Q2 2023 Vertex Energy Inc Earnings Call

Good morning, and welcome to the vertex energy second quarter 2023 earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions.

To ask a question you May press Star then one on your Touchtone phone to withdraw from the question queue. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to John Rogers Hino Investor Relations. Please go ahead.

Thank you good morning, and welcome to vertex Energy's second quarter 2023 results conference call.

On the call today are chairman and CEO , Ben Cowart, Chief Financial Officer, Chris Carlson, Chief Operating Officer, James Reine, Chief Strategy Officer, Albert Louise and Chief Commercial Officer, Doug Hall.

I want to remind you that management's commentary and responses to your questions. On today's 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 risk factors that could cause actual results to differ please refer to the risk factors section of vertex Energy's latest annual and quarterly filings with the SEC.

Additionally, please note that you can find reconciliations of the historical non-GAAP financial measures discussed on our call in the press release issued today.

This call will begin with remarks from Ben Cowart, followed by an operational review from Jan brain.

Financial review from Chris Carlson.

By review of our commercial strategy by Doug Hall.

At the conclusion of these prepared remarks, we will open the line for questions with that I'll turn the call over to Beth.

Thank you John and good morning to those joining us on the call today during the second quarter of 2023 market shifts in refining margins combined with startup expenses associated with our renewable diesel facility impacted profitability at the mobile facility.

Several factors associated with the start up and optimization of our R&D facility effective financial results for the quarter.

Primary limiting factor unexpected financial performance is attributed to the volatility of market conditions for refined fuels and products.

Without compromising safety or quality, our goal is to maximize profitability in these ever changing market conditions does that end.

Sure. Thanks, there's been laying the groundwork for strategic pathways that we believe can help us accomplish our performance goal as an energy transition costs.

This broader strategy.

Third, creating a vertically integrated renewable fuels focused company.

It's built on three key principles, which our team will elaborate on in greater detail throughout the call.

First our.

Our commercial strategy.

Advancements in our fees origination and product marketing strategy are crucial.

Capturing opportunities along the full value chain.

These are core competencies. They vertex has developed over more than several decades, and we have recently made significant progress here as chief commercial officer, Doug Hog will address on the call today.

Okay.

Continued operational excellence in the form of a liability and attention to safety.

The reliable smooth operations of our facilities or batch consistency and visibility required to execute on our strategic vision and continue to scale the business going forward.

Our operational team continues to perform exceptionally well with chief operating officer Dwayne will cover shortly.

Third capital efficiency.

Our focus on the efficient use of capital through continued balance sheet improvement and enhanced risk management strategies remain a key priority for the business as we continue to grant, which our Chief Financial Officer, Chris Carlson will discuss.

With that I'd now like to hand, the call over to Jane drain our Chief operating officer, who will provide an update on our operations during the quarter.

Thank you Ben good morning, everyone.

I'll begin with a brief report on our health safety and environmental performance.

The second quarter 2023 was a clean quarter with zero, Osha recordable and zero incidents of environmental noncompliance recorded across the entire company.

Additionally, mobile solve zero process safety events.

I want to commend our team for their continued commitment to excellence and protecting our people as well as the environment journey extremely busy period.

Yeah.

Marrero had a successful turnaround during the second quarter in which we executed a full rebuild the evaporator during the outage since taking the outage marrero has exceeded the budgeted capacity utilization.

Our conventional fuels operation team at the mobile facilities successfully navigated several challenges during the quarter, including equipment failure and supply disruptions mitigating further potential impacts to our day to day conventional business second quarter conventional throughput volumes at the mobile refinery averaged set.

<unk> 6330 barrels per day or 102% our stated operating capacity.

This strength in conventional throughput is attributed to our team's ability to procure feedstocks despite pipeline outages.

Direct opex per barrel for the second quarter was slightly above our initial expectations at $4 23 per barrel.

This was largely driven by incremental cost associated with the repair of the Rd unit feedstock pumps as well as the additional effort associated with reengineering the startup sequence of the renewable diesel unit.

Our finished products such as gasoline diesel and jet fuel accounted for 61% of our total product yield during the second quarter 2023.

With the completion of the renewable diesel conversion project now behind US. We believe that this yield profile is an accurate representation of the expected yield profile going forward.

On a combined basis, our fuels gross margin per barrel during the quarter was $7.34 per barrel.

On a conventional fuels only basis, our fuel gross margin per barrel was $8.03, reflecting a capture rate of 34%.

The erosion in our reported fuels gross margin per barrel during the quarter was driven by a combination of several factors.

First <unk>.

First quarter compared to second quarter refining margins were compressed due not approximately 25% drop in the crack spread.

Second.

A reduction in crude prices of approximately $8 per barrel during the quarter impacted our inventory position.

Third the base refinery encountered yield impacts due to the Rd units operational downtime and startup.

Regarding the Rd unit conversion, there was $20 million and cost associated with the R. D units start up most all of which were one time costs.

These costs included marching downgrade.

Fixed cost associated with the pumping systems and feedstock devaluation that occurred prior to successfully getting the feedstocks intermediates.

Vertex renewable diesel conversion and set the industry pace for safety cost and schedule.

Unit achieved on spec status, just 14 months after the site acquisition.

Since commencing initial production of our D on may the 27th.

