FutureFuel's CEO Discusses Q4 2012 Results - Earnings Call Transcript

Mar.19.13 | About: FutureFuel Corp. (FF)

FutureFuel Corp. (NYSE:FF)

Q4 2012 Earnings Call

March 19, 2013 9:00 a.m. ET


Lee Mikles - President

Chris Schmitt - Chief Financial Officer

Rose Sparks - Principal Financial Officer


Jonathan Tanwanteng - CJS Securities

Craig Irwin - Wedbush Securities


Ladies and gentlemen, thank you for standing by. Welcome to the FutureFuel 2012 fourth quarter conference call. At this time all participants are in a listen-only mode. Following management's prepared remarks, we will hold a question-and-answer session. (Operator Instructions) As a reminder this conference is being recorded today, March 19, 2013.

I would now like to turn the call over to Mr. Lee Mikles, President of FutureFuel Corp. Please go ahead, sir.

Lee Mikles

Good morning. This is Lee Mikles from FutureFuel. Thank you for participating in today's call to discuss FutureFuel's 2012 fourth quarter financial results and business progress. Joining me today from FutureFuel is Chris Schmitt, our Chief Financial Officer, and Rose Sparks, Principal Financial Officer.

I would like to remind the listeners that comments made during this call will include forward-looking statements within the meaning of the federal securities laws. These forward-looking statements involve risk and uncertainties that could cause actual results to be materially different from any of the anticipated results. For a list and description of these risks and uncertainties, please review FutureFuel's filings with the Securities and Exchange Commission.

Please note that the content of this call contains time sensitive information that is accurate only as of today March 19, 2013. FutureFuel disclaims any intention or obligation to update or revise any financial projections or forward-looking statements whether as a result of new information, future events or otherwise. With that I would like to turn our attention to the fourth quarter results.

The fourth quarter 2012 results were down from the fourth quarter 2011. Net income decreased 42% to $6.2 million. This decrease was heavily impacted by the softening biodiesel market due to the RSF2 mandate, essentially being met early in the quarter and there being no support from the blenders' tax credit. Biodiesel RIN prices, renewable identification number prices, in the fourth quarter were only a fraction of what they had been in the fourth quarter of 2011.

On a consolidated basis, revenues decreased 17% for quarter 4 versus quarter 4 2011. Adjusted EBITDA totaled $6 million compared to $20 million in the fourth quarter of 2011, and as I mentioned before, net income decreased 42% to $6.2 million. I would like to turn the call over to Rose and then to Chris to talk about our financial results. Go ahead Rose.

Rose Sparks

Thank you, Lee, and thank you everyone for joining us this morning. Regarding fourth quarter 2012, revenues fell 17% to $74.6 million from $89.6 million in the fourth quarter of 2011. Biofuel revenues totaled 33.8 million as compared to $45.1 million in the comparable period from the prior year. Demand for biodiesel was down in the fourth quarter of 2012 as was the sales price. Chemical revenues decreased approximately 8% to $40.8 million from $44.5 million in the fourth quarter of 2011. Revenues from the bleach activator for proprietary herbicide both decreased due to a decline in sales volume from both customers.

Increased sales prices helped to slightly offset these reduced volumes. Gross profits for the biofuel segment decreased from $4.6 million in the fourth quarter of 2011 to a loss of $2.3 million in the fourth quarter of 2012. Biodiesel margins continue to be compressed in the quarter due to a challenging and uncertain economic environment for this product including the lack of the dollar blender credit. Chemical segment gross profit decreased to $10.3 million during the quarter from $14.8 million in the fourth quarter of 2011 on reduced sales and production volumes.

Income before interest and taxes was down 71% totaling $4.7 million, compared to $16.4 million in the fourth quarter of 2011. Net income totaled $6.2 million for the quarter or $0.15 per diluted share. This compares against $10.6 million for the fourth quarter of 2011 or $0.26 per diluted share. With respect to the financial results for the 12 months ended December 31, 2012, revenues totaled $351.8 million, up from $309.9 million for the year ended December 31, 2011.

Biofuel revenues increased from $141.6 million in '11 to $191.4 million in 2012. Sales of biodiesel in the first quarter of 2011 were limited due to the initial conversion to lower grade biodiesel feedstock and adaptation to the improvement in biodiesel economics, whereas in 2012 despite a decline in fourth quarter sales quantities, biodiesel was produced and sold over larger percentage of the fiscal year.

Chemical revenues decreased from $168.2 million in 2011 to $160.5 million in 2012. Revenues from the bleach activator decreased 13% and revenues from the proprietary herbicide decreased 31% during the 12 months as compared to 2011. This decrease was attributable to reduced volumes for both products in 2012 and was partially offset by increased sales prices. We are unable to predict with any certainty the revenues we will receive from these products in the future. Revenues from other custom chemical products were strong with a 47% increase year-over-year.

