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Vertex Energy, Inc. (NASDAQ:VTNR) Q1 2024 Earnings Call Transcript

Vertex Energy, Inc. (NASDAQ:VTNR) Q1 2024 Earnings Call Transcript May 9, 2024

Vertex Energy, Inc. misses on earnings expectations. Reported EPS is $-0.18964 EPS, expectations were $-0.17. VTNR isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello everyone, and welcome to Vertex Energy, Incorporated First Quarter 2024 Earnings Conference Call. Please note that this call is being recorded. [Operator Instructions] Thank you. I'd like to turn the call over to Chris Delange [ph], Investor Relations Coordinator. You may now begin the conference.

Chris Delange: Thank you, operator. Good morning, everyone, and welcome to Vertex Energy's first quarter 2024 conference call. On the call today are Chairman and CEO, Ben Cowart; Chief Financial Officer, Chris Carlson; Chief Operating Officer, James Rhame; Chief Strategy Officer, Alvaro Ruiz; and Chief Commercial Officer, Doug Haugh. I want 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 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.

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Additionally, please note that you can find reconciliations of 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 an operational review from James Rhame, financial review from Chris Carlson, and a review of our commercial strategy by Doug Haugh. At the conclusion of these prepared remarks, we will open the line for questions. With that, I'll turn the call over to Ben.

Ben Cowart: Thank you, Chris, and good morning to those joining us on the call today. We had better-than-expected operational results as we maintained our commitment to operating safely and reliably. From a financial perspective, the first quarter saw significant improvements supported by improved crack spreads. We generated almost $20 million in adjusted EBITDA, an increase of over $50 million quarter-over-quarter. Additionally, we saw conventional throughput above our guidance and managed direct operating costs and capital expenditures below our guidance. Over the past few years, we have made material advancements and strategic decisions to grow Vertex. For the past two years we have operated safely and reliably while investing capital into upgrading the Mobile Refinery.

We built in flexibility in our capital spend to allow us to redeploy our renewable equipment back into conventional production if our strategy required adjustment. Due to the significant macroeconomic headwinds for renewables over the past 12 months, many of which we believe will continue to occur over the next 18 months and beyond, we have decided to strategically pause our renewable diesel business and pivot to producing conventional fuels from the hydrocracker unit. We plan to reconfigure the hydrocracker in conjunction with a planned turnaround on the unit. When modeling the unit in conventional service against first quarter 2024 historical data, we estimate the unit could have significantly improved our results providing an additional fuel gross margin contribution of roughly $40 million on conventional fuels.

On the call today, the team and I plan to update you on the financial and operating results for the first quarter of 2024 and go into our plans around the renewable business pause and pivot. I want to start by thanking my team, all the employees listening on the call today for the good work they have accomplished thus far in 2024. As James will note shortly, our safety track record is commendable and we have more work ahead of us to convert to all conventional feedstock, which we want to do safely because our people are our most valuable asset. With that, I'll now hand the call over to James.

James Rhame: Thank you, Ben. Good morning, everyone. We continue to believe that our people and their safety are of the utmost importance, which is why I like to start talking about our health, safety and environmental performance. We're proud to say that in the first quarter of 2024 was another clean quarter with zero OSHA recordable injuries. In fact, we've now operated for two years at the Mobile site without a recordable injury. We did have one minor environmental non-compliance at the Mobile site associated with the planned small unit turnaround executed during the first quarter. Additionally, Mobile saw zero process safety events, continuing its streak of outstanding HSE performance at the site. I want to commend our employees at every location for continually prioritizing the safety-first mentality of our entire organization.

The effort and care for each other seen across the entire business is a testament to the dedication of both employees and contract partners working within our facility. Our legacy operations overall had a good quarter with Marrero performing better than budget on volume and margin. This is an accomplishment of continuous improvement in operating performance by the Marrero team. Our team at the Mobile site demonstrated strong operational performance at the conventional facility during the quarter with average throughput volumes of 64,065 barrels per day for capacity utilization of 85% which was above the high end of our guidance of 63,000 barrels per day. The higher volumes compared to guidance are primarily due to stronger capacity utilization and getting accrued unit back from cleaning ahead of schedule.