And achieving our targeted phase one production rate during the initial test runs we have observed stable performance and reliability of the facility along throughput curve as.

As we continue to operate we are focused on optimizing the unit through the pursuit of pathways approval for alternate feedstocks to improve L. CFS credits by improving their carbon intensity, which allows us to unlock the full value of the asset, which Doug Haugh will elaborate upon following a financial update and Chief Financial Officer, Chris Carr.

Olson to whom I will now hand, the call over.

Thank you James and welcome to those joining us on the call today.

For the three months ended June 32023, vertex reported a net loss attributable to common shareholders of $81 4 million or a dollar three per share versus a net loss attributable to common shareholders of 67 million or <unk> 99 per share in the second quarter 2022.

Included in this quarter's net loss on a GAAP basis is a onetime noncash interest expense in the amount of 63 million, which reflects the recent convertible note exchange transaction, we executed in June .

We reported an adjusted EBITDA loss of $34 2 million in the second quarter 2023 versus EBITDA income of $71 3 million in the prior year period.

The adjusted EBITDA loss for the quarter reflects the combination of weakness in refined product margins as well as the impact of incremental costs associated with the repair and startup of our R&D facilities here in the quarter.

Total capital expenditures for the second quarter 2023 were $30 5 million in line with our prior guidance issued on May nine.

Turning to the balance sheet.

As of June 32023, the company had total cash and equivalents, including restricted cash of $52 1 million versus $95 1 million at the end of the prior quarter.

Vertex had total net debt outstanding of $275 3 million at the end of the second quarter of 2023.

Including lease obligations of $162 1 million and.

Implying a net debt to trailing 12 month adjusted EBITDA ratio of three six times as of June 32023.

While shifts in market pricing had a negative impact on the profitability of the conventional refining business during the quarter.

Prices had materially improved from the lows experienced earlier into Q2.

The Gulf Coast 211, crack spread has materially improved from the lows of approximately $18 per barrel in two Q to over $35 per barrel as of the end of July .

Additionally market pricing for refined products outside of the benchmark such as jet. He has also recovered substantially improving 40% from the lows witnessed in two Q 'twenty three.

As a result, our current liquidity situation remains adequate to satisfy our near term obligations and capital plan for the remainder of 2023.

We remain focused on upgrading the overall capital efficiency of our balance sheet.

During the second quarter, we successfully executed on our cash flows to equity conversion for approximately $79 9 million of our 6.25% convertible notes for an aggregate of $17 2 million shares of common stock.

This is expected to drive approximately 5 million in annual cash interest expense savings and remove the longer term need to meet the obligations of principal in cash upon maturity.

The refinancing of the remaining $15 2 million of convertible notes as well as the $150 million in term loan debt outstanding remains a top priority of our financial strategy.

Keeping in mind, the prepayment prohibition clause on our term loan which expires on October one of this year.

We maintain an opportunistic view on refinancing this debt with more efficient less expensive sources of capital consistent with our strategic focus on our balance sheet and maintaining longer term capital efficiency.

Looking to the third quarter of 2023 with a successful conversion of our hydro cracker to renewable diesel production now complete and considering the lower complexity of the mobile facility less than 50% of our expected each of product yield profile now falls within the current benchmark product composition.

We therefore believe it is far less useful as the tool for forecasting expected profitability of our conventional refining operations and will no longer provide specific guidance unexpected capture rates.

For the third quarter 2023, we anticipate total conventional throughput volumes at mobile to be between 74070 7000 barrels per day.

Our expected yield of conventional products is expected to be comprised of between 59% to 63% finished products such as gasoline diesel and jet fuel.

Balance in intermediate and other products such as B G O.

Opex is expected to be $3 60 to 380 cents per barrel for the quarter and we anticipate total capital expenditures for the third quarter to be between 20 million to $25 million.

I'd now like to turn the call to Chief commercial Officer, Doug pause.

Thank you, Chris and good morning.

Now that we've achieved commercial production sales of Rd, and proven the unit to run at designated rates with yields at or better than target we.

We quickly shifted our focus to accelerating the deployment schedule of our multi feedstock supply and production strategy.

We are accelerating this due primarily to two factors.

One.

The new plan as demonstrated operational stability over a wider range of throughput rates than we'd originally anticipated at acceptable conversion rates provide.

Providing valuable insight into the optimization of the facility.

Two the economics of producing already from our B D. Soybean oil are currently unattractive under prevailing market conditions.

While the Rd unit and our supply system, our multi feedstock capable we had initially anticipated a longer break in period to stabilize and streamline operations.

Utilizing our B D. During this initial period.

With diligent work from our supply engineering and operations teams were able to introduce distillers corn oil or D. C O into our feedstock blend last week and have advanced the combination of eight different feedstock blends through our feedstock approval process in the last six weeks.

These include technical Tallo D C O canola and crude begun soy process through a nearby pretreatment unit under a tolling arrangement.

The reason I mentioned eight and not just the four different feedstock types, because we must run each supplier in origination point through our feedstock approval process before it becomes approved for use in blends run through the yard to unit.

This process is robust and includes quality assurance and quality control steps at each critical step along the supply chain.

I, specifically want to thank the engineering and laboratory staff the mobile site.

And it's fine trading team in mobile for advancing our feedstock schedule by months with the hard work and diligent required to do it safely while maintaining the quality, we need to protect our catalyst life longer term.

