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Edited Transcript of VTNR earnings conference call or presentation 8-Nov-19 2:00pm GMT

Q3 2019 Vertex Energy Inc Earnings Call

CUPERTINO Dec 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Vertex Energy Inc earnings conference call or presentation Friday, November 8, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Benjamin P. Cowart

Vertex Energy, Inc. - Founder, Chairman, CEO & President

* Christopher Carlson

Vertex Energy, Inc. - CFO & Secretary

* John Noel Strickland

Vertex Energy, Inc. - COO

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Conference Call Participants

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* Brian Joseph Butler

Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst

* Eric Andrew Stine

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Tom Bishop

BI Research

* Noel Ryan;Vallum Advisors;Senior Partner

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to your Vertex Energy Third Quarter 2019 Earnings Conference Call. (Operator Instructions)

At this time, it is my pleasure to turn the floor over to Noel Ryan. Sir, the floor is yours.

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Noel Ryan;Vallum Advisors;Senior Partner, [2]

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Thank you, Christie. Good morning, and welcome to Vertex Energy's Third Quarter 2019 Results Conference Call. Leading the call today are our Chairman and CEO, Ben Cowart; CFO, Chris Carlson; COO, John Strickland. And I'm Noel Ryan of Vallum Advisors, the company's Investor Relations counsel.

We issued a press release before the market opened this morning detailing our third quarter results. In conjunction with this release, we also posted a conference call presentation that is available on the Investor Relations portion of our corporate website at vertexenergy.com. We will reference this presentation throughout the remainder of today's conference call.

Please note that we recently updated the Investor Relations portion of our corporate website to provide increased accessibility to key resources while allowing users to sign up for real-time email alerts. We encourage you to sign up for these real-time alerts if you have not done so already.

I would 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 a discussion of some of the 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.

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 will open the line for questions.

With that, I'll turn the call over to Ben.

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Benjamin P. Cowart, Vertex Energy, Inc. - Founder, Chairman, CEO & President [3]

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Thank you, Noel. Good morning to those joining us today. Early today, we posted the company presentation materials on our Investor Relations section of our website that I'll refer to throughout this call. We'll begin with our overview of third quarter results on Slide 4 through 6 of the conference call presentation.

Our third quarter results benefited from a combination of strong growth in used motor oil collections together with an exceptional performance of our Heartland refinery, where we operated above nameplate capacity in the period. Direct collections of UMO increased 24.5% in the third quarter when compared to the prior year's period. Direct UMO collections represent approximately 48.6% of overall feedstock processed at the company's refineries in third quarter versus 38.7% in the third quarter of 2018, with the remaining feedstock being sourced from third-party UMO suppliers.

During the past 4 years, we have invested more than $8 million preparing Vertex to capitalize on International Marine Organization's low sulfur marine fuel mandate that comes into effect January 1, 2020. With the IMO transition now just weeks away, we have seen product spreads widen versus prior year levels, supported by a decline in feedstock cost together with a corresponding increase in distillate values, as was expected. This month, we plan to start our TCEP plant at Baytown, Texas, for the first time since the third quarter of 2015, positioning us to begin converting surplus feedstock available in the market into a low sulfur marine fuel that can be sold into the new 0.5 low sulfur specification mandate under IMO 2020.

With regards to our JV with Tensile Capital, we have made steady progress on the previously disclosed UMO to high-purity base oil pilot test, which is targeted to reach completion by year-end 2019. Subject to the successful close of the pilot test, Vertex will receive $13.5 million of nonrecourse cash to our balance sheet under the terms of the agreement. Assuming receipt of the $13.5 million, we will move from a net debt to a net cash positive by year-end or shortly thereafter.

Turning to Slide 7. Here, we provide an adjusted EBITDA bridge that outlines key variances on a year-to-year basis. Clearly, Marrero had the most significant impact on our business. Again, while the cost impact from Marrero contributed to a $0.8 million year-over-year decline in the bridge, the actual opportunity cost in the period was an additional $1.5 million. Despite generally favorable market conditions, the planned turnaround at Marrero we referenced on our last call lasted longer than expected during July due to Hurricane Barry. Weather conditions resulted in the hurricane extended planned maintenance at the Marrero facility by 8 days to 121 days in total, resulting in higher turnaround costs and lower than anticipated production levels at the refinery.

