2020 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.

[Ben Cowart:]

Thank you, Noel. Good morning and good morning to those joining us on the call today. Earlier today, we posted accompanying presentation material on the Investor Relations section of our website that I'll refer to throughout this call. Since our last quarterly call we've been -- we've all witnessed one of the most horrific public health crisis in modern history. The rapid emergency of the novel coronavirus, or COVID-19, has led to an unprecedented disruption in the global economy, with far-reaching consequences that are not fully understood at this time. During this period of uncertainty, we've heard many stories of sacrifice and courage, as first responders, plant workers, truck drivers, grocers, delivery people and others have worked to ensure that the food, medicine and other critical items are delivered to those most in need. On behalf of our entire leadership team, I want to thank these brave men and women for their unwavering courage and fortitude during this time, including our team that's been in the market and on the road, servicing customers, running plants and taking care of the operations of Vertex Energy.

[Chris Carlson:]

Thanks, Ben and welcome to those joining us on the call today. For the three months ended March 31, 2020 the company reported net income attributable to Vertex Energy of $2.8 million versus a net loss of $5 million in the first quarter of 2019. Vertex reported adjusted EBITDA of $1.6 million in the first quarter of 2020 versus a $500,000 loss in the prior period. We reported near-record profitability in the first quarter given strong demand for refined products, improved operating efficiency and a $4.2 million gain on derivative instruments. The Marrero Refinery operated at elevated rates during the first quarter giving a more than 15% year-over-year increase in the production of middle distillates used in the marine bunker fuel market. Turning to a discussion of our balance sheet and capital structure. As of March 31, 2020 we had total cash and availability on our lending facility of $16.4 million and $3.9 million, respectively. We had term debt outstanding of $6.1 million as of March 31, 2020, meaning we were net cash positive at the end of the quarter.

[Operator:]

Gentlemen, thank you for your remarks. We'll hear first from the line of Eric Stine at Craig-Hallum.

[Eric Stine:]

Good morning, everyone.

[Ben Cowart:]

Good morning.

[Chris Carlson:]

Good morning.

[John Strickland:]

Good morning.

[Eric Stine:]

So I know the majority of the impact here is COVID-19 and the low -- or limited feedstock availability. But would just love to get your thoughts the oil price drop, I guess two parts industry response and then your spread management. Industry response it seems like it's been much quicker than it was in that 2014 to 2016 timeframe where it was pretty difficult to get movement in the industry. So would love your thoughts on the industry but also what you're doing internally?

[Ben Cowart:]

Okay Eric, good questions. I see the industry responding somewhat in line with what happened in 2014 to be honest as far as making adjustments at a street level. We are moving quickly. I think we did pretty good in 2014 also. The biggest challenge is demand for products and that has really backed up base oil. Fortunately with our Marrero offtake agreements we're able to move all of our production into the marine fuel market. So the real challenge is available UMO and base oil markets to -- in a broad level. Pricing for the finished products related to crude pricing is a continued challenge. So in order to manage your spread, you've got to adjust your cost of raw material. You got to adjust any operating costs that you can and pass that back onto the generator of the waste material that we're collecting and processing. What's taking place in the market related to the downturn in pricing as many suppliers of this used oil really don't have their pricing adjusted at a street level and they have chose to go to inventory with a lot of this oil, which we completely understand.

[Eric Stine:]

In outright, it was a long question too. Obviously, collections secondary to just the availability right now, but a big strategic focus going forward. I mean, is this something where you think just given that you've now got the balance sheet in place that whether it's small acquisitions or just actions you can take in the street? Is this something that you think you potentially take the current environment to accelerate that?

