FutureFuel Corp. (FF) Q4 2014 Earnings Report, Transcript and Summary

Welcome to the FutureFuel 2014 Fourth 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. To ask a question at that time, please press star followed by one on your touchtone telephone. If anyone has difficulty hearing the conference, please press star, zero for operator assistance. As a reminder, this conference is being recorded today, March 13, 2015. I’d now like to turn the call over to Mr. Paul Flynn, Executive Vice President of Business and Marketing. Please go ahead, sir.

Hi, good morning. This is Paul Flynn. Welcome and thank you for participating in today’s call to discuss FutureFuel’s 2014 fourth quarter financial results and business progress. Joining me today from FutureFuel is our CFO, Ms. Rose Sparks. I would like to remind listeners that comments made during this call will include forward-looking statements within the meaning of federal securities laws. These forward-looking statements involve risks and uncertainties that could cause actual results to be materially different from any anticipated results. For a list and description of these risks and uncertainties, please review FutureFuel’s filings with the Securities and Exchange Commission. Please note that the contents of this call contains time-sensitive information that is accurate only as of today, March 13, 2015. 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. Before reviewing 2014 fourth quarter results, I would like to take a moment to thank our former President, Mr. Lee Mikles for the many contributions he has made to FutureFuel through the acquisition of the plant from Eastman Chemical in 2006, taking the company public, and leading us through our listing on the New York Stock Exchange in 2011. We wish Mr. Mikles the very best in his new career and look forward to looking with him as he continues his services as a member of our Board of Directors. Turning our attention to our fourth quarter results, net income increased 14% to $30.1 million. This increase was from the net benefit of the retroactive reinstatement of the one dollar blenders tax credit. Revenues decreased 30% from Q4 2013 partly as a result of lower average biofuel selling prices. Adjusted EBITDA was $10.9 million, down 57% compared to $25.5 million in Q4 2013. Rose will now walk us through the details, and then we will be available for additional questions. I turn it over to you, Rose. Thanks.

Thank you, Paul, and thank you everyone for joining us this morning. For the fourth quarter of 2014 as compared to the fourth quarter of 2013, sales revenue decreased 30% from $125.6 million to $88.5 million. Biofuel revenue was down 44% to $50.1 million. Revenue was reduced by $18.6 million in the fourth quarter for the amount of reimbursement owed to customers for the blender tax credit. In addition, biofuels revenue declined on both reduced sales volumes and selling price, given the weakened renewable fuel market. Chemical segment revenue increased 7% to $38.3 million. The largest contributor to this increase was the sales from the new proprietary herbicide intermediate, which was not in the prior year quarter. Conversely, revenues from the bleach activator declined 27% on reduced sales volume as compared to the prior year quarter. Income from operations increased to $26.3 million in the fourth quarter of 2014 from $22.8 million in the prior year period. Gross profit from biofuels improved 39% or $4.7 million quarter-over-quarter. We recognized profit of $10.3 million from the retroactive blenders tax credit in the fourth quarter, net of reimbursements due to customers. Derivative gains were $7.8 million in the fourth quarter, which compares to $1.2 million in the prior year quarter. Our immediate recognition of derivative gains and losses can cause net income to be volatile from quarter to quarter due to the timing of the valuation change in the derivative instruments relative to the sales of the physical product. Gross profit from chemicals declined 7% or $1 million quarter-over-quarter. This decrease was largely driven by the aforementioned decrease in sales volumes of the bleach activator and a product we no longer produce. These reductions were partially offset by the profit from the new herbicide intermediate, which was not sold in the prior year quarter. Other income included gains on marketable securities of $1.4 million in the fourth quarter as compared to a loss in the prior year quarter of $0.2 million. Net income increased to $30.1 million or $0.69 per diluted share, which compares favorably with $26.5 million or $0.61 per diluted share for the fourth quarter of the prior year. Turning now to our financial results for the 12 months ended December 31, 2014, revenues decreased 23% to $341.8 million from $444.9 million. Biofuel segment revenue decreased 31% from $283.4 million in 2013 to $195.7 million in 2014. Chemical segment revenue decreased 10% from $161.5 million in ’13 to $146.1 million in ’14 and accounted for 43% of total revenues as compared to 36% in 2013. Income from operations was $56.1 million, down from $90.3 million in 2013. Gross profit was $66 million, down from $100.2 million. Biofuels gross profit decreased 56% from $45.5 million in ’13 to $19.9 million. Partially offsetting the decrease was derivative gains, which were $12.8 million in 2014 as compared to $1.2 million in ’13. Chemicals gross profit decreased 16% to $46.1 million in 2014 from $54.7 million in 2013. Gross profit decreased primarily from reduced sales of the bleach activator and reduced sales volume of other custom chemicals. Partially offsetting these reductions was the recognition of the graphite anode material shortfall payment. Net income was $53.2 million or $1.22 per diluted share as compared with net income of $74 million or $1.71 per diluted share in 2013. Adjusted EBITDA for 2014 totaled $43.6 million, down from $96.7 million in 2013. Paul, that concludes my remarks. I’ll turn the call back over to you.

