Q1 2020 Earnings Call
Onto our colors presently standing by for this morning's vertex energy conference call. At this time, we're bidding additional participants and we hope to be getting underway and just the next couple of minutes. We thank you all for your participation as well as your patience.
[music].
Please standby we're about to begin.
Good day, ladies and gentlemen, and welcome to this vertex energy Q1, 2020 earnings Conference call. As a reminder, all phone participants are in 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 started with opening remarks that introductions I'm pleased to turn the floor over to Mr. Knoll Ryan.
Sure Ryan. Please go ahead Sir.
Thank you Jim Good morning, and welcome to vertex Energy's first quarter 2020 results conference call, leading the call today, our chairman and CEO been Coward CFO, Chris Carlson COO, John strictly in it I know Ryan development advisors, the company's Investor Relations Council.
We issued a press release before the market opened this morning detailing our first quarter results in conjunction with this release. We also posted a conference call presentation that is posted in the Investor relations portion of our corporate web site at vertex energy dotcom.
We will reference this presentation throughout the remainder of today's call.
Please note that we recently updated Investor relations portion of our corporate website to provide increased accessibility to key resources, while allowing users to sign up for real time email alerts. We encourage you to sign up for these real time lurch, if you've not done is already.
I would like to remind you that managements commentary and responses to questions on todays 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 Energys latest annual and quarterly filings with the FCC.
Additionally, please note that you can find reconciliations of the historical non-GAAP financial measures discussed during our call in the press release issued today.
Today's call will begin from March from Ben Cowart fall by financial review from Chris Carlson.
At the conclusion of these prepared remarks, we will open the line for questions and with that I'll turn the call over to Ben.
Thank you know good morning.
And good morning to those are joining us on the call today earlier today, we posted a company presentation material on the Investor Relations section of our website that I referred to throughout this call.
Since our last quarterly call Weve been.
We've got a witness.
One of the most terrific public health crisis in modern history, the rapid emergency of the noble core Corona virus or covert 19 has led to an unprecedented disruption in the global economy with bar, reaching consequences that are not fully understood. At this time during this period of uncertainty we've heard many stories.
Sacrifice encourage as first responders plant workers truck drivers grocers delivery people and others that work 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 think these brave men and women for.
Our unwavering courage and fortitude during this time, including our team that's been in the market and on the road servicing customers.
Many plants and taking care of.
Operations, a vertex energy.
Before we move into a discussion of our first quarter results I want to begin by sharing the actions. We've taken in recent weeks to help ensure the safety of our people.
Our continued.
Access to capital and the continuity of our business operations throughout this crisis turning to slide four.
First we want it we want you to know that vertex is open for business given that our operations are dangerous nature, one critical infrastructure not to U.S. Department of Homeland Security, we have implemented or emergency response protocols why adopting all CDC guidelines to ensure that continue safety and well being of our employees who remains.
Hi.
Second we want you to know that we have adequate liquidity to support our operations at this time as of March 31st 2020, we had more than $20 million in cash available liquidity on our revolver.
Not including at recent 4.2 million in funding that we receive from the SBK PPP program on May 15 2020.
Further we have taken decisive actions to reduce both fixed and variable costs throughout the business, while deferring discretionary capital investments until such times that we see markets stabilize so that he can we expect to kind of approximately $1.8 million a plan cost from the business by year end 2020, which includes.
Borough discretionary spending.
Production and travel salary freezes in hiring freezes.
Third we want you to know that in response to the sharp decline in young of feedstock availability, we've chosen to conduct planned maintenance at our Meraux refinery that began on May 10.
Well the Hartman refinery is operating it is currently operating.
And producing at a reduced rate given the shelter in place orders vehicle miles traveled declined significantly from normal levels, resulting in a lower supply of used motor oil available to process at our refineries in recent weeks, we've already begun to see a recovery and the value.
The ability of years my role as shelter in place orders are lifted and regional economies reopened.
Turning to slide five and six.
We generated strong collection growth during the first quarter, while continuing to operate both.
Of our refineries New York near peak capacity entering the first quarter business was on track for a strong full year performance with the future markets, implying sustainable growth and refined product margins following the IMO 2020 transition.
In the months, leading up to the emergency it could but cobot 19, we entered into a derivative contract that allow contracts that allowed us to lock in favorable margins evident in our market.
