Vertex Energy, Inc

Q3 2021 Earnings Conference Call

11/9/2021

spk03: Good morning, ladies and gentlemen, and welcome to the Vertex Energy, Inc. Third Quarter 2021 Earnings Call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Noel Ryan. Sir, the floor is yours.
spk04: Good morning, everyone, and welcome to Vertex Energy's Third Quarter 2021 Results Conference Call. Leading the call today are our Chairman and CEO, Ben Cowart, CFO, Chris Carlson, and EVP of Development, Alvaro Ruiz. We issued a press release before the market opened this morning detailing our third quarter results. I'd like to remind you that management's commentary and responses to 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 discussion of some of the risk factors that cause actual results to differ, please refer to the risk factor section of Vertex Energy's latest annual and quarterly filings with the SEC. Additionally, please note you can find reconciliations of the historical non-GAAP financial measures discussed during our call and the press release issued today. Today's call will begin with remarks from Ben Cowart, followed by a financial review from Chris Carlson. The conclusion of these prepared remarks will open the line for questions. And with that, I'll turn the call over to Ben.
spk09: Thank you, Noel. Good morning, everybody. Thank you for joining the call today. I'd like to begin our call with a brief overview of our third quarter results, followed by a progress update on our pending acquisition of the mobile refinery, including those key milestones leading up to the close of the transaction. We generated strong year-over-year growth in Adjusted EBITDA during the third quarter, given a combination of improved refining economics and continued operational execution. UMO collections increased 9% year-over-year in the third quarter, while refined product margin reached elevated levels given higher overall commodity prices. This performance serves to more than offset a 14-day weather-related outage at our Morero Refinery in September, together with lower utilization at our Heartland Refinery as a key hydrogen supplier was forced into temporary force majeure for the period. Despite these internal headwinds, our team delivered an exceptional performance in the period, focusing on those factors within their control. Chris will provide more detail on our financial performance in the third quarter during his prepared remarks following my comments here. Since we first announced our planned acquisition of the mobile refinery earlier this year, our team was working diligently to recapitalize our balance sheet as we prepare the business for the next important phase of growth. Following months of discussion with commercial lenders and capital providers, we've begun to lay the foundation for a long-term, low-cost capital structure capable of supporting the planned growth of our business with minimum dilution to our existing equity shareholders. To that end, In November, we completed $155 million offering of 6.25% convertible senior notes due 2027. This heavily oversubscribed transaction achieved several important objectives for Vertex at a critical moment in time. First, it allowed us to lock in an attractive fixed rate on long-term notes maturing seven years from now second given the structure of the transaction we have the option to settle future conversions in either stock or cash subject to timing and conversion price restrictions outlined in the offering memorandum given the significant free cash flow we intend to generate from the mobile asset over the next three years we may choose to settle future conversions in cash which could serve to significantly reduce potential equity dilution third This transaction is more than sufficient to fund the entire $75 million purchase price of the mobile refinery without having to issue equity. And finally, this transaction introduces Vertex to an entirely new base of sophisticated, high-quality institutional funds who believe in the long-term potential of our story, some whom we have both chosen to own equity in the bond. In summary, this transaction was a significant win for the entire company and its shareholders. We want to thank our partners at Oppenheimer who led the transaction together with co-managers Craig Hallam and HC Wainwright for executing this successful capital raise. In addition to the net cash proceeds collected from the convertible notes offering, we are currently engaged in final negotiations with a capital provider to secure a $125 million term loan which will be used for the capital investments at the mobile refinery together with 125 million working capital facility with a commercial lender that will be used to support the purchase of inventories at closing. We expect that both the term loan and the working capital facility will be finalized during the first quarter of 2022 in conjunction with the closing of the mobile transaction. Before I conclude my prepared remarks, allow me to share a brief update On where we stand with the planned measure of our UMO collection and recycling assets to safety claim. This month, we intend to respond to a previously disclosed second request of additional information, documentary materials from the U.S. Federal Trade Commission in conjunction with our proposed asset sales safety claim. Upon closing of the transaction, we currently anticipate total cash proceeds to Vertex will be between $90 and $100 million. As the FTC is currently evaluating the transaction, we will not provide additional comments on the matter. We currently expect the transaction to close during the first half of 2022 subject to FTC approval. In summary, our team continues to demonstrate a consistent track record of execution and value creation with our legacy operations. In fact, we expect record fourth quarter as we close out 2021. Additionally, we've nurtured a culture of safety and reliability throughout our current refining systems. Looking forward, we've made significant progress to ensure that upon the closing of the mobile refinery acquisition, we have the people, systems, and processes in place to support a seamless transition of its commercial operations. Our balance sheet is stronger than it's ever been, bolstered by a combination of free cash flow from our legacy operations, recent cash proceeds from the convertible offerings, together with expectations for additional availability under a planned term loan and working capital facility, all of which are expected to support our plans for growth. With that, I'll hand the call over to Chris Carlson for a review of our recent financial performance.
