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FutureFuel Corp. (NYSE:FF)

Q3 2013 Earnings Conference Call

November 8, 2013 9:00 AM ET

Executives

Lee Mikles – President

Rose Sparks – CFO

Analysts

Jonathan Tanwanteng – CJS Securities

Gavin Richey – Rockwood Investment

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the FutureFuel 2013 Third 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, November 8, 2013. I’d now like to turn the call over Mr. Lee Mikles, President of FutureFuel Corp. Please go ahead sir.

Lee Mikles

Good morning, this is Lee Mikles from FutureFuel Corp. Thank you for participating in today's call to discuss FutureFuel's 2013 third quarter financial results and business progress.

Joining me today from FutureFuel is Rose Sparks, our Chief Financial Officer.

I like to remind 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 risks and uncertainties that could cause actual results to be materially different from any anticipated results. For a list and descriptions 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, November 8, 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 out of the way I’d like to turn our attention to our third quarter results.

In Q3 we had a very strong quarter in terms of financial performance. Revenues were up 37% for Q3 - from Q3 2012 a new record at $121 million in revenues. Adjusted EBITDA totaled $28.2 million up 17%; net income increased to $15.3 million or $0.35 per diluted share from $12.5 million or $0.30 a year ago. Rose will walk us through the details and then we will be available for questions. Rose?

Rose Sparks

Thank you Lee. Good morning everyone. For the third quarter ending September 30, 2013 sales revenue increased 37% to $121.1 million from $88.3 million in 2012, we came 14% stronger than the second quarter of 2013. Biofuels revenue increased 61% to $77.4 million from $47.9 million in the third quarter 2012 on stronger sales volumes and sales price.

Chemicals revenue increased 8% to $43.7 million from $40.3 million in the third quarter of ‘12. This change was attributed to higher sales volume with sales revenue increasing 39% for the antimicrobial intermediate, 27% for CPOs, 23% for performance chemicals, and 47% for other custom chemicals which included the first year shortfall payment of $2.3 million from the anode powder. Slightly offsetting these increases in revenues was a 25% reduction in DIPB sales revenue. There was no change in the bleach activator for the comparable quarters. From a gross profit perspective biofuels increases from $6.6 million in the third quarter of ‘12 to $12.2 million. This increase resulted from improved market conditions with the dollar blenders credit in effect, which was not in effect in the prior year quarter, and the continued demand for biodiesel in the United States given the government mandated Renewable Fuel Standard.

The Chemicals segment gross profit decreased from $15.4 million in the third quarter of ‘12 to $13.8 million. This decrease included a net impairment on fixed assets for the anode powder in the amount of $1.4 million, and a reduction in gross profit from the bleach activator and proprietary herbicides. Partially offsetting these decreases was a shortfall payment of $2.3 million from the anode powder customer as increased sales volumes of products from other custom chemicals and anti-microbial intermediate.

Income before interest and taxes was $23.5 million in the third quarter of ‘13 as compared to $19.2 million in the same period of 2012. Net income totaled $15.3 million for the third quarter or $0.35 per diluted share. This compares against $12.5 million for the third quarter of ‘12 or $0.30 per diluted share. For the nine months ending September 30, 2013 revenues increased 15% to $319.3 million as compared to $277.2 million in ‘12. Biofuels revenue increased 23% to $193.5 million from $157.6 million in the first nine months as compared to ‘12,

The gallons sold increased year-over-year as did the average selling price. Revenues from chemical sales increased 15% in the first nine months from $119.6 million in ‘12 to $125.8 million. This change was attributed to increased sales revenue from both the antimicrobial intermediate at 44% and the other custom chemicals of 34% which again included the first year shortfall payment of $2.3 million from the anode powder.

Partially offsetting these increases was a reduction in the sales revenue from the proprietary herbicide down 16%, DIPB down 15% and the bleach activator down 4%.

Gross profit for the first nine months of 2013 was $75 million up from $49.2 million in 2012. Gross profit from the Biofuels segment increased to $33.3 million or 206% from $10.9 million in ’12, the increase was from improved market conditions as previously discussed and partly attributed to the retroactive reinstatement of the 2012 dollar blenders credit of $2.5 million recognized in the first quarter of 2013. This credit is set to expire at December 31, 2013. No such credit existed in ‘12.

