Q2 2020 Vertex Energy Inc Earnings Call
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And your audience Danny vying for today's vertex conference call. At this time are allowing a couple extra minutes to allow for additional color. We thank you all for your participation as well as Youre patients and we ask that you. Please continue to stand by your conference will be getting momentarily.
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Ladies and gentlemen, Hello, and welcome to this vertex energy Q2, 2020 earnings Conference call. As a reminder, all lines are in listen only mode, but after today's prepared remarks, you will have the opportunity to ask a question.
Now for opening remarks, and introductions I'm pleased to turn the floor to Mr. Noel Ryan Good morning no.
Morning, Jim. Thank you for for that introduction and good morning, everyone on the line today welcome to vertex Energy's second quarter 2020 results conference call, leading the call today, our chairman and CEO been cower, our CFO, Chris Carlson and our COO John Stricklin.
We issued a press release before the market open this morning detailing our second quarter results in conjunction with this release. We also posted a conference call presentation 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 conference call.
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 discussion of some of the factors that could cause actual results to differ please refer to the risk factor section the vertex Energy's latest annual and quarterly filings with the as you see.
Additionally, please note that you can find reconciliations with historical non-GAAP financial measures discussed during our call in the press release issued today.
Today's call will begin with remarks from Ben Cowart, followed by financial review from Chris Carlson.
At the conclusion of these prepared remarks, we'll open the line for questions and with that I'll turn the call over to Ben.
Thank you know good morning, and thank you for that is going in US today early today, we have posted a company presentation materials on the Investor Relations section of our website that our bird to throughout this call.
As expected our second quarter performance was impacted by a combination of LOPI stock availability extended downtime at our marine <unk> refinery and in Louisiana, and a year over year decline in both refined products demand in refined products margins all of which were attributable to the historical [noise] slow.
And and economic activity caused by the code at 19 and damage.
Government 19 related decline.
Yeah, and economic activity resulted in a reduced driving activity during the second quarter. The decline in driving activity contributed to fewer all changes, thereby reducing the available supply of used motor oil for collections given the lack of feedstock availability.
You Emma prices remain at elevated levels, well above historical correlations the product pricing, particularly impacting our spreads.
During may.
We were forced to reduce utilization across our refining system. As you have no collections decline. So that again, we took the morale <unk> refinery all planned for 34 days of extended maintenance during the second quarter, while at Heartland. The refinery operated at reduced rates.
Commercial demand for refined products was weak in the period also contributing to a decline in product spreads.
Our business bottomed in May and showed an indication of gradual improvement.
Existing exiting the second quarter as shelter in place orders or East then economic activity began to improve.
Well you asked vehicle miles traveled increased more than 25% on a month to month basis between April and May 2020.
The B M. T remains 25% below the May 2019 levels.
During April and May direct collections declined, 34% and 29% respectively versus the prior year. However in the month of June total collections increased 1% year over year in July we continued to see improvement and stabilization.
And then are you all know collection operations.
As you know why you almost have recovered we've increased utilization at both Maria <unk> and the Heartland refinery.
In July our refineries operated near peak capacity.
Spreading fixed cost across more barrels and production.
Our team has done an outstanding job of ensuring the safe and in a Bible restart of a marrero refinery, while ensuring continued plant reliability at the Heartland facility.
Operationally our business is moving closer to where we want to be however, the spreads between diesel and high sulfur fuel oil.
Bag news.
This is crude all remain well below historical levels.
Ted economic activity recover meaningfully we would expect to see refining margins to recover that said, we're assuming that suboptimal margins will be here today over the near term.
As indicated on slide six of our presentation materials contraction in product spreads represented 85% of the year over year decline in our adjusted EBITDA during the second quarter.
With the other factors being lower volumes and losses in our metals business offset by lower interest expense.
We expect the second quarter.
We'll be our weakest quarter of the year with sequential growth in adjusted EBITDA expected in both the third and fourth quarter of 2020.
During the second quarter, our total cash burn was approximately $2 million, assuming that our refineries operate on point and and spreads continue to mirror the forward strip.
We would expect to burn $1 million to $2 million a cash per quarter in the third and fourth quarter of 2020, respectively. We expect to return to positive free cash flow generation beginning to first quarter 2021.
Looking ahead, our management team remains focused on several key areas as we transition into the remainder of the current year first we remain focused on aggressively growing our your remote collection business. We have expanded the geographic radius of markets, where we collect while continuing to evaluate a number.
For a smile testing and opportunities that have the potential to grow our direct you emo collections second we remain focused on operating our plants.
And our near peak capacity throughout the remainder of the year, assuming normal planned maintenance positioning us to capture improved operating leverage and economies of scale throughout the organization.
