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Edited Transcript of VTNR earnings conference call or presentation 15-May-18 1:00pm GMT

Thomson Reuters StreetEvents

Q1 2018 Vertex Energy Inc Earnings Call

CUPERTINO May 21, 2018 (Thomson StreetEvents) -- Edited Transcript of Vertex Energy Inc earnings conference call or presentation Tuesday, May 15, 2018 at 1:00:00pm 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

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Presentation

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Operator [1]

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Greetings, and welcome to the Vertex Energy, Inc. 2018 First Quarter Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ben Cowart, Chairman and CEO. Thank you. You may begin.

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Benjamin P. Cowart, Vertex Energy, Inc. - Founder, Chairman, CEO & President [2]

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Thank you, operator, and good morning, and welcome to Vertex Energy's 2018 First Quarter Financial Results Conference Call. Joining me today on the call is Mr. Chris Carlson, our Chief Financial Officer; Mr. John Strickland, our Chief Operating Officer; and Michael Porter, our Investor Relations Consultant at Porter, LeVay & Rose.

The company expects to make forward-looking statements during today's call. Statements including words such as believe, anticipate, except and statements in the future tense are forward-looking statements. These statements involve known and unknown risk and uncertainties and are based on management's current views and assumptions regarding future events and operating performance. A number of factors could cause the company's actual future results to differ materially from its current expectations.

Before we review our financial results, which were filed yesterday evening with the SEC, I would like to discuss some key points about our business operations. We met or surpassed many of our internal target for the first quarter 2018. We have improved revenue and witnessed strong demand in our finished products in the first quarter. In addition, we managed to protect our spreads during the quarter, maintaining our charge for oil for collected volume. There were, however, some production issues at both our Marrero and Heartland facilities, which impacted our net income by approximately $0.05 per share.

We missed production slightly at our Heartland facility because of failing heater. During our recent annual full turnaround, we replaced the heater and made some additional capital improvements to the process that will allow us to improve the original plant's production capacity going forward.

At Marrero, we had a planned turnaround that extended 5 more days than anticipated. Some of that unplanned downtime was recovered during the quarter, but still created a negative impact on production. Despite the negative impact of our turnaround, our consolidated revenue jumped 19% to $41.4 million. Our gross profit rose 67% to $6.8 million, and our gross profit margin was approximately 16%.

We maintain optimistic -- opportunistic as we -- we remain opportunistic as we focus on building our collection volume organically as well as through acquisition. Our volume grew 17% in the first quarter 2018 over the first quarter 2017, and jumped 27% for the 12 months ending March 31, 2018, over the 12 months ending March 31, 2017.

Our UMO collection volumes are trending and tracking ahead of projections. Our contribution margin was also ahead of our internal expectations despite The Street shifting to a pay-for-oil model. We completed the trial of our -- one barge of UMO at our TCEP facility to produce a product that would meet the new IMO 2020 Marine bunker fuel regulations. We are confident that the facility is ready for 2020, and will also explore, in the interim, other market opportunities for products produced at the TCEP facility.

Volume in the Vertex Penthol Group III base oil import business was on target for the quarter, and we anticipate being ahead of volume for the second quarter. As for the private capital-funded projects, we have no major updates at this time. However, we are comfortable with the progress and still maintain a summer time frame to secure funding. Further, we do expect to recover some of the capital invested in the projects, to this point, back into our balance sheet.

We remain opportunistic in our outlook and performance for 2018. We have the ability to capture and recapture capacity to get back to our target of production volumes in 2018. The turnarounds at our facility have allowed us to make additional adjustments to our equipment that will yield significant improvement in production volume and financial performance going forward.

I'll now turn the call over to Chris Carlson, our CFO.

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Christopher Carlson, Vertex Energy, Inc. - CFO & Secretary [3]

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Thank you, Ben. I will now review our financial results for the 2018 first quarter ended on March 31, 2018. All of our financial statements, unless otherwise noted, are prepared in accordance with generally accepted accounting principles.

For the first quarter of 2018, consolidated revenue was $41.4 million, higher than the $34.8 million reported for the first quarter ended March 31, 2017. Our total overall volume for the business was up 1% for the quarter over the first quarter of 2017. Our gross profit was $6.8 million, an increase of 67% from a gross profit of $4.1 million during the same period in 2017. Gross profit margin was approximately 16.4% for the quarter compared to 11.7% for the same period a year ago.