Thank you, Rose. We had hoped that 2014 would be a better year for the biodiesel portion of our business in patient anticipation of the EPA’s final mandate for 2014 and hopeful that the dollar blender credit would have been reinstated a little sooner in the year. This is obviously more value to capture when both of these are in the marketplace throughout the year rather than made retroactively. Nonetheless, we are happy that the one dollar blender tax credit was reinstated. We also knew 2014 would be challenging as the life cycle of some of our legacy products continued to decline. We were challenged in bringing on some new products in 2014, particularly relating to the new herbicide intermediate product and moving a higher value refined glycerine into the marketplace. We executed better in the fourth quarter on the chemical side of our business and plan to build on this momentum through 2015. We have a healthy pipeline of new products under evaluation and continue to focus our efforts to build out our chemicals side of our business, fully utilizing the plant and equipment, evaluating opportunities for new products and acquisitions to optimize value for our shareholders. The biodiesel industry continues to be somewhat uncertain with the expiration of the blenders tax credit and continued pressure on the EPA to modify the RVOs, the renewable volume mandates. With those comments, I’d like to open the call to questions. Operator?

[Operator instructions] Our first question comes from Jon Tanwanteng of CJS Securities. Your line is now open.

Good morning, Paul and Rose. How are you doing?

Good morning.

Fine, thank you.

Can you talk about the improvement in the chemicals margins in the quarter, maybe how much was organic improvement or yield improvement compared to fixed cost attribution that went over to biofuels, and maybe should we expect similar margins in Q1 or the first half of this year?

Rose, do you want to take that one?

Yes, for the fourth quarter we saw, as I mentioned in my prepared remarks, increased revenue from the new herbicide intermediate, so we’re excited about that product. As you know, we had a legacy product that was a significant portion of our business and that went away. We converted it to a tolling arrangement in the fourth quarter of 2014, and so we’re very happy that that product has come online and we’re beginning to see the benefit of it. Obviously that product, we had hoped to have it in place earlier in the year, but we had some challenges there in converting the equipment, but we are pleased to see that improvement. We do have some new products, as Paul had mentioned, that we’re excited about, and the volumes from those products in the fourth quarter were not evident there, but we are considering products in our pipeline. But I would say the most significant of the chemicals would be the new herbicide intermediate.

Okay, and how much of the improvement was from fixed cost attribution to biofuels, if any at all?

It was only modest, Jon, very modest.

Okay, great. Then can you talk about what you’re seeing so far heading into Q1 just in biodiesel demand and economics? Has the improved RIN pricing helped your profitability at all, or is the spread actually lower inclusive of the RIN compared to Q4?

The biofuel market is very challenging in the first quarter. Obviously when you have a year in which the dollar credit expires and then you have the market is supplied from that carryover, so for the first quarter it’s been challenging. We continue 2015 like we were ’14, without a final mandate and no dollar.

And what are your high level thoughts on what the mandate might include or when it might come out, and maybe on top of that, have you thought about the impact of Argentinean biodiesel imports and how that could affect you guys?

