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Vertex Energy (NASDAQ:VTNR)

Q3 2013 Earnings Call

November 06, 2013 10:00 am ET

Executives

Benjamin P. Cowart - Founder, Chairman, Chief Executive Officer and President

Christopher Carlson - Chief Financial Officer, Principal Accounting Officer and Secretary

Analysts

Chad M. Bennett - Craig-Hallum Capital Group LLC, Research Division

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

Jack Lasday

Operator

Greetings, and welcome to the Vertex Energy's Third Quarter 2013 Financial Results. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Ben Cowart, Chairman and CEO.

Thank you Mr. Covert, you may begin.

Benjamin P. Cowart

Thank you, operator. Good morning. Joining me today on the call is Mr. Chris Carlson, our CFO; Mr. Matthew Lieb, our Chief Operating Officer; and Michael Porter, our Investor Relations Consultant at Porter, LeVay & Rose

Before we begin the business portion of this call and on behalf of the company, I'd like to inform you that the company expects to make forward-looking statements during today's call. Statements including words such as believe, anticipate, or expect and statements in the future tense are forward-looking statements. These statements involve known and unknown risks and uncertainties and are based on management's current views and assumptions regarding future events and operating performance. A number of factors could cause the company's actual future results to differ materially from its current expectations.

Thank you, everyone, for joining us today on our third quarter 2013 earnings call for Vertex Energy. This call coincides with today's filings of our 10-Q for the quarter ending September 30, 2013. I want to start by giving you a few highlights from the third quarter and then I'll turn the call over to Chris Carlson, our CFO, so that he can walk you through the third quarter financial performance.

Following Chris's presentation, I'll provide some thoughts on our plans for the remainder of this year and I'll make some closing remarks. We'll then open the line for questions.

The third quarter of this year showed an improvement in revenue, gross profit, net income related to Q3 2012. As results from our acquisition of nearly year ago are taking hold and the impact of our TCEP improvements during 2013 are beginning to show results.

Here are a few quick highlights that will be touched on in more detail during this call. Our revenue increased 29%, relative to the third quarter of last year to $46.8 million. Gross profit increased by approximately 53%, relative to the same quarter last year to $4.88 million.

Overall volumes of products sold, an important matrix of our business as it illustrates our reach into the market, increased by 19% for Q3 2013 versus Q3 2012. Our overall per barrel margin increased by 29%, relative to the same quarter a year ago. This ties into our improved gross profit overall and illustrates our ability to drive our feedstock costs down across the business. Income before income taxes, which does not account for the $1.71 million income tax benefit we had in Q3 2012, improved by 486% for the quarter.

Net income improved by 11% relative to Q3 of last year to $2.33 million. Before discussing our outlook for the remainder of 2013, I'd first like to turn the call over to our CFO, Chris Carlson, for a more detailed review of our financial performance during Q3 2013. Chris?

Christopher Carlson

Thank you, Ben. For more information, please refer to our press release issued today, our latest Form 10-Q for the fiscal quarter ending September 30, 2013, as well as our other filings made with the Securities and Exchange Commission.

I'll also want to mention before we proceed that all financial numbers are prepared, unless noted, in accordance with generally accepted accounting principles.

I'd like to now discuss our results. For the quarter ended September 30, 2013, we reported consolidated revenue of $46.8 million, compared to $36.2 million in Q3 2012. This represents a 29% revenue increase. The revenue increase was due primarily to increased sales volumes. You can find more detailed information on the various pricing benchmarks that are most applicable to our business in our 10-Q that was filed today.

Our Black Oil Division revenue for Q3 2013, was $30.9 million as compared to $23.1 million in the third quarter of last year. This 34% increase in Black Oil revenue is attributable to improved pricing and a 17% increase in Black Oil volume relative to Q3 of 2012. TCEP, which is a business unit within our Black Oil Division generated $14.1 million in revenue for Q3 2013 versus $16.4 million in Q3 2012.