Our consolidated per barrel margin increased 65% in the quarter compared to the same period a year ago. The growth was attributed to improvements in market conditions throughout the year, continued focus on finished product value enhancement and the management of our costs and spreads.

In our Black Oil Division, which includes our Marrero and the Heartland business units, revenue was $32.2 million for the quarter as compared to $24.8 million in the same period a year ago, an increase of approximately 30%. Volume increased 10% for the first quarter over first quarter of 2017. Gross profit for the division was $5.7 million during the quarter, which was a 95% increase over $2.9 million in the first quarter of 2017.

The Refining & Marketing Division produced revenue of $5.7 million in the first quarter of 2018 as compared to $5.4 million for the same period a year ago, an increase of 5.2%. Volume for the quarter was down 7% over the first quarter of 2017. The division's gross profit decreased 42% to $436,000 for the quarter compared to $746,000 a year ago. Per barrel margin decreased 37% for 2018 over the same period a year ago.

For the first quarter of 2018, the Vertex Recovery division, which includes our Group III base oil import business, generated revenue of $3.5 million, a decline from $4.6 million a year ago. Volume was down 33% for the quarter over first quarter of 2017. Gross profit was $620,000 in the first quarter of 2018 compared to $388,000 a year ago, which was an increase of 60%.

Selling, general and administrative expenses were $5.7 million in the first quarter of 2018 compared to $5.2 million for the same period a year ago. Our SG&A was impacted by increased operational expenses and compliance costs related to the additional facilities acquired during the second quarter of 2017. Depreciation and amortization expenses were $1.7 million compared to $1.6 million a year ago. As of March 31, 2018, our term debt was approximately $15.9 million.

At the end of the quarter, our working capital was approximately $4.4 million compared to working capital of $3.9 million at the end of March 31, 2017.

Our reported net loss, which includes the accretive cost of our preferred stocks, was $3.5 million or a loss of $0.10 per share in the first quarter of 2018 compared to a net loss of $4 million or a loss of $0.12 per share in the same period a year ago. Without the accretion of the preferred stock, our net loss for the quarter 2018 was $2.3 million or a loss of $0.07 per share compared to a net loss of $3.2 million or a loss of $0.09 per share for first quarter of 2017.

Our EPS was calculated using an average of 33 million shares outstanding in first quarter of 2018.

Before we take questions, I want to let the listeners know that if you had any follow-up questions or comments, please feel free to contact Porter, LeVay & Rose Investor Relations Representative, Marlon Nurse, at (212) 564-4700. I also want to mention that a digital replay will be available via telephone approximately 2 hours after the call's completion until July 31, 2018. Details on how to access the replay can be found in our recent press releases and on the Investor Relations section of our website at www.vertexenergy.com.

Operator, we are now ready to take a limited number of questions pertaining to the matters discussed on this call and in our 10-Q. Remember, we are unable to discuss any information or business plans which are not publicly available. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is coming from Eric Stine of Craig-Hallum.

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

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I was wondering if we can just start with the collections, great to hear that you were able to hold the charge for oil. And I know in late 2017, you noted that there were some in the market who were paying, but that was really related to weather and just limited feedstock. I mean, any thoughts about what you're seeing in the market today? And is there a price of oil that you think, the industry as a whole, may switch or have to go more of the pay-for-oil route? Or do you think long-term, you can hold on to this charge-for-oil?

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

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Well, good question, and obviously, a major driver to our industry. It is related to the value of products that the industry produces: one, because the industry will tend to take those margins or those increases in product value and apply it to more volume for volume growth sake. The second component is the supply and demand for used motor oil. So that's the wildcard. We certainly see more used oil today than we have in several years available. And so we're not sure that demand is strong enough to keep driving this pay-for-oil model. So we've kind of just kept a hold-in-place position on our spreads and tried to maintain a charge-for-oil because we just don't see the demand out there. So it's supply and demand and it's oil prices. Those are the two that drive the pay-for-oil versus a charge-for-oil model.

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

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Got it. So I mean, at current levels you feel okay?

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

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Yes. I don't see that -- if oil prices continue going up, I do not see a charge-for-oil market. I think the industry will lose that.