With approvals in place we've obtained attractively priced commercial supplies of crude to gum soy technical Tallo canola and D. C O for this quarter.

These fees will be included in our feedstock blends for the remainder of this quarter and optimizing a feedstock diet consisting of significant percentage of these lower costs needs is a key priority for our R&D team.

In parallel with these current optimization efforts.

Our feedstock development team his sourcing suppliers of other lower Ci and lower cost alternatives in the yugo and fats and oils and greases market, while they build a longer term supply of agricultural oils produced some cover crops.

This combination of near term optimization and longer term feedstock development.

Builds on the 20, plus year history of vertex of developing sourcing and scaling alternative feedstocks.

To enable and support these feedstock optimization and development efforts, we have 500000 barrels of tankage and logistics capacity in mobile that provides dedicated storage for each family of feedstocks as required by the EPA.

This infrastructure also provides us the necessary blend tank capacity needed to optimize the blend.

Prior to final injection in our pipeline to the refinery day tanks that feed Dr. D unit.

Our feedstock supply system provides us with the capacity flexibility and capability needed to optimize our mix of many alternative feedstocks using a combination of truck rail and barge logistics with a dedicated storage and blending tanks that are multi feedstock supply strategy requires.

In addition, as feedstock supply system, we've added storage capacity to our deepwater products terminal utilize to load vessels with our D for supply to the West coast to North America.

With these additions we now have 450000 barrels of Rd storage pipe directly from our argue unit to our Blakeley Island terminal, whereas manifold together and pipe directly to our deepwater dock.

The system performed well loading our first shipment last month with rapid loading rates that minimize dockside time for the vessel and eliminate unnecessary demurrage or delay for deepwater vessels.

We added the additional stores to ensure that we can more easily maximize volumes loaded to each vessel.

Which in turn minimizes our freight cost per gallon.

In closing I would just like to thank our supply engineering and operations teams for allowing us to safely advance and scheduled this work and for obtaining excellent operational and safety results during a hectic startup and commissioning period.

This team is demonstrating that we can build upon our solid operation with advanced feedstock supply system.

That allows us to optimize available margins.

While advancing those plans are a key priority for all of us at vertex the ability to do so starts with safe and reliable operations.

And we're grateful for the team for delivering those conditions.

Thank you for your time and attention today, we look forward to taking questions. Following some final remarks from Ben.

Thank you Doug over the past year, our focus has been on executing the biggest development project in the 22 year history of vertex we knew we owed it to the market to deliver on our target of successfully transition and the mobile refinery and completing the renewable diesel conversion project.

As Doug and the team have laid out we have the assets.

We have the operational capability.

And with our expanded teams expertise, we are well positioned to execute a strategy that has been taking shape since the close of the acquisition of the mobile we're fine.

We are currently drafting our five year plan and are looking forward to publishing this and 2024 following Finalization and board approval.

For now as I've stated in the beginning of the call. We will build on our achievements to date and pursue areas of greatest opportunity, which we believe are in feedstocks logistics for products marketing balance sheet improvement and risk management.

The progress we've made to date is exciting.

We know we have a lot of work to do in terms of translating this the shareholder value as always we are grateful for the shareholder support.

All of us to continue executing our vision as a vertically integrated energy transition company. Thank you for joining us on this call today, we look forward to providing you more information and updates in the near future.

With that well open the line for questions operator.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.

Youre using a speakerphone please pick up your handset before pressing the keys to withdraw from the question queue. Please press Star then two.

The first question is from Noah Kaye with Oppenheimer. Please go ahead.

Hi, good morning, Thanks for taking the questions.

Good morning Noah.

So so nice job on the reliability and Ah you know just the throughput at.

At mobile and a hearing that's the new normal is very encouraging.

I understand the logic around not providing a capture rate going forward given the product slate, but can you give us some directional guidance you know and I think Chris you were alluding to this in prepared remarks on where you think.

Margins can go as we look out here in the third quarter in the back half I mean, clearly they should go up right based off of where are you now that the benchmark is and some of those other price, but can you help us put a little bit finer point on it because you know I think we just wanted to get our bearings here from the sell side.

That's a good question Noah. Thank you. So yeah, I would say definitely as I noted, we're seeing improved margins in the third quarter.

Especially over what we saw in the second quarter.

And you know as far as you know the percentages of yield and what we're going to see out of the refinery.

Yeah, that's kind of what we're going to present going forward.

You know from us.

The yield perspective.

Okay I wouldn't try to follow up on line, maybe we can try to get a little more clarity on Rd production clearly you're doing a lot of work around sourcing the alternative feedstock.

Having run into the reality of RV D. Economics here, just given everything you said when should we expect.

The company to start profitably generating renewable diesel production and scale.

Yeah.

Well I think you know we're.

We're going to optimize the mix that we outlined today.

Today, you know for this quarter I think the.

You know there's.

The margin environment similar to you know.

Along with crack spreads has improved this quarter versus last quarter, just on any feedstock mix right. So I think.

We should all be encouraged by that and sort of it looks like we commissioned a unit and produce that.

At the bottom.

At least we hope in the near term that's the case.

And you know margin environment this quarter looks.

Is it.

Oh, I'm, sorry, I, just wanted to get a little bit of a.

