FutureFuel Corp. (FF) Q3 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the FutureFuel 2015 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 11, 2015. I’d like to turn the call over to Mr. Paul Flynn, Executive Vice President of Business and Marketing of FutureFuel Corp. Please go ahead, sir.

Thank you, Michelle. Good morning to everyone. This is Paul Flynn with FutureFuel. Thank you for participating in today's call to discuss FutureFuel’s 2015 third quarter financial results. Joining me on today’s call is our CFO, Rose Sparks. Just before we begin on this Veteran's Day I would like to take a moment and thank our veteran and their families for the scarifies they have made. So thank you on this Veteran's Day. I plan to cover our third quarter results and then turn it over to Rose for a more detailed review of our financial performance. We will then open the call for questions. As in the past we have prepared a short deck, which would [should] appear automatically with the webcast, which you will need to manually advance the slides forward as prompted. For those of you dialing in, the slide deck can be downloaded from the Investor Section of our website at www.futurefuelcorporation.com Turning to Slide 2, I would like to remind listeners that comments made during this call will include forward-looking statements within the meaning of federal security 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 those risks and uncertainties, please review FutureFuel’s filings with the Securities and Exchange Commission. Please also note that content of this call contains time-sensitive information that is accurate as of today’s date November 11, 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. With that, I would like to then turn our attention to our [second quarter] highlights on Slide 3. On slide three, we reported our revenues of $107.1 million which is a 4% increase from Q3 2014. The increase in revenue was predominant result of a significant increase in sales volume of petroleum products offsetting lower units price in biofuel segments and lower chemical segment sales. Our chemical segment sales declined significantly 30% or $13.3 million from Q3 2014, $8.8 million of this decline was related to a one-time termination payment for a graphite material contract which we recognized in the third quarter 2014, which did not occur in 2015. We also encountered continued decline from 2014 of our legacy bleach activator product to P&G but under our amended agreement, we are actively working to develop sales of this product to third party detergent companies and we’ll talk about that a little bit later in the call. [Some of the declines] in bleach activator sales were offset by growth of [our] product lines, we were anticipating stronger growth of some of these new custom chemical sales products however some of this growth was dampened by contraction in the energy exploration and [high] chemistry markets. Our net income for the quarter decreased to $4.9 million or $0.11 per diluted share from $11.5 million in Q3 or $0.26 per diluted share. Our -- other highlights obviously we have communicated this earlier on September 30 of this year we amended our contract with P&G to extend sales of our bleach activator products for 2016, which we’ll talk about later in the call. We also are diligently working to develop sales of our refined glycerine products, glycerine as you know is a biodiesel by-product which developing and refining the product and upgrading its uses helps support our overall biodiesel production economy. With that I’d like to turn it over to Rose for a more detailed review of our financial results.

Thank you, Paul and welcome to today’s call on this Veteran's Day and I too would like to extend a heartfelt thanks to all who serve our country. Please turn to Slide 4 for a review of our consolidated financial results. Also note that all comparisons on slide 4, 5 and 6 are against Q3, 2014. For the third quarter 2015 revenue increased 4% to $107.1 million from $103.1 million, this increase was primarily from higher sales volumes offset by lower sales prices in our biofuel segment combined with lower sales volumes and unfavourable product mix in our chemicals segments. Gross profit declined 58% to $8.7 million from $20.9 million due to the contract termination payment that Paul mentioned earlier of 8.8 million in the third quarter for laundry detergent additive and thirdly an increase in cost of goods sold from adjustments in the carrying value of our inventory as determined utilizing the LIFO method of accounting. Net income for the quarter declined 57% to $4.9 million or $0.11 per diluted share, as compared to $11.5 million or $0.26 per diluted share in the prior period. Turning to Slide 5, for the chemicals segment third quarter 2015 revenues declined 30% or 13.3 million primarily on lower volume and product mix. Custom chemical revenue was $26.7 million as compared to $40.6 million in the prior period. Performance chemicals were $4.9 million an increase of $0.6 million. Gross profit declined 59% or $10.5 million. This decrease beyond the previously mentioned contract termination and decline in the bleach activator additive was also impacted by a $0.9 million increase in cost of goods sold from adjustments in the carrying value of inventory as determined utilizing the LIFO method of accounting. Slightly offsetting these declines in gross profit was increased volumes from other custom chemical products and performance products. Also note from this slide our chemical sales revenue comprised the lesser percent of our total revenue. From 44% in the third quarter of ‘14 to 30% of consolidated revenue this quarter, and -- please excuse our mistake in that bar chart on the slide, it reads 48% though its 44%. Turning to slide 6, the biofuel segment, third quarter 2015 revenue increased 30% to $75.4 million from $58.2 million in the prior year quarter. Sales volumes increased $36.6 million or 63% offset by a 33% or $19.4 million decline in sales prices. Total revenue from petroleum sold on and [common carrier pipelines] increased $16.5 million. Sales volumes of biodiesel and diesel, biodiesel blends increased but was offset by a reduction in sales price following the worldwide trend of energy prices, absent the EPA's final mandate. Gross profit was $1.4 million, a decline of $1.6 million as compared to the prior year quarter. The reduction in profit was attributed to reduced profitability experienced against nationwide in energy markets and with a decline in rent prices given the continued strain on the biodiesel industry, based on prices declined as a slower pace in selling prices and third, again the increase of cost of goods sold of $1.3 million from adjustments in the carrying value of our inventory as determined utilizing the LIFO method of accounting. Turning to slide 7, for our nine months 2015 consolidated results revenue increased 5% or 12.4 million to 265.7 million as compared to 253.4 million in the first nine months of 2014. Chemical segment revenue declined 9.3 million to 31.6 million. This decline excluding the contract termination payment of 8.8 million was impacted by continued declines in the bleach activator [evident] which was offset by improved sales of the herbicide intermediates, and [additive] products. Biofuel revenue increased 21.7 million on increased volumes of 49% offset by a 34% decline in selling prices. Net income declined 27% or 6.3 million to 16.8 million with diluted earnings per share of $0.38 in the first nine months of 2015 as compared to 23.1 million in the first nine months of 2014 or $0.53 per diluted share. And Paul that concludes my remarks, I’ll turn the call back to you.