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

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Got it. Okay. But here, I guess, it sort of remains to be seen when supply/demand comes into play. But -- okay. Maybe if we could just turn to the Marine Fuel market. I know right now, you're producing fuel out of Marrero, which is compliant to the current standards, and the TCEP would be for the 2020 standards. I mean, can you just talk about maybe the differences between the two fuels? And looking out to 2020, should we view that as just being TCEP? Or are there investments you can make at Marrero that mean that, that fuel would also be IMO 2020 compliant?

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

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Okay. So yes, the fuel today at Marrero is going into the bunker market in different blends. So it's a distillate product that's being used in different ways, primarily in a low-sulphur 0.1 fuel specification to meet the 2015 ECA fuel regulations. So that's where it's currently being used.

In 2020, the sulfur-owned major engine fuel goes from 3.5% down to 0.5%. So this is a black fuel product that will have a 0.5 Sulphur. So it's -- it will be different than the markets that we're selling into today. So that's what our TCEP plant is geared for. And we also have opportunities around our Houston facility as well as the Belle Chasse, Myrtle Grove facility to enhance our production and supply of fuels, both into the 0.1 and the 0.5 bunker fuel markets. So it is one of our target markets for the company along with the high-purity base oil market. Those are the 2 focuses that we have with our assets and in our company.

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

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Got it. Okay. So Marrero, then if we look out at 1.5 years, you would use that potentially for other markets. I mean, it wouldn't be 2020 compliant but you will have volumes that will be 2020 compliant?

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

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Yes, Marrero is more than 2020 compliant. It's 2015 ECA compliant. So it's way ahead of 2020 already. So we're -- yes, we're -- we don't see that changing.

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Eric Andrew Stine, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [10]

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Perfect, great to hear. Then last one for me just more to clarify. So at Marrero and Heartland, I know you had some operational days down there in the first quarter and they're up now. Were those up at the start of the second quarter? And does that do anything to change your turnaround schedule for the rest of the year?

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

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Yes, so Marrero -- I'll tell you what. I'm going to turn this over to John. He was working through these issues. So I'll let him explain both the turnarounds and answer your question.

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John Noel Strickland, Vertex Energy, Inc. - COO [12]

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Yes, so our planned turnarounds for the year have not changed, even though the down days were there. At Marrero, we were down, like I said, 5 days longer than normal, but we came back up doing production, a little built -- a bit above production and are still that way today. At Heartland, that heater issue that was there, we already planned to replace that heater and create more production for us in the back end of the hydrotreater there, and that hydrotreater today is doing production budget today and higher production of close to 20% today.

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Eric Andrew Stine, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [13]

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Okay. So really Q2, I mean, there is very little impact.

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John Noel Strickland, Vertex Energy, Inc. - COO [14]

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From [our budget], yes.

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Operator [15]

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Our next question is coming from Brian Butler of Stifel.

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Brian Joseph Butler, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [16]

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Just the follow-up on that kind of margin impact that happened from the down days and the heater issues. That was $0.05 in the quarter, so about, I'm guessing, $1.7 million to gross profit, just kind of rough calculation, is that right?

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Christopher Carlson, Vertex Energy, Inc. - CFO & Secretary [17]

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A little bit lower than that. But I mean, really right around the $1 million impact to the bottom line.

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Brian Joseph Butler, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [18]

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$1 million impact on bottom line, okay. And I guess, on the margin basis, how does that look on gross margin? I mean, when I did it, kind of backing it out [5x to --] with the 33 million shares, I got margins, excluding those two items, gross margins being around 20.5% of that. Is that the right way to look at it? Or is it really sub-20%, I guess, if it's only a $1 million on the gross profit line.

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Christopher Carlson, Vertex Energy, Inc. - CFO & Secretary [19]

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It's about sub-20%, and keep in mind there was no SG&A impact. We would have still had the same SG&A, just miss production opportunities.

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Brian Joseph Butler, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [20]

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Okay. And then, so this is a little bit -- even with -- even excluding those items, margins were slightly down from fourth quarter, kind of, in that 18% to 20% -- 21% range that you talked about. Thinking about going forward for the remainder of 2018, how should we think about margins? I mean, is it going to be back over 20% kind of like what we saw in the fourth quarter of '17? Or is it kind of run more in this adjusted, call it, 18% to 19% range?