Clear answer to that I mean, you've got peers guiding to renewable diesel production for the back half of the year or at least didn't sort of you know volumes I understand you know they have different feedstock blends, but maybe you can help us better understand at least the steps that you need to take to get alternative pathways approved and whether or not you.

See a pathway here to actually materially increased production using our BD.

Yeah, I think that yeah, we're going to I mean, the main focus now is this quarters getting those pathway for Eagles right. So you've got it you have to actually run each of those fees.

And.

Quantities enough to get the approvals for all CFS. So that's the focus right now.

Uh huh.

You know our run rates are going to be.

Based on the available margin right and what we found with the units, which James can speak to.

Any more clearly than I can but.

And the operating range.

Stable production with good conversion rates.

Is wider than we anticipated which is good.

So we're not we're not forced to run the unit at higher production rates, if theres no margin available.

So that's you know that's that's what we're exploring is that's why we're not.

You're not providing guidance on throughput on the Rd unit, yet are similar to what we've done with conventional yeah. I expect that you know, we hope to be able to do that in four quarters, but right now I haven't weeks of production time under our belt, we're not going to make that commitment just yet.

Okay. That's helpful. Thanks, I guess, if I could sneak one last one then just.

How should we be thinking about managing the balance sheet and the cash generation profile for the back half you know I assume there'll be some focus on.

Decreasing inventories you do have some capex here in the guide for three Q.

Maybe you can speak to balance sheet management cash generation and and potential additional capital sources are if you need to.

You know expand your liquidity.

Yes again good question Noah.

And I think as everybody knows the last 12 months, we've put tools in place for day to day working capital.

One being an intermediation agreement on the conventional side and then also in the recent quarter. Another intermediation agreement for the R&D side of the business.

In addition, we retired the majority of the $155 million convertible bonds.

That was out there.

And you know as you heard last quarter, where we're ahead on Capex for phase two.

So as we kind of look forward in the next two to three quarters. Our Capex spend is expected to go down.

You know all of which you know really put us in a great position.

To look out then to refinance the overall business heading into the fourth quarter and first quarter.

Okay, great. Thanks, very much for taking the questions.

The next question is from Eric Stine of Craig Hallum. Please go ahead.

Good morning, everyone.

Ordinary or so.

So just sticking with the renewable diesel you just to be clear the E.

E. Feedstocks that you mentioned are those improved or is that still in process and then I know this doesn't necessarily matter and so you get <unk> approval for those pathways, but can you just give an idea here maybe.

I don't know if its a blended ci score Ci.

Carbon intensity with comparable to soybean oil.

Yeah, we can't give you a direction on the C. I sort of averages at this time I mean, the Ci scores on the.

Feedstock categories themselves or are you know that's all public information in terms of the standard Ci score that you can ascribe to those we certainly hope that our particular Lcs pathways. Once approved will improve on those public benchmarks, but no reason to believe they wouldn't but if you want a sort of a.

For calculation I've looked at those.

You know these are their card numbers are they're great numbers. However, you look at the qualifying.

Qualifying those argon scatter.

Spread on those as well.

Yeah.

The approval process I spoke to is from our internal engineering team right. So that's we first have to know okay.

Yeah.

We've obtained feed we know we can run it it goes through our quality control process. It's one thing to know that you know a particular type of feed which we've engineered for us is workable than we have to actually get commercial quantities of the feedstock and make sure that it meets the specs right because it.

The.

The big fear is contaminating or poisoning your catalyst right. So we've got to keep those safeguards in place and then make sure that we run through that rigorous approval process on each of these each of these origins and each of these types.

That's the that's the that's the treadmill of the teams on right now to keep up at that pace we've got.

Many additional blends that we've got to get through the next couple of quarters to make sure we can fully optimized.

You know the margin environment that gets presented to us.

Because we don't know.

You know at any given time, which of those feedstocks is gonna be advantaged in that you know in the.

For part of their curves in terms of the costs. So our goal operationally is to make sure that we're prepared both with the infrastructure.

The pipeline configuration that we've got between the infrastructure and the Rd unit.

And that all the engineering and lab works been done to qualify all of those plans so.

Particular feedstock presents a really good buying opportunity in the market. We can act very very properly get that indoor blend and know that we can do that safely and reliably.

That's really the work that's going on right now with the feedstocks.

Got it and when understood I mean, obviously I've got access to the various Ci scores I guess that was more getting at ads more comes in and as you see availability what that mix might be but I guess, that's more of a you know.

To be determined going forward, so I guess I'll leave it at that.

Then maybe last one for me just.

So obviously the production a lot of it it's falling outside the 211.

So no cancer rate going forward.

It's understandable, but any thoughts on.

On maybe.

Changing the way that you can talk about this you know not the 211 any more maybe it's a different crack spread.

Or anything along those lines because I'm just envisioning when you do your quarterly update.

What are those metrics that you're going to give in.

Does that truly give transparency into what the quarter.

Is looking like.

Whether it's a week or two after quarter end.

Yeah.

So what we're trying to give you is really more of what our yield structure is.

As we kind of go within ranges and this way there are commercially available or available in the market versus current plus forward strips and that.

Doing that.

Should allow you enough, we hope enough insight to be able to.

Look for.

What the guidance would be and so we're giving you crude rate capital.

The yield.

And.

What did I Miss that.

That's it.

