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spk01: Good day, ladies and gentlemen, and welcome to the Vertex Energy Q1 2022 earnings conference call. At this time, all participants have been placed on listen-only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Noel Ryan, with the investor relations team. Noel, the floor is yours.
spk09: Thank you, Paul. Good morning, and welcome to Vertex Energy's first quarter 2022 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 recent operational and financial 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 could differ materially. For 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 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. 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.
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spk04: Thank you, Noel, and good morning to everybody joining us today.
spk06: Sorry for my voice. I had a lot to talk about here lately. For the purpose of today's call, I'd like to begin with an update on our recent acquired refinery in Mobile, Alabama. Exactly 40 days ago, Vertex assumed ownership of the Mobile refinery, signaling an entirely new chapter in the history of the company. This next chapter will be one during which you will see us build a leading platform focused on the development and acquisition of complementary energy transition assets, with an emphasis on conventional and alternative fuels. We view the acquisition of the Mobile Refinery as a first, pivotal step in this multi-year transformation. Since assuming ownership of the Mobile Refinery April 1, the transition of the refinery operations from shell to vertex has been seamless, with no impact on production levels or scheduled product deliveries. As expected, our new teammates at the Mobile Refinery have performed with exceptional professionalism, ensuing a successful integration process. When we first evaluated the Mobile Refinery as a potential acquisition target, our base acquisition case focused mainly on a hydrocracker conversion project, once completed, would allow us to produce high-valued renewable fuels. Both then and now, this project remains a key cornerstone of our investment thesis, one with the potential to drive significant value creation in future years. However, what we didn't fully anticipate at that time was the value creation potential of the conventional fuels business, which today is more profitable than originally expected. Conventional fuels refining economics have improved materially in recent months, driven by a combination of improved post-pandemic demand for conventional fuels, a 5% decline in domestic operable crude oil refining capacity since 2019. and lower domestic natural gas prices versus those in Asia and Europe, which has advantaged domestic refiners. At present, domestic inventories of distillate fuel oil are approaching a multi-year low. Given recent geopolitical events, this inventory situation is only expected to worsen, creating the potential for further widening in refined product margins. Currently, the Gulf Coast 312 crack spread and approximate gross profit per barrel benchmark for the mobile refinery is more than $48 per barrel versus the five-year average of $13 per barrel. Even more importantly, the Gulf Coast distillate crack is currently north of $70 per barrel versus a five-year average of $15 per barrel. Given that approximate two-thirds of the mobile refinery's current product slate is distally, we are uniquely positioned to capitalize on current refined product economics. Further, with no refined product pipeline,
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spk06: Feeding the region, our refinery remains the primary source of fuels to these local markets. During the month of April 2022, our first full month of operations, the Mobile Refinery operated at 90% of utilization, given operable capacity of 75,000 barrels per day. During the first 30 days of operations, the refinery generated strong EBITDA, all of which came from conventional fuel production. Putting the significance of this performance in perspective, we currently anticipate Vertex, who have generated enough cash flow to have paid for the mobile refinery and related logistic assets in less than one full quarter of operations, and an incredible accomplishment that supports further balance sheet optionality as we look over the coming years. Concurrent with our acquisition of the mobile refinery, we entered into a crack spread hedging program representing approximately 50% of our anticipated production for the period between April 1 and September 30, 2022. For this six-month period, we've locked in an average crack spread hedge at a level approximately 25% above the trailing five-year average 312 crack spread. This hedge program, which is intended to secure elevated product margins in a favorable spread environment, is expected to significantly de-risk anticipated margin capture for the full year 2022, while still providing a spot market exposure on the other half of our production. With respect to the hydrocracker conversion project, we remain on schedule with the previous communicated project timelines. Today, we have engaged technology, engineering, and construction partners to lead the project, with approximately 50% of all detailed engineering work now complete. All major long