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Christopher Carlson, Vertex Energy, Inc. - CFO & Secretary [21]

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I think you're going to be in this, call it, 16% to 19% range, and a lot of that has to do in part to this shift in the market from a charge-for-oil to now a lower charge, and what we think will become a pay-for-oil on The Street. And then, of course, you've got higher oil prices that factor into that.

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Brian Joseph Butler, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [22]

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Which should be an offset, correct? I mean, that should be benefiting you guys. Okay, and then just talking about that charge-for-oil PFO trend, I mean, has that slowed down that swing or the decline of charge-for-oil and kind of bottom out at current levels? Or is that still trending towards pay-for-oil or higher pay-for-oil depending upon where you are, I guess, on the -- of the range?

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Benjamin P. Cowart, Vertex Energy, Inc. - Founder, Chairman, CEO & President [23]

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Yes, so Brian, we planned for a pay-for-oil market just based on what behaviors and what we've seen in the industry, kind of, coming into 2018. So we don't see that changing too much. We've hung in there pretty well. We do see an opportunity to grow our collection volumes in a pay-for-oil market and actually improve our overall contribution margin to what we have to pay for third-party supply. So we've been as disciplined as we could be in managing that charge-for-oil, but the industry has just gotten way out there. And so in order to really try to figure out where this is going, our assumption, as it was when we came in 2018, is that the industry is going to give up a charge-for-oil to pay-for-oil type of model. Fortunately, we have 60 million gallons of third-party supply that we can displace. And so far our contribution margins, as we've grown our collection volume, has been ahead of our targets.

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Brian Joseph Butler, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [24]

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Okay, that's helpful. And on the collected value, you mentioned it, do you have a number for how much you collected out of the $104 million that you guys aggregated?

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Christopher Carlson, Vertex Energy, Inc. - CFO & Secretary [25]

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I mean, it's around $30 million, $32 million.

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

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Yes, $30 million, $32 million. We don't have that number right here with us.

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

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Okay. And then just the last one for me. On the refining gross profit, which was down year-over-year, do you have any color on what was kind of behind that? Is that attached to the issues you had at Heartland or Marrero? Or is that something else?

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

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Yes, I think -- the only thing that we've seen in the whole quarter from our operating performance, we kind of exceeded every other area other than our production volumes. So we were 95.5% utilization at our Marrero facility, and we were 92%, John?

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John Noel Strickland, Vertex Energy, Inc. - COO [29]

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92%.

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

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92% at our Heartland facility. And so our costs and our spreads were a little bit ahead of target. So we definitely managed the spread well through the quarter.

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

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In first quarter of '17, did you possibly have something that benefited that I've either forgotten or just missed in the Refining & Marketing? Because going from $700,000 to $440,000 in gross profit seems kind of like a sizable swing.

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

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Yes, I think it was volume related. So that -- if you recall, the Refining & Marketing business will come in lumps. It just depends on the cycle of the sales of product when they get booked, and we've seen that in the first quarter. We have stuff fall over in the second quarter. We expect second quarter to be better than the first quarter in Refining & Marketing. So it's just a lumpy business.

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

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Okay. I was going to say, in the current environment, should we be expecting refining to be up year-over-year though? I mean, just on the gross profit side, I mean, it seems like it's an attractive fundamentals with higher oil?

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

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Yes. No, I think Refining & Marketing has a good outlook for the rest of the year.

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Operator [35]

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(Operator Instructions) Our next question is coming from Tom Bishop of BI Research.

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Tom Bishop, BI Research [36]

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This is probably more for Chris. You've mentioned in the commentary that you were disappointed in the EBITDA for the quarter, and actually, this also applies -- this comment also applies to adjusted EPS. But I think most people would eliminate, or add back in, the increase or decrease in the fair value of derivative liability and the increase or decrease in futures contracts, the noncash ones. I think that was $456,000 to adjusted EBITDA as well as to adjusted net income as these are impossible for analysts to project and for the companies to project, I would think.

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

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Yes, definitely as far as managing and reporting on a quarterly basis with the stock price, spending and impact and the number of B and B-1 out there and potential for exchanges, it is a very hard number to predict. So that number does tend to move around. They've both always been in the $450,000 to $500,000 range quarterly. So that's kind of been where...

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Tom Bishop, BI Research [38]

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Well, I'm looking at last -- I'm looking at the consolidated statement of cash flows. A year ago, they were markedly different, both of them, especially the decrease in futures contracts.

