Vertex Energy, Inc. (NASDAQ:VTNR) Q4 2023 Earnings Call Transcript

Vertex Energy, Inc. (NASDAQ:VTNR) Q4 2023 Earnings Call Transcript February 28, 2024

Vertex Energy, Inc. misses on earnings expectations. Reported EPS is $-0.74 EPS, expectations were $-0.14. Vertex Energy, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. My name is Jeannie and I will be your conference operator today. I would like to welcome you to the Vertex Energy Inc. Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the conference over to John Ragozzino. You may begin your conference.

John Ragozzino: Thank you. Good morning and welcome to Vertex Energy’s fourth quarter and full year 2023 results conference call. On the call today are Chairman and CEO, Ben Cowart; Chief Financial Officer, Chris Carlson; Chief Operating Officer, James Rhame; Chief Strategy Officer, Alvaro Ruiz; and Chief Commercial Officer, Doug Haugh. I want to remind you that management’s commentary and responses to questions on today’s conference call may include forward-looking statements, which by their nature are uncertain and outside of the company’s control. Although these forward-looking statements are based on management’s current expectations and beliefs, actual results may differ materially. For a discussion of some of the risk factors that could cause actual results to differ, please refer to the Risk Factors section of Vertex Energy’s latest annual and quarterly filings with the SEC.

Additionally, please note that you can find reconciliations of historical non-GAAP financial measures discussed during our call and on the press release issued today. Today’s call will begin with remarks from Ben Cowart, followed by an operational review from James Rhame, a financial review from Chris Carlson, and a review of our commercial strategy by Doug Haugh. At the conclusion of these prepared remarks, we will open the line for questions. With that, I’ll turn the call over to Ben.

Ben Cowart: Thank you, John, and good morning to those joining us on the call today. 2023 was a year marked by significant volatility in the refining and renewable sectors. This instability was driven by several factors, including geopolitical tensions that affected crude oil and products pricing. Additionally, shifting supply and demand balances had a profound impact on renewable credit values and lagging feedstock costs. In the midst of these fluctuations, 2023 also marked a significant shift in the evolution and growth of Vertex Energy as a company. Throughout the year, our focus was on launching a renewable business and optimizing our feedstock strategy following the construction and start-up of the renewable diesel unit at the Mobile Refinery.

In addition, we have expanded our logistics footprint in Mobile through our marine fuels and logistics operations and establish our trading and supply division, creating significant opportunities to vertically integrate the broader business and capture more of the value chain along the way. With the Mobile Refinery purchase, we have invested roughly $260 million of new cash into the renewable diesel business today, including fixed assets, the cash portion of working capital for inventory, and funded losses through the year end 2023. We have grown our corporate overhead to support this growth and bring in the talent needed to drive progress towards our overall goal as a leading energy transition company. Given our accomplishments in the startup and the development of these initiatives, we believe we are well positioned to refine our strategy, concentrating now on cash management, cost reduction and enhanced profit margins.

On the call today, the team and I plan to update you on the financial and operating results for the fourth quarter and full year 2023. But I want to start by thanking my team, all the employees listening to the call today for the good work they have accomplished throughout the year. As James will note shortly, we not only got a lot done, but we did it safely, which is the most important measure of all. Before I hand the call off to James, I know many of you are eager to get an update on the ongoing process underway with Bank of America. As we’ve communicated, we are evaluating various alternative strategies to free up some liquidity and strengthen our current balance sheet position. We are continuing to work the process. We’re encouraged by the progress made.

And I hope to bring this to resolution sometime during Q2 of this year. We fully intend to update the market once we have tangible information to share. With that, I’ll now hand the call over to James.