lead equipment has been purchased to ensure a timely completion of the project by year end 2022. Initial RD production rates are expected to be approximate 8,000 to 10,000 barrels per day beginning in the first quarter of 2023. The range is being governed by what we know now to be our current hydrogen capacity at the site. We anticipate the completion of a hydrogen expansion project during the second half of 2023, and it will allow maximum production of the renewable diesel and anticipated levels of 14,000 barrels per day. Our initial project estimate was 85 million and has increased between 90 to 100 million, given raw materials and labor cost inflation. These cost increases were well within our expected range of total potential project costs. We currently anticipate that the entirety of this project budget will be funded through cash on hand and available liquidity. We anticipate no further increase to the project budget at this time. Turning now to review our recent financial results. We generated record first quarter results driven by a combination of strong operational execution, together with elevated refined product margins, which currently sit at multi-year highs. Our legacy business continued to perform ahead of plan during the first quarter, highlighted by continued growth in UMO collections together with strong reliability at both our Marrero and Hartman refineries. On a trailing 12-month basis through the end of the first quarter, our legacy assets generated more than $31 million of adjusted EBITDA, supported by strong spreads on VGO and Group 2 Plus base oil prices. As the mobile refinery acquisition closes on April 1st, this performance excludes any contributions from Mobile. Second quarter to date, refined product margins have increased above first quarter levels across each of our refining assets, positioning our combined business to continue outperformance as we move into the remainder of 2022. In the press release issued earlier today, We introduced updated financial guidance, including forecasted contributions from the mobile refinery for the full year 2022 and 2023, which Chris will walk through shortly. Given current expectations for significant outperformance over the next 24 months, together with strong first quarter results reported earlier today, we believe the company is well positioned to deliver additional shareholder value. With that, I'll turn the call over to Chris.
spk08: Thanks, Ben, and welcome to those joining us on the call today. For the three months ended March 31st, 2022, Vertex reported a net loss of 0.8 million versus net income of 3 million in the first quarter of 2021. The first quarter of 2022 net loss includes 8.1 million of non-recurring items, including a 3.6 million non-cash gain on a change in the value of a derivative liability and $4.6 million in non-recurring transaction-related expenses. We reported record adjusted EBITDA of $13 million in the first quarter of 2022 versus $7 million in the prior year period. First quarter results benefited from elevated utilization rates at both the Marrero and Heartland refineries, together with improved refined product margins. As of March 31, 2022, the company had total cash, including restricted cash, of $124.5 million. Total liquidity at the end of the first quarter of 2022 included $17.2 million of cash limited to use by the two special purpose vehicles. Vertex had total term or senior secured debt outstanding of $145.7 million as of March 31, 2022.
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spk08: We have provided full-year financial guidance for the full year 2022 and 2023, including anticipated contributions from the Mobile Refinery, completed on April 1, 2022. together with the implied net cash impact of hedges currently in place on approximately 50% of the mobile refinery's production in the second and third quarter of 2022. All guidance is current as of the time provided and is subject to change. For the full year 2022, Vertex anticipates gross profit in a range of $440 to $460 million. Adjusted net income in a range of $235 million to $255 million. An adjusted EBITDA in a range of $340 million to $360 million. Free cash flow in a range of $150 million to $175 million. For the full year 2023, Vertex anticipates gross profit in a range of $530 million to $550 million. adjusted net income in a range of $250 million to $270 million, adjusted EBITDA in a range of $425 million to $450 million, and free cash flow in a range of $260 million to $280 million. This guidance assumes that the Mobile Refinery will operate between 69 and 70,000 barrels per day in 2022. In 2023, we anticipate the refiner will operate at 80,000 barrels per day, including 70,000 barrels per day of conventional and 10,000 barrels per day of renewable diesel, as the conversion project is set to be complete in the fourth quarter of 2022, with RD to come on stream in the first quarter of 2023. Importantly, in the second quarter of 2022, we expect to generate total adjusted EBITDA in a range of 110 to 130 million, resulting in free cash flow generation of between 70 to 90 million. The strong free cash generation will position us to fully fund the hydrocracker conversion project together with other internal growth initiatives entirely from cash on hand. With that, we will open the line for questions. Operator?