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

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Well, that's a different line item. The futures contracts is related to our hedging activities, which, with the high oil price market, we've put on a few more hedges to protect our margins.

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Tom Bishop, BI Research [40]

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Okay, well, again, I would not look -- askance at you for including those two items in your adjusted EBITDA and net income calculations, so you might just want to consider that. The TCEP facility being converted to 0.5% [range in] Sulphur fuel?

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Christopher Carlson, Vertex Energy, Inc. - CFO & Secretary [41]

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Yes.

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Tom Bishop, BI Research [42]

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For 2020, does that go into effect on January 1? Or when it...

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Christopher Carlson, Vertex Energy, Inc. - CFO & Secretary [43]

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Yes, it goes into effect January 1, 2020.

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Tom Bishop, BI Research [44]

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So you would start producing, and perhaps, getting revenue from that even before 2020? And if so, roughly when?

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Benjamin P. Cowart, Vertex Energy, Inc. - Founder, Chairman, CEO & President [45]

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Yes. We are certainly capable of doing so. As I said in the second -- or on the first quarter, we produced 13,000 barrels of finished product from the plant, just from all the R&D work that we had done last year and so everything went fine. We're going to be looking for additional niche markets for that spec product, but we certainly believe 2020 will -- we'll take the product with no issue. It's a 0.2% Sulphur finished products. So today, it would go into a cutter market, and the residual fuel trade is pretty weak at the moment and has been so far this year. So we don't anticipate operating the plant until we see good market conditions for the spec for the finished product.

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Tom Bishop, BI Research [46]

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Well, okay. When in 2020 does the rule go into effect?

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Benjamin P. Cowart, Vertex Energy, Inc. - Founder, Chairman, CEO & President [47]

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January 1, 2020.

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Tom Bishop, BI Research [48]

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Okay, sorry I missed that. And okay, I mean, you do have to start billing the people's pipelines or oil tanks or whatever for that product in 2019?

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

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The market's looking at around September of 2019, where people start transitioning to the new regulatory requirement.

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Tom Bishop, BI Research [50]

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Okay, good. And on this preferred stock, I have a little trouble with the terminology, I'm a little rusty, graduated from Accounting a long time ago. Can you -- on the temporary equity, is that temporary because it's convertible to the preferred?

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

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Yes, that is correct.

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Tom Bishop, BI Research [52]

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Can you read through one of those lines and just explained it to us, for example, what's the difference between designated and authorized? Are there 10,000 shares of series B outstanding? Or...

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

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There's 10 million that are available to be issued, so they're designated. We have only issued the 3.4 million that's listed there as of March 31 and December 31.

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Tom Bishop, BI Research [54]

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So designated sort of equals authorized here?

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

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Yes, that is correct.

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Tom Bishop, BI Research [56]

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Okay. And then the liquidation preference, is that larger than the $7.5 million because of the accrued dividends?

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

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The liquidation preference is larger because it is at a stock value of $1.56 for the B-1 and $3.90, I think, for the B, so it is higher.

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Tom Bishop, BI Research [58]

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3.9x the value that you've received, is that what you're saying?

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

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Well, when we did the initial B issuance back into June of '15, the stock price was quite a bit higher than it is today.

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Tom Bishop, BI Research [60]

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Can you remind us where the convertible is at those -- on those two? At what price is that convertible?

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

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Yes, the B is, again, I want to say it's around $3.90 and the B-1 is $1.56.

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Tom Bishop, BI Research [62]

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Okay. And the liquidation preference only matters if the company was liquidated, right? I mean, it's just a number you supply but...

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Christopher Carlson, Vertex Energy, Inc. - CFO & Secretary [63]

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Well, it would be viewed as a debt obligation 2 years from today in the event they did not convert.

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Tom Bishop, BI Research [64]

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If they did not convert, okay. Well, I hope we get the stock price up then.

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Operator [65]

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(Operator Instructions) At this time, I'd like to turn the floor back over to management for any closing comments.

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Benjamin P. Cowart, Vertex Energy, Inc. - Founder, Chairman, CEO & President [66]

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Okay. Thank you, operator. Thank you, everyone, for dialing in. Again, if you have any further questions, please feel free to reach out to Marlon Nurse at Porter, LeVay & Rose at (212) 564-4700. Again, thank you for dialing into our call.

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Operator [67]

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Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may disconnect your lines at this time, and have a wonderful day.