Also impacting gross profit was reduced [inaudible] which totaled $1.7 in 2013 as compared to $3.1 million in the first nine months of 2012. Gross profit from the Chemicals segment increased to $41.7 million or 9% from $38.3 million.

The proprietary herbicide and bleach activator gross profits declined during the first nine months of 2013 as compared to 2012. But that decline was more than offset by the increased profits in the other custom chemicals and antimicrobial intermediate.

Income before interest and taxes was $67.4 million in the first nine months of ‘13 as compared to $41.3 million in ‘12. Net income totaled $47.5 million for the first nine months or $1.10 per diluted share. This compares against $28.1 million for the first nine months of 2012 or $0.68 per diluted share. Lee, that concludes my remarks and I’ll turn the call back over to you.

Lee Mikles

Thank you rose, I appreciate it very much. I think there was a typo that appeared that Rose happened to mention and I just caught it as she was talking, the revenues for the chemicals increased actually 5% not 15%, from $119.6 million to $125.8 million; Rose had the numbers exactly right, we just had the increase – we added a digit to that so I just wanted to mention that.

Comments about the business, the biodiesel margins and profitability continue to be very strong, with the dollar credit the blender’s credit, in spite of softening RIN prices it was still a terrific quarter in terms of that. The RVO, which is, required usage mandate we anxiously wait to hear from the EPA what they’ll do for the 2014 RVO, we actually thought it was come during the government shutdown, we have not heard about it yet. We expect it any time. It is evident without a strong mandate in the dollar credit the margins will suffer dramatically for the whole industry, as the market adjust to capacity that remains. We strongly believe that they will continue to support the continued growth of biofuels as they consider the proposal for next year's mandate. We also hope that our legislature will take a serious look now at the dollar federal blender’s credit and not let it lapse at year-end as they did in 2009 and then they retroactively brought it back in and they did in 2011 as well then reinstated it in January ‘13 retroactive to the first of ‘12, the starting and stoppings don’t help. So we are hopeful that they will get out in front of it this time.

Chemicals remain strong with the bleach activator continuing to slow as expected. The pre-emergent herbicide contract expired again as expected on September 1. We sold product on a purchased order basis in September to that customer while we’ve discussed with them a path forward on a modified tolling basis. We signed a new agreement in the third quarter with another customer for a different herbicide intermediate. The revenue from the new customer will be less than 10% of our total revenues but it will certainly help to fill the gap from the expected cancellation of the pre-emergent herbicide as we’ve discussed before.

As Rose mentioned we impaired fixed assets related to the anode intermediate product with a net pretax amount of $1.4 million this quarter, that’s a non-cash charge. The customer’s terminated the contract effective August 9, 2014; we do not expect any further product to be shipped under this contract. The customer is liable for the last shortfall of this payment and is due upon the termination of the contract. We certainly remain optimistic about the prospects for both segments of our business, chemicals and biodiesel.

With that I’d like to open the call up to questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions)

Lee Mikles

While we have a second, as people queue up for questions, it’s a good time to really thank our associates in our company. I think we've done an extremely good job; I think they have done an extremely good job of replacing some of the runoff business in the chemicals side. They've replaced and grown that business and I think they are to be commended for that.

And the 32% margins on the chemical business the type of chemicals that we do is terrific. And 16% biofuels given the reduction in RIN prices during the quarter I think is a really commendable result and I think it performed at a high level, so I want to thank all of our associates for their performance. I think as senior management we are very pleased with the performance of the underlying businesses and how they have been operated.

Operator

Okay. Our first question comes from Jon Tanwanteng from CJS Securities. And your line is open.

Jonathan Tanwanteng – CJS Securities

Good morning guys. Nice quarter and thank you for taking my questions. Obviously we are all waiting on the EPA here. Can you bracket where you think RIN prices would be next year if the RVO didn’t increase and the credit lapses?