I think it's probably good to add that we're benchmarking off of LLS crude rate posting.

I think yeah, LLS boasting see Bob.

The Gulf Coast.

D G O Gulf Coast and.

<unk>.

Yeah.

U L S D.

So net covers okay I'll take the rest offline that's most of everything we have.

They actually better it should be better it better than what we were trying to do 211, especially with the hydrocracker out of service or moved or Rd serves sorry.

Okay. Okay. Thank you.

The next question is from Amit Dayal of H C. Wainwright. Please go ahead.

Thank you good morning, guys just on the repairs and then.

The costs associated with that was how much of this was anticipated and how much you actually went into the repairs you know for the $20 million.

<unk>.

Thank you.

Yeah, So what I, what I described was what I put the startup cost which was of course delayed further from.

You know what our original plan was when we damage the pumps. So none of the cost about a third of it was just straight repair costs and what the team had to do to get the pumping system to work.

And with that we also brought in a <unk>.

Expensive startup.

Material and downgraded and that was about another third of it and that startup material was what was required, especially as we restarted that was our plan. However, we did not plan for the way that the team had to adjust to be able to startup safely and make sure we get through the initial commissioning phase.

Because we knew we had to get way out in front of this unit to make sure. We had feed in case, we did startup but during that time, we did get out.

A devaluation of the pool.

Understood. Thank you and then okay.

I may have missed some of the commentary around.

The feedstock and the R&D production just to clarify are we still producing that it doesn't barrels per day, given sort of you know our feedstock.

You know.

Process, that's going on in terms of finding the most optimized the bathroom et cetera.

So to be clear, we're going to we're gonna vary that production rate based on a couple of factors the biggest of which is margin of opportunity. So if there's if there's very very attractive margins. We will we will max rates within safe limits of course, and then you know we're finding the optimum rate.

On each blend in each mix that we see to the unit, which as you know it's going to take some trial and error and we need to ramp you ended up and down to do that.

You know against each each blend that we want to optimize them. So you know.

We don't that's why were you know and I. Appreciate your earlier question as well, but that's why we're not providing the same throughput guidance yet on the Rd news that we have for the conventional so we hope to do that in the future.

Hope everybody understands that's you know we're past commissioning we run at design rates, we know that the unit can do it now it's now it's what's the operating envelope that's available to us to optimize with.

So one of them.

You may be provide this guidance.

<unk> fourth quarter or early going going forward.

I mean, we.

There's certainly some opportunity for fourth quarter, but I would feel much more comfortable with you know next year I think heading in fully got the system run and we've got the optimization funds done you know what our conversion rates are at each of those each of those blends.

And then we can get much firmer guidance and we'll have a little.

A little bit more forward look on the fees at that point, because we'll know what our recipes are gonna be it with more certainty going forward. So we'll actually be bye.

Buying those speeds on a on a forward basis.

Much more consistently so that'll give us are you know our run rate.

Forecast a lot more stable than what we have right now.

Thank you for that and just last one.

If he doesn't luxury.

It looks like you sold.

Southern reentry into the quarter I'm I'm, just trying to sort of bridge.

The logical trying to sell more inventory during a tighter market conditions.

Just any color on how you're managing that side of the business.

And what maybe drew and maybe I didn't understand this correctly, but if we did sell more inventory into the quarter I'm just trying to understand the logic behind that.

So I guess just to be clear if youre looking at last quarter to this quarter.

And the last quarter call, we did discuss inventories building around R&D.

Especially around the feedstocks that we brought in.

We did have some other inventory builds at the end of last quarter at our Marrero facility of which the majority of that is started to sell during Q3. So that's the shift that we're seeing in inventory at the moment.

Again, a lot of that is driven by the the Rd startup.

Okay understood.

That's all I had guys. Thank you so much.

Thanks.

The next question is from Manav Gupta of UBS. Please go ahead.

Hey, guys. So I wanted to understand that to capture a little bigger.

<unk> was the fact that you have a slightly higher diesel yield and high jet fuel yield and those products were discounting to gasoline also a drag on your capture in the <unk>.

Yes, yeah.

Yeah, particularly jet jet jet was big difference between <unk> and too cute.

Okay. So it was Jack Oh, that's what I thought he loved yet, but Jack has allowed and so it has dino so again I don't want a guidance, but if it was basically jet and diesel trading at a big discount to gasoline.

Those two have liberalist right.

Yeah, and I wouldn't say, it's just a discount to gasoline more of a discount to their traditional position versus gasoline that had been in the prior quarter. So you saw a realignment in the second quarter of distillates versus gasoline.

Not entirely anticipated with driving season, hitting in gasoline going through its seasonal adjustment but.

Certainly.

That impacts how the 211.

Translates into a capture rate for us in a big way. So you know I think that's why we're trying to.

Move move your view to from a capture rate at a gross level against two on one to more of a understanding of the actual yields.

Particularly given how much jet we make.

A substantial portion of our production.

Okay. That's all I needed. Thank you so much.

Thank you.

The next question is from Brian Butler of Stifel. Please go ahead.

Good morning, Thanks for taking my questions.

Hi, Brian Hi, Brian .

Just on the conventional again at the current prices as conventional profitable is it past breakeven.

Yes, yes, yes.

So if we were to run at current prices for a quarter you would be the convention would be profitable I just wanted to be clear on this because I guess, what's your yes.