Biofuel segment gross margins decreased to $8.6 million in 2012 from $19.1 million in 2011. Market conditions were less favorable for biodiesel in 2012 as compared to 2011 partly as a result of the expiration dollar blender's credit at December 31, 2011. The existence of this credit was a significant market factor in the profitability of the biodiesel production. As previously mentioned, biodiesel profitability was particularly low in the fourth quarter of 2012 as the 2012 biodiesel consumption mandate established by the government was largely met earlier in the quarter as we mentioned.

Chemicals segment gross profit increased 14% from $42.7 million in 2011 to $48.7 million in 2012. Income before interest and taxes decreased to $46.1 million for 2012 from $51.6 million in 2011. Net income totaled $34.3 million in 2012 or $0.83 per diluted share. This compares against $34.5 million in 2011 or $0.84 per diluted share. Please note that on January 3, 2013, the blender's credit was retroactively reinstated for 2012 and extended through December 31, 2013. This action resulted in our biodiesel blending activities for 2012 qualifying for this credit.

The retroactive credit for 2012 totaled $2.5 million and will be recognized as a reduction in cost of goods sold in the first quarter of 2013. And with that, Lee, I will turn the call back over to you.

Lee Mikles

Thank you, Rose, very good job. Really appreciate it. We continue to work to expand our specialty chemicals segment and I think we are very encouraged by the potential of business that we see. Going into the biodiesel industry for just a second, it certainly was a down year but it rebounded to a degree this year in the first quarter that we have seen so far. However, the industry continues to have somewhat of an uncertainty to it because the blender's credit is only extended a year at a time as I think many are aware. And the continued pressure that the EPA is experiencing to modify the renewable volume mandate, I will tell you I think it's our view, that that’s in particular aimed at ethanol. Because they are up against the blenders' wall and some other issues there with the drought. So I don’t think that’s particularly germane to biodiesel in our opinion but it's out there.

To give you an idea as Rose talked about, what happened in the fourth quarter to biodiesel, and I think you can see that from some of our competitors volumes and profitability, what happened in the fourth quarter. To give you an idea of the RIN values that are attached to every gallon of renewable fuel, last year averaged in the fourth quarter approximately $1.31. This year they averaged approximately $0.56. So that’s all profit. And then when you think about a biodiesel RIN is worth 1.5 times, this gets to be real money. So it had a dramatic effect on our profitability and our volumes that we were willing to sell into the marketplace in the quarter. So I think it's important to note.

With those comments I would like to open up the call for questions. Operator?

Question-and-Answer Session


(Operator Instructions)

Lee Mikles

One further thing I think I would like to comment on, has to do with the balance sheet. We ended the year $146.5 million in cash, no debt, and I will remind you that after we paid $1.20 special dividend in the fourth quarter and the regular $0.10 dividend, which is now $0.11 a quarter doing forward. So in addition to $146.5 million, that’s after paying out approximately $55 million in dividends in the fourth quarter.


Our first question today comes from the line of Jon Tanwanteng from CJS Securities. Your line is open. Please go ahead.

Jonathan Tanwanteng - CJS Securities

Can you talk a little bit more about the reintroduction of the blenders' credit? Do you expect it to impact RIN prices again later this year or has most of the effect been priced in by now and also will it change the amount of biodiesel you guys choose to blend internally?

Lee Mikles

I think our internal blending really goes to demand and where we are geographically and the customer's desire, because some customers desire to have the RIN attached, some do not. So it's not been a preponderance of our business. We tend to do more of that in the summer time because of the regional players, if you will, that we sell to. Certainly that would be a desire since that typically is the highest margin business that we have because we retain 100% of the RIN value. Back to your first question, Jon, on will the credit have an effect on RIN prices, there is two different issues there as I know you are aware. You have got the dollar blender credit and you have got RIN values and RIN values are directly in proportion to what production is going to be. So I think it would be a widely held view that there will be more production in the marketplace for that credit than less because it brings some of the players, I will call them inefficient players, back into the market place because they get that additional support from the government.

So I think there would be, all things being equal, more production in marketplace maybe from the soy players. And the question really comes down to, do the fully integrated players come back in and those would be the ADMs, the Cargills, the Bunge's, do they come in. And the National Biodiesel Board will tell you that they produced about 300 million gallons last year and then came out of the market, and that looked to be to support the other side market on the soy oil, because I can't imagine that any of that production even fully integrated, was done profitably. So the question is, how much do they really come in. And I think there is a view on the marketplace that there is a reasonable chance that they are not going to be players because I think it's more economical for them to go to the other direction on the business.