At the time.
Effectively shielding much of our business from the volatility that followed.
We recognized $4.2 million engain at least derivative instruments during the first quarter contributing to near record quarter profits of 2.8 may.
Turning to slide seven we generated 1.6 million of adjusted EBITDA during the first quarter 2020 versus a negative 500000 in the prior year period.
On a TTM basis.
What are the first quarter vertex generated 9 billion of adjusted EBITDA are nearly double that of the prior year TTM period.
We generated 5.5 million of TTM free cash flow defined as adjusted EBITDA less capex versus 2.6 million in the prior year TTM period with the Marrero refinery currently on the turnaround we expect to be free cash flow negative in may however, coming out of the Turner.
And we would expect to see recovery back towards free cash flow positive.
Turning to slide eight again, both Marrero and Hartman operated at near peak rates in the first quarter.
But where are we generated near record production of middle distillate in the period as we continue to supply our bunkering partner under long term offtake agreement.
At Heartland, we had a strong quarter operationally.
Although global base, all demand remains well below historical levels at this time.
And.
Importantly, BARTEX as multi year volumes contracted.
Key basal customers that have helped us to weather current market volatility at the heart refinery.
Turning to slide nine.
Well first quarter and the TTM collections growth.
With solid through March we began to see a significant decline in travel late in the first quarter, leading to a reduction in.
Used motor oil availability.
According to the U.S. Department of transportation vehicle miles traveled declined nearly 20% year over year in March at the end of the first quarter.
We initiated an aggressive charge for old program that compensates us for removing used motor oil and waste related materials and to generators.
During April collection volumes decline materially, but have since improved entering may back up to a 70% level over our normal volumes.
In most of our markets as you can see from the bottom portion of this slide lower gasoline prices are expected to stimulate increase road travel over the coming weeks as the summer driving season gets started.
Turning to slide 10.
Here with bridge, our EBITDA performance between the first quarter 2019 in the first quarter 2020 increased sales volumes together with improved margin realization more than offsets Harris DNA and continues and continued challenges within the metals business.
The 900000 year over year increase in SDMA, approximately 500000 was related to the ERP implementation expenses under the company's digital transformation initiative. This initiative will.
Which is scheduled for completion by the end of the second quarter 2020 is is designed to streamline our accounting systems improve inventory management.
An increase operating efficiencies throughout the organization as I indicated earlier, we expect to remove approximately 1.8 million in current year over year expenses from the business between May in December 2020, as we continue to focus on capital conservation turning to slide 12.
The spread between 3% hassle for fuel.
The historical proxy for used motor oil pricing and WT, yeah, the proxy for product pricing narrowed significantly in May 2020. Looking ahead. The strip is calling for a gradual improvement it's spread as business conditions improve and economies restart bottom line, while the second call.
Order will be challenged we would anticipate a recovery in the business as we look to the back half a 2020 turning to slide 13.
Makes all markets have been challenged in recent months following a lower wtf price per barrel on the other hand, cobot 19 has reduced supplies. The view on loan as drivers have driven less on the other hand demand for base oils has also decline given the near term decline in economy activity.
In summary, while our company is both well capitalize and well positioned to whether the current environment, we will need to see basal and product demand improved for current levels between the cash proceeds from the realized derivative gain in the PPP loan.
We have been able to maintain full employment of our workforce. However had we not had the benefit of these liquidity events. We would have had to reduce headcount throughout the business given that we have been able to retain our workforce vertex is better positioned the restart key operations as market conditions.
Return to some level of normalcy in the coming months with that I'll turn the call over to Chris British discussion of our first quarter financial liquidity and capital structure.
Thanks, Ben and welcome to those joining us on the call today.
For the three months ended March 30, Onest 2020, the company reported net income attributable vertex energy of 2.8 million versus a net loss of 5 million in the first quarter 2019.
Protection reported adjusted EBITDA of 1.6 million in the first quarter 2020 versus $500000 lost in the prior period.
We reported near record profitability in the first quarter, given strong demand for refined products improved operating efficiency and the $4.2 million gain on derivative instruments.
The morale refinery operator that elevated rate during the first quarter, given a more than 15% year over year increase in the production of middle distillate used in the marine bunker fuel market.