Turning to Slide 8. Beginning with a review of our Heartland business. Heartland came in $1.3 million ahead of budgeted EBITDA estimates in the third quarter, supported by a combination of reliable operations and continued stability in our base oil pricing. The refinery operated at 108% of capacity in the period, a performance made possible by maintenance activities completed earlier in the year.

During the past year, Marrero has regularly operated with a utilization rate in the mid- to high 90% range, whereas in the third quarter, the refineries operated at 82% due to the extended maintenance we referenced earlier in the call. Currently, both Marrero and Heartland are operating near peak capacity as planned.

Turning to Slide 9 and 10. We operate a facility in Baytown, Texas, where we have the ability to collect and process used motor oil and high-value feedstock through our patented thermochemical extraction process technology, or TCEP. During the past few years, a portion of TCEP has been used to pretreat UMO feedstock prior to being processed at our company's Marrero refinery. However, given increased demand for low sulfur marine fuels ahead of the IMO 2020 mandate, we intend to restart the facility this month.

During the fourth quarter 2019, we expect to produce approximately 30,000 barrels of marine fuel using our TCEP technology, the first such production since the third quarter 2015. We will ramp production as available surplus supply comes to market in accordance with our customer demands once the 0.5 sulfur cap on marine fuel comes into effect in January.

Turning to Slide 11. As I indicated at the beginning of the call, product spreads have widened considerably in recent months as we get closer to the January 2020 IMO deadline. As you can see in Slide 11, the spreads between 3% high sulfur fuel oil and NYMEX WTI crude first began to widen in August. Early into November, spreads have widened further to $15 a barrel below WTI.

What is not represented in the chart on Slide 11 is the fact that the 5-year average discount to WTI for high sulfur fuel has been approximately $8 per barrel. Looking at the recent impact to the high sulfur fuel spreads versus WTI between November 2018 and July 2019, this represents a negative impact to the historical price of more than $11 per barrel. To that end, the spreads we lost over the past year have come back into the business beginning in the fourth quarter, giving us confidence in our outlook.

Turning to Slide 12, 13 and 14. To recap, we see several investment catalysts as we enter the fourth quarter into 2020. First and foremost, we see the structural widening of our product spreads as a majority opportunity for Vertex. While the future strip isn't a guarantee of the future results, the data clearly supports the case for improved margin capture over the medium term. Second, we view the successful completion of the pilot test related to the Phase 2 closing with Tensile Capital as a liquidity event that has the potential to transform our business, both reducing net leverage and by providing capitals for long-term growth. Third, we anticipate some benefits resulting from a full year of TCEP-related production, subject to market conditions. Fourth and finally, we see the opportunity for continued growth in our collections, particularly as we look to grow our truck fleet into next year.

For the fourth quarter 2019, we anticipate adjusted EBITDA in the range of $2.5 million to $3 million, which includes plans for 7 days of scheduled maintenance at our Heartland refinery in November. For the full year 2020, we anticipate adjusted EBITDA in the range of $15 million to $20 million, driven by incremental year-over-year contributions from widening product spreads, contributions from TCEP and collection growth. Assuming we generate approximately $4 million to $5 million in adjusted EBITDA for the full year 2019, our 2020 forecast represents a major step change in our financials. We have baked in what we believe are achievable assumptions in this forecast, including the impact of planned maintenance.

With that, I'll turn the call over to Chris Carlson for a review of our third quarter financials.

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Christopher Carlson, Vertex Energy, Inc. - CFO & Secretary [4]

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Thanks, Ben, and welcome to everyone joining us on the call today. Turning to a discussion of our reporting segments. Our Black Oil segment revenue declined 20% on a year-over-year basis to $32.3 million, while gross profit declined 41% to $4.6 million due to a year-over-year decline in commodity prices, decreased production volumes at our Marrero facility and the higher-than-planned maintenance costs related to our annual turnaround in July.