Third we remain focused on cost reductions during the second quarter, we reduced our SDMA by 10%.
The first quarter two the second quarter looking to the second half of this year, we expect to realize approximately $1 million to $2 million in additional annualized operating cost reductions. We've also reduced discretionary capital expenditures and sharing that non essential investments are postpone.
Sure we're pursuing a series of initiatives intended to further optimize our asset portfolio. For example, as an established refinery and collector of used motor oil, we see an opportunity to apply the a similar model to the processing of other automotive waste streams that we currently managed sectors used all Phil.
Doctors and anniversaries together these opportunities reflect our commitment.
To expand our total addressable market through process innovation and aggressive new business development activities. Finally during a period of historical volatility capital discipline remains a top priority for our entire team now more than ever before we have focused on conserving liquidity to support the long term growth of the business.
Yes, Chris and our finance team has done a great job of cleaning up our balance sheet in recent years, which has served us well during this difficult period for the business with that in mind I'll turn the call over to Chris for his prepared remarks.
Thanks, Ben and welcome to those joining us on the call today.
The three months ended June Thirtyth 2020, the company reported a net loss attributable to vertex energy at 8.9 million versus a net loss of 400000 in the second quarter 2019.
Protection reported negative adjusted EBITDA of 5.3 million in the second quarter 2020 versus 1.9 million in the prior year period.
The year over year decline in profitability was due mainly to a decline in refined product margin, resulting from a higher feedstock costs and lower finished product prices.
Turning to slide 11 for a discussion of our balance sheet and capital structure.
As of June Thirtyth 2020, we had total cash and availability on our lending facility of 17.9 million and 1.8 million respectively.
Included in total cash amounts our cash held in the company's special purpose vehicles relating to our Myrtle Grove and Heartland assets, which are limited to use by each has PV respectively.
Well take 10 total term debt outstanding of 10.2 million as of June Thirtyth 2020, which included 4.2 million related the funds received under the Paycheck protection program or PPP, which is part of the recently enacted Corona virus aid relief and economic Security Act or cash.
With that.
Under the terms of the cares that that PPP loans accrued interest and fees may be forgiven. Following a period of 24 weeks. After PPP loan proceeds are received if they are used for qualifying expenses as defined by the care that which are subject to certain exclusions based on the number of full time.
Equivalent to retain and maintaining at least 75% of the level of compensation during the covered period.
We use that PPP loan proceeds to pay for payroll costs and other eligible expenses consistent with the terms of the program in the plan to submit our for given those applications to our lending.
The ability during the third quarter of 2020.
With that I'll turn the call over to the operator as we take questions from those joining us on the call today.
Gentlemen, thank you for your remarks and to our audience. If you would like to ask alive question over your telephone line simply press Star and one on your telephone keypad pressing star among replace your line into Accuen, we'll take your questions. One at a time once again, ladies and gentlemen that is star in one we'll hear first this morning from Eric Stine at Craig Hallum.
Good morning, everyone.
Hey, good morning, Eric.
Hey, just wanted to just had a little bit about what you're seeing on the street in terms of Yamal pricing.
I know in second quarter Big objective to the to.
Lower plant utilization pushback volumes to generators, you did that it sounds like some others in the industry did that as well, but it sounds like the pricing still not necessarily reflecting that is that something that you think.
You kind of have to wait out or are you starting to see any improvement on that on that side of it.
Yes, it's.
It's a cycle you go through when when the market.
Dries up as far as you're most supply than the first thing that has to happen is the all has to come back into the market.
Then it has to come back into tankage, and then from tankage back out to the end market like there is the refinery so we have.
I think weve cycled through most of that.
Transition and were starting to see you ammo availability.
It is.
At least in balance with the refining capacity this operating today.
So we do believe.
That that you ammo should.
Should become more oversupplied, probably as we get further in the third quarter on into the fourth quarter. Because this is also the season where.
Used all as use as an alternative fuel for road construction, where they they make asphalt for road. So so with that.
We do believe that we have seen the bottom we see the supply we've got good inventories.
At the refineries.
And we see new suppliers coming to the refinery looking for market early.
Early indications now as that translates.
To the street and charge role.
We also see.
Chart for all slowly.
Taken up.
Across the country and so that's that's a positive sign as well, but it does it takes a little tamper, though to get back until everything up and get get the industry Percolating began if if if that makes sense. Yeah. It makes sense I mean, your but obviously you see it given that you've got Morone heartland running.
Pretty full out right now.
Okay, maybe just turn into it you mentioned that you're looking at other waste streams.
In that make.
Makes a lot of sense given.
It would be things that are related to you ammo I'm just curious if I mean is there a lot of investment needed in that.
To get into those markets or is it more just a case of.