James Rhame: Thank you, Ben. Good morning, everyone. I will start as always with our report on health, safety and environmental performance. The fourth quarter of 2023 was another clean quarter with zero OSHA recordable injuries. We did have 4 minor environmental non-compliances at the Mobile site associated with the planned power outage. Additionally, Mobile saw zero process safety events, continuing the streak of outstanding EH&S performance at the site. For the full year 2023, our environmental, health and safety performance reflects a great achievement by our team, which I’m extremely proud of. After acquiring the Mobile facility, the team was immediately put to test as our conversion of the RD facility was a monumental task as the site executed a project with multiple times as many boots on the ground as normal for the better part of the year.

Throughout this period of unprecedented busyness with hundreds of unfamiliar faces on the site, the fact that the team was able to successfully maintain daily operations without serious injury or environmental damage and no disruption to our surrounding neighbors and community demonstrates the diligence, skill and commitment to quality of each of our employees. I’m extremely proud of our legacy business also as that group saw a reduction of 90% year-over-year in OSHA recordables. I’m proud of our employees at every location, who are continuing to prioritize the safety-first mentality of our entire organization, and I must say thank you to all of our dedicated employees and contractors. The effort and care for each other seen across the entire business is a testament to the employees and contract partners that work within our facilities.

Our team at the Mobile site demonstrated strong operational performance of the conventional facility during the quarter, with average throughput volumes of 67,083 barrels per day for a capacity utilization of 89%, consistent with the updated guidance of 67,000 barrels per day in January. The lower volumes reflect the combined impact of a strategic curtailment of throughput in light of deteriorating market conditions during the quarter as well as previously disclosed downtime to proactively replace an electrical transformer. Total OpEx per barrel for the fourth quarter was in line with our guidance at $3.83 per barrel and reflects increasing cost efficiencies gained from smooth operation, which more than offset the inflationary impact of lower throughput volumes on a cost per barrel basis.

Our conventional fuels gross margin per barrel during the quarter was $4.79, reflective of the challenging market conditions encountered in the conventional fuels markets during the quarter. At the onset of the fourth quarter, market prices for finished motor fuels, including gasoline and diesel began a sharp correction and continued this downward trend throughout the first 2 months of the quarter before finally reversing course in early December. The weakness in fuel prices for much of the quarter has a significant negative impact on our fuels’ gross margin per barrel in our conventional fuels business. However, just as quickly as prices began the downward trend, at the beginning of the quarter, they have steadily rebounded since early December and through most of the first quarter of 2024.

Our finished products such as gasoline, diesel and jet fuel accounted for 66% of our total product yield during the fourth quarter 2023. This was in line with our guidance and reflecting continued focus on facility-wide yield optimization as we’ve previously described. Now turning to our renewable fuels business. Vertex’s renewable diesel plant operated smoothly, generating total renewable fuels gross margin per barrel of $12.11 for the quarter. Our fuel gross margin for fourth quarter 2023 included $6.1 million of benefit attributed to production volumes from the second and third quarters. Adjusting for the third quarter LCFS credit, our fuel gross margin per barrel for the fourth quarter was approximately a negative $4.78. Our renewable throughput volumes averaged 3,926 barrels per day for capacity utilization of 49%, in line with our recently updated guidance.

As Chris will detail in a moment, our crude oil throughput projections for the first quarter are expected to be between 60,000 and 63,000 barrels per day. We’ll have a planned small turnaround of one of the reformers and a pit stop of one of the crude units during March as we prepare the plant for generally higher margin periods in the second and third quarter ahead of gasoline demand during the driving season. We have seen margins increase in the first quarter and have accelerated crude throughput volumes in conjunction with the improved margin environment. Looking out to the remainder of 2024, we continue to make good progress on the development of Phase 2 of our RD conversion project as well as the work necessary to qualify additional feedstocks.

We continue to believe in our expansion of 14,000 barrels a day is on track for completion in the first quarter of 2025 as we’ve previously communicated. The RD business continues to be challenging in 2024 as we use this time to develop capabilities and operate in the unit as well as understand the differences with various feedstock slates, which Doug Haugh will expand on in a moment. Moving quickly over to our legacy business. Operational performance in 2023 for Marrero was outstanding as they saw a 4.4% capacity improvement year-over-year. And we also saw a 23% increase in collection volumes in our Collections business through our UMO collection operation. Both of those groups have had a excellent 2023. I will now turn the call over to Chief Financial Officer Chris Carlson for a review of the company’s financial results and additional detail regarding our financial and operating outlook for the first quarter of 2024.