[Ben Cowart:]

Yes. No we're looking at different opportunities in general, and we really need to just give this market some time for recovery is the way we're looking at it. We think second quarter -- as we go into the third quarter, we have a very good view on what those opportunities look like. The good thing is we've got good solid end-markets really for both refineries and we see our product markets recovering quickly and we do believe that UMO is going to recover quickly as the economy is reopened. We were down probably as deep as 60% all of our normal volumes at the beginning of the quarter the second quarter. And we think by the end of this week, we'll be back up to 70% of our normal volume. So that's a big swing. So the market is moving well at a generator level. And fortunately, for us, we had very good inventories going into the first quarter that allowed us to run the refineries really at almost full throttle through the quarter and on into the second quarter. So we've been -- we've really been working at full pace. So we're just now slowing down. We're going to take our turnaround, which is really scheduled for this quarter already, and we're going to take advantage of having all our people and we'll do most of the turnaround ourselves taking more time than we normally would, allowing our feed tanks to build so we can get a strong restart coming -- going into the third quarter. So that's the thing.

[Eric Stine:]

Got it. Yes. Last one for me just, I mean, I know that it's -- on the demand side, you've got Bunker One out of Marrero and then in Heartland you've got the offtake agreement. So are there any penalties or anything if you don't meet? Are there minimum volume requirements or anything along those lines?

[Ben Cowart:]

No. No. A good long-term relationship and a lot of coordination with our bunker partner in our decisions around the turnaround the extended time. The good thing is that we've actually performed exceptionally well in volume to that relationship. It's up 15% year-over-year and that's good. Their inventories were good. This is -- it all kind of goes hand-in-hand. The bunker market is slowing down a little bit at this point in time anyway and most of the major refineries are oversupplied. So there's plenty of product in the market resupply opportunities for the bunker company that doesn't hurt them in the near-term, while we take advantage of this downtime.

[Eric Stine:]

Yes. Okay. Thanks a lot.

[Ben Cowart:]

All right.

[Operator:]

Thank you, Eric. Our next question will come this morning from Amit Dayal at H.C. Wainwright. Please go ahead.

[Ben Cowart:]

Good morning, Amit.

[Operator:]

Hello, Amit. Check your mic, but you may have us on mute. We'll give just another moment for Amit. You may have us on mute sir. And hearing no response from the line, gentlemen, I'll move forward to Tom Bishop at BI Research.

[Tom Bishop:]

Yes, hi. Good morning.

[Ben Cowart:]

Hi. Good morning, Tom.

[Chris Carlson:]

Good morning, Tom.

[Tom Bishop:]

With regards -- I had a number of questions. But with regards to the hedges, well how does that look in Q2? I mean, that seemed to kind of save the first quarter, but is there anything like that coming up in the second quarter?

[Ben Cowart:]

Yes. So we continue to protect all the product purchases as we buy feedstock. And so any downside we've done a pretty good job of holding that cost in place and not having a lot of inventory exposure, right? What really benefited us, Tom, in the first quarter was, just looking at foresight when the forward curves related to IMO 2020 the high sulfur fuel was much lower and our product pricing was much higher. So beyond hedging our inventory, we actually took the crack spread that was better than what we had budgeted. So we took a very conservative approach instead of waiting to see how the market played out. We went ahead and locked those index spreads. We locked them up. And that was a really big decision as it turns out. So we will continue to do that. Today, high sulfur fuel is real tight to WTI and to our product pricing. So that opportunity doesn't exist for the second quarter. But we do see it open and back up as we go forward. The spread appears to be coming back pretty quick so.

[Tom Bishop:]

Okay. You mentioned that about $10 million of your cash -- of your $16 million of cash is limited to use by each SPV respectively. So my question there is, for what I mean, if you're operating at a loss for example just lately is it available for that, or what does that mean?

[Ben Cowart:]

Well, I'll answer it, and then Chris can clean my answer up, if I don't get it right. The SPV is with our relationship with Tensile. So we have cash in those entities that are earmarked for the development of those SPV businesses. And so we will use that cash specifically for those areas of the company, and then we have cash in the public company for the remaining areas that we believe is sufficient to fund the business, so.

[Tom Bishop:]

I thought Tensile was paying for the improvement. So you have to kick in those two amounts for the improvements?

[Ben Cowart:]

No, they have their capital in as well as we had retained capital from the transaction that we left in to those SPVs as well.

[Tom Bishop:]

I see. Okay. And then when you say that at Heartland, you have surety of offtake. But if you're producing at a loss is that a good thing or a bad thing that there's an offtake agreement, or they'll take less if need be?