Lee Mikles

That is the $64 million question, Jon. I – a couple of things. The alleged leaked report out there which has the mandated usage, the RVO next year staying stagnant where it is this year. We had previously kind of heard rumors within the markets and the rumors the year before happen to be true of 1.5 or 1.55 billion gallons, so I don’t really know.

But specifically your question of what RIN prices will do There certainly will be a shakeout period much like they did last year because we had no mandate until they put it in retroactively in terms of the dollar credits so we kind of ran with the RIN prices.

I would certainly anticipate that they would increase how much of the dollar credit and will that make up? I do not know. It depends on how many players fall out of the market because without the dollar and without an increase an in the RVO you’re going to knock a lot of players out of the market. And whether the dollar comes back and just the RVO doesn’t come up, you’ve got two different parts there moving, but I would certainly anticipate some players would fall out of the market. And as they do obviously less capacity would get you an increased RIN price.

Jonathan Tanwanteng – CJS Securities

So, assuming the worst, are you guys ready to pursue plant acquisitions like you have in the past? And do you have potential targets lined up for that if that is the case?

Lee Mikles

Well, I think a couple of things, Jon and we have talked about it in the past both on these calls and I think we have been very forthright that we’d like to be acquisitive; we’d like to make acquisitions; the prices that people have been willing to pay and the price expectations from the sellers have just been something we didn’t want to participate in.

I will tell you without an increase in the RVO and if you get any delay in the dollar credit, you’re going to see more properties realistically priced on the marketplace. And given our balance sheet strength and given our desire to want to grow both sides of our business that would be an environment I think where we'd be very active.

Jonathan Tanwanteng – CJS Securities

Okay, and then assuming that the RVO increases and the credit gets reinstated, would you think about other uses of cash, special dividends that kind of thing?

Lee Mikles

I think, Jon, we’ve been very shareholder aware. I think the Board will continue to– continue to look at those items. We have a very strong balance sheet. Obviously, we are carrying a lot of cash on the balance sheet for just that event.

But I think we’ve been prudent in use of that cash, whether it be returning the - some of our retained earnings to shareholders or whether it be in pursuit of acquisitions. So there's really a balance there, Jon, but again depending on what happens, going forward, whether we use our cash or whether we use other means, to finance acquisitions when and if we find them, we‘ll have to cross that road when we get to it.

Jonathan Tanwanteng – CJS Securities

Okay great. And then finally do you have any comments on input pricing, you know, corn oil supply likely to track next year. You have your competitor ramping up a plant in Louisiana. Just wondering if you’re seeing that having an impact going forward?

Lee Mikles

You know again I think we’re on record at saying if that plant was to run flat out which at best we can tell has not really done that, for any length of time, if it was run to flat out and they were to use 100% grease, you’re talking about 10% of the grease market, that could be meaningful. Having said that, given that ethanol is in a profitable situation getting corn they're running flat out. And so there's a lot of corn oil on the market. So the market is well supplied at this juncture.

Jonathan Tanwanteng – CJS Securities

Okay. Thank you very much.

Lee Mikles

Thank you, Jon.

Operator

(Operator Instructions) Our next question comes from Gavin Richey from Rockwood Investment. And your line is open.

Gavin Richey – Rockwood Investment

Good morning.

Lee Mikles

Good morning.

Gavin Richey – Rockwood Investment

Just a quick question. If the ethanol mandate comes in below the 10% mark for blending, what – is there any incentive to blend biodiesel beyond the RVO where would that come in for biodiesel?

Lee Mikles

Probably not a question that I'm qualified to answer but if we think about it for a second, if they stop that out at 10%, they’ll probably fill up their mandate themselves and not have to – one would think that they wouldn’t have to jump over to our designation on the RIN side to fulfill. So it may not get as much support to our RIN pricing. I think there was some thought at the beginning of the year when you had that big spike this year in ethanol RIN pricing. The guys were jumping over to get the 1.5 RIN on ours. Remember, if they can jump over and get ours, we can’t jump back and get theirs to satisfy our mandates. So I think we’ll just have to wait and see at the end of the day.

But again I think if our RVO doesn’t increase, theirs doesn’t increase, which is kind of perplexing to me because they're completely different issues. But let's say they go that direction I think you’d see less support for our RIN and people jumping over but I would think that a lot of players would drop out of our market increase RIN prices and make up for a little bit of some of the short fall you might see elsewhere.