spk01: Thank you. 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 ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Once again, please press star 1 if you have a question at this time. Please hold while we poll for questions. And the first question today is coming from Manav Gupta from Credit Suisse. Manav, your line is live.
spk00: Thanks, guys, and congrats on a good quarter and a very positive outlook. Just working through the slides here, so it looks like Mobile Refinery on its own is looking at about 320 million EBITDA for the year. And if you look at the throughput guidance, it's coming down to about like $12.50 of EBITDA margin, which is extremely gettable at this point. And similarly for next year, it's like $16 of EBITDA margin. So if you could walk through, if that's the right way, you are modeling it about $12 to $16 of EBITDA margin, which is very achievable. And then for next year, if you could also help us a little bit on terms of dollars per gallon of renewable diesel profit that you are building in,
spk06: to get to the annual guidance so if you could just walk us through the assumptions thank you yeah so and chris you can pick up as well um we're using forward strips so the markets in backwardation um we we agree with you we think those are conservative on the conventional side of the business the um You know, this is something we're going to be looking at on a quarter-by-quarter basis so we can kind of bring more of these economics forward as they develop. So as far as the per gallon on the renewable, Chris, I don't have that myself. We are using the forward strips. Yeah, we're using forward strips going forward.
spk08: And the credits are in the deck. But slide 17 shows the credits that we're utilizing for the coverage stress.
spk06: So will that get you to your answer?
spk00: I'll work through it. But the point is I think your refining assumptions are very achievable, so that's good. I mean, we are in a crazy crack environment right now, but what you are assuming out there is reasonable, so I think that's a positive. I just have a quick follow-up here, sir. Yesterday, one of your competitors, Dino, who is also looking to do something, indicated that for one of their PTU units, which they were planning to do, they're not going to move ahead with it. They don't think it's the right use of capital at this point of time. And I'm wondering if you had similar thoughts. You were thinking of building a pretreatment unit, but as you said earlier in the call, the existing conventional fuel margins are very good. And I'm just wondering if, I mean, you definitely will have the cash, but do you still want to go ahead and build a pretreatment unit at this point of time?
spk06: Well, our team's been very successful in partnering with several pretreatment facilities. And so we have the property at our Myrtle Grove site. We believe the bio intermediary ruling is going to be in our favor to where we can build a pretreatment plant at Myrtle Grove. We are still evaluating the investment. We do have engineering done and technology suited for the site. But we do know that's a finite supply of material, and it could very easily get commoditized if there's already an overbuild around pretreatment assets. So we have a view on this to continue cautiously down that path and make that decision in the next quarter or two.
spk00: Perfect. I'll turn it over and congrats on a good quarter and a very positive outlook. Thank you.
spk01: Thank you very much. Appreciate it. Thank you. The next question is coming from Eric Stein from Craig Harlem. Eric, your line is live.
spk07: Good morning. Thanks for all the details and thanks for taking the questions.
spk06: Thank you.
spk07: Good morning. So just kind of following up on what you talked about with pre-treatment and Myrtle Grove, maybe just I'm stepping back to feedstock, you know, would just, uh, would love to get your, your current thoughts on that. I know that's an area where you've been pretty positive given your location, um, there, um, you know, and, and all the potential sources and the net back and all of that, but, uh, would just love your current thoughts on feedstock.
spk06: Yeah, nothing's nothing's changed as far as our view. Um, you know, we're excited to be in the market now. We've got storage to carry product, feedstock product for the refinery. And we've made some recent hires that are going to be moving our supply and trading forward around the renewable and the conventional business. So we just don't see a change in our view on feed. We're very optimistic about our position and our ability to buy the feed and our logistic system to optimize transportation costs of feedstock into our refinery. As well as delivering our finished product by cargo vessel to the key markets.