This 14% year-over-year decrease was driven by lower commodity prices and a 12% decline in volume.

The Refining & Marketing division produced revenue of $15.9 million in the third quarter versus $13.1 million in the Q3 2012. This represents an increase over the prior year of 22%. This increase was primarily attributable to a 25% increase in volume.

Gross profit increased in the third quarter to $4.88 million compared to $3.18 million during the same period last year. This 53% increase is primarily attributed to our ability to source feedstock at a lower cost, combined with increased overall volumes during the quarter. Gross profit for the Black Oil Division was $3.22 million for the quarter, a 200% increase over last year's Q3 gross profit of approximately $1.07 million. TCEP had a gross profit of $1.08 million in Q3 2013 compared to a gross profit of approximately $1.03 million a year ago, representing an increase of approximately 5%.

We were able to improve TCEP gross margins despite lower revenue and volume through improved operational efficiencies and reduced feedstock costs.

The Refining & Marketing division generated gross profit of $1.67 million for the quarter, a 21% decrease compared to Q3 2012's gross profit.

Selling, general and administrative expenses increased in Q3 of 2013 relative to the third quarter last year, as we have significantly increased our staff from 12 to 102 employees as a result of our acquisition last year.

Our third quarter SG&A expense was $2.5 million versus $1.61 million for Q3 2012. It's our belief that our improved gross margins associated with the benefit of collecting our own used oil for processing will more than offset the increased SG&A associated with these collection efforts as we move forward.

We had net income of roughly $2.33 million or $0.12 per fully diluted share in the third quarter of this year. This was an 11% increase relative to the 2012's Q3 net income of roughly $2.11 million, which represented a per fully diluted share figure of $0.13.

I wanted to point out that our Q3 2012 net income, which included a tax benefit of $1.71 million, which Ben alluded to previously, therefore, a comparison of income before income taxes for Q3 2013 versus Q3 2012, which eliminates the tax benefit may also be useful.

Income before income taxes improved 486% relative to the same quarter last year to $2.29 million. I also wanted to point out that we do expect our performance for the full year to be in line with previous statements we have made. We believe that revenue for 2013 will be $140 to $150 million and net income will be in excess of $5 million or $0.30 per fully diluted share.

I'd like to now turn the back over to Ben Cowart our CEO.

Benjamin P. Cowart

Thank you, Chris. As we look ahead to the rest of this year, I want to share some of our thoughts on recent activities with the business and where we see Vertex heading for the rest of the year and into 2014.

We're very pleased with the 19% growth in volume, the finished products sold and the improved per barrel margin we're seeing in the business.

We're continuing to track -- to grow our internal collections because of the improvement margins on TCEP finished product made from used oil that we collect relative to the margins on used oil that we aggregate from other suppliers.

We have continued to serve our debt with September 30, 2013, term debt of $6.7 million and our $3.5 million that's drawn on the line of credit. This compares favorably to our $8 million of term debt and $6.75 million of debt that was drawn down on line of credit, which existed on December 31, 2012.

In an effort to expand the market for our TCEP finished product, we have increased our base of customers. This reduces our customer concentration for this line of business. We recently launched used oil collection operations in Dallas/Fort Worth market. As a result, we are now operating in most major Texas metropolitan markets in an effort to expand our footprint for feedstock which we will allow us to continue to improve our margins going forward.

We continue to push to capitalize on our vertical integration potential, we now handle collections, aggregation, processing, and the end sale of various hydrocarbon-based products. Our recent purchase of a controlling stake in E-Source as outlined in our 8-K filed on October 31, 2013, is another example of expanding our reach into the market in new ways.

We expect this acquisition to improve the value of our used oil filter recycling business, further increase our access to distressed hydrocarbon fuel streams and provide us access to the metals recovery market.