The Argentinean imports, we’re hopeful that the EPA will come out and lift the mandate for that additional supply, so it’s hard to say how that will affect us and what the decision will be from the EPA. We’re hopeful also that the EPA will come soon with some kind of final mandate for 2014 and obviously for ’15, and then for, you know, ’16 is due also soon, so it’s hard to speculate as to what they will do. But we’ll hopeful that they will come out soon with that mandate.

Okay, and then finally, Paul, I’m wondering what’s going to change following Lee’s resignation. Are there any operational or strategic objectives that you guys are going to be focusing on?

I do think there are some particular markets that we think play in very good to the capabilities of the company, the site and what we’re good at. Just to give you some strategic direction, if I look at the ag chemistry market in particular, it’s a $50 billion-plus market. A big portion of it is in North America and South America where you have large acre soy and corn, which have higher demands for unique chemistries in that whole market space. So I do think we’re well positioned, and I just wanted to make a qualitative statement around the herbicide intermediate project. You know, these are pretty complex chemistries, and a lot of our partners are strategic customers, invest a lot to bring these products to market, so they’re looking for somebody who has a fully integrated site to leverage a lot of the capabilities that FutureFuel brings in the Batesville facility to help them bring some of these products to market, be it existing chemistries or new chemistries. So I like that space a lot because it’s a good play into what we’re good at, so we’re going to continue to explore building out more of our chemical business. Going back to the herbicide intermediate question, we were probably a little bit over-ambitious in ramping that product up, looking backwards. It is a completely different chemistry than the existing chemistry, so we had a lot of retrofitting and new process design work to introduce that chemistry into those assets that was a very different set-up. So just ramping up, FutureFuel is pretty good at scaling up things and really deploying continued process improvement, so I think we’re finally there fourth quarter on that particular product in 2014, so we look at driving continued improvement in that in 2015. A lot of the time, a lot of that business on the chemical side of our business is really built out based on our reputation with large multinational suppliers. We end up working with one division of the company and our reputation translates to other divisions within the companies, and we find ourselves working, developing and scaling products for multiple divisions at these large companies. So that’s really basically -- we like generally markets that have good long-term fundamentals - ag, energy - that we kind of have some dips with the current commodity prices right now in the energy sector. But to us, they’re good relative to where we’re positioned and what we’re good at.

Okay, great. Thanks a lot. I’ll jump back in the queue.

[Operator Instructions] Our next question comes from Craig Irwin of Roth Capital Partners. Your line is now open.

Hi, good morning, and thank you for taking my questions. So most of the other biodiesel fuel producers, public of private, write their contracts in a way where they have a clawback on at least a chunk of the blenders credit when its reinstated, so can you talk to us a little bit about how you write your contracts for your biodiesel sales and whether or not this is an opportunity, because quite frankly, most investors look at this and say, okay, I believe in the R&D tax credit - you know, you’ve got IBM and big tech companies lobbying for the exact same basket of tax incentives, of tax breaks that get extended every year, so we should basically expect it and I think it would make a material contribution if we could see that change to FutureFuel. Can you talk about that?

Craig, yes, we have some sales contracts where we do have that clawback provision, and we are aggressively doing the best we can for our stockholders in that regard. To say that the biofuels market has been very challenging, given the weakened --you know, without the mandate, and obviously FutureFuel, where we are located, we are strategically located with certain refineries and I will also add that we have recently -- I think I mentioned on the call that we were working previously on getting registered in the California market for the low carbon fuel standard, and we are registered there now. So yes, some of our contracts do have that clawback provision.

Can you break out for us approximately how much the blenders credit contributed, both on a clawback and an actual basis in the fourth quarter? Is production still 59 million gallons?

We disclosed in our filings, yes, that $10 million of the net benefit to FutureFuel occurred in the fourth quarter related to the retroactive reinstatement.

Okay, and the capacity?

I think we don’t release what our actual utilization is, Craig, but I think we strategically sell our inventory, and I will say that we were not at the capacity we were at in the prior year, obviously, given the weakened market conditions.