spk08: Thanks, Ben, and welcome to those joining us on the call today. For the three months ended September 30th, 2021, we reported net income of $10.6 million versus a net loss of $2 million in the third quarter of 2020. Third quarter 2021 results include an $11.9 million gain in the value of a derivative warrant liability versus a loss versus a gain of $300,000 in the prior year period. As a result of the pending UMO collection and recycling assets divestiture with safety claims, The company met all of the criteria to classify the UMO businesses' assets and liabilities as held for sale during the quarter. The company has classified the assets, liabilities, including debt required to be paid as a result of the disposal transaction and results of operations for this business as discontinued operations for all periods presented in our filing. Net incomes reported in the period includes a $3.3 million benefit related to assets held for sale. We reported adjusted EBITDA of $1.5 million in the third quarter of 2021 versus a $500,000 loss in the prior year period. Third quarter results benefited from a combination of improved or refining product margins and used motor oil collections growth. which offset a 14-day weather-related outage at the Marrero refinery in September and a temporary hydrogen shortage at the Heartland refinery due to a force majeure event. Currently, both the Marrero and the Heartland refineries are fully operational. Fourth quarter to date, refined product margins are at or above third quarter levels. In November, Vertex completed a successful $155 million offering of 6.25% convertible senior notes due in 2027. The sale of the notes resulted in approximately $133.9 million in net proceeds to Vertex after deducting placement agent fees and estimated offering expenses payable by Vertex. As of September 30, 2021, excluding the cash proceeds from the convertible transaction, The company had total cash and availability on a funding facility of $12.1 million and $2.9 million, respectively. Total cash and availability as of September 30, 2021, included $7.2 million of total cash limited to use by the two SPVs. Vertex had total term or senior secured debt outstanding of $10.8 million as of September 30, 2021. The term debt was paid off on November 1, 2021, following the completion of the convertible notes offering. As indicated in the release issued before the market opened today, we have updated our base case assumptions for the mobile refinery. As outlined within our three-year forecast, given expectations for improved refining economics on conventional fuels, together with a modest reduction in RD refining economics We currently anticipate the following. For 2022, we anticipate the mobile asset will generate total revenue of $2.4 to $2.5 billion and gross profit of between $230 and $240 million. For 2023, we anticipate the mobile asset will generate total revenue of $3.4 to $3.5 billion and gross profit of between $460 and $470 million. versus the midpoint of the prior forecast, our gross profit expectations for 2022 and 2023 have increased 12 and 15% respectively. Further, given our decision to shift the timing of the mobile transaction close from the fourth quarter of 2021 to the first quarter of 2022, we have subsequently shifted the CapEx originally planned for the current year into 2022. resulting in a higher anticipated spend next year. With that, I'll turn the call over to the operator as we take questions from those joining us on the call today.
spk03: Certainly. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We do ask that while posing your question, please pick up your handset, if you're listening to the speakerphone, to provide optimum sound quality. Once again, if you have any questions or comments, please press star 1 on your phone. Your first question is coming from Eric Stein from Craig Hallam. Your line is live.
spk02: Good morning, everyone.
spk09: Hey, good morning, Eric.
spk02: Hey, so maybe just can we start with Myrtle Grove? I know with the convert financing, you're not dependent on the sale of the UMO business to move forward on that. Curious question. your thoughts on moving forward on the investment needed to upgrade the pre-processing capabilities at Myrtle Grove?
spk09: Yeah, good question. Myrtle Grove was impacted by the hurricane that came through this past quarter. So we've kind of been in a recovery and recovery Rehab mode really is more offices and warehouse damage. So we had we had flooding there in that location Nothing material from a infrastructure standpoint So the the the pretreatment capital is earmarked from the Asset carve out, you know with safety clean. So the the timing of Myrtle Grove has been you know, pushed in conjunction with the close of that asset carve-out. So, the engineering and the work around pretreatment, and we're not losing any ground there, but that's, as we indicated, as a use of the asset carve-out, the liquidity that comes from that, it will be earmarked for pretreatment.
spk02: Okay. That's helpful. Maybe just on the updated outlook for 2022 and 2023, I can certainly appreciate the conventional refining economics given what's going on in the overall market, but renewable diesel, I guess a little surprised that you're bringing that in some. Maybe you could just talk about that. I know that the credit values did get hit in mid-third quarter, but there has been some recovery, and it still seems like you know, you've left a fair amount of cushion in your outlook, and maybe part of that is just some of the timing uncertainty, but any thoughts on that would be helpful.