Turning to discussion of our balance sheet and capital structure as of March 31st 2020, We had total cash in availability on our lending facility of 16.4 million and $3.9 million respectively.
We have term debt outstanding of 6.1 million as of March 30, Onest 2020.
Meaning we were net cash positive at the end of the quarter.
In April 2020, we secured an extension on our $10 million credit facility within Sina from February 120, 21 to February Onest 2022, ensuring that we have adequate liquidity to operate the business.
Given current volatility in the marketplace and the terms of our current credit facilities, which prevent such redemption, we do not anticipate being in a position to redeem the $23 million of outstanding series B and view on stock until June Thirtyth 2021 at the earliest.
However, the original preferred stock terms contemplated in our potential and ability to redeem such preferred stock on the June 24, 2020, redemption and provide the dividend rate payable on preferred stock automatically increases from 6% to 10 per cent per annum from June 20.
Fourth 2020 until such time as the preferred stock can be routines.
Pursuant to the terms of our outstanding credit facility. They end up a below we anticipate that the dividends will continue to be paid through the issuance of in kind equity as we seek to conserve cash and liquidity to support to support our operations.
With that I will turn the call over to the operators, we take questions from those joining us on the call today.
Gentlemen, thank you for your remarks and to our phone audience. If you would like to ask a life question. Please press Star then one on your telephone keypad pressing star and one will place your line into acute and we will take your questions. One at a time, but from a reminder, that if you're joining us today on a speakerphone. Please return to your handset prior to pressing star and one to be certain mature signal.
I was recharge equipment once again, ladies and gentlemen that is star and one we'll hear first from the line of Eric Stine at Craig Hallum.
Good morning, everyone.
Good morning morning, Lauren.
So I know.
The majority the impact here is called the 19 in the low or limited feedstock availability, but would just love to get your thoughts.
Oil price drops.
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.
Street, So would love your thoughts in the industry, but also what you're doing internally.
Okay, Eric good good questions.
I see the industry responding.
Somewhat in line with.
What happened in 14 to be honest as far as making adjustments at a street level, we are moving quickly.
I think we did pretty good in 14.
Also the biggest the biggest challenges demand for products and that that has.
Really backed up base, all Fortunately with our Maria Roe.
Offtake agreements were able to move I'll, our production into the marine fuel market. So so the.
You know the real challenge is available you ammo and basal markets.
Good.
And in a broad level pricing for the for the finished products related to crude pricing.
As a is up a continued challenge so in order to manage your spread you've gotta adjust your cost of raw material.
You got to just any operating cost that you can and.
And in past that back on to the the generator of the waste material that we're we're collecting and processing.
What's taken place in the market related to the downturn a pricing as many suppliers of this used all really don't have their pricing adjusted at a street level and they have chose to go the inventory.
With a lot of this whole, which we've completely understand.
We we've taken the opportunity to adjust our maintenance at our Marrero refinery today, and we were idled the heartland plant back in the interim so so the inventory build and the lack of used all availability both.
They have to fine fine there their balance and we believe the inventories are quickly filling up in the market theres been a lot of refining capacity or I would say the majority of U.S. used oil refining capacity has shuttered and taken the same window to maintenance the Pacific.
30, so we anticipate the availability of you ammo and.
The favorable price on that product to to come back to the market here hopefully by the end of the quarter. So.
Okay.
Yes, not you're right. It was long question too.
You know obviously collections.
Secondary to just the availability right now, but a big strategic focus going forward. I mean is this something or you think just given that you've now that the balance sheet in place.
You know that whether it's small acquisitions or.
As actions you can take in the Street is this something that you think you potentially take the current environment to accelerate that.
Yeah, No order run.
We're looking at different opportunities in general.
And we really need to just give give this market some time for recovery.
Is it the way we're looking at it we think second quarter as we go into the third quarter, we'll have a very 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 recover and quickly and we do believe that you I'm always going to.
Going to recover quickly is the economy's reopened we were down probably is deep is.
Yes, 60% off our normal volumes at the beginning of the quarter. The second quarter and we were we think by the end of this we will be back up to 70% of our normal volume so.
It's a big Swain. So we you know the market is moving move and well at a generator level.
You know Fortunately for US we had very good inventories.
Going into the first quarter that allowed us to run the refineries.
Really it almost full throttle through the quarter and only into the second quarter. So.