Without those fully integrated players in there, it's probably going to be reasonably hard for the industry to exceed 1.28 billion gallons. I think they can reach it but the question is, how late in the year and what are the economics due. So we have seen an acceleration in RIN prices this year. We closed out the year, Rose and Chris will know better than I, but let's call it $0.40 roughly, maybe a little higher than that. And they have gone to as high as $1.15, is the highest point I've seen this year, and this morning they sat at about $0.83. So 1.5 times that, it gets to be a real difference in profitability for this industry.

Jonathan Tanwanteng - CJS Securities

Got it. With the first quarter almost closed, I guess, can you tell us if you were able to make up any loss in what you saw in fourth quarter? And given where spreads are now, have you building inventory given where feedstock prices are?

Lee Mikles

I think a couple of things. I think the first quarter is never -- first and fourth quarter aren’t nearly as robust as two and three. So you have to factor that into your business. So it's certainly the economics in the business for us and for other players are measurably different in the first quarter then they were in the fourth. But again, what we are going with inventory and some of the things, I would probably like to keep it to ourselves for competitive reasons.

Jonathan Tanwanteng - CJS Securities

Got it. And finally, what you are plans for capacity expansion this year and the associated CapEx and maybe a little bit on potential acquisitions after that.

Lee Mikles

Two questions there. First on sizing. I think it really comes down to taking what we have today and continuing to debottleneck and put more volume through basically the same pie. So I think there is a continued effort to expand volume with the facility that we have today. I don’t think we have any immediate plans to go beyond our capacity as it's stated in our information, in the short term. And to expand beyond that, I don’t have any CapEx numbers that would mean anything because we don’t have any plans right now to do anything meaningful on the incremental volume over what is stated today.

On the acquisition front, I think we continue to be very active and I think we have been extraordinarily disciplined. I think there are opportunities in the biodiesel space and the chemical space. Both on a proprietary basis and a custom basis on the chemicals side. On the biodiesel side, obviously a lot of producers or a number of producers have had difficulty running on a continuous basis and they've either shut down, gone broke or going broke. And some of these are kind of headed for Chapter 22, it's kind of the second time around.

The subsidy does put some of these people back in business. It gives them a chance or a viable route to profitability at least in the short term. That may take some of the acquisition candidates off. But we tell you we continue to be active in that area but we are disciplined to pay our price. And the things that we have gone after and missed, I can tell you with absolute certainly there isn’t one that I wish we would have jumped the highest bid and purchased. They were good acquisitions at our price but I didn’t have any interest at the prices they were ultimately paid.

Jonathan Tanwanteng - CJS Securities

Got it. Just to clarify. When you are talking about capacity, you are talking about your nameplate?

Lee Mikles

That’s correct.


Thank you. Our next question is from the line of Craig Irwin from Wedbush Securities. Your line is open, please go ahead.

Craig Irwin - Wedbush Securities

Lee, I wanted to ask a couple of questions about the pricing that you are achieving in the market for biodiesel. When we look at the delta between biodiesel and ultra-low sulfur diesel, it looks like the premium for biodiesel is approaching the levels that we had right in the back of 2011 when there were some pretty strong profitability for the whole industry. Can you confirm that you are seeing a good premium reflecting both the RIN and the blenders' credit in your sales today? And would you expect the crush margins to stay the same absent any significant changes in feedstock cost?

Lee Mikles

So, a couple of things and I would like Chris to dive in here to get a little more granular as best as we can. Clearly, the margins have changed significantly from the fourth quarter to the first quarter. Having said that, the margins that we enjoyed late in 2011, I don’t think the industry, that’s of industry-wide, is probably achieving those margins yet, although they are markedly improved Craig, to say the least. To understand what the market is going to do going forward is really to speculate at the end of the day. I think there is a view that there is a tightening of the RIN market and you can see that simply in price.

And so some of that has to do with people jumping from -- as the ethanol RIN has gotten up, they are going to replace it with biodiesel and they jump a little bit. So I would be speculating at the end of the day, I don’t think our margins and the industry margins look like they did in the late 2011 but clearly they are enhanced over the fourth quarter, given the return of the blenders' credit and the increased RIN values. But is there anything that you can add to that, Chris, that would be meaningful?

Chris Schmitt

Lee, I think your observations are accurate. And, Craig, I think your observation is accurate in that the spread of biodiesel prices to NYMEX (inaudible) for example, has improved from the fourth quarter here into the first quarter. However, having said that, I don’t quite see those approaching to 2011 levels at this point in time. We will just have to wait and see how that plays from the rest of the year. There is an awful lot of, as you know, there is a lot of different factors that play into that particular spread. But it has improved. And I think we will just have to kind of see how things develop through the remainder of the year and as we enter the summer months.