Chris Carlson: Thank you, James, and welcome to those joining us on the call today. Before reviewing our detailed financial results for the fourth quarter and full year 2023, I want to reiterate our continued focus on the improvement of our balance sheet. The elimination of our high-interest term loan and convertible notes has been a key component of our overall strategy following our transformational acquisition of the Mobile facility in 2022. Over the course of 2023, we made notable progress towards this goal with the announcement of our private exchange of approximately $80 million of our 6.25% convertible notes due 2027. We expect to continue our pursuit of this strategy, utilizing the most efficient tools accessible to us along this path.

Turning now to our financial results. Vertex reported net loss attributable to the company of $63.9 million for the fourth quarter and $71.5 million for the full year 2023. This compares to $44.4 million and $4.8 million reported in the fourth quarter and full year 2022, respectively. Total adjusted EBITDA loss of $35.1 million in the fourth quarter and $17.1 million for the full year 2023 compared to $75.2 million and $161 million in the prior year period, respectively. During the quarter, we recorded operating cash flow before changes in working capital of negative $43.6 million. Total capital expenditures for the fourth quarter of 2023 were $11.7 million, 33% below our prior guidance issued on November 7, reflecting a deliberate preservation of capital achieved via a deferral of certain discretionary capital expenditures.

This primarily includes a realignment of planned capital expenses for Phase 2 of the renewable diesel project with external time line. The deferred timing of these Phase 2 expenditures has not directly impacted the project schedule. Turning to the balance sheet. As of December 31, 2023, the company had total cash and equivalents, including restricted cash of $80.6 million versus $79.3 million at the end of the prior quarter. Vertex had total net debt outstanding of $205.5 million at the end of the fourth quarter, including lease obligations of $68.6 million, implying a net debt to trailing 12-month adjusted EBITDA ratio of 12x as of December 31, 2023. As previously announced, on January 2, 2024, we reached an agreement with our existing group of lenders to modify certain terms and conditions of the term loan agreement.

The amended term loan provides for an incremental $50 million in borrowings, the full amount of which was borrowed upon closing on December 29, 2023, and therefore, reflected in our year-end cash position of $80.6 million. During a period of rapidly eroding fuels margins encountered in the fourth quarter, we took the opportunity to shore up the balance sheet with additional cash provided by the amendment in order to support adequate financial flexibility through the completion of our ongoing process with Bank of America aimed at evaluating strategic opportunities. Relative to the other tools available in the market to us at the time, we maintain our view that the term loan amendment presented the most efficient means of achieving our goal in the short term after considering several alternatives.

We continuously monitor current market conditions and assess our expected cash generation and liquidity needs against our available cash position using the current forward price spreads in the market. Looking to the first quarter of 2024, we anticipate total conventional throughput volumes at Mobile to be between 60,000 and 63,000 barrels per day. Our expected yield of conventional products is expected to consist of between 64% to 68% high-value finished products, such as gasoline, diesel and jet fuel, with the balance in intermediate and other products such as VGO. On the renewable side of the business, we expect a total throughput of renewable feedstock to average between 3,000 and 5,000 barrels per day, or approximately 38% to 63% utilization on our total Phase 1 production capacity of 8,000 barrels per day.

We anticipate an efficient total production yield of renewable diesel between 96% to 98% for the first quarter as well. Anticipated OpEx per barrel encompassing both conventional and renewables businesses on a fully consolidated basis is projected to range between $4.59 and $4.95 for the quarter. We anticipate total capital expenditures for the first quarter to be between $20 million to $25 million. As of the fourth quarter 2023, Vertex has entered into fixed-price swap contracts covering approximately 40% of expected diesel and distillate production for the first quarter of 2024 at a weighted average swap price of $28.39 per barrel. I’d now like to turn the call to Chief Commercial Officer Doug Haugh.