Within our Refining & Marketing segment, revenue declined on a year-over-year basis by 58% to $3.1 million, while gross profit increased 110% on a year-over-year basis to $600,000. The year-over-year decline in revenue was due to a reduction in low-margin business within the segment, coupled with improved spreads on existing business.

Finally, within our Recovery segment, revenue declined 17% on a year-over-year basis to $2.4 million, while gross profit increased to $200,000. The year-over-year decline in revenue was due to less favorable pricing on metals.

Turning to a discussion of our balance and capital structure. We are currently in compliance with all of our debt covenants under our term loan and other credit facilities. On a pro forma basis, assuming completion of Phase 2 of the Tensile transaction, we expect to take net leverage to 0 by year-end 2019.

With that, I will turn the call over to the operator as we take questions from those joining us on the call today.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll take our first question from Eric Stine with Craig-Hallum.

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Eric Andrew Stine, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [2]

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So just wanted to start with collections. It looks like some 42% collections in the last quarter. I mean that puts you well ahead of what I think your annual goal was. And looking through some of the filings, it doesn't look like there were any acquisitions in there driving that. So just maybe thoughts on -- I mean obviously a positive trend, but how we should think about that into 2020?

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Benjamin P. Cowart, Vertex Energy, Inc. - Founder, Chairman, CEO & President [3]

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Yes. So we actually did, and we still got the fourth quarter to build into these numbers, but our growth was higher than planned. I think we're on a run rate right now of 40 million gallons annually, and I think we were planning for a 35 million gallon volume. So things have worked out much better. I think a lot of that's been driven primarily by high third-party supply cost. With high-sulfur fuel being as high as it was over the past 12 months, it drove our ability to expand our collections as an alternative lower cost feedstock. So that was the big driver. As we go forward, we've got a lot of momentum. We see high-sulfur fuel tempering third-party supply costs, so we may give our guys some breathing room as far as getting assimilated with all the growth that we've tacked on. But we do see an opportunity to continue growing our collection business, and that's a key focus for the coming years.

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Eric Andrew Stine, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [4]

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Yes. And then, and I know part of this is kind of tied to Tensile and strengthening the balance sheet as that plays out. But I mean does that change kind of your acquisition strategy at all? I mean -- and I know it's kind of small roll-up acquisitions. Or is this something that you think you've got the opportunity to expand that number but it would be more organically?

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Benjamin P. Cowart, Vertex Energy, Inc. - Founder, Chairman, CEO & President [5]

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Yes. It's going to happen in both organic and acquisition growth, especially in the Heartland region where Tensile will be coming in to help us accelerate the development of that business. So we won't have any real capital limitations up there. It's just making good decisions and building business on the platform we've already got in place. So we see that growing rather quickly in both organic and acquisition. As -- and in the Gulf, we see some opportunities to do some acquisitions as well once our balance sheet improves with the liquidity that we'll get back in the business.

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Eric Andrew Stine, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [6]

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Yes. Got it. And then maybe just lastly on TCEP, great to hear that you're starting that up. I mean it would seem with IMO 2020, that availability of feedstock might be pretty good. Is there -- I mean is there a reason to think that, that wouldn't be running at pretty high levels? And maybe just a reminder, because it's been 4 years, what does that look like if it is running at full levels?

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Benjamin P. Cowart, Vertex Energy, Inc. - Founder, Chairman, CEO & President [7]

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Yes. So we have full tanks across the whole Gulf Coast, so inventories are as much as we want today. We see available supply. Now how much supply and how fast, it's really going to be a step-by-step process. We -- what we're not going to do is go out and put a press in the market on feedstock. We believe that the market is oversupplied. And as the oil is available, we're going to take it in and convert it to low-sulfur fuel for our marine market. We really just -- we're not going to try to strike out some production levels at the moment until we get further into 2020 and just see what is available as far as supply at the current market prices. So the production capacity, when we left [end of] 2015, the plant was running really well. It can go up there pretty good, 80,000, 90,000 barrels a month on the top end. So we got plenty of room. And we do believe that the feed will be available, and we're looking in that direction. But that's something we got to wait out and just kind of let the market kind of do its thing and let the feed come to the plant. That's our goal.