Before we move to the question-and-answer portion of this call, I want to let the listeners know that if you have any follow-up questions or comments, please feel free to contact our Porter, LeVay & Rose Investor Relations representative, Marlon Nurse. He is at area code (212) 564-4700.

Also, I want to mention that a digital replay will be available by telephone approximately 2 hours after the call's completion for 2 weeks. Details on how to access the replay can be found in our recent press releases.

Operator, we are now ready to take a limited number of questions pertaining to the matters discussed on this call and our 10-Q. Remember we are unable to discuss any information or business plans which are not publicly available.

Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Chad Bennett with Craig-Hallum.

Chad M. Bennett - Craig-Hallum Capital Group LLC, Research Division

Ben, can you just give us or Chris for that matter, give us an update of where index pricing was during the September quarter? Where it is today? And a kind of the relative premium you're getting on the end-product side and the relative kind of discount getting on the collection's side and if that's changed much?

Christopher Carlson

Yes, this is Chris. As far as index pricing, where we are at for the quarter, this is as far as 9/30 into the quarter we just reported. Pricing was down only 2% year-over-year. Now, from September through today, we're seeing the decline in pricing in the Platts posting indexes that we track on daily basis.

Chad M. Bennett - Craig-Hallum Capital Group LLC, Research Division

Okay. And how has the kind of premium and discounts relative to that index moved over the last quarter?

Christopher Carlson

As far as our pay for oil and what we're bringing in, we're holding those steady. So there has been no change in that. In the fourth quarter, we actually expect on our finished product side to get a better pricing than we did in the third quarter.

Chad M. Bennett - Craig-Hallum Capital Group LLC, Research Division

Okay. And then that -- that includes your -- the finished product coming out of your TCEP plant?

Christopher Carlson

Actually, it’s specifically TCEP.

Chad M. Bennett - Craig-Hallum Capital Group LLC, Research Division

Okay. And how should we think about overall volumes in the fourth quarter in relative growth rates there?

Benjamin P. Cowart

I think, volumes are solid. We're continuing to move ahead, specifically with our TCEP production. So the improvements have played out very well, production-wise. Our last quarter in September, we were operating with the improvements of around 65,000 barrels of total feed production. So we're very optimistic about the fourth quarter's overall volume, related to our TCEP business. Our other products that are in the system, they all seem to be very strong and as good or better for the fourth quarter is what we are seeing. And we had some projects, obviously, that happened in third quarter that will not happen in fourth quarter. So -- but our -- the base business continues to move ahead.

Benjamin P. Cowart

I think very interesting, though Chad, that when you really look back, volume growth of finished product sold is really a key performance metrics that we track as a company. And year-to-date, we're at 19% and we have got 2 years behind us that have better than 20 plus percent growth. So we're in our third year of 20% type growth numbers in market penetration.

Chad M. Bennett - Craig-Hallum Capital Group LLC, Research Division

Okay. And can you speak to the E-Source acquisition that you made -- acquisitions/investment that you made and kind of the impact on the P&L going forward from a -- both from a revenue standpoint, but more importantly from a margin standpoint kind of how that impacts things?

Benjamin P. Cowart

I'll speak to the strategic aspect of that and I'll let Chris speak to the numbers. We find this very interesting and complementative to our platform. There is a considerable oil filter opportunity that we've been pursuing and with this acquisition, it makes it very possible to be a very strong player in the oil filter recycling sector and then the distressed hydrocarbon streams that we now have access to that we can monetize are very interesting as far as growth long term. It also gives us an exposure to the metals recovery market, which we see very -- as a very good diversification to our recovery business.

Christopher Carlson

As far as specific numbers as it relates to margin and revenue improvement, from E-Source, we definitely expect improvement and we'll see improvement but it's a little early right now for us to be putting out actual projections of what we anticipate that to be. Again, I can't say in the fourth quarter, we will see positive numbers coming from that transaction.