Thank you, Rose. As we wait for a couple of -- we wait for additional questions, I’d like to kind of make a couple of comments relative to our chemical business and our biofuel business. But starting with our chemical business, obviously the highlight of our quarter was we were very pleased with the amendment to our P&G agreement the extended sales of the bleach activator product through 2018. As part of that arrangement, we also acquired certain intellectual property rights relating to laundry detergent formulations, which we believe will help us develop sales of the product to other companies. The bleach activator product as we call knobs in future field is a terrific product in terms of its raw cleaning performance, it works well at low temperatures over very broad range of stains and really works well relative to other products on the market. And we’re going 100% on all cylinders working with several charging companies for a while working on to try and qualify the product in their consumer product applications. I wanted to do express a word of caution it does take a good deal of time and a significant effort to qualify the new materials in these consumer product markets. And overall the macro trend of -- towards liquid detergents away from powders is a challenge that we’re going to have to work through as we work diligently to try and develop new business for the bleach activator products with other companies outside of P&G. So these are just challenges we’re going to have to work through. Also as we communicated in earlier calls, we’re working pretty aggressively to try and build this outside of our legacy products. We had the legacy P&G and [other] product, bleach activator product and also herbicide select product that we had with another company. We are working very hard to build and develop markets outside of these two legacy products which really made up the majority of our historical chemical business. And we stand in place for a little bit more growth in the new product lines. However it's well noted the softness in the Ag chemistry market and energy exploration markets which really dampens some of our growth projections for this year in those two particular markets. Overall we do believe these are good long-term markets to be a part of and we do anticipate they are going to come back like other people projected, but it's probably not a short-term issue for this to be resolved. Turning to biofuels, I think Rose communicated pretty well. This industry has generally behaved in anticipation and reinstatement of the $1 blenders tax credit. We see declines in energy prices like everybody else, feedstock prices have not dropped in line with these reduction in energy prices. The industry is producing at rates [indiscernible] values anticipation of return of the blenders tax credit. We like everybody else would welcome retroactively to return to the blenders tax credit and in particular it was implemented at the U.S. producers tax credit, but again we’re waiting on governmental action to see how this will turn out. With that, I would just like to open the call for questions.

Thank you. [Operator Instructions] Our first question does come from the line of Craig Irwin with ROTH Capital Management. Your line is open. Please go ahead.

Good morning and thank you for taking my questions. So the first question I wanted to ask is about the sequential progression of revenue and gross margins in the chemical segment. Can you give us a more exacting discussion from a sequential basis rather than year-over-year basis? This quarter that you reported the third quarter, I think was the lowest revenue quarter in almost two years and the margins as reflected that, was there anything discrete in there that cause this sequential deterioration or is this some of the volatility that we’ve seen over the last several quarters?

So, I think I'll give a first shot at that and thank you Craig for your question. I think obviously the big data points in this quarter is obviously $8.8 million one-time termination payment for the comp that graphite material contract [laid to] the graphite material contract, but I don't think based on what we look at our business, it doesn’t really change trending downwards, our legacy products that seem to be maturing and continually defining that at a control rate and then I think the noise you see is -- as we bringing new products to come on and grow at different rates. I didn’t think that contraction in the Ag industry and the energy market for our business is exposed to them really is causing some of the noise you are observing Craig in your question.

So, when I look sequentially, the gross profit, so in the third quarter to $7.3 million down from $10 million in the second quarter or gross margins fell to 23.1% from 30.6% in the second quarter. That's the sequential progression that I’m looking at the prior year to completely understand the take or pay payment very happy, you’ve got it, you are right, great contrast at FutureFuel, I’m just trying to understand the sequential progression and how this is likely to progress into the end of the year?