We've been and we've really been working at full pay so we're just now slow and down we're going to take our turnaround which is really scheduled for this quarter already and we're we're going to take advantage of Havent all our people.
And we'll we'll do most of the turn around.
Our sale taken taking more time than we normally would allowing our feed tanks to.
To build.
So we can get a strong restart coming going into the third quarter. So that's a guidance.
Got it yes last one for me just I mean, I know that its.
On the demand side, you've got a bunker one on a morale and then in Heartland, you've got the offtake agreements are there any penalties or anything if you don't meet their minimum volume requirements or anything along those lines.
No no we are good.
Good long term relationship and 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 in volume to that relationship, it's it's up 15% year over year.
And Thats.
Thats.
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.
Product in the market resupply opportunities for the bunker company that.
It doesn't doesn't hurt them in the near term why we.
Take advantage of this downtime.
Yes.
Okay. Thanks, a lot.
Right.
Thank you Eric our next question will come this morning from honest style at H.C. Wainwright. Please go ahead.
Hello, Good morning, anomaly, but you may have us on mute.
Well give just another moment.
You may have us on mute Sir.
And hearing no response from the line gentlemen, I'll move forward too tall.
Research.
Yes, hi, good morning.
Hey, good morning dominant good morning style.
With regards I had a number questions, but with regards to the hedges.
How does that look in Q2, I mean, it seemed to kind of saved the first quarter, but.
Is there anything like that coming up in the second quarter.
Yes, so we continue to protect all the product purchases as we bought feedstock and so any any downside we've done a pretty good job of you know.
Holding that 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 fore sight when when the forward curve is related to IMO 2020, the the hassle for fuel was much lower and our product pricing was much higher so.
Beyond hedging our inventory we actually.
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 when we went ahead and lock those.
Those.
The index spreads, we lock them up and that would that was a really big decision.
As it turns out so we will continue to do that today hassle for fuel is real type two diabetes into our product pricing so that opportunity doesn't exist for the second quarter.
But we do see an opening up as we go forward the spread appears to be coming back pretty quickly. So.
Okay. You mentioned the that about 10 million of your cash used $60 million Kish is.
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.
Well I'll I'll answer it thing Chris can can clean my answer up if I don't get it right. The the SPV is with our relationship with potential so.
We have cash in those entities that are earmarked for the development of those SPV businesses and so we we will 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.
We believe is sufficient to fund the business so.
I thought tinsel was was paying for the improvements you have to kick in those two amounts for the in the improvements.
No they have their their capital in as well as we had to retain capital from the transaction that we left in two those SBBS as well.
I see okay, and then when you say that.
The Heartland you know you have surety of offtake.
[music].
But.
If you producing at a loss is it is that a good thing or a bad thing that there's an off take agreements or or they'll take less if need be.
No. It's it's a good thing because if we were not producing at all or losses would be much higher.
So habit and that you are coming here your costs and contributing.
Something to further down the income statement, but not as much as you normally would.
That is correct, that's right and really because the market.
Came to a dead stop as far as base oil consumption.
Most all our customers just could not by any product.
Other than the contracts that we had in place that carried you know the business at a much.
More favorable financial result, now the markets coming back.
And so it may take a month or two or quarter to get get the economy back going and lubricated. If you will and so we would fill that we weathered a from a base oil demand standpoint that situation.
Pretty well.
So I'm I'm I'm very pleased with the financial results onto the market conditions that were under.
Yeah Yeah.
I noted that SGN. He was up 25% and you also made some comments about the ERP.
System and.
I was just wondering is unfortunately time to see that as DNA go up.
Well these were the seasons, 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 you know the cost, yes, probably not the best timing, but certainly those decisions were made.
Long before cobot 19.
But the window and having the team available to us during this second quarter as really been perfect timing in implementation and allowing these systems to get ceded into the business before them the markets and the volumes and the activity starts pick.
And backup so I think we.
It's really been great to build that launch this ERP system without the full pressure of the customers in the demands for the company. So I think it's a it's going to work out really well.
Where there's some other factors that increase that was about a half a million in Q1 did you see.
Yes, that's correct.
Where there's some other factors that increased selling in general and admin by one point.
4 million remaining yes, there was a few others the tinsel transaction, which closed at the beginning of the quarter. There was some remaining cost related to that.
And the bunker one transaction those two.