Okay, that’s helpful. Thank you. So then just getting back to the herbicide intermediate, congratulations on the really good work remediating the problematic ramp there. I know that that’s been a real focus for everybody. Can you tell us what the trajectory looks like for this product? Previously I think you’d mentioned that it’s just something that comes on incrementally over time, so should we expect it to continue to build in volumes, or are we likely somewhere near steady state on that product? Anything you can share would be useful. Thank you.

So Craig, I could give you a qualitative answer in that. I think fourth quarter would--you know, I would say we’re probably about 90% there. We’ve demonstrated design rate on it, but it’s just translating that into month-over-month production goals, meeting production goals for the product is what we’re kind of in the process of doing, just kind of locking down production. So I think fourth quarter would be a good baseline to go off for that particular product.

Great. Thanks again for taking my questions.

Okay, thank you.

Thank you. Our next question comes from Jon Tanwanteng of CJS Securities. Your line is now open.

Hi guys. Can you give us an update on the glycerine refining efforts? Are you at full production there, and are the yields and prices where you want them to be?

I think we’re pretty much at desired production of that product, refined glycerine. I think imports have kind of softened the market a little bit as you have quite a bit of refined glycerine coming in from different Asian countries - Indonesia, Malaysia, and some South American, Argentina refined glycerine coming into the market. So we’re in a very active process of qualifying direct business with several of our companies that we engage with directly, and then also getting qualified, so we’re going through a qualification process with a lot of companies. So I think having the optionality of selling in the refined or the crude form, depending on market conditions, it’s a nice optionality card to have in this market, that everything helps in biodiesel. You hear--you know, we were one of the first companies to have feedstock flexibility, being able to produce, because we’re building from expertise as a chemical company, so we’re one of the first companies to successfully--although one of the smaller biodiesel producers to develop feedstock flexibility to kind of help on the production of good quality biodiesel from multiple feedstock sources, and in market conditions. And then also, any internally--you know, valuing up byproducts, it gives us a lot of flexibility then companies that are kind of totally 100% dependent on soybean oil prices staying competitive in the biodiesel world as you have different changes in market conditions.

Okay, thanks. Rose, just trying to drill down a little bit into the hedging strategy, are we going to see a gain again in Q1 as it stands now?

There will be some carryover there, Jon, but I can’t talk about that. I’m sorry, I can’t comment on that.

Okay, maybe to put it another way, generally how far ahead do you usually initiate your contracts?

Yeah, I’m sorry, I’m just going to have to defer. I can’t answer that, Jon.

Okay, fair enough. I know I ask this every quarter, but do you guys see more opportunity for M&A, just given the high cash balance and the uncertainty in the biofuels industry?

I would agree with that. In terms of the M&A, there are more and more opportunities that we’re seeing, but we want to be not rushed into it, we want to make the right decision on finding stuff that’s accretive in the near term and then kind of is a nice strategic fit with the current capabilities, complementary to what we currently have.

Are you guys more biased towards the biodiesel side, or it would be more in the chemicals?

I don’t think we’re in that position right yet. On the biodiesel side, we would obviously want to figure out something that we actually can add a lot of value-add, based on our current capabilities in the facilities. We see a lot of different opportunities in that space where companies are struggling right now to kind of continue their current operations, so there are things coming in that market space but we’ve really got to figure out, is that good, long-term strategic asset and how we would value it up.

Okay, thanks for the color, and thank you again.

Thank you, and at this time, I’m not showing any further questions. I’d like to turn the call back to Mr. Flynn for any closing comments.

I guess just closing out, 2013 was an incredible year for us. A lot of things aligned very nicely in terms of our--and in particular on the biodiesel side of the business, so it was a challenging year to compare to. Obviously having a mandate in place early and higher commodity prices really created a nice alignment of things on the biofuels part of our business. On the chemicals side of our business, we always have a bogey of our legacy products, which are kind of mature products, so we’re aggressively working to diversify our markets and pick good markets that lend itself where we bring a lot of value to and good use of our capabilities and U.S. location. So we look forward to keeping you appraised of our progress in Q1, and thank you for participating in today’s call.

Ladies and gentlemen, that does conclude today’s presentation. You may all disconnect. Everyone have a wonderful day.