FutureFuel Corp. (FF) Q3 2014 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the FutureFuel 2014 Third Quarter Conference Call. At this time, all participants are in a listen-only mode. Following management’s prepared remarks, we will hold a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded today, November 7, 2014. I’d now like to turn the call over to Mr. Lee Mikles, President of FutureFuel Corp. Please go ahead, sir.

Good morning. Thank you for participating in today’s call to discuss FutureFuel’s 2014 third quarter financial results and business progress. Joining me from FutureFuel is Rose Sparks, she is our Chief Financial Officer. I’d like to remind listeners that comments made during this call will include forward-looking statements within the meaning of the federal securities laws. These forward-looking statements involve risks and uncertainties that could cause actual results to be meaningfully different from any anticipated results. For a list and descriptions of these risks and uncertainties, please review FutureFuel’s filings with the Securities and Exchange Commission. Please note that the comments on this call contain time-sensitive information that is accurate only as of today, November 7, 2014. FutureFuel disclaims any intention or obligation to update or revise any financial projections or forward-looking statements whether as a result of new information, future events or otherwise. With that out of the way, I’d like to turn our attention to the third quarter results. Q4 financial results were down from the prior year, given the most difficult environment in biodiesel, the plant performed quite admirably. Revenues were down 15% for Q3 versus Q3 of ’13. Adjusted EBITDA totaled $15.9 million, or down 44%. Net income decreased to $11.5 million or $0.26 per diluted share from $15.3 million or $0.35 per diluted share. Rose will walk us through the details and afterwards we’ll both be available for questions. Rose?

Thank you, Lee. Good morning everyone. Thanks for joining us. For the third quarter, revenue decreased 15% to $103.1 million from the prior year quarter. Biofuels revenue decreased 25% to $58.2 million. We experienced declines at biodiesel sales volumes, and lower sales prices. Chemical revenues increased 3% inclusive of the graphite shortfall revenue of $6.5 million to $44.9 million. The shortfall revenue recognized this quarter was at $0.8 million as compared to $2.3 million in the prior year. Excluding the shortfall revenue, chemical revenue decreased 13%. Revenues decreased primarily on lower sales volumes for the bleach activator and that revenue was down 21%, and other custom chemicals revenue which declined 22%. Partially offsetting these decreases was increased sales volume of the new proprietary herbicide intermediate and other performance chemicals which increased 12% and increased demand from a existing product line and from revenue from a new product added in the second quarter. Within the other custom product portfolio, sales revenue declined with the discontinuation of two products and sales deferred to October due to a production disruption. Gross profit for the quarter declined 20% to $20.9 million from $26 million. Biofuels gross profit declined to $3 million as compared to $12.2 million last year. This difference resulted from severely weakened market conditions for biodiesel with the absence of the dollar blender’s credit, the final mandate from the EPA for the 2014 RVO and the narrow spread on feedstock prices to biodiesel selling -- selling process. Partially offsetting these gross profit reductions was hedging gains of $5.2 million as compared to hedging losses of $1.9 million in the prior year and the benefit from the reduced share of fixed cost to chemicals during the quarter. Chemical segment gross profit increased 29% to $17.9 million, inclusive of the graphite shortfall revenue. Excluding the shortfall revenue, chemical segment gross profit decreased 18% or $2.6 million to $11.3 million. This reduction was primarily attributed to the reduction in sales volumes and the shift to fixed costs in the biodiesel as previously mentioned. Partially offsetting this reduction was a benefit from the absence of an asset impairment in the third quarter of 2013 for $1.4 million that did not exist in the third quarter of 2014. Earnings from operations decreased 23% to $18.2 million. Earnings from operations -- I’m sorry, net income totaled $11.3 million for the third quarter of 2014 or $0.26 per diluted share. This compares against $15.3 million for the third quarter of 2013 or $0.35 per diluted share. For the nine months ended September 30, 2014, revenues decreased 21% to $253.4 million as compared to $319.3 million in the first nine months of 2013. Biofuels revenue decreased 25% to $145.6 million. Gallons sold decreased, as did the average selling price given weak biodiesel market conditions. Revenues from chemical sales declined 14% to $107.8 million. The revenue decline was attributed to reduced sales volumes of the bleach activator, reduced sales of the original proprietary herbicide intermediate, reduction from [ph] [key] products we no longer sell, and sales of one product which were deferred to October due to production disruption. Slightly offsetting these decreases was a 24% increase in revenue for performance chemicals from a new product we started selling in the second quarter and increased demand from an existing product. Gross profit for the first nine months of 2014 was $20.9 million, down from $37.1 million in 2013. Gross profit for biodiesel decreased to $3.1 million as compared to $33.3 million in the first nine months of 2013. This significant reduction was the result of the weak market condition as previously stated. Chemical gross profit declined to 18% to $34 million, down from $41.7 million in 2013. Exclusive of shortfall revenue, chemical segment gross profit decreased 34%. This reduction was largely the result of previously mentioned reduced sales volumes. Earnings from operations were $29.8 million in the first nine months of the year as compared to $67.4 million in the first nine months of last year. Net income totaled $23.1 million for the first nine months of the year or $0.53 per diluted share. This compares against $47.5 million for the first nine months of 2013 or $0.10 per diluted share. From a balance sheet perspective, our cash, cash equivalents and marketable securities remain strong at $195 million and also our inventories increased $70 million, primarily from an increase in biodiesel and from the timing the amount of purchases made on a common carrier pipeline. And Lee, that concludes my remarks. I’ll turn the call back over to you.