Chad M. Bennett - Craig-Hallum Capital Group LLC, Research Division

Okay. And then, Ben, on the collection side, last couple of quarters, it's been tighter than probably you expected, anything changed with respect to the collection side in your ability to kind of grow that internal volume?

Benjamin P. Cowart

Yes, we obviously think that street collection volumes is critical to margin expansion. And so we have been pushing this year and we are really gaining ground now. Chris and I were looking at our numbers, our street collection business is up 21% year-over-year based on where we were last 12 months, I guess Chris?

Christopher Carlson

That's correct.

Benjamin P. Cowart

So, that's really good considering we've only done one small acquisition at the end of December last year and most of this growth is coming organically. So we've put the right people in the right markets. So we've invested in SG&A to capture more of the street business and our return on those investments are very attractive. So we're going to continue expanding that business and will continue looking for additional targets to acquire that will give us access to more of the street-level volume.

Operator

Our next question comes from the line of Michael Hoffman with Wunderlich.

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

I apologize, if you talked about this at the beginning, I've got a stream of earning calls and I ran in over, so I didn't hear your opening remarks, but can you talk about the TCEP utilization in 3Q versus-- 2Q was down in 2Q versus in 3Q and how does that -- what are the thoughts of utilization as far as the $140 to $150 million in guidance and what that means to fourth quarter?

Benjamin P. Cowart

So utilization was ramping up in the third quarter. We basically exceeded our targets in September of the third quarter. So we believe the fourth quarter will be a steady state of those type of production levels. So we were very pleased that, that expansion was successful and it proved itself in September and the fourth quarter is where we really said, we will get to look at both in terms of the production volume and our costs. So we did see about $0.04 a gallon reduction in our production cost in September of the third quarter.

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

Okay. And would it be fair to sort of carry that $0.04 through each month of the fourth quarter?

Benjamin P. Cowart

Yes, I think so.

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

Okay. And in the context of the project work that was done in the distressed fuel work that was done in the third quarter, I-- maybe I misunderstood some of that. I thought the guidance you were suggesting there wasn't any outlook for that then Chris you alluded there would be some, should we assume E-Source contributes in the fourth quarter?

Christopher Carlson

Yes. E-Source will definitely contribute in the fourth quarter, as it relates to Hydrocarbon projects, I think, that what we were talking about in the third quarter, those -- we can't guarantee or speculate when those will come. They're project based.

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

Okay. And so, how do we think about what the annualized revenue of E-Source is in how are you modeling that?

Benjamin P. Cowart

I think we want to get everything under belt Michael, and I think the fourth quarter, between now and then, we'll be able to speak to what our revenue forecast and game plans are. We're still trying to get our hands around the acquisition. It just got done and I'd rather have some good numbers I can put back to the market related to our plans with that business.

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

Okay. So, what should we take out of the third quarter as it relates to the contribution from that project, so we understand what the sort of baseline revenues are?

Benjamin P. Cowart

Yes, it's kind of hard. I don't have that broken out because we've always done project work with Vertex Recovery. So we've had projects that have blended into our business since day 1. Vertex Recovery has been in business since 2002, so this project just happened to be a little bit bigger in size than some of the other projects we've done in the past. I think you can see that just in the real operating income performance, it certainly made a good contribution in the third quarter.

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

There is no question, I just want to make sure we don't get the model set up wrong, to hit your guidance, the high-end of your guidance, we generally do in $34 million in the fourth quarter? That seems like pretty big swing. That puts you up $2 million year-over-year and you've got all that TCEP expansion, that's in -- and now getting a full quarter of effects, I'm struggling a little bit with -- that $34 million seems a little low on the revenue side. What do you think?

Christopher Carlson

Yes. I think, I mean, we're focused on that $34 million. I think, a good bench mark, may be to look back at fourth quarter last year and we anticipate improvement, fourth quarter last year to fourth quarter this year and that's probably a good benchmark to look at.

Operator

Our next question comes from the line of Jack Lasday with Morgan Stanley.