Gavin Richey – Rockwood Investment

And what level of cash are you comfortable with as far as actually needing to keep on balance sheet?

Lee Mikles

Now that really comes down to a question of acquisition targets and potential targets. To run the business that we have today, it's a dramatically reduced number from where we are. You - call it $200 million roughly in cash, no debt, we have an unused credit line so we have I think a very strong financial position to go out and make acquisitions in that type of environment.

If we were just going to run a business of the size, it's a number that’s dramatically less than what you see on the balance sheet today. So that would tell one that given the right circumstance and the right opportunity that we have the ability to move quickly and not have to wait for financing or any type of best efforts to make acquisitions.

Gavin Richey – Rockwood Investment

Thank you.

Operator

Thank you. Our next question comes from Carl Flournoy, a Private Investor.

Carl Flournoy – Private Investor

I didn’t hear or maybe you said on heresy, trade logistic area going out to California and Oregon, are you able to get more tank cars? And are still putting money into R&D for glycerin?

Lee Mikles

Well, on the tank cars I can’t answer that specifically. I could get back to you, Carl, with a specific answer on that. But on the glycerin side, we continue to improve our capability to basically call it up charge if you will to get to a higher technical and industrial grade on that to get a higher sales price and that takes capital and takes time and we continue to work towards that and it’s something that we took a long time to commit but we’re fully committed to doing that with our glycerin. We can only burn so much. And if we can get – if we can refine to a higher grade, it allows us to sell at a higher price, as we get a higher purity for that product.

Carl Flournoy – Private Investor

Thank you.

Operator

Thank you. Our next question comes – is a follow up from Jon Tanwanteng from CJS Securities. Your line is open.

Jonathan Tanwanteng – CJS Securities

Yes, just given where RIN prices are trading now is that an indication of demand in the market? Can we – I don’t know expect a similar degree of sequential decline in biofuel sales compared to Q4 last year?

Lee Mikles

Jon, I don’t know. I think it’s again a reflection of the fact that the mandate for this year has been met and exceeded and they’ve extended the carryover period into next year, so I think all of those dynamics have had a dramatic effect on RIN prices. I think the last RIN price that I saw for our designation is under $0.40.

So I think it’s a reflection of exceeding that amount. Much like happened last year, we saw the dramatic reduction in October timeframe. We started to see over the last couple of month’s degradation of prices in the RIN market, so I think it’s a reflection of meeting the required usage. But again it’s a seasonal business to a certain degree, as I know you’re aware our biggest quarters are two and three and one and four are the – are lower volume quarters typically.

Jonathan Tanwanteng – CJS Securities

Okay. And then just on the chemicals side, [inaudible] now purchasing off contract and you have a new herbicide customer. Do those two added together kind of equal the old business or is it somewhat less than that?

Lee Mikles

I don't think that – again we're not fully up. We're having to make some improvements in the plant to accommodate that business.

I think we probably like to wait to comment on that until a little further down the road but we're very excited about the new customer and the business that we'll be producing with that customer. But I think it's a little early to talk about that, Jon.

Jonathan Tanwanteng – CJS Securities

Okay, great. And then just one clarification. The annual contract runs until 2014, so do you expect a similar payment in Q3 of next year?

Lee Mikles

No, it'll be bigger. Rose, you might comment on that. And it holds in the deferred revenue line, but Rose, what's that amount?

Rose Sparks

The amount that we'll collect next year, Lee?

Lee Mikles

Yes.

Rose Sparks

Would be north of $8 million.

Jonathan Tanwanteng – CJS Securities

Okay, great. Thank you very much.

Lee Mikles

Thank you, Jon.

Operator

Thank you. I'm showing no further questions at this time. I would now like to turn the call back to Lee Mikles for any closing remarks.

Lee Mikles

Thank you all very much. I appreciate your time and your consideration and we'll endeavor to continue to grow the business, and I'm very pleased with the job that the associates are doing and the direction of both of our businesses, so we look forward to talking to you next quarter. Thank you for your time and consideration.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.

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