spk07: Got it, and I guess that would then play into, you certainly don't have as much urgency. You're looking at the upgrade at Myrtle Grove, but I guess we'll have to see how that plays out. You know, maybe just given the guidance and your CapEx needs, if I do the math, I mean, it looks like if debt repayment is a priority that you could be in a cash-neutral, potentially cash-positive situation, position by the end of the year. You know, so maybe how you think about that, but then also weigh that against at the start of the call, you talked about that, you know, mobile is just the start and you're looking at some other areas. So, you know, maybe, maybe how you, you view all of that together and timing of when potentially you do look at some other assets.
spk06: Well, obviously we got a lot to get put to bed. The team's done a great job as far as integration and settling the refinery into our platform. And so all of that's gone extremely well. We do see the mobile site and the Vertex platform collectively in a position to expand and grow over time. We do see the use of capital to vertically integrate and build off this platform. As far as what our next steps are, I think there's still a lot of work before we can really open up and convey where we want to go as far as future investments in the business. I think for us, just the journey over the last five years with very tight means and the team's work to build the business out and grow under those conditions. We're actually enjoying the cash generation that the business is seeing today. So I think we're going to let that kind of get ahead of us a little bit before we start making plans on how we grow and expand the business.
spk07: No, absolutely. I can appreciate that. I mean, I guess you have options, which is great. So maybe last thing, just on the hedging strategy, is this, I mean, I would assume this will be pretty dynamic just based on the market. You know, you're locking in 50% for the next six months. You know, just curious, is that the kind of level you think is the right place to be in terms of what you lock in? Um, or is that something that really is going to just depend on where spreads are at any given moment?
spk06: Yeah. I mean, it's a rule of thumb for, you know, refining at least like where we entered the business to make sure that, you know, we, we have exposure. Um, I think people appreciate the exposure, especially now, but at the same time, you know, we have the fiduciary of removing volatility of our earnings. to ensure a safe journey in this space. And so I think we've done both. Very pleased with what we accomplished for the first six months. And again, that speaks to our relationship on our working capital side of the business and our partner, our banking partners that have provided a hedging vehicle that's credit backed in order to build to take those kind of positions without draining cash and liquidity out of the company.
spk07: Got it. Okay. Thanks, everyone.
spk01: Thank you.
spk07: Thank you.
spk01: Thank you. And the next question is coming from Amit Bail from HC Wainwright. Amit, your line is live.
spk05: Thank you. Good morning, everyone. Sorry, I joined a little late. Just one question for me for now, Ben. What are the plans for the UMO business? I know you're looking to sort of carve it out previously. That didn't go through. Are you potentially, you know, looking for options in that going forward, you know, maybe to deleverage a little bit, et cetera, or maybe just sticking with the business? Any comment on that would be helpful. Thank you.
spk06: Yeah. Thank you for the question. You know, it was tough going through that process. You know, we're running the business like we're going to keep the business.
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spk06: Are, you know, going through the process of evaluating... certain interest in some or all of those assets as a fiduciary to make sure that we understand, you know, where the market is and where their interest is in those assets. I think we have to do that. We're in that process. And so it's too early to say if there's a change to our plan that we currently have in place right now.
spk05: Okay, thank you. Appreciate it.
spk01: Thank you. Thank you. And the next question is coming from... Looks like we just lost Michael. He had Michael from Stiefel. He had a question. Okay. In the meantime, I'll hand it back to Ben Cowart for some closing remarks.
spk06: Okay. Well, hey, this is the close... the closing quarter of what I call Vertex 1.0. We're very excited about the call coming up that will represent the first new quarter or the second quarter of the year of Vertex 2.0. And I couldn't be more pleased with the way all of this has come together and the support the company's got in investors, in banks, and in the market in general, you know, to the work that we're doing. And, you know, it's really a new day for the company, and we're moving the business forward. We've got tremendous opportunities as we look ahead. So thank you, everybody, for joining the call. And if you have any further questions, feel free to reach out to ir at vertexenergy.com. And that will reach our investor relations representative, Noel Ryan, and we'll be glad to answer any other questions that may come up. Thank you for joining the call.
spk01: Thank you, ladies and gentlemen. This does conclude today's conference. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.
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