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Eric Andrew Stine, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [8]

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Right. Understood. And then I mean in terms of the guidance, it sounds that since you are taking more of a kind of a measured approach to TCEP that, that step-up in EBITDA or projected EBITDA for 2020, it sounds like it doesn't -- it includes some of TCEP, but it certainly is -- I mean it's far from a full contribution from TCEP.

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Benjamin P. Cowart, Vertex Energy, Inc. - Founder, Chairman, CEO & President [9]

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Yes. Absolutely. I think the big step-up is just getting the market straightened back out on how sulfur fuel values as it relates to WTI. As we indicated on Slide 11 on the deck, you can see that this run up on IMO 2020, where I think that the world really knows the ships aren't going to be able to use this product, there's a lot of hustle for fuel redirected to other markets that left the shipping industry short, causing high-sulfur fuel to trade abnormally high. All of that, I guess we've gotten through that. That had about a -- Chris, $10 million or $11 million impact on our numbers.

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Christopher Carlson, Vertex Energy, Inc. - CFO & Secretary [10]

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That's correct.

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Benjamin P. Cowart, Vertex Energy, Inc. - Founder, Chairman, CEO & President [11]

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Right? And so that's behind us as we see it. If you look at August going in all the way to November, things are improving. And if you look at the forward strip on Slide 12, you can see it's going to open up even more. And then over time, it'll start to tighten back up a little bit. So 5 years of history showed high-sulfur fuel trading around $8 below WTI, before this took place. So we're not sure where high sulfur is going to land long term with this shift change, but we feel very confident that high-sulfur fuel is back to historical levels. And then there's more there than historically because of the shift change with IMO and the demand for these high-sulfur fuel molecules. So that's going to impact the cost of feedstock, get back what we lost and then seeing some opportunity on the upside. That's what we really see in our assumptions going forward.

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Operator [12]

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And our next question comes from Brian Butler with Stifel.

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Brian Joseph Butler, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [13]

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Let's just -- the chart you guys provided on Slide 14 there, where the kind of the waterfall up to the guidance is super helpful, I just want to kind of understand some of the details behind this. So on the collection growth, that $1 million to $2 million, is that you guys just benefiting from the ramp up of, to the 40 million kind of gallons you've already got? Or is that assuming another big step-up in your efforts to increase that collection?

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Benjamin P. Cowart, Vertex Energy, Inc. - Founder, Chairman, CEO & President [14]

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Yes. There's some growth built into that. Obviously, we're going to take new earned gallons this year with us, so it's a combination of the impact of these lower-cost gallons, feedstock gallons. I think that's how we've got it modeled at the moment. But we're somewhat tempered on our growth, collection growth for next year just because we think that we're going to have plenty of breathing room with third-party supply. And we really just want to get our cash flow caught up. I mean, 25% growth in 1 year in collections is a lot of work, and our guys have done a fantastic job to assimilate all that volume and stretch the business like we've done on an organic basis. So we're going to make sure that this is done extremely well and that we don't get too far ahead of ourselves, as we see it.

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Brian Joseph Butler, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [15]

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Okay. So I mean if you were to see another surprise -- you beat your target by 5 million gallons this year. I mean that would be incremental to that $1 million to $2 million. I understand you're kind of taking a breather to everything...

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Benjamin P. Cowart, Vertex Energy, Inc. - Founder, Chairman, CEO & President [16]

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Yes. I mean we got a lot of momentum that it's going to be difficult to slow down. And so I think these assumptions are -- we're pretty comfortable with them. I'll just say that.

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Brian Joseph Butler, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [17]

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Right. And that's a multi-year opportunity where you can continue to grow that, right? I mean that's -- I'm not thinking about that incorrectly there.