Hey Craig, I’ll add to what Paul said that's very much related to the volume that we are experiencing as Paul referenced in the -- with the declined volumes in our bleach activator and also with the challenges that we are seeing in the ag market.

That makes sense if its ag related and energy related I would understand that, it's just not opportunity for you to build your custom chemicals, your proprietary business, as that commodity business bounces around I guess.

Yes, but I too would call your attention to the nine months to nine months comparison in the fact that we disclose how the other custom chemicals as we are trying to build our added custom product line is helping to offset that decline that we are experiencing with the bleach activator product.

Okay. Excellent and my next question was more broadly about biofuel, so in your prepared remarks you referenced how feedstock prices are reflecting, the anticipated reinstatement the blendish credit, my understanding from talking to multiple people out there is roughly third of the blendish credit is in the feedstock calculations people are making, so may be $0.02, $0.03 a pound for your feedstocks, maybe more in sometimes. What others in the biodiesel market have done is set in place contracts with their customers that take the majority of their fuel that allow a clawback of the blendish credit, yet historically FutureFuel has not done this as aggressively as others. Can you talk about whether or not this is a priority for you to increase the clawbacks in your contracts whether or not you’ve made any progress on this, this year, or if we are to see the reinstatement of the blender’s credit, would we see something similar to what we’ve seen historically, sort of $10 million retroactive payment, if you could help us understand that please?

So Rose, do you want to take that?

I’d be happy to. Craig, I believe last quarter we spoke a little bit about this, but yes FutureFuel does have contract arrangements where there is clawback related to the sales of our biodiesel where we can, obviously we prefer -- the most ideal situation with biofuel is to sell to the retail market, but where we are not selling for the retail market, where we are selling to other obligated parties, you can rest assured that we’re treating our contracts similar to others in the industry.

Okay. Excellent that's really good to hear. The next question that I had was related to your RIN inventory, so in the second quarter you built an inventory RINs a couple of million dollars and 1.5, $2 million maybe, I was wondering if you could update us on whether or not that was released in the third quarter, it's very nice to see positive margins in an industry where I believe most others are actually operating at negative margins, can you maybe help us understand the inventory effect on the profits in the quarter?

Yes, Craig, we did have a carryover of 2 million RINs sold in the third quarter. Our RIN inventory at the end of the quarter was not as large and comparatively year-over-year it was not that different. So you are exactly right, there was a carryover of 2 million in the third quarter from RINs that were produced in the second quarter of ‘15.

And then last question historically when Lee Mikles was single-digit President of the company, Lee would say repetitively on these calls that, [well, how they] are going to make FutureFuel bigger or were you going to sell it. And most institutional investors out there looked that this as a real opportunity given the track record of your Chairman, the track record of Mr. Mikles and many of the people involved with FutureFuel and creating a lot of value. You have a huge war-chest of $247 million. Can you discuss with us the level of activity at FutureFuel around potential acquisitions, evaluating acquisitions, how many companies you may have bid on in the last year? How you would look to put that war-chest to work in making FutureFuel bigger if that is still a priority?

Yes, I can give a couple of high level comments, but obviously Craig your questions are pretty confidential in nature, without going into a lot of detail, I would say we’re doing more activity in this area than we ever have done and we’ve brought some new people onboard to help as like the effort for us, we hired somebody in the last couple of months to really dedicate the time to this essentially full time. But if you take a step back from our chemical businesses, the makeup of our chemical business are really in markets around chemistries that are used in the energy industry, in ag chemistries, in laundry care type markets. So when we start looking for opportunities, we’re really focusing on stuff downstream from those businesses that would complement the wonderful assets that we do have in Arkansas and it's really where our focus is around those areas. A lot of the companies that we’ve looked at are kind of carve out of other companies that really don’t have the synergies or the strategic fit of what we currently have. So it's just a matter -- these are the ones that kind of show up on our screen [indiscernible] before we start taking more control of looking for a good strategic fit for what a company would like to grow. And we obviously want to grow bigger, haven’t really met the synergy fit that we’ve been looking for, that really complements the assets and the capabilities we currently have. And really what we’re trying to do is figure out a way to kind of go downstream for what we are rather than add-on an existing manufacturing assets that really does has limited synergies to what we currently have.

So have you submitted formal bids on any companies in 2015?

I know we’ve done indications of values of companies and done synergy phase, but I -- rather than that I don’t want to go into any more discussion on it.

Thank you. [Operator Instructions] And I am showing no further questions at this time. And I like to turn the conference back over to management for any closing remarks.

I’d just like to thank everybody for calling in on this Veterans Day and as always thank you for your support and your interest in FutureFuel Company. And with that I would like to close the call. Thank you again.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. And you may all disconnect. Everyone have a great day.