[Ben Cowart:]

No. It's a good thing, because if we were not producing at all our losses would be much higher right? So having...

[Tom Bishop:]

Your costs in contributing something to further down the income statement, but not as much as you normally would.

[Ben Cowart:]

That is correct. That's right. And that's really because the market came to a dead stop as far as base oil consumption. Most all our customers just could not buy any product other than the contracts that we had in place that carried the business at a much more favorable financial results. Now the market is coming back. And so it may take a month or two or a quarter to get the economy back going and lubricated if you will. And so, we feel that we weathered from a base oil demand standpoint that situation pretty well. So I'm very pleased with the financial results under the market conditions that we're under.

[Tom Bishop:]

Yeah. I notice that SG&A was up 25% and you also made some comments about the ERP system. And I was just wondering it's an unfortunate time to see that SG&A go up.

[Ben Cowart:]

Well, these were decisions we started in the fourth quarter, and actually implementation of a major overhaul of our ERP system. It will complete in the second quarter -- this quarter and be implemented. And the cost, yeah, probably not the best timing but certainly those decisions were made long before COVID-19. But the window and having the team available to us during this second quarter has really been perfect timing in implementation and allowing these systems to get seeded into the business before the markets and the volumes and the activity starts picking back up. So I think, we -- it's really been great to be able to launch this ERP system without the full pressure of the customers and the demands for the company. So I think it's going to work out really well.

[Tom Bishop:]

Were there some other factors that increased -- that was about $0.5 million in Q1, did you say?

[Chris Carlson:]

Yeah, that's correct.

[Tom Bishop:]

And were there some other factors that increased the selling and general admin by $1.4 million $3 million?

[Ben Cowart:]

Yeah. There was a few others. The Tensile transaction, which closed at the beginning of the quarter. There were some remaining costs related to that.

[Chris Carlson:]

And the Bunker One transaction as well.

[Ben Cowart:]

Right, those two.

[Tom Bishop:]

So that maybe will go down a little bit?

[Ben Cowart:]

Yes, we would expect it to go down.

[Tom Bishop:]

Okay. And when you said the $1.8 million of cost savings, I didn't know, if that was the aggregate amount or an annualized amount, or what was that?

[Ben Cowart:]

That's the aggregate amount of what we expect to see during the rest of this year 2020.

[Tom Bishop:]

Okay. And last question. You said that free cash flow was $1.2 million. But if I turn to your cash flow statement, I see that net cash provided in operating activities was $3.1 million and cash flows for investing activities was $0.5 million, which to me is $2.6 million. So I'm wondering, what I'm missing free cash flow. Maybe you're not giving yourselves them enough credit there.

[Chris Carlson:]

No, you're correct, Tom. When you look at it from the cash flow statement perspective, it is higher. We were looking at it from an EBITDA against CapEx perspective, just in our presentation.

[Tom Bishop:]

Okay. But is $2.6 million technically more correct?

[Ben Cowart:]

Yeah. That is right.

[Tom Bishop:]

Okay. I’ll somebody else to ask a question. Thank you.

[Ben Cowart:]

Thank you, Tom.

[Chris Carlson:]

Thanks for your questions, Tom.

[Operator:]

Next, we'll go to the line of Sameer Joshi at H.C. Wainwright. Please go ahead, Sameer. Your line is open.

[Sameer Joshi:]

Thanks. Can you hear me, guys?

[Ben Cowart:]

Yes, yes.

[Chris Carlson:]

Yes.

[Ben Cowart:]

Good morning.

[Sameer Joshi:]

Okay. Good morning. I hope everyone is staying safe. Just had a few questions on given the macro environment, how are AR and inventory going to look like going forward? Are you building inventory in anticipation of demand coming back? And how are those two items going develop?

[Chris Carlson:]

Yeah. As far as inventory the value of course is coming down, just because of the market conditions and the commodity pricing. We do expect to build some inventory while the plant is in a turnaround mode. So I would expect at the end of the second quarter we would have a little more inventory than we do at 3/31.