Total OpEx per barrel for the first quarter was also below the low end of our prior guidance at $4.10 per barrel and reflects the increasing cost efficiency gained from smooth operations, which more than offset the inflationary impact of lower throughput volumes on a cost per barrel basis. Our conventional fuels gross margin per barrel during the quarter rose significantly to $12.63 compared to $4.79 in the fourth quarter. Our finished products such as gasoline, diesel and jet fuel accounted for 64% of our total product yield during the first quarter of 2024 in line with our previous guidance. In the first quarter, we had a planned small turnaround of one of the reformers and a pit stop of the number one crew unit in March. Following these successful maintenance events in March, the Mobile facility is poised to operate at full rates during the second and third quarters, coincided with an expected rise in demand over the driving season.

Now turning to our renewable fuels business, Vertex renewable diesel plant operated smoothly, generating total renewable fuels gross margin per barrel at $10.29 for the quarter. Our renewables throughput volumes average 4,090 barrels per day for a capacity utilization of 51%, in line with our recently updated guidance. During the second quarter of 2024, in line with our pause and pivot strategy, we are pausing renewables fuels production and redirecting the hydrocracking unit to conventional fuels and products. We had a previously planned catalyst and maintenance turnaround scheduled again later this year for our renewables business. We will now use the planned turnaround to load a conventional catalyst and transition the unit back to conventional fuel service.

This hydrocracker unit is one of the most valuable physical assets and we have retained the full optionality of this unit through engineering efforts in conjunction with the additional capital investments made. There will be a transition period as we can reconfigure the unit and prepare it to run conventional feedstock. We are targeting startup conventional service prior to the end of the year. Following the unit startup, we expect to utilize it to further refine our existing VGO stream to an upgraded conventional product. We are optimistic that the timing of the unit coming on stream will benefit from seasonal market shifts where typically gasoline prices dip during the winter while deals diesel season premium due to increased heating level demand.

Oil tankers docked at the port, showing the scale of global fuel supply.
Oil tankers docked at the port, showing the scale of global fuel supply.

We'll continue to watch closely as we work through this process. I will now turn the call over to Chief Financial Officer, Chris Carlson for a review of the company's financial results and additional detail regarding our financial and operating outlook for the second quarter 2024.

Chris Carlson: Thank you, James, and welcome to those joining us on the call today. Our focus continues to be on managing our balance sheet and liquidity. As Ben and James have outlined, our strategic decision to pause and pivot RD production is aimed at significantly enhancing this effort over the near-term by stopping losses associated with renewable diesel production and adding available margin through upgrading VGO to a higher margin conventional product. We anticipate based on near and midterm macro pricing that we will be able to materially generate additional cash flow, allowing us greater financial flexibility and improving our balance sheet. Turning now to our financial results. We were very pleased to see improvement across the board driven by stronger crack spreads.

Vertex reported net loss attributable to the company of $17.7 million for the first quarter of 2024. This compares to a net loss of $63.9 million in the fourth quarter of 2023. We saw a $53 million improvement in our total adjusted EBITDA from a loss of $35.1 million in the fourth quarter to $18.6 million for the first quarter of 2024. During the quarter, we incurred a $15 million impact in cash flows, mostly as a result of the CapEx of $15 million spent during the quarter. We saw a decrease in cash from operating activities offset by an increase in financing activities. Total capital expenditures for the first quarter 2024 were $15 million, 29% below our prior guidance issued on February 28th, reflecting a deliberate preservation of capital achieved via a deferral of certain discretionary capital expenditures.

This primarily includes a realignment of planned capital expense for the renewables business. Turning to the balance sheet. As of March 31, 2024, the company had total cash and equivalents, including restricted cash of $65.7 million and total net debt outstanding of $218.5 million at the end of the first quarter 2024, including lease obligations of $68.1 million. We continuously monitor current market conditions and assess our expected cash generation and liquidity needs using the current forward crack spreads available. Weakening crack spreads indicate a continued need for proactively managing our liquidity position. As I stated, we believe that our strategic redirection for renewables will help our financial position. Given current market conditions, we are pursuing strategic financing opportunities to improve our balance sheet.