Doug Haugh: Thanks, Chris. First, I want to share that our feedstock optimization strategy has progressed according to plan. As expected, our temporary LCFS pathway approval last year resulted in us receiving LCFS credits for imports to California producing a $9.6 million benefit. We were also able to complete our runs and the data collection required to support our provisional LCFS application for 4 Vertex specific pathways covering soy, canola, Tallow and DCO. This application has been submitted to CARB and we expect that we will receive LCFS credits based on these improved CI scores for imports into California during 2024, which will improve our per gallon credit values as compared to the temporary CI values received last year.

With our provisional pathway application filed for our first 4 feedstocks, we have shifted our focus to completing additional 90-day runs of lower CI feeds, specifically UCO and poultry fat. These feeds represent not only improved CI values but also outright lower cost. We’ve started aggregating the inventory needed to support these runs and expect to complete the runs for these additional feeds during the second quarter. Across all families of feedstocks, the team has been able to double our supplier base over the last quarter, and the market continues to provide tremendous support for our facility. Logistically, we’ve continued to receive supply primarily via barge and rail. Both the addition of UCO and poultry fat to our supply base has added truck deliveries to our logistics mix.

We’ve started to rationalize our feedstock inventories of each grade as we build confidence in each supply chain and in each supplier. This optimization allows us to create more flexible blending schedules, and having multimodal delivery capacity across dedicated tanks for each class of feedstock allows us to capture price changes quickly as volatility in feedstock pricing has continued to be very material. Our primary message around feedstocks is one of abundant and flexible supply from a portfolio of suppliers that have been reliable and supportive. We appreciate all of them working with us as we have pursued each of these pathways and continue to build our yield curves and carbon intensity data. Through all these changes in feedstocks, run rates and hydrogen uptake rates across a wide range of blends, our plant has operated reliably and maintained high conversion rates.

This reflects both on the design, engineering and construction quality we have now seen evident in plant performance, but also just as importantly on the commitment, skill and cohesive team work with which our trading operations and engineering teams have executed this demanding plan. In conjunction with building a new business in renewable diesel production, we continue to build out our supply, trading, risk management and commercial marketing capabilities. These capabilities along with our continued development of internal logistics, barge and commercial delivery capabilities position us to continue to reduce cost and secure improved netbacks and margins for our conventional refineries and our renewables business. With our initial offtake contracts starting to come up for negotiation, we could begin now to use these supply, trading and commercial capabilities across all of our products to improve our netbacks for our production.

We have already seen benefits by leveraging our internal capabilities to bring a portion of our Marrero production to where we have blending capacity in Mobile to produce a higher value finished product. This product also supported the launch of our marine fuelling business that allows us to capture retail margins on those barrels versus being traded in the bulk wholesale market. We are still in the early stages, but this is the type of work we are doing to bring continuous improvement. On netbacks and build a reliable customer base around the business that maximizes the value of all our products.

Ben Cowart: Thank you, Doug. Once again, our team is doing a great job of managing our operations, reducing risk and executing the expansion of our business capabilities. As we navigate the first quarter of 2024, we anticipate facing similar challenges and market fluctuations experienced in 2023. Our priorities will continue to be safety and reliability with a continued focus on cash management, cost reduction and capturing enhanced margin opportunities. I wish to reiterate to everyone on this call that our strategic decision to acquire the Mobile Refinery was driven by the significant long-term potential we saw and continue to see in the renewable sector. Our substantial cash investments in renewables are testament to our confidence in this decision.

The renewables diesel project was launched with remarkable speed and cost effectiveness, yet it represents a multi-year endeavour within a still evolving market. Reflecting on the journey, 2022 was about establishing our foundation. 2023 about building the structure and 2024 is focused on advancing this framework towards our 2025 goal. By which time we expect our transformation into a leading energy transition company to yield results that better reflect the value of this business. Until then, we have work to do, and we look forward to keeping you updated on the exciting milestones we have planned ahead. Thank you. I will turn this call now over to the operator for questions.