[Sameer Joshi:]

And any problems with receivables?

[Chris Carlson:]

None.

[Ben Cowart:]

We've actually been pretty aggressive on collections Sameer to stay ahead of that potential issue. So we've drawn receivables in pretty tight from an administrative level.

[Sameer Joshi:]

Okay. The scheduled maintenance which you began on May 10 when do you generally have this? Is it still a second quarter event normally, or have you preponed it from the 3Q into 2Q?

[Ben Cowart:]

Yeah. John, I'll let you answer that.

[John Noel:]

Yes. Yes, it's a normal long turnaround and Marrero was always scheduled in the second quarter.

[Sameer Joshi:]

Okay. You just preponed it to capitalize on not much activity.

[John Noel:]

That's true. And we can use our people which will cut costs doing it also to give us time to build some inventory. So we thought this was the best way to do it to take a little bit longer and use our people and cut costs there.

[Sameer Joshi:]

Right. Right. And I think Ben you mentioned UMO recovery is – you're already seeing the turnaround back to 70% of normal. Is this 70% of year-over-year like – relative to last year, or what is the 70% relative to?

[Ben Cowart:]

Yeah. I'm speaking of our 3/31 closing volume kind of our run rate, let's say, it's around 38 million gallons a year. And so it fell off from there to these lower levels as we discussed. And then we see it – this week we estimate it to be back close to 70% of our historical run rate at 3/31.

[Sameer Joshi:]

Okay. And in terms of utilization or availability of your plant given the maintenance schedule your – the 70% is a comfortable level as of now?

[Ben Cowart:]

Yeah. So the 70% really applies to our collection. So this is the volume that, we collect and sort with our own trucks. But to your question as far as the refinery yes that's a very comfortable capacity. We definitely are looking to see the availability of third-party supply, which is something that we rely on at a larger degree than our collections. And so that is something less in our control, when it comes to commodity pricing and how much inventory people choose to feel before they ship all to the refinery, which we understand that as well. So, that's going to be something that we got to play out as we go into the third quarter.

[Sameer Joshi:]

Understood. One last one from me actually. On the convertible, were there any other covenants that were breached, or this was just the automatic extension with the increase in the interest rate?

[Chris Carlson:]

Correct. It was just an extension.

[Ben Cowart:]

Yes, that was provided in the agreement.

[Chris Carlson:]

Right.

[Sameer Joshi:]

Got it. Thanks for taking my question.

[Chris Carlson:]

Thank you.

[Ben Cowart:]

Thank you.

[Operator:]

And thank you to all of our callers for their questions today. In the interest of time, I will turn the floor back over to CEO, Mr. Ben Cowart for any additional or closing remarks.

[Ben Cowart:]

Thank you, operator. Please turn to slide 15. In closing, we see three near-term investment catalysts for Vertex. First, we see the return of the UMO supply to the market as the single biggest opportunity for us, positioning us to return to normal utilization rates at Marrero. Second, we see the opportunity to supply as much middle distillate into the marine fuel market as we can produce once Marrero is back online given our long-term offtake agreement with our bunker fuel partner. And third, we see a continued stable demand for a significant portion of our base oil production at our Heartland Refinery, given multiple year volumes under contract that remain in force. In summary, after a strong first quarter, we expect that our business will experience COVID-related softness in the second quarter; followed by what we anticipate will be a gradual recovery into the third and fourth quarter of this year. While most upcoming Investor Relations events having been rescheduled from live to virtual formats, we remain actively engaged with our investors and coverage analysts. During May and June, we will be attending both the Craig-Hallum Annual Institutional Investor Conference and the Stifel Cross Sector Insight Conference all in virtual format. We encourage you to contact your institutional salesperson at these firms, should you have any interest in attending. In the interim, should you have any questions, please contact, Noel Ryan of Vallum Advisors at [e-mail]. Thank you everyone for joining us today. This concludes our call.

[Operator:]

Ladies and gentlemen, again, thank you all for joining us today. This does conclude our session. You may now disconnect your lines and we hope that you enjoy the rest of your day.