Yeah. So the expectation is on a long term basis, you are able to manage it at some level of profitability correct absolutely.

Brian I mean, one of them one of the things you see us doing now that we've moved the hydrocracker and the renewable diesel surface and is dedicated to renewables. It's how do we continue to try to get yield improvements inside of the refinery. We've got we've already captured a few of those we've got more coming and we expect within the next couple of years.

To replace that income generation not only within the defense line, but really one of the reasons that doug's here is to help us make sure we get the best net back all the way with our products that we are now selling.

Selling.

Outside of our shelf facility and Thats what.

You see Doug and his team doing is really making sure that we're getting we're capturing good net backs. When every one of our molecules as we try to improve the yields across the refinery inside the sensor.

That's right James Jamie two fold right.

What we can do inside the fence line on yields and that's what we can achieve commercially.

In the market for all of the production of the refinery, which you know.

So it's ongoing.

Ongoing optimization opportunities and margin capture opportunities there so I think the Oh.

And also the.

It's not just the second quarter market conditions, but.

Unit showing through commissioning, we had their unconventional different as well right.

The two are disconnected.

Correct.

But.

That's why we're the yield guidance going forward. We believe is accurate on the current facility and yes. It is profitable at today's crack certainly let me let me just.

Hello.

Yes.

Yeah.

When you think about that.

Third quarter that we're in.

And what we're looking at as far as forward curves.

In fact, we've added roughly 10000 right.

Production on the conventional side really.

Yeah positions us.

Well.

As we look ahead.

Kind of.

Added value that that we originally really didn't anticipate.

So the team's continued off demand.

Got it.

On a go forward basis.

Okay, and then on the renewable diesel.

If my understanding is correct that feed the changing of the feedstocks that you're not running in that 8000 barrels per day and and at some point I'm guessing you'd get there, but is that a fourth quarter or is that a first quarter 2020 for event.

But yeah, so to be clear again.

For the earlier question, we are not running at 8000 barrels a day and we're not currently providing guidance on throughput for the third or fourth quarter at this time.

But to be clear the unit is fully capable of operating at that level.

What we've proven out with the commissioning process.

You know very very pleased with the conversion rates.

And the throughput capacity of the unit.

Performing above design.

Target So you know.

We're pleased with that.

But you know this is a necessary work, we need to do to position the unit for long term success and also the you know the market conditions don't tell you to run hard so we're going to we're going to optimize against the available margin.

And find the you know the optimum operating envelope at the unit provides us to do that.

Alright, and so on on this uncertainty kind of around the feedstock on the renewable diesel.

Does this limit your ability to get a ci score for the LCR fast does that now get pushed from an expectation that you were going to get a score in the fourth quarter now that some time in 2024.

No no. That's that is in fact that is the work that we're doing now asics.

If anything we've accelerated versus you know delayed in that regard. So you know the pathway approval requires us to run some commercial quantities of each of the feeds that we seek pathway to belong.

And then to move from the default score to a fruit pathway.

We've got to submit all of those details on each run.

Through the guard processes required to achieve those those pathway approval. So.

Now look we don't control the schedule that they can get backlogs.

So many other regulatory agencies have been of late but for what we can control. We are we are marching forward at pace.

Alright, and you do have you've already received authorization for the sell the Rins and in your other tax credits is that correct.

Our yes, we've been.

We secured that the.

Rents have already traded in and then produced in file so.

Yeah.

Okay, and then as we wait on that.

Solving the feedstock on renewable diesel is the hydrogen expansion project slowed or is that still expected to continue to move forward.

Yeah, it's still expected to move forward mid year next year.

It's when we plan on bringing it in we're doing the capital work around it where we tie into it as it's massive since doing all the foundation work right now.

Alright, Thank you very much for taking my questions.

Thank you.

The next question is from Donovan Schafer of Northland. Please go ahead.

Hey, guys. Thanks for taking the questions. So the first question I know.

It did miss some of the prepared remarks kind of juggling calls so apologies if you've already covered any of this but.

You know you've moved away from crop from providing a capture rate you talked about jet fuel, it's kind of a big part of that.

Your your other the quote unquote other category that includes our intermediates like D. G O L.

LPG.

And other items. That's also a significant piece I think 37% of the yield.

This quarter, so I guess I'm curious if in this quarter.

Hum.

If you can give us a sense of kind of the magnitude of the significance of the impact that had on the capture rate was it was it really pretty much all on the jet side and that kind of held steady or didn't make a big difference or was it sort of mostly.

But but there were you know 64 do you like you know mostly jet, but there is still a big impact from changes in those that other category.

And then and then sort of going forward.

I think I appreciate the logic of moving away from the capture rate. It probably makes a lot of sense, we might need some help figuring out how to kind of follow you know something like <unk> in particular.

It was a product that gets traded between refineries and whatnot. There is not a great kind of public.

We don't really get public prices.

It reported so I'm wondering if you can help us.

Think through what we would track or what we might look at to to estimate where that other category is going but that's you know like more than 30% of the yield.

Go ahead, James Alright, let's let's.

First start with your first question. So what was the impact so roughly I'll answer the yield component of it it was roughly a dollar a barrel impact just on yields.

And crude devaluation was another dollar a barrel during.

During this quarter.

Top of it we solve the jet dropped by about $30 relative to crude across the quarter.