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Benjamin P. Cowart, Vertex Energy, Inc. - Founder, Chairman, CEO & President [18]

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No, no, no. I mean just with the 2 refineries running, we've got about 50-plus million gallons of third-party supply that we're buying historically, at least in the last year or 2, at a much higher price than our cost to collect. That's going to come down, I believe. And then we bring TCEP on and ramp it up. That's more refining capacity. And we need to have a healthy amount of collections with the third-party supply that we depend on. I mean we've got a lot of good relationships across the country that we work with. We support their business, and we don't anticipate that changing. But for us, around the refinery specifically, collecting volume into the plant is part of our strategy.

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Brian Joseph Butler, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [19]

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Okay. And talking about pricing, kind of on the used motor oil, what was that trend in third quarter? Are you in a charge-for-oil scenario where you're charging on your trucks? I mean -- and what did the pay-for-oil for the third-party guys kind of trend like?

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Benjamin P. Cowart, Vertex Energy, Inc. - Founder, Chairman, CEO & President [20]

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Yes. Remember, Brian, we're a little bit different. 2/3 of our feedstock comes from third party. And when you've got high-sulfur fuel like it's been in the last 12 months driving that third-party cost up, our ability to collect at a street level is much different than the major market where people collect most of their oil for their refining capacity. So all that being said, we probably are in the low teens on pay-for-oil at the moment as far as where we stand. We've had a lot of pressure in the market from other third-party suppliers. That's put a lot of pressure on the streets that caused costs to go up. And so we've responded to that, but we feel like our collection costs in comparison to our feed costs is very attractive and has added a big part of our value to the business.

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Brian Joseph Butler, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [21]

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And that's been improving, though, in November here. You've been seeing that? Or has that not flowed through when you think about the spreads that are out there and coming down?

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Benjamin P. Cowart, Vertex Energy, Inc. - Founder, Chairman, CEO & President [22]

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Yes. We're first seeing it on third-party supply. So it is coming down, it's flowing through in a very positive way. And obviously, just how the mechanics of the industry work, third-party pricing for used oil sets the value of charge or pay-for-oil on the street. It just works. It trickles that way. So we hope to see street pricing come off, which is another reason it doesn't -- at least for now putting a lot of pressure on the street is probably not necessary now that high-sulfur fuel is bringing the value of used motor oil back in line with where it was. And then where it's going to go, it could be less going forward.

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Brian Joseph Butler, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [23]

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Okay. And then on TCEP, I know you started it up, so I'm guessing you have pretty good confidence that there's buyers out there. Is that -- when you look at that $3 million to $4 million impact for 2020, how much of a stretch goal is that versus how much is kind of if you're going to do 30,000 gallons in the fourth quarter? Is that kind of the annual pace that's kind of built into that $3 million to $4 million? Or is it really ramping up much higher?

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Benjamin P. Cowart, Vertex Energy, Inc. - Founder, Chairman, CEO & President [24]

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No. Just keep in mind, the plant's not running today. It's going to start this month. And we're going to put up 30,000 barrels just -- in short order by the end of the year. And then we're going to run the plant based on available supply in the market that's coming to us, not that we're chasing and pressing for. So we think that this number is in line with what we think we see at the moment, and that could be much improved to the upside all based on supply and managing the cost of that supply.

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John Noel Strickland, Vertex Energy, Inc. - COO [25]

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We also have a buyer.

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Benjamin P. Cowart, Vertex Energy, Inc. - Founder, Chairman, CEO & President [26]

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Yes. And that's all sold, so as John said, we have a buyer.

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Brian Joseph Butler, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [27]

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All right. You have a buyer for that 30,000 that you're going to be producing at the end of the month -- or end of the quarter?

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Benjamin P. Cowart, Vertex Energy, Inc. - Founder, Chairman, CEO & President [28]

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Yes. And all the production going forward, so.

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Brian Joseph Butler, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [29]

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Okay. And then the IMO spread impact, is that $7 million to $9 million, kind of assuming you get back to that historical 5-year $8 discount? Or is that assuming it's going to be at the forward rate of $22 discount?