Thank you, Rose. Very good. Couple of points to consider, that I will start with -- that we have previously discussed. First, the new herbicide intermediate to a major customer that we discussed prior, bringing up a new process, we’re running much closer to design rate now than we had in the prior quarter, maybe even a little bit back the quarter prior. So there is improvement on the run rate there. Moving on to another product that we are bringing up, which is technical grade glycerin. That plant is up and running. We didn’t show any glycerin in the quarter, but we did commence sales in October. So I think those are a couple of important points to note. We are transitioning the production capacity from our original herbicide customer to produce new herbicide intermediates for the customers. That’s an addition to that changeover that we talked about with a major customer that we’ve been bringing [ph] [up to rate]. Additionally, we continue our efforts for a new laundry detergent molecule. So we continue to work on that. We have all fine LDA for testing out with new customers for approval and that goes to this laundry detergent issue that we’re talking about. So we’re encouraged by the prospects there, but again there is nothing to report other than we continue to work on new chemicals and new processes on the detergent side that hopefully will bear some fruits in the not too distant future. Moving on to biodiesel, with no RVO, as Rose mentioned, that’s required volume obligation for the industry. It continues to suffer the entire industry with this uncertainty. Our view is that, that has had a dampening effect on the price awareness, renewable identification numbers. So if you look, we kind of average roughly $0.50 during the quarter for the price awareness. A year-ago it was $0.62. Additionally, without the $1 credit, so we’re talking about $1.62 last year versus $0.50 this year. So you can kind of see what’s happened with the industry. Without the dollar credit profitability has suffered for us and everybody else in the business. It’s really a testament to our commitment and investment over the past number of years to be a low cost producer that we will remain profitable given these headwinds. I mean, that’s pretty significant headwinds and we continue to turn profit in that business. So with those just some general comments, I’ll open it up to questions. Operator?

(Operator Instructions)

Additionally I’d like to just make one final note that Rose did mention, but I’d really like to drive it home because I think it is very important. With almost $200 million in cash and no debt we continue to have an extremely strong balance sheet given the environment for both of the businesses and the growth of these businesses and the potential to make acquisitions externally and to grow internally. So, it is a favorite position to be, and I think it’s important to know.

Thank you. Our first question today comes from the line of Jon Tanwanteng of CJS Securities. Your line is open. Please go ahead.

Good morning, guys. Thanks for taking my questions.

Hi, Jon.

How should we think about the RVO for the rest of the year with only a month and a half left, I mean, even if a number comes out tomorrow, how much impact could it have?

Jon, that’s really an unknown. Again, I would have said at the beginning of the year, we would have had that number long, long ago, many quarters ago. We still sitting limbos in industry. I think it would have a positive effect assuming that, that number goes up, that its doesn’t stay at the 1.28 billion gallons. But again, we’re now sitting at November 7, without an RVO. It’s pretty remarkable. The other thing that goes on to there is, we’ve always thought if we were going to get the dollar credit back the industry has thought, if that came that would probably come during the length of that session which we are now just entering. So, again, I think if we get an RVO and it is raised, I think that can only be a positive for the industry, but I have no insight to whether that might transpire.