Jack Lasday

Got a couple of questions for you. First of all the accounts payable went up by about $3.5 million and the line of credit went up by about $3.5 million. So we've got kind of $7 million there, while accounts receivable up about $800,000 and inventories up about $2.3 million for about $3.1 million, can you give me little bit color on negative effect to working capital of $4 million and by virtue of having a negative working capital, does that put you in jeopardy with any of your criteria for your loans that stand out there today?

Christopher Carlson

No. As far as the line of credit, we actually paid $3 million down on the line, so we're actually in a better position today than we were 3 month ago with our banks. As it relates to payables going up, you will see that inventory went up about the same percentage. So that's just a reflection of inventory going up, that's managing our cash internally throughout the process.

Jack Lasday

Chris, the '12/31, 10-K shows $3.5 million of line of credit in the payables and the current liabilities that didn't exist as of '12/31. So we're up $3.5 million there, we're up another roughly $3.5 million in accounts payable and I mean, I'm just taking the numbers right from your 10-K or 10-Q rather.

Christopher Carlson

Okay. I got -- I was looking at quarter-over-quarter. Yes, we're definitely up on the line of credit from '12/31, that's correct. But in addition inventory is up substantially to go along with that.

Jack Lasday

Okay. I'll pass it on for now. Let me ask you this, if you take a look at the SG&A and both you and Ben explained the SG&A in [indiscernible] it in the Q, can you give us an idea of what you think normalized SG&A is going to look like by virtue of the big increase on a percentage basis and obviously your revenues are up and your margins are up and that's all great, but just for us to be able to have some kind of an idea, what you think normalized SG&A will look like?

Christopher Carlson

Yes, that's a good question. Our SG&A has a historically run right around $2.4 million, $2.5 million per quarter. As we grow and expand, obviously, we're focused on the sales efforts and that does drive up our SG&A. As far as the baseline, $2.4 million is a good number to focus on and I don't think it's going to go up dramatically from there, but $2.4 million to $2.6 million is where we're going to probably land quarter-over-quarter going forward.

Jack Lasday

Okay. And lastly, TCEP revenues were down 12% in volume, due to -- was that due to the lack of feedstock or is that lack of orders for refined product, how do you explain that?

Benjamin P. Cowart

Well Jack, if you remember in the third quarter, we were finishing up the expansion, so there was some downtime. Our production volumes were actually off quarter-over-quarter or year-over-year, I guess. And then, we obviously see the plant operating at a different level in September. So we were ramping production up, we were not where we had been because of the work that we're doing at the plant.

Jack Lasday

And are we now at full production level?

Benjamin P. Cowart

Yes. We are operating as of September at full level, full production.

Jack Lasday

And Ben, in the 10-Q, it states that your intent is to either buy or acquire another TCEP plant? Can you give us a little more color on that?

Benjamin P. Cowart

Yes. We're looking at some other markets that are not addressed with technology for used oil and we've got discussions in locations that we're looking at. That's been a continued theme over the last 9 months this year. We've been working on the engineering to get that done and behind us, so it's a work-in-progress. But these markets have really been disrupted this year, so there's a lot of, I guess, distress in the industry itself. So I think that, we're waiting for the right time and the right opportunity to present themselves, to make sure that our capital is deployed very efficiently and in the right spot. So that's why we're focused on expanding TCEP at our facility, we had the feedstock and we had the asset already there. It was incremental. We are going to see benefit from that. We definitely want to build more capacity, so, it's our intention to move ahead with our technology. It's just timing and location based on what the markets are doing as got us moving very carefully.

Operator

There are no further questions at this time. I would like to turn the floor back over to Mr. Cowart for some closing comments.

Benjamin P. Cowart

Okay. Well, thank you all, appreciate everybody being on the call and joining us for this third quarter report. We appreciate your interest in our business and hope to see you and talk to you soon. Thank you.

Operator

Thank you. This will conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Have a great day.

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