Operator: [Operator Instructions] Your first question comes from the line of Eric Stine with Craig-Hallum. Your line is open.

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Q&A Session

Ben Cowart: Hey, good morning, Eric.

Operator: It appears Eric’s line has dropped. This question comes from the line of Donovan Schafer with Northland Capital Markets.

Donovan Schafer: Hey, good morning, guys. Thanks for taking the questions. So, I want to follow-up with Doug’s comment or saying during the prepared remarks that the CI, and I think in the release it said you have successfully sort of completed the runs on the four feedstocks for renewable diesels. And then all the cost that you used out of the CI’s in sort of submitting everything and that that should come back. You expect sometime in 2024 getting the benefit, showing up sort of in the financials or recognition on that from the improved CI scores. Is there, do you have a sense at all of whether that’s kind of like first half of 2024, second half, kind of earlier or later? Is there some kind of risk or potential that gets pushed into 2025? I just know, bureaucratically things can have a wide range of variation between agencies and whatnot and how quickly things get turned around. So, any color of that would be helpful.

Doug Haugh: Good question, Donovan. Yes, our expectation is that we should have the new scores in place for second quarter production. Possibly first quarter, although that’s again, we’d have to have kind of outperformance on the part of the regulator, which, to their credit, we’ve had good responses and relationships and, they’ve been supportive throughout the process. So, they’re engaged and supportive and moving things as fast as we can. We’ve also taken some steps to get the audit phase of the submission kicked off early. So, we think that could reduce the cycle time. So, but in short, now we expect some benefit from that in the first half. Not perhaps all of first half, but we’re hopeful there. We certainly expect to be fully covered under those pathways for the second half.

Donovan Schafer: Okay, and then kind of talking about the cost side of the equation, getting into some nuanced things and whether or not these can be material or move the needle. I believe in the fourth quarter, there was some impact from the Panama Canal. If you can kind of quantify or talk about that, and maybe the transportation cost dynamic in general, the ability to switch to rail or whatever, because with the renewable diesel, that’s got to get to California. You don’t really have too much option in terms of where you send the product. And so just how transportation costs play into that. And the other one would be natural gas prices are so low. And I don’t know if the hydrogen that you get to help in the hydrocracker for the renewable diesel and a lot of it’s coming from natural gas, that can get impacted by natural gas prices.

And those, of course, are super low right now. So, I don’t know if that gives kind of a tail end or helps there at all, or if that’s just too de minimis of a difference to matter. So, those kind of two things, transportation and natural gas.

Doug Haugh: Yes, I’ll take transportation and I’ll hand it to James for the natural gas question. Yes, the fourth quarter transportation cost was very, very bad in terms of the Panama Canal impact. I think it was on the order of $6 million above our normal rates, which we – you can look at the third quarter numbers and sort of interpret those. But, we really, and it was a kind of a crazy situation where you send the ship, you participate in a live auction once you’re there, or on your way there, and you don’t really know what the cost is going to be until you get through. So, kind of a chaotic mess, if you would. We’ve since fixed that for the first 6 months of this year, with a good trade on the transportation capacity for the partner to have confirmed slots or guaranteed positions through the canal that was able to take those costs out.

And the canal has improved operationally. So, both of those are helping us. And we don’t expect to see those costs in the first and second quarter as a result of the repositioning we’ve done on that transportation. So, that’s been favorable, but it was a tough lesson to learn in the fourth quarter. We were far from the only ones to experience it talking to other industry players, everybody was up against the same expense to get through the canal. I think they were basically at 40% or 50% throughput rates in terms of ships per day, as compared to normal. So, it’s a pretty big problem. But again, we believe we’ve rectified that for the first half of this year, and hopefully all year, as things normalize. But we’ve got a good line of sight for the first two quarters on this transportation cost, getting back to our normal business case rates that we count on.