Okay. And then, what are the strategic steps you might want to take if these RVOs increased or the credit isn’t reinstated by 2015. Is there -- how should we think about the business going forward? And maybe on top of that any read-through from the change in control in Congress?

Yes, couple of things. I think that without an increase in the RVO and without the reinstatement of the dollar you’re going to have a lot of guys out of this business. They’re going to have to either shut-in or they’re going to go broke and maybe both of those. So, I think it becomes a -- kind of a market share business at that time if you don’t get a growth in the RVO. I think we’re well positioned to take advantage of that given our relatively low cost position to any one that I’m aware of, certainly anybody who is a major player in this business. I like our cash margins over anybody else. So I think we have some real advantages there that can be taken advantage of given our balance sheet and given our expertise. So again, it’s a business whenever you get the government (indiscernible) you’ve a lot of uncertainty. And I think the opportunities for us to be able to pick up acquisitions strategically, well built, well located plants that may have trouble in that environment. I think we have some real advantages there.

Okay. Great. And then, one final one, just through the month of October, just your take on the economics that are out there and maybe where you stand with the current hedging?

The economics that are out there, meaning in the general economy or?

The biofuel economy.

On the biofuel economy?

Yes.

They used to be challenged I think for everybody in the industry and you’ve got two things going there. You’ve got diesel prices coming down, and you’ve got feedstock prices input on the other side. And it’s a pretty tight spread out there, I think for most parties. And I think the guys that can only run (indiscernible) pretty challenged to say the least. I’d hate to be in that position. So the fact that we use exclusively these low valued feedstock’s I think is a terrific advantage. But the business continues given the dynamics that we’ve already spoken about with the RVO and the lack of the dollar. The industry continues to be pretty constraint and profitability although we’ve demonstrated that we can do it. I think there are limited number of players that can in the current environment.

Lee, may I add to that?

Sure.

Also keep in mind that biodiesel can be used as a solvent and so there might be an application which we have sold out diesel in some cases for chemical application. So, I think that would be something else we would seriously consider if biodiesel as a fuel doesn’t work for us.

Great. Thank you very much guys.

Thank you, Jon.

Thank you. Our next question comes from the line of Craig Irwin of ROTH Partners. Your line is open. Please go ahead. Please check to ensure that your line is not on mute.

Yes. Good morning and congratulations on the strong quarter.

Thank you.

I have a big picture question. So this chatter, this discussion we face about retroactive reinstatement of blender’s credit, and some of the lobbyist that I talk to occasionally are even saying that [ph] [Harry Ree] is discussing, bringing us forward in lame-duck. Can you update us on the percentage of your production where you are the blender of the record? And does it sound like something that you think is more credible and more believable these days? Or are you cautious on the potential for the reinstatement of blender’s credit near term?

Well, thanks for the question, Craig. Again -- I don’t think my crystal ball is any better than anybody else. I think that as I stated before, if we were going to get the blender’s credit retroactively it probably would come a lame-duck, so this is our best chance. In terms specifically to your question, again I can't really gauge whether that’s a likelihood or not. But to your specific question about us being the blender of record. I don’t think it’s much different than it has been in the past. It’s a relatively small percentage were worthy the blender of record. But unlike maybe past experience where you got a retroactive payment, we have agreements in place as a profit sharing for a relatively large percentage of our sales. So, if we were to get a retroactive payment it would be a huge benefit to us. And again, it would be a very welcome payment clearly given the modest profitability in the industry today. So I think we’re in a much different position that we would have been a couple of years ago.

Great. Thank you for that. So then my next question is about the chemical side. Particularly your herbicide intermediate business, 19% growth is I think what you had in the 10-Q there, that means a risk a year-ago today the new customer. So clearly, I mean even if we strip out the take a pay revenue, the revenue from the (indiscernible) anode contract. You’re making progress increasing the revenue from this customer that’s been difficult to meet their specification. Can you talk about whether or not you would expect to continue increasing the revenue to this specific product category, to this customer? And then as a second part, we improved on the profitability sequentially again stripping out the take or pay revenue, 200 basis points is till down fairly materially from the year ago period. I know that there is a costing effect because of the biodiesel revenue being lower. But can you talk about how the margins should trend in that business over the next few quarters as well?