One to quarter two it was still healthy however, it was a significant drop in and those all affected the capture rate.

Yeah.

Alright, So that's question one.

Question, two was really around B G O.

Yeah, Let me say this ramp.

We're focused on the key products, which is gasoline diesel jet where you can actually go get those index pricing and do your evaluation against L. L. S crude.

As you said <unk> is a is a.

Large piece of our yield structure. It is and there's not a big index to go draw from publicly to figure that out. So you got to that's why we're not making it part of the guidance because it has.

The ability to be.

A big positive or bring a negative at the same time, depending on what those markets do so as you said that video trades between refineries and the rule of thumb James I guess when when yes, either 70, 70, 60, 40, 70 30 versus seaborne prices kind of our rules of thumb gas diesel diesel yes.

So.

Either.

70 gas 30 diesel or 60 gas 40 days, so everybody has their own choice on what what they use to figure that out. So I think we're probably tracking closer to 30 today.

It has moved away some recently due to some cat cracker outages.

Recently in the market.

But that's generally has worked pretty well for us long term well, we'll leave that up to you Donovan, but that's probably the best guidance. We can provide to you there okay.

And then my second question is on <unk>.

The cost that you incur for rents on the fossil fuel side.

So it looks like unless I just sort.

Misreported things it looks like the cost of rents actually went up.

$2.51 per barrel in Q1 to $3 66, a barrel in Q2, when I look at the EPA is kind of a dashboard showing these pricing.

I believe it's D six.

Returns that you guys typically purchasing maybe you have the option to do <unk> five if you see that is advantageous.

<unk> for any reason, but in any case the pricing for those seems to decline from the first quarter to the second quarter. So I'm curious what caused the cause cosby them cost for you guys to increase was there a change in the AR and the commitment.

Obligations for you guys, where you had to do more RIN purchase more rins than you would've been in the past based on yield.

Mix or is there sort of a timing delay between what I would see you know like on the EPA is pricing dashboard versus what you experienced just kind of trying to understand the difference there.

Yeah, I'm not sure how that.

No I'm actually not merit, the EPA dashboard price, but the.

The locals the spot price in the <unk> market has.

By arch for instance increase a bit during the quarter didn't go down.

Specifically the sixes, yeah and okay. So you you saw <unk> go up on a on a per Ren that actually increased.

And is it a is it regional there's regional pricing.

No no, but there is no okay.

It's a liquid market, but it's not like it's.

Traded index right sure Okay. Okay.

Both transactions right, so you've got that.

I run our run rates were up so you're incurring greater.

RVO obligation.

With those run rates. So that's a factor, but if you go out and find out per barrel I understand you've accounted for that but the.

Yeah. The the RIN cost was was higher.

Okay. Okay.

Yeah, that's probably just something I think the EPA dashboard is the sort of like a sampling or something it's not a complete data set so that might just be part of the issue. There. So okay. That's helpful that clarifies things a bit. Thank you guys I'll take the rest of my questions offline.

Thank you okay. Thank you.

I don't know if you have a question. Please press Star then one the next question is from Jason gave women from TD Colin. Please go ahead.

Hey, good morning, guys.

Great.

I wanted to go back to the renewable diesel project and just clarify a couple of points that you've touched on during the call. So far so I understand you're not providing throughput guidance and it sounds like you've made around under 8000 barrels a day I guess I'm wondering if is that a function of.

<unk>.

Not having the L CFS approval, yet or is it a function.

Of just other market dynamics going on and I guess, what I'm trying to understand is in a.

If you were kind of.

Fully operational when everything was lined out would you still be running under nameplate given market conditions.

Yeah, I think it's yeah. Thanks for the question I think it's a combination of both so you've got.

Yeah.

So you can look at the.

She bought on soy to see the unbelievable runway.

During the quarter right. So you know feedstocks are kind of skyrocketed.

Even when you're not using soy everything trades off of soy right. So it drags the whole complex up when you've got that kind of move.

You know and that's that's it.

In addition to the operational.

Or is that we've talked about already but that's just that's a big factor I think yeah. If we.

And you don't have the additional margin opportunity of the of the CFS pathways available to US right now right. So there's no.

You know normally yes, those were all in place for your question. We would we would run to capture those are not in place so youre not going to run and not not not catch those yields obviously against a very very high feedstock costs. So.

Yeah.

Got it and my follow up also on the project is can you discuss if you're utilizing the third party pretreatment units.

Yet if not when we should expect that to occur.

And then maybe just touch on I know you've mentioned in the past or some unique logistical benefits to the renewable diesel project, if you're able to quantify any of those that are more difficult for the market.

Quantify themselves that'd be great. Thank you.

Yeah, I think the.

Yes, we have we are as of now utilizing pretreated feeds we've put our first largest through the initial.

Richard facility.

As we've mentioned I think on earlier calls, we do intend to utilize multiple facilities.

The commissioning on the second one is.

There's about a month behind by our partner. So we're looking forward to that but that's that's in hand and ready to roll on the feedstock plan for us.

So.

You know we'll.

We will start to benefit from the.

Not just the.

Base.

Spreads between bean oil and the other feeds that we described but the.

Spreads between that and the crude fields of those same categories. So those economics will continue to be available to us now in this quarter and going forward. So that's certainly a big part of the plan as we described last few quarters. So that's now in place and.