Craig Irwin - Wedbush Securities

Okay. So then my next question was, in the past you have occasionally produced biodiesel using soy, corn oil, choice white grease, some of the other feedstocks that you do not favor. I understand from your prior comments that yellow grease is best economics. Can you comment whether or not you are expecting to see any mix shift in your feedstock over the course the '13, specifically corn oil or if there is any other more attractive feedstock you see potentially helping your economics?

Lee Mikles

Yeah, I think there is two things there, Craig. I would comment on -- first off, we made a small amount of soy product back in 2011 when the economics were very robust for the industry for a short period of time. You can see the economics have to be -- there has to be a very attractive spread to make that feedstock viable, candidly. And those that blend with soy even on a 20% or 30% basis, to make their refineries run, clearly that’s a loss leader and they have to make it up on the other side. So the margins would have to get pretty extraordinary for us to want to use any soy. And that would only be in our batch reactors, if you will, where we can't use the lowest -- where we are not connected to use the lowest value of the feedstock.

But I think that the principal source for us on a -- not principal, exclusive basis has been corn oil, choice white grease, yellow grease. I think acid oil has now entered the market. I think there are producers out there trying to use acid oil. It's a feedstock we are familiar with but I think those would be the areas you would look to this year for our principal feedstock.

Craig Irwin - Wedbush Securities

Great. Then if I can move over to the chemicals side of the business. Obviously, nice profitability there, over the last several years really. Can we talk a little bit about the growth that you are seeing in your chemicals business outside of Proctor and Gamble and [Arista]. Really what's driving that? Is this primarily new programs or is this older programs that are getting bigger fast? And what is the outlook for new program addition to this book of the business?

Lee Mikles

I am really glad you asked that question, Craig, because we probably don’t cover it enough. It's new business, and I am sure somewhere in there we have got some expansion of small business but is' principally new business. It tends to be smaller contract business than larger contracts, specifically the Proctor business. But it comes at higher margin. You can see the expansion of our margins for the last 8 quarters, it has been quite impressive. And some of it has to do with the fact that biodiesel has gone for the minority to the majority in terms of revenue. So it's seeing that more of the allocated overhead for the plant so it has an effect of increasing the margins on the chemicals side and depressing the margins on the biodiesel side. And it's just an allocation that goes by revenue and by reactor.

But I think the new business that we will continue to look at today is with new customers and expansion with other customers but not an expansion of the existing products so much as other products of that customer may make. As you and I have talked about before, customers are typically very recognizable, big chemical companies, big petroleum companies, may be consumer product companies. So I am very encouraged by what I see on the custom chemicals side and candidly, the performance chemicals side continues to grow although of a very small base, it continues to grow. So I think our margin in that business are, I think very attractive. I think we have done a good job of managing the cost there but it's new business that is brought in at higher margins from new customers [principally].

Craig Irwin - Wedbush Securities

Thank you. And last question, if I may, and you did kind of wind this into your earlier comments. It's well known that the herd out there has been culled fairly significantly over the last 12 months and your comments about the anticipated impact of soy oil in your core markets. Obviously, the culling of the herd reduces demand for soy protein, reduces production of soy oil, takes some pressure off the biodiesel market. One of the benefits that we were potentially looking for in the backend of the year was sort of a dislocation in feedstock prices. Can you update us whether or not you were able to take advantage of attractive feedstock prices and maybe put some feedstocks into storage for production in the first couple of quarters of '13?

Lee Mikles

Well, I will tell you that if anybody was going to be able to take advantage of that, it was us, simply because of our outsized storage capability. And it's a business that we understand reasonably well. That phenomenon, Craig, that you talk about, happened for a very short period of time. And I think we took advantage of it as best anybody could because the window for that was not as deep as you might imagine and it certainly wasn’t as long. So again, it might have been advantageous to us for a short window of time but I wouldn’t factor that in as being overly meaningful.


Thank you. And I am showing no additional questions in queue. I would like to turn the conference back over to Mr. Mikles for any closing remarks.

Lee Mikles

Thank you again for joining us this morning. I appreciate everyone's interest in FutureFuel and your ongoing questions I think are important to understanding to distinct businesses that are fully integrated, and I think it's important that we continue to explain our business and explain the dynamics that affect it. So I look forward to keeping in touch with you and keep your appraised of our progress going forward and hope that each of you have a good day. Thank you.


Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of the day.

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Future Fuel (FF): Q4 EPS of $0.15 misses by $0.04. Revenue of $74.6M misses by $7.6M. Shares +1.6% AH. (PR)