So that may be will go down a little bit.
Yes, we would expect it to go down.
Okay, and when you said the 1.8 million of cost savings I I didn't know if that was the aggregate amount or an annualized amount or what was that.
That's the aggregate amount of what we expect to see during the rest of this year 2020.
Okay last question, you said that free cash flow was 1.2 million.
But if I turn to a your cash flow statement I see that net cash provided.
Operating activities was 3.1 million.
And cash flows were investing.
Activities was.
Half a million.
Which to me is 2.6 million.
So im wondering what I'm missing free cash flow.
Maybe you're not giving yourselves them enough good [laughter].
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.
Okay, but it is 2.6 technically more correct.
Yes that is right.
Okay I would go to somebody else's two questions. Thank you.
Thank you Tom your questions. Tom next well go to the line of Sameer Joshi at H.C. Wainwright. Please go ahead, Sir your line is open.
Hi, Thanks can you hear me guys.
Yes, yes, good morning, Okay. Good money.
I Hope instinct say, it's Bob.
Just had a few questions on.
Given the Oh.
Macro environment, however, he AR and inventory going to look like going forward are you building inventory in anticipation of.
Oh, the demand coming back and all of those two items into <unk>.
Yeah as far as inventory the value of course is coming down just because the market conditions and the commodity pricing, we do expect to to build some inventory while the plant has been a turnaround mode. So I would expect heading into the second quarter, we would.
I have a little more inventory than we do.
At 331.
And then any problems with receivables.
None.
We've actually been pretty aggressive on collections Samir to to stay ahead of that potential issue, so weve drone receivables and pretty tight.
From an administrative level.
Okay.
This scheduled maintenance, which you began on me Dan the when do you generally have this is it is still a second quarter, even normally or.
Have you people on the from the Q.
Due to.
Yes, John I'll, let you answer that yeah. That's.
The normal.
Long turnaround morale was always schedule in the second core.
Okay that is just people on the ability to capitalize on that well not much activity.
That's true and what can use our people, which will cut calls doing it also gives us time to build some inventory.
What we thought this was the best way to do it does take a little bit longer.
News our people in Tulsa.
Right right.
And I think then you mentioned you almost equally is up if you on our you're already seeing that go in there around.
Back to 70, plus and often on them.
Is this some people are sent off year over year like they need to last year or what is the 70% to lengthen <unk>.
Yeah.
Speaking of our 331 closing volume kind of our run rate, let's say, it's around 38 million gallons a year and so it fell off a from there too.
These lower levels as we you know we discussed and then we see it. This week, we estimated to be back close to 70% of our our historical run rate at 33 31.
Okay and in terms of Oh utilization or availability, a few atlanta, given the maintenance schedule or you are the 70 plus into the comfortable level and stuff now.
Yes, so the 70% really applies to our collection. So this is the volume that we all collected so worked with our own trucks.
But to your question as far as the refinery yeah that that's a very comfortable capacity you know, we we definitely are looking to see.
The availability of third party supply, which is something that we rely on a it up at a larger degree than our collections and so that is something less than 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.
And this.
One last one from me actually on the convertible lived it any other covenants that the low beach or.
So just automatic extension with the increase in the.
Interest rate.
Correct. There was just an extension yeah that was provided in the agreement right.
Got it.
Thanks for taking my question.
Thank you. Thank you here.
Thank you all of our colors for their questions today.
Just a time I will turn the floor back over to CEO Mr., Ben Coward for any additional or closing remarks.
Thank you operator.
Please turn to slide 15.
In closing, we see three near term investment catalyst for vertex first we see the return of the amount of 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 supplies much middle distillate into the marine fuel market as we can produce wants marrero is back on line 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 Hartman refinery given multiple year volumes under contract that remain in force in summary, after a strong first quarter, we expect that our business where experienced govies related softness in the second quarter, followed by what we anticipate.
They will be a gradual recovery into the third and fourth quarter of this year.
Well, 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 to Craig Hallum annual institution institutional investor copper.
And the Steve will cross sector insight conference all in virtual format. We encourage you to contactor institutional sales person at these firms should you have any interest in in attending in the interim should you have any questions. Please contact no ran a balanced advisors at our it.
Vertex energy dotcom.
Thank you everyone for joining us today this concludes our call.
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.
[noise].