You know I think that.

It's going to be a big benefit.

As we continue to optimize the blends.

Yeah.

I don't know how much of those two pretreatment units what is their capacity relative to the size of the 8000 barrel a day facility that you have.

You know, it's it's a I don't want to speak for those producers they've they have named Blake capacities.

<unk>.

They are working towards and representing we don't have the commercial operating experience with him yet to know that those are where those units will run. So you know our.

Our approach from a feedstock portfolio standpoint has been that you know we have the capacity available from a PT pretreatment standpoint.

To treat.

All of our feet at these run rates right at the phase one design run rate so.

That's the premise that's the approach that's the strategy on the Port you know the feedstock portfolio.

We can't confirm for you at this time that those pizza use will run at that that those rates. We have no reason to believe they won't but again, we're not going to can't.

I can't commit to what they can achieve until we see them do it.

We have been pleased with the initial results.

We're excited about continuing to work with them and I'm very positive in their progress at this point.

Got it and then anything on the logistics side that you could comment on or have things been running there as expected where you're seeing some benefit above what a generic renewable diesel plant would do.

Okay.

Yeah, I mean, I think the biggest benefit we have is optionality right, where we have the logistical optionality in mode. So we can take truck rail or barge.

And we have you know.

Really good optimization capability between feeds in terms of segmenting each family as required by EPA before we blend.

All of that infrastructure is in place and it really just gives US you know the optimization levers we need.

To pursue the lower cost feeds whichever category they arise it which obviously not entirely predictable and that's one of my guess so.

That's the that's the infrastructure that's in place and allows us to do that optimization.

In terms of modeling that or benchmarking that you know.

We will look for public information that we could provide going forward on that but there's there's nothing obvious right now, but I think the.

Simple way to think about it is as you know that infrastructure allows us to buy a better basis than we would otherwise achieve versus the.

Versus the board.

Okay.

Alright, thanks for the color.

Okay.

Okay.

This concludes our question and answer session I would now like to turn the conference over to Brian <unk> for closing remarks.

Thank you operator, and thank you everybody for joining us on the call today.

No.

It's really been a.

A landmark quarter for the company.

Definitely not happy with the market headwinds I guess, we face then.

Bottomed out on some of the the spreads.

It's really good looking ahead to see the third quarter bounce back like it has done so.

Very positive about that we see a lot of.

Good.

No.

Conditions, so as we look to the end of the year.

Really pleased with the delivery of.

This R&D facility on plan and the way the company and the team is.

Projected.

That work deliver that work has been it's been a monumental and commendable to the efforts of our people.

And so we're very proud of.

What has been accomplished there.

I wanted to talk about.

The systems Thats been deployed so.

Doug mentioned.

All of the third party infrastructure all the pipelines all the connections.

The tankage, the barging and the ship and all the the logistic assets all have been deployed and tested in the second quarter. So that was a big undertaking.

Our our EHS performance.

<unk> pad.

You know our history historic accomplishment from a safety environmental compliance in its history. So you know that.

The drinks to the team and to the organization.

Stay focused on what's most important very proud of that the leadership.

You know Doug coming in around our our trade teams now in place we've got we got the people.

We're acquiring feedstocks were opening up new relationships every day so the market is.

Very very excited about our.

Our facility being in Atlanta, So thats positive our working capital facilities that we've been able to establish with.

With Macquarie across the conventional business and now in the second quarter. The R&D business that provides good working capital for the business.

And then the fact.

We've pivoted again in the middle of all this we accelerated our phase two with the pipeline system that we brought forward. We spent the capital early that is really allowing us to move our pre treatment in all our advantaged feedstocks up in front of our plan. So we're ahead of plan when it comes to that.

And it's a good thing we didn't say this the.

The soybean prices accelerating like like we did but we're well prepared we're right where we're supposed to be too.

Stay ahead of that curve I think what's.

Most most noteworthy.

As I look at the business.

It's the fact, we closed this transaction.

April of 2022, while at the refinery.

We took on a monumental challenge to build the R&D plant and build it out quickly.

And deliver on that which we've done.

But we only had $100 million at close in cash.

And we've had unbelievable amount of tailwind from the conventional business from the time, we close in the second quarter doesn't count because we had a little of takeaway.

But when I look at the balance sheet.

200, plus million dollars of capital that's been deployed into the mobile refining asset.

Between the conversion.

The remaining working capital that we have in inventory now to run the business.

And then to take and reduce our debt by $150 million through the conversion mainly of the bonds.

That's a major shift on our balance sheet.

We've been very focused on that.

When we look at now.

We've created around the asset compared to what we started with.

I think we will see as we get close to the opportunity to recapitalize our debt.

And see our R&D margins start to really flow into the business.

You know that.

The refinery has served as a as a major platform and its and its gotten better.

Quarter by quarter month by month or people has developed.

Ross the business. So I'm very very excited about the business I believe we've got.

A lot now we can we can rest alone.

Yeah.

We look ahead. The work is done we've delivered on what we said we needed to do so we see this quarter.

As translational it doesn't define how the business moves forward by any means.

<unk>.

I do believe that.

We can we can start talking about the future plans of the company and that's what we're looking forward to it so really appreciate everybody's time and I appreciate.

The support.

To us and to the company and we look forward to our call in the third quarter.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.