Looking to the second quarter of 2024, we anticipate total conventional throughput volumes at Mobile to be between 68,000 and 72,000 barrels per day. Our expected yield of conventional products is expected to consist of between 64% to 68% high value finished products such as gasoline, diesel and jet fuel with the balance in intermediate and other products such as VGO. On the renewable side of the business, we are running our remaining inventories of renewable feedstock, which we believe will improve our working capital and margins for the second quarter. Once the renewable feedstock is diminished, we will use previously planned catalyst and maintenance turnarounds scheduled for 2024 to load conventional catalyst and bring the unit out of turnaround into conventional service.

The total cost of about $10 million was previously budgeted as part of the planned catalyst and maintenance turnaround and does not represent a material change to our forecasted capital spending. Anticipated OpEx per barrel, encompassing both conventional and renewables businesses on a fully consolidated basis is projected to range between $4.11 and $4.46 for the quarter. We anticipate total capital expenditures for the second quarter to be between $20 million to $25 million, which includes a portion of the $10 million conversion cost. I’d now like to turn the call to Chief Commercial Officer, Doug Haugh.

Doug Haugh: Thanks, Chris. As Ben and James shared earlier, we’re planning to pause renewables production, optimizing our hydrocracking asset to be utilized in upgrading conventional products. Our team has done an incredible job in terms of running and managing the unit in renewable service. I’m exceptionally proud of the work they achieved in building a supply base and securing approvals for lower carbon intensity pathways. The work done on developing these feedstock pathways not only deepens the proven capabilities of the asset in renewable service, but it also paves the way for potential future benefit, should market conditions support a decision to resume renewables production. Our commercial team has now shifted its focus to supporting this strategic pivot, fulfilling our current renewable commercial obligations, winding down feedstock positions and supporting our operational team on the ground.

We continue to work closely with customers and suppliers, all of whom have been great partners through this process. We’re appreciative of their collaboration and support of this effort. The company continues to advance targeted netback improvement opportunities on conventional and renewable products to bolster profitability, notably completing all pathway approvals for renewable feedstocks and securing a direct off-take of jet fuel produced at the Mobile Refinery. After tendering and negotiating a new off-take agreement for this jet this spring, we commenced supply for a new customer on April 1. The transition has been well managed by the operational and commercial teams. And this is an important milestone for Vertex as it is the first of the finished product contracts to roll off our initial off-take agreements inherited upon the purchase of the refinery.

We expect our margin uplift on these barrels under our new contract to represent a $10 million improvement over the previous agreement. We have additional agreements approaching expiry over the next year and we’ll be following a similar process with those volumes as we did with the jet volumes and expect to deliver increased value for the company as compared with the existing contracts. With that, I’ll turn it over to Ben for some closing remarks.

Ben Cowart: Thank you, Doug. Our team is doing a great job of keeping our operations safe, minimizing risk and delivering incremental results towards our stated goals. As we navigate the second quarter of 2024, our focus is on managing cash flow during this transitional period. We believe this is the best decision at this time for this asset, as it is not only expected to curtail and stop losses associated with renewable production, it is also expected to provide additional margin opportunities following successful conversion. Given the persisting market volatility and crude pricing, which is impacted by a variety of global factors, we will continue to pursue strategic opportunities and financing pathways that support liquidity needs over the near-term.

We’ve done a lot of work proactively restructuring the business to reduce cost and capital and set up systems to manage and monitor cash flow effectively, and we will continue these efforts on ongoing basis. We have been adamant that our strategic priorities are to increase our cash position, reduce our operating costs and improve margins. While we’re optimistic about the future of renewables over the long-term, we feel this decision to optimize the renewable diesel hydrotreater to conventional service is not only prudent, but a necessary step in accomplishing these goals for the remainder of 2024 and into 2025. Thank you. I’ll now turn the call over to the operator for questions.

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