spk09: Yeah, no, I don't think the outlook for the renewable portion of the business has changed very much at all. It is down slightly, and I would say that a lot of that is just how things have as you said, gone up and down from the time we shared the forecast to checking all the numbers and updating our models. Very little has changed on the renewable side, but it's not improved. So we just wanted to differentiate what we're, the majority of what we're seeing is a build on our crack spreads from the conventional side, which was really underwater or at a break even at that time. So nothing really bad on the renewable side at all. Very little material change. It's had its ups and downs, as you said.
spk02: Yep. Okay. No, fair enough. And then last one for me, just on hydrogen. I mean, obviously key to what you're doing on the renewable diesel side. And I know you know, we're talking about some disruption at your existing UMO facilities, but just maybe updated thoughts on confidence that the mobile refinery has sufficient hydrogen for what you're trying to do, you know, maybe for the initial project, but then the expansion.
spk09: Yeah, good question. We were very surprised in Ohio when our supplier force majeured with a shortage or outage at their hydrogen plant. To mitigate that, we made a decision over a year ago to build our own hydrogen generator at the Heartland facility, and that's very close to going into the site, and you wouldn't have that issue on a go-forward basis, so I think that this was just a timing where You know, we just didn't have our own hydrogen plant. That site's always been supplied by truck. And so that was the challenge there. Kicking over to Mobile, what's interesting, you know, we have a crude refining business that's going to be separate of our renewable fuel business, two different operations running in parallel. The crude reformers will be supplying hydrogen to its own process and providing some hydrogen to the renewable, but also the separate chemical train that we're converting to renewables has its own hydrogen plant that is on site, so we're not dependent on any outside hydrogen to run the operations there in Mobile. In addition, to bolster our production capacity, we're bringing in a new hydrogen plant to upgrade our third-party hydrogen supply there in the facility. That will come later, and that's how we go from 10,000 barrels a day of renewable to 14,000 barrels a day. we should be robust on our internal hydrogen that we need to run that site.
spk02: Okay. Thanks a lot.
spk09: Thank you.
spk03: Thank you. Your next question is coming from Amit Dial from HC Wainwright. Your line is live.
spk01: Thank you. Good morning, everyone. Hi, Ben. So with respect to the mobile acquisition, could you give us any update on what remains in that process, and if there is any possibility you could close this before the end of the year?
spk09: Yeah, good question, Ahmed, and thanks for dialing in. We've set this timeline for the first quarter. When we had to update our timing because of the FTC transaction, we wanted to... Set a timeline that gives us the comfort on mainly bringing the junior capital in, which we've already accomplished. And then there's a turnaround that we were responsible to take over, which that's being done today by Shell, which is positive. We need to get that turnaround completely done. And then we go into the holidays. So we just felt like... you know, getting holidays and giving everybody the breather. So we step in, you know, next year and probably sooner in the quarter than later. We anticipate a close and don't, you know, we really don't have anything in front of us that concerns us to make that happen.
spk01: Okay. Thank you for that. And could you remind us, Ben, the revised CAPEX plan? I know some of it has been pushed out from this year to next year. What that includes?
spk02: Yeah, go ahead.
spk08: Yeah, I mean, the CAPEX is mostly around the renewable diesel project, you know, that we're targeting to get online by mid-year. Yeah. So engineering costs, you know, around that project are probably the bulk of it that's going to be up front.
spk09: Yeah, so I guess some of the hard capital will be pushed back, but the timing of the project because of our raise on the convertible bonds is not going to be impacted. We actually said fourth quarter originally, but we had an internal target for October 1st, with a renewable startup of mid-summer, early third quarter. We intend to keep that schedule. That's the good thing about this raise and what it's allowed for us to do. So we still are holding the line on our renewable entry into the market to be early third quarter 2022. Okay.
spk01: And just one last one from you. As you sort of get through all of these transactions, how are we managing sort of resources to take over the mobile facility while also running the UMO collections business, et cetera?