Focusing more on those in just making that a part of your outlook going forward.
Yeah, I would say that majority of investments.
Have had been underway in and pretty much maybe towards the end of the third quarter.
So nothing.
It was not planned in our and our capital utilization and so thats somewhat behind us. So we've spent this whole coded period last three months deep inside the business trend of really optimize.
The utilization of our assets and stretch in the return on the different waste streams that that we are committed to industry street level to collect and make sure that that we can optimize the value of those does materials and we.
We've made.
A lot of adjustments and changes in the business that really gives us.
Some long term.
Runway to to grow not just the used motor oil collection part which is been a.
Big focus for us but also.
Handling properly the way standard freeze and processing that material internally and then also the.
The usual filter process and really taking a lot of costs out of that.
And that process and optimizing the value of our metals and and and so we've seen and made a tremendous amount of headway fairness cobot periods ethane that will be very helpful. As we go forward in the business.
Okay. Thank you very much.
Thank you here.
Gentlemen, next we'll hear from the line of Aamodt dial it HC Wainwright.
Thank you and good morning, everyone appreciate taking my questions.
So then.
With respect to sort of the gross margins how should we expect recovery on that front to take place do we see maybe five or 10% gross margin the loads in the.
Third quarter and perhaps further improvements you know as you go through the year.
Yeah, I would agree with that and then you're going to see by the 10% in Q3, and then maybe 15 improvement in Q4.
I mean again market conditions right now we are seeing improvement, it's small and incremental but we do see improvement.
Understood. Thank you for that.
Any change in the competitive environment full year move collection, because vehicle with 90.
Yes, it's a tough business.
Okay on the street today, just because of the.
The cycle.
As the market going shorter supply and then oil prices collapsing and.
So there's it's it's very difficult as a small collector today.
And so we do see a lot of strain there we've picked up.
A lot of good organic growth over the last.
70 days that.
That is due to this.
This this major change to the used oil markets. So I do believe that thats in the favor of our business model and.
And so we're going to discontinue to the monitor.
Those opportunities as the market continues to play out.
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Understood.
Any revenue concentration coming from changes in the business dynamics, I mean, you sort of more dependent on the bunker ones now or.
Does that has that featured not really changed as much for you.
No no no no real change to the.
The uptake of our products bunker. One obviously is a is a big uptake for our marrero facility and.
And then we've got dedicated offtake.
For the majority of our production at Heartland as well, so I don't see of any kind of material change there when the business at all.
Understood.
Yes, Thats all afternoon has declared the questions offline. Thank you guys. Yes. Thank you appreciate it.
Mr. Michael Hoffman at Stifel. Your line is open Sir.
Oh, My goodness Mr. I got a really smart questions.
Hi, Ben trademark.
Just some clear what was the total you expect to get from the PPP for 2020 and did you take advantage of payroll deferral as well the cat cash tax payroll.
Yes, we received 4.2 million from the PPP.
And there.
And that was it that's right.
Okay, and then are you deferring cash taxes can payroll taxes, the cash tax part of payroll taxes Bang no not at the moment no. We're not okay is that still an option.
You know, we're talking with our payroll provider about that at the moment, but as of right now we haven't done it.
Okay and then then.
On the demand side for your products.
Sensitive are you to the fact that the cruise industry basically is all the ships or.
In the harbor and not going anywhere for probably until the beginning of 21.
Yes, that's a very good question Michael and.
But the cruise industry is definitely.
Head.
Impact on the overall bunker fuel demand and so the the demand for bunker fuel probably as down worldwide in the neighborhood around 40%.
At the end of July so it's it also has some kind of tail through the economies. So it was fairly strong in the early part of the second quarter in minutes. This kind of fell out of bed here recently now.
For us Fortunately, we've got a full commitment of all day and so our product has been.
A priority to bunker one prior to going to other refineries for additional blend blend stock our re supply. So it's not affected our business, but the bunker business has clearly been impacted by the cruise line as well as just general eco.
Comic activity and shipping.
And the AD in Salt and during this is typically to slow part of the bunker business.
You know it starts to pick up in October.
Okay and then.
Are there.
I'm not sure how to ask this question so I'm trying to figure out if theres, a disruptor effect happening in year low collection.
Like our our parts of that market.
Behaving badly in this environment.
Per se.
Particularly with the oddity of where the spreads are with relationship of diesel and high sulfur fuel versus crude.
Or are in the market in fact behaving okay and this is just ugly in and the macro is the disruptor.
Well I would I would say the macro is clearly a disruptor because low oil prices makes the industry very difficult unless you can backup the charges through the generator.
I don't believe that the deep charges to the generator.
And have have happened yet I think the industry's on the way.