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Benjamin P. Cowart, Vertex Energy, Inc. - Founder, Chairman, CEO & President [30]

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That pretty much assumes we're just getting our historical spreads back in the business. And we see good margin going forward, and so we -- but again, that's less out of our control, and we think there's a good view and a good picture for the business. But the majority of what you're looking at is just getting our money back.

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Brian Joseph Butler, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [31]

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Right. So that factored that $8 spread. So I mean if the spreads really stay at $22, a discount of $22, the future strips imply then you could be materially above that $7 million to $9 million. That's the right way to look at that?

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Benjamin P. Cowart, Vertex Energy, Inc. - Founder, Chairman, CEO & President [32]

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Yes. I mean I think it's -- that's a market way of looking at it today. If you look at the forward strips on Slide 12, there's some upside here, so.

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Brian Joseph Butler, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [33]

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Okay. And then just maybe one last one. Just on with your working capital, when you think about kind of the expansions that you have kind of going forward here, how should we think about working capital, I guess, in the fourth quarter, but more importantly, kind of into 2020? Is that going to be a big use? Or is that going to kind of flatten out?

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Benjamin P. Cowart, Vertex Energy, Inc. - Founder, Chairman, CEO & President [34]

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Yes. I think the plants are in excellent shape. I mean obviously, this turnaround in the third quarter in July had a major impact on the -- what we're looking at for third quarter results, but it was very necessary. We did some really big stuff on this turnaround to prepare the plant for IMO 2020. We replaced the top of our column, we put new exchangers in, we -- so things that you'd normally do on a 10-year basis...

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John Noel Strickland, Vertex Energy, Inc. - COO [35]

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10-year turnaround.

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Benjamin P. Cowart, Vertex Energy, Inc. - Founder, Chairman, CEO & President [36]

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Yes, 10-year turnaround stuff. So we got all that done in July, plants came up, it's been running great, no issue. And we're -- we feel really confident that the asset is prepared for the opportunity. So we wanted to -- we just didn't want to have to bump around once we get into these better spread opportunities for IMO. So that was done. Obviously, we had a storm that kind of slummed us down while we were in the middle of the heavy lifts and a lot of stuff going on, on the turnaround. That's just part of it. So that's behind us. So heavy capital for the refineries. So Heartland, the same, is in really good shape. Everything's good. So most of our capital is going to be around rolling stock and equipment as we look into next year. And we'll probably stay around the same range, Chris, $3 million or $4 million? $3 million?

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Christopher Carlson, Vertex Energy, Inc. - CFO & Secretary [37]

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For CapEx.

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Benjamin P. Cowart, Vertex Energy, Inc. - Founder, Chairman, CEO & President [38]

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Yes, for CapEx? Maintenance CapEx?

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Christopher Carlson, Vertex Energy, Inc. - CFO & Secretary [39]

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That's right.

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Benjamin P. Cowart, Vertex Energy, Inc. - Founder, Chairman, CEO & President [40]

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So not much change.

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Brian Joseph Butler, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [41]

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One last one, I'm sorry. On the Heartland investment, when you think of that $15 million to $20 million that it could add by 2023, other than the execution risk and being successfully kind of getting to the -- all the stuff within your control, what's the kind of market risk or the environment out there that would potentially slow that down or, I guess, speed it up? But I guess really, it would be more slow that down reaching to kind of those targets?

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Benjamin P. Cowart, Vertex Energy, Inc. - Founder, Chairman, CEO & President [42]

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Yes. Base oil prices probably is the variable that we don't have as much control of. Our collection volumes are growing. We're going to build our collection volume out probably into the full capacity and add some new capacity potentially. That's part of the strategy. A lot of synergies around the facility with the new property that we own that's going to debottleneck things and get more margin and production capacity on the unit. That's another, so that's in our control. And the majority of the oil that we produce today is stemmed on contracts that still go out quite a way. So we feel good that as far as not being a distressed seller of base oil has been a real positive for us. So we've not had to go to the market and give our product away, and the quality of the product is increasing really well. So everything's working for us at Heartland. What's going to slow that down, John? I mean, you see anything?