spk09: Yeah. No, it's a good question, and it's a perfect segue for me to talk about Our people, our teams, and you can see the results that our legacy business is generating. We haven't gone backwards. We've gone forward in every respect. Our production, our improvements across the operations, the safety and the reliability that our facilities are operating at really speaks to bandwidth. And the bandwidth for us to carry this acquisition of the mobile refinery alongside the day-to-day business is noteworthy to our team and our people and what they're capable of doing. We have open offices there in Mobile. We're going to move some of our commercial team to the Mobile office to really set on top of the needs of the refinery. But there's still a lot of redundancy and bandwidth within Vertex to carry both of these projects forward. So, so far, it's worked out really well. And, you know, I've learned over the years, especially through this transaction, you just can't underestimate what people are capable of doing. And that's what we're seeing with our whole team in our legacy business from the street, whether it's drivers or people in the plant and our sales team. You know, the business is growing. You see growth on our collection business. It's just the integrity and the fortitude of the people that allow us to do what we've been able to do. So I appreciate the question because I want to give credit where credit's due. Thank you, Ben. That's all I have. Thank you.
spk03: Thank you. Your next question is coming from Brian Butler from Stifel. Your line is live.
spk06: Good morning. Thanks for taking my questions.
spk00: Good morning, Brian. Good morning, Brian.
spk06: All right. Just to start with, on the reported 3Q adjusted EBITDA, the 1.5, can you give some color on what pushed that below the guidance range of 1.7 to 3.3 that was given back in October or late October?
spk08: yeah the the biggest piece of that would have been what i'm calling yield costs or expenses related to the divestiture as well as the acquisition um you know that you guys are fully aware of the next piece would be as ben mentioned and kind of laid out the impact from the hurricane and then the slight impact from the hydrogen force majeure yeah so those non-reoccurring um you know charges to our ebitda was around four point
spk09: $7 million, Chris?
spk08: All in, yeah.
spk09: From deal costs to what we lost on our margins in the black hole division.
spk05: Okay. I guess those events happened prior to October 26th. They just were greater than what you had expected. Is that the right way to understand this?
spk00: Yep.
spk06: Okay. And then on the asset sales to Clean Harbors, So you have a close now of second half of 22, which is kind of a wide range. What factors can move that forward or back to the back end of that range? Is this all just the Department of Justice getting through the paperwork and the information, or is there other items?
spk09: No, I'll let Alvaro answer the question. He's heading that whole workflow up on this.
spk00: FTC transaction. Yes, it's just the process with the FTC. The different work streams, we are very much down the road and, you know, I think like permits and compliance related activities, we are pretty much done. So, yeah, everything is going down to getting, you know, the process with the FTC completed.
spk09: And there is a negotiating around the timeline with the FTC that's underway, you know, that once given the information, then they're committing to certain timelines, so we should have that very soon, we anticipate.
spk06: Once you have those timelines, you'll be able to get a little bit finer point, I guess, on that first half of 2022 closure. I'm just trying to understand if the DOG gets their act together and can get through the paperwork, could this close as early as March, or is this really Kind of back to, you know, it's going to take them however long it's going to take them.
spk09: Yeah, until they make a commitment on timing as far as what they need to go through the information, it's just too early to try to put it in a tighter box. We're giving it plenty of room based on what we see at the moment.
spk06: Okay. And then on the mobile refinery. I just want to make sure I heard this correctly. The closure of that is not contingent on the debt financing, the $125 million term debt and the $125 million working capital. Those two are, while they might happen close together, they're not contingent on each other. Is that correct?
spk09: Yeah. We have enough capital to close the refinery from the rent.
spk06: Okay. On the timing of the mobile refinery being pushed back into 2022, is there any risk to the offtake and supply agreements that you're looking to sign, that the terms and or the ability to get those completed have changed?
spk09: No. No, everything is papered up and on schedule. So we really hadn't lost our schedule rhythm for the transactions. other than on the conventional side where it's been pushed, but those agreements are mainly with Shell and our bunker partners, so no issue there.
spk06: Okay, and then last one, although this business is going away, can you give a little color maybe on the spread that you saw in the black oil business?
spk09: and that kind of what trends you're seeing going into the fourth quarter here on on price as well as uh the cost of uh used motor oil yeah no it's good question because um the the the spreads are very strong in our legacy business uh as as i said you got one uh 4.7 million of eba die you know, that we didn't see that would stack on the 1.5. That's a huge move between last year and this year. And as Chris indicated, and I think I did in my earlier remarks, we anticipate the fourth quarter to be a continuation of those spreads.
spk06: All right, great. Thanks for taking my question.
spk09: Thank you. Appreciate it, Brian.
spk03: Thank you. There are no further questions in the queue. I will now hand the conference back to Ben Cowart for closing remarks. Please go ahead.
spk09: Okay. Thank you, Operator, and thank you, everyone, for joining us on the call today. We look forward to executing our plans as we discuss here today. In the interim, should you have any questions, please contact Noel Ryan, our Investor Relations Lead at ir at vertexenergy.com. Thank you, everyone, for joining us today. This concludes our Q
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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