James Rhame: Okay. And natural gas that is indeed the source of hydrogen from our Matheson unit that we have on site today. In the future, that’ll be about 50% of the feed going into the hydrogen plant on the larger one that we’re currently in construction. But we are seeing, indeed, cheap natural gas, which in turn translates to the price of hydrogen on the energy side. I don’t have an exact number for you, but we are seeing that and really looking at what do we think is going to happen this year into the future, and what’s going to happen with natural gas. So, that indeed is the case. We have not hedged any of it. Yes.

Donovan Schafer: Yes. Great. Okay, okay.

James Rhame: We might. Yes. It’s pretty attractive. Yes. That’s current price.

Donovan Schafer: Very attractive. And actually, if I could just squeeze one more on kind of the cash options or flexibility stuff there. In the release for the upsizing of the term loan, there is a sort of briefly mention of another $25 million that was sort of maybe contemplated in the extension or at least like a framework or something put in there. So, if you can kind of give an update on like what’s the – is that like a commitment by the lender in some way, or is it kind of fully sort of discretionary, but you at least have the pieces in place? And then what’s also if you’d consider like a Marrero Refinery or other assets as something you can monetize or lean on in some way to raise cash?

Ben Cowart: Yes. Donovan, it’s Ben. The change in our loan terms with the lending group included an additional $25 million. It is subject to their approval. The club of lenders have been very supportive of the business, obviously, from the purchase of the refinery and all the work and investments that we’ve made. So, we do have that as a opportunity to go back to our lenders for additional liquidity. Our focus, obviously, is on the BofA process that really addresses liquidity on a much bigger picture. So, that’s the state of the relationship with the lender. So, I think that’s good. And we stay in close contact with them and they’re up to speed on the business as we go forward.

Donovan Schafer: Okay, great. Thank you, guys both for asking my questions offline.

Ben Cowart: Thank you.

Operator: Your next question comes from the line of Eric Stine with Craig-Hallum. Your line is open.

Eric Stine: Hey, no idea what happened before, but I was jump into a queue. When thinking about first quarter and just the operational outlook, so you’re guiding to lower throughput and I know that the market has improved somewhat, and it sounds like you have hedged favorably to an extent. So, just curious, I mean, is that a nod to that the market is still very tough? You mentioned a small turnaround. Any other color on what’s happening in first quarter would be helpful?

James Rhame: Yes. Hi, Eric. This is James. Really, what we’re doing in the first quarter, as we started the year, we were held crude back a little bit because margins had not returned enough yet, but they have. And so, we entered – in turn raised rates during the month of February did have a little bit of maintenance in January that we did. And then in March, it’s really about a reform turnaround and us changing catalysts and doing work there as also our planned number one crude unit where we’re going in and doing maintenance on it and cleaning it up. And this is our typical twice a year. And our point of view in setting this up was we would do this prior to the driving season coming in April, May, June, July, and we’d be able to run full rates during that time and that not hold the plant back. So, that’s what was behind our thought. That’s our plan to do that and run full in the future based upon the market conditions we believe that are coming.

Eric Stine: Got it. Okay. That makes sense. It’s helpful. Maybe just last one for me and then I’ll take the rest offline. I know when you acquired this facility and then embarked on the RD plan, you viewed that you would be in an advantageous spot from a feedstock perspective, both availability and price. Curious as you look back, is that how it has played out and just curious, what kind of mix are you thinking about in terms of finished feedstock versus tolling? And maybe the economic doesn’t, maybe it doesn’t really matter, but just curious on that as well.

Doug Haugh: Yes, its Dough here, it’s a great question. We’ve certainly seen the advantages we believed were there in the site materialized from a logistics and availability and security supply standpoint. Deep roster of suppliers, a lot of liquidity across most every grade you want. Obviously, as we get into the more disparate feeds that aren’t produced from large integrated suppliers like the Yuko is coming from small gatherers and collectors and poultry fat, which is prevalent in the Southeast with a lot of the chicken industry around us. Those take a little bit more work. Like I mentioned, we are bringing in trucks now, which is – we’ve avoided as long as we could just because there’s a lot of handling costs and testing costs on each truck versus a barge or a rail car.