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John Noel Strickland, Vertex Energy, Inc. - COO [43]

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Today, I don't. I think the base oil market is -- today, we have better -- I hate to say the word control of what we're doing, with the contracts we have. And the production up there, it's running over 100%, nameplate. So we got it dialed in with all the maintenance CapEx we've spent in the last year. We have it and ready to go today.

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Benjamin P. Cowart, Vertex Energy, Inc. - Founder, Chairman, CEO & President [44]

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So, yes. So those investments will ratchet the value of the product up. There's some hoops, like things that we got to do, long term.

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John Noel Strickland, Vertex Energy, Inc. - COO [45]

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And another thing we've done up there, the collection for that refinery this year, 50%, it will come. Collections will be 50% of the volume, which we need at the plant compared to 35% a year ago. So, yes.

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Benjamin P. Cowart, Vertex Energy, Inc. - Founder, Chairman, CEO & President [46]

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Yes. A lot of collection growth up there. So that's a view that we've spent a lot of time working on. And obviously, it's been looked at, tested and checked very carefully by our JV partner as they've made their decision to come alongside that business. And so we think we're pretty comfortable with what we got.

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Operator [47]

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And our next question comes from Tom Bishop with BI Research.

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Tom Bishop, BI Research [48]

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The $1.5 million impact at Marrero, was that relative to EBITDA? Or what was the...

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Benjamin P. Cowart, Vertex Energy, Inc. - Founder, Chairman, CEO & President [49]

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Yes. That was -- that's an EBITDA impact on the business. That was an extra 8 days of downtime that wasn't really planned. And then of course, we had some OpEx costs that came with the delays at the turnaround.

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Tom Bishop, BI Research [50]

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Yes. Okay. So it's EBITDA. And looking ahead to better times here in 2020, I'm wondering what will be the diluted share count once net income turns positive and hopefully the stock price improves? I mean are we going to be able to use $42 million? Or is it set to climb based on some mechanics of the calculation?

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Christopher Carlson, Vertex Energy, Inc. - CFO & Secretary [51]

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I mean it potentially could climb a little bit, Tom, as preferred Bs convert. But as of right now, it should be right in that $42 million to $45 million range.

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Tom Bishop, BI Research [52]

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Okay. It's currently around $42 million. What's the $45 million going to relate to?

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Christopher Carlson, Vertex Energy, Inc. - CFO & Secretary [53]

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Well, just -- I mean if some start to convert in the near term.

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Tom Bishop, BI Research [54]

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I see. It probably wouldn't get above $45 million is -- you're saying, but...

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Christopher Carlson, Vertex Energy, Inc. - CFO & Secretary [55]

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Potentially, yes.

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Tom Bishop, BI Research [56]

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And what is the conversion feature there that would trigger?

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Christopher Carlson, Vertex Energy, Inc. - CFO & Secretary [57]

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Well, they have the ability to convert at their discretion. But the B1 can convert at $1.56, which we're not too far from.

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Tom Bishop, BI Research [58]

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Great. And how many shares does that relate to?

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Christopher Carlson, Vertex Energy, Inc. - CFO & Secretary [59]

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It's approximately 15 million. It's in the financials and the notes. You can get the details in there.

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Tom Bishop, BI Research [60]

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Okay. Now will the interest line go to 0? Or will that just temporarily go to 0, and then as you make acquisitions and other investments, will that go right back to $13 million? The...

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Christopher Carlson, Vertex Energy, Inc. - CFO & Secretary [61]

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I wouldn't anticipate it going to 0 because we will want to maintain our revolver for inventory. So we'll definitely have interest going forward. As far as how far that goes down, it's going to depend on Encina and how much we pay down on the term debt.

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Tom Bishop, BI Research [62]

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Okay. Do you have an estimate of roughly what it might go to?