And but you got to go through some bad actors in the market that.
Clearly.
You know operate on a different.
Business model.
Maybe pravin and have chose to.
In a crop up a straight prices the gain market share.
We.
We have a lot of third party oil dependency. So we can you know it.
You know for US we can grow our collection business against our third party costs and.
So that that helps us, but it takes time and I think that's the biggest issue there's.
Theres those two disruptions I think that are prevailing at the moment in the space.
And.
And our their geographic aspects of where you're able to influence the CFO and others, where you're not because of what you're talking about or is this this is kind of the CFO limits on up im pushing CFO or just broad based.
No I think it is geographic nothing if you take our heartland footprint.
Our ability to chart for all up there is much different than our ability in the Gulf and so but you got a lot of refining capacity and.
You know between the southeast market and.
That how would you ever and I always say, he sort of Mississippi River its.
And so it's a challenge there are things done a good job, we've got charges and we got we got volume growth there.
But it's.
It should be better I wish I wish there was a.
The magic wand that that aligns everybody's interest, but that's what that's what the pre markets. All about you know as the markets are efficient and they will.
They will make the adjustments given time.
And then as you've seen the supply recover as what's the quality of the oil look like.
No I think we were pretty pleased with old quality, we've not seen any any real material change from.
Pre pre Kobe the post cobiz from a quality standpoint is just really volume related.
As what what we've seen but most of our supply.
Is.
It's kind of baked in and fixed into two our refineries and so we've just kind of whether this this be up.
Nothing nothing nothing's changed on quality, John you are great quality change, that's OCA, which say so.
Okay and question.
And then the nature of the maintenance, it's been done pretty much barring something that just can't plan Touchwood, you should run through the rest of year uninterrupted.
Yes, the Marrero facility I think our you know.
We paid a price in the second quarter to shut the plant down.
We we certainly.
Reduced our turnaround cost and it was that the scheduled turnaround time as well. So we just we really drug it out.
And we did all the work internally, which saved us a lot of mining.
But we did not restart the plant until our feet stands for pool and we were.
We were really pressed by third party suppliers pricing wise and exists you could make the numbers work and so we we just stood down in.
And.
Eight the downtime and its it served us.
It served the business really well because the plant restarted pool, we've been able to run rates and it gave the market time to store used motor oil.
And then the all came back into the business and has continued to come in.
No additional.
Cost so it's not it's not a sellers market and is not really a buyers market at the moment.
So I think we're doing pretty good and the strategy worked out kind of scary at the time, but but I believe that was the right thing looking back.
Worked out worked out well so I think we're set up pretty good for the rest of the year.
At Marrero I don't see any real maintenance I think there's a couple of days to three days for heater cleaning towards ended the year, which is planned and.
And Hartley will have their planned turnaround I think in September with normal so nothing abnormal I think we're we're set.
With what we see to run the plant.
And then the tough question.
Well why can't you take out incremental costs are you at least run breakeven on a cash burn basis.
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Well, it's it's really the spread.
So you got your fixed cost obviously to run the refineries and.
Marrero is more sensitive to crude prices and specifically diesel prices.
And there is theres no way to changed.
The price for diesel fuel, our and our usual SD that that our sale prices to add to on the Platte boat. So yes.
Before co bid we were around them.
We were.
Our spreads were.
28 cents, a gallon better than what they are today when you look at diesel at the crude.
The demand for diesel in the collapse or that demand destruction around diesel fuel that impacts our sale price.
So.
What I can say is were 28 cents.
All right and just on our diesel and we've made up 8% tone our feed costs. So far when you look at like June and July against that just that diesel loss from historical used oil prices. So we're we're making headway on the used all side.
Which is positive that's something that we have more controller and our team is.
I see in.
Better results in getting used oil prices down compared to crude than than diesel prices going up but it's.
You know.
We were we're comfortable with.
The rest of this year as far as.
Cash flow and and free cash flow and well what liquidity, we have for the business and I don't see a concern.
That that we're facing.
Okay. Thank you very much.
Yes.
And that concludes our question and answer session I'll turn it back to the vertex leadership team for any additional or closing remarks.
Okay. Thank you Jim Thank you.
Everyone for joining us on the call today, we look forward to executing on our.
Our profit improvement plans as we've discussed here today, while most.
Upcoming Investor relations events, having been rescheduled from last the virtual format. So we remain active and engaged with our investors and are covered analysts during September will be attending both the LD micro 500 conference and the H.C. Wainwright copper installing virtual format, we incurred.
Due to contact your institutional sales person as these firms should you have any interest in attending in the interim should you have any questions. Please contact knoll ran about them advisors at our at vertex energy dotcom. Thank everyone for joining US today. This concludes our call.
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