But we’re seeing the prices of those be more than attractive enough to justify that work. So, I think when it comes to prices, we’ve seen our basis versus the futures price that everybody can see to be coming back in-line where we expected. We are sort of hard to draft too many conclusions on the late summer spike. And I think that not only the flat prices went up substantially, but the basis really blew out. We don’t have any indication that we were disadvantaged in that regard, but we don’t have any evidence that we were particularly advanced either, right. So I mean, I think the whole industry sort of got caught in a pretty strong run up. But we have seen as those prices are down. And basis has come back in-line that given where we’re at logistically we’re able to take advantage of that very, very rapidly.

And we’ve gotten a lot better at, just rationalizing the inventory. As I mentioned, I think we’ve been very transparent with folks that there’s a lot of angst in industry and every – almost every analyst we talked to every investor we talked to about, hey, you’re spending all this money, you’re starting this brand-new units. You better make darn sure that you’ve got inventory and feedstock’s to feed it, because everybody’s worried there wasn’t going to be enough to go around, obviously. So, we created a lot of inventory headed in to start-up took us, really the run rates of both quarters to run through all that feed. But now, as we look at our, typical day’s supply on hand, we’re trying to stay 30 days max, where before we had a couple months worth of inventory on hand, which is not where you want to be in terms of lining up your ability to take advantage of price declines quickly and turn that into product and capture the crack.

So we’re much better positioned for that now. How quickly the feed pricing adjust to account for the decline in the regulatory credits. That remains to be seen. We’re still chasing that right? I mean we’ve got RINs have continued to collapse. And LCFS isn’t helping much. It’s been stable, but at a very, very low level. And so, feeds have come down quite a lot, certainly, dramatically from third quarter and fourth quarter. But they still got room to run in order to create the right margin structure, one needs given that rents have declined faster. So, we feel good about the progress we have made in that regard and certainly very comfortable that we are in a great position from a supply chain standpoint to have access to a broad array of feeds with efficient logistics, good modes of transport, and now a really good opportunity to optimize our storage and terminaling positions to term quickly.

And try to eliminate as much of that lag impact as we can as we are coming down the price curve on it.

Eric Stine: Okay. That’s great. Thank you.

Operator: Your next question comes from the line of Noah Kaye with Oppenheimer. Your line is open.

Noah Kaye: Thanks. Picking up on the marketing front, I think in the prepared remarks you mentioned some of the initial off-take contracts coming up with this renewal or expiring. Can you just elaborate on that a little bit and talk about your potential pricing and margin capture opportunities?

Ben Cowart: Yes. So, the first four contracts that we were able to retender to the market were predominantly jet that came up this quarter, it rolls over April 1st to a new contract. So, we took that to market fourth quarter last year and been very, very pleased with the results. It’s a substantial netback improvement over our previous off-take agreement with a equally creditworthy and reliable counterparty that we are excited to be doing business with, that we believe fully reflects the value of the product that we are producing because there was a quality spread that we weren’t capturing previously, we do now. And the next opportunity for that is just marching through the products, diesel and gasoline. We have a notice period approaching and then we – those are open for unbranded products, April, next year.

We have got some time to work on that. Our off-take partner has been very supportive. It’s a good relationship. It’s worked very, very well operationally. But we want to make sure that from the pricing standpoint and we are in a fair position to get full market value for our products, which we are now in a position to do. We saw the results in jet and we look forward to the results on diesel and gasoline.

Noah Kaye: Okay. Great. The hedges that you entered into and the lot of detail in the release and the slides, so I appreciate that. I guess just for those of us listening at home are kind of a hedge positions through January and February, effectively in the money, it looks like they were struck on for the attractive terms. And March seems to be sort of in line