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Benjamin P. Cowart, Vertex Energy, Inc. - Founder, Chairman, CEO & President [63]

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Well, the, they -- right now -- we'll finalize that. But there's a $9 million paydown that they've asked for, at least as a placeholder. So that's -- if that gives you an idea. But we'll decide all that after the second close and finalize that with the bank.

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Tom Bishop, BI Research [64]

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With regards to TCEP, I didn't understand the volume being conditional on the availability of supply. I would think you could get as much supply as you want. I mean you've been able to fuel your other 2 plants. So what am I missing there?

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Benjamin P. Cowart, Vertex Energy, Inc. - Founder, Chairman, CEO & President [65]

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No. I mean you're exactly right. We can go get the supply and put a big press on the market. But today, the market's oversupplied. We know that for sure. We're just not sure how much.

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Tom Bishop, BI Research [66]

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Oversupply of what?

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Benjamin P. Cowart, Vertex Energy, Inc. - Founder, Chairman, CEO & President [67]

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And it's not a good -- I said the market is oversupplied. Can you hear me?

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Tom Bishop, BI Research [68]

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Yes. With what?

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Benjamin P. Cowart, Vertex Energy, Inc. - Founder, Chairman, CEO & President [69]

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With used motor oil. Right? But we don't know how much...

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Tom Bishop, BI Research [70]

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Right. Okay. I was thinking you would be able to run the TCEP plant as much as you want. But you said there was some...

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Benjamin P. Cowart, Vertex Energy, Inc. - Founder, Chairman, CEO & President [71]

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Yes. We don't know how much that is oversupplied at today's price, Tom. So we're going to temper the production, at least as we're discussing it today, based on the oversupply volume that's out there that's undetermined. So this is going to take a little time before we go getting in a hurry and pressing the markets just to run production up and create a false demand on the value of the used oil. We're not going to do that.

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Tom Bishop, BI Research [72]

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Okay. Is there a max capacity, though, if everything played out correctly?

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Benjamin P. Cowart, Vertex Energy, Inc. - Founder, Chairman, CEO & President [73]

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Yes. That's what I said. The plant in 2015, when we shut it down was capping out at 80,000, 90,000 barrels a month, so.

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Tom Bishop, BI Research [74]

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All right. Understood. And finally, the white paper that was put out a while ago based on assumptions from other parties at the time for the IMO 2020 impact, how is it looking today versus that?

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Benjamin P. Cowart, Vertex Energy, Inc. - Founder, Chairman, CEO & President [75]

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Yes. I think if you look at Slide 12 and you look at the forward view on high-sulfur fuel, it's played out pretty well. I think the only thing that those early assumptions on IMO really missed was the run-up on high-sulfur fuel leading into IMO 2020 that really hurt us this year.

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Christopher Carlson, Vertex Energy, Inc. - CFO & Secretary [76]

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That's right. Yes.

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Tom Bishop, BI Research [77]

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But that should go -- that run up should go away, right?

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Benjamin P. Cowart, Vertex Energy, Inc. - Founder, Chairman, CEO & President [78]

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Yes. It's already gone away. If you look in August, on Slide 11, you can see that we've already returned back to a deeper discount of high-sulfur fuel off WTI.

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Operator [79]

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And that does conclude our Q&A session for today. So I'll turn it back over to management for any closing remarks.

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Benjamin P. Cowart, Vertex Energy, Inc. - Founder, Chairman, CEO & President [80]

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Okay. Thank you, Kristen. Please turn to Slide 15. In conclusion, it's a very exciting time for our business. Widening product spreads, together with the many opportunities afforded by our Tensile JV, have the potential to transform our business over the next 12 to 36 months. We appreciate your ongoing support of Vertex and look forward to hosting investor meetings at the Craig-Hallum Alpha Select conference in New York this month and at the LD Micro Conference in California in December as well. In the interim, should you have any questions, please contact Noel Ryan of Vallum Advisors at (720) 778-2415, or reach him at ir@vertexenergy.com. Thank you, everyone, for joining us today. This concludes our call.

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Operator [81]

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And that does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time, and have a great day.