Sure. That’s very granular, and I’m happy to go into it the best that I can. I would anticipate as we get fully the rate for that particular customer that you talked about that there will be increased revenues. But again, I think we’ve done a -- I think we’ve done a very good job in this quarter in bringing it much closer to full rate than we had in the past. So the gap from where we were to full capacity has closed dramatically, at least I view it as dramatically. So, I think there is some additional revenue to be had there, but again the gap has been closed quite a bit. I think the way to look at the margins in the business, it goes to product mix, it goes to filling up the plant, and what you fill it up with. So I think that -- I think there is -- again we have done a really good job over the last four or five years of improving the margins on the chemical side and taking it kind of from the high-teens to ultimately below 30s. Some of that again Craig has to do with the biodiesel component, because that eats up some of the allocated overhead. So that has the effect as we have talked about before of increasing the margins on our chemical side and decreasing the margins on a biodiesel side. So, as biodiesel does more revenues, you’re going to see a pick up in the margin on the chemical side. So it’s a dollar shift if you will, because the dollars are all still buried away. But again I think that -- I think going forward you’re going to see incremental revenues for that customer as we go to full rate. Hopefully we bring on new business at acceptable margins, and I think that business is out there to be had. But again, I think you’ve got to kind of watch the biodiesel revenues because that does have an effect on the chemical revenues.

Great. And then about the chemical segment again. I think before, couple of times you had estimated utilization somewhere in the mid 80s. Yes, I know it’s a batch process, so you’ll never get to a 100%. But where do you think this can go? I mean, what is the potential to actually take on new business in this segment? And do you have to continue calling customers to take new customers or? How should we be thinking about this?

Well I think a couple of things, as again I think you’re pretty familiar with what it is we do, and how we do it. As we talked about before, very few customers kind of fly in the door and (indiscernible) reactor and we start (indiscernible). There is typically anywhere from modest to significant modifications that are required to be made. So the capability within the plant continues to, in most cases increase. But the technical expertise required also increases. So, when you talk about utilization rate, again you’re right, but you’re never going to get to a 100%. But as you kind of come up that scale and get closer and closer to full capacity, that capacity changes, and the capability changes, and the requirement of the customer changes. So when you talk to a customer that you maybe producing one unit for and then now they want two, if that transpires then there is a need to add on new capabilities, new volume requirements for that particular customer. So again, I think the way to think about it, is chemicals is a growing business for us. We think over time it starts and stops. But I think we’ve done a good job of recovering the sales that were lost from our major customer on the bleach activator side and then really the complete loss of the bleach, the herbicide business, pretty much on herbicide. So again, I think we’re ready to grow from there, but again it’s kind of the fits and starts and you have to have an acceptable margin on that. So, I think the capability isn’t stagnant. It’s robust, and it has the ability to increase from its current capability.

Great. And if I could ask another question more specifically about chemicals margins. A year ago the margins were volatile, they would bounce between the low and mid 30s and sometimes lower to today where (indiscernible) take or pay payment you’re approaching the mid 20s.

Yes.

What gets us back to a 30% plus gross margin? Is this a mix of business? Does something have to change? And is there anything beyond this single contract that’s been problematic to commission that’s causing headwind on gross margins into the chemicals business?

Now its two things, Craig. Craig, that one is pretty easy to answer. Its product mix and its biodiesel. If the biodiesel improves you’re going to see an improvement of the margins on the chemical side and its product mix.

Great. Thanks again, Lee. Thanks for taking my question.

Thank you, Craig.

Thank you. (Operator Instructions) And I show no further questions in queue. I’d like to turn the conference back over to Mr. Lee Mikles for any closing remarks.

Thank you all very much for taking the time prior to the market open to listen to our explanation of our numbers and talk about the prospects of our business. And we’ll look forward to talking to you in another 90 days, and talking about our year-end results. So thank you very much for your interest in FutureFuel, and have a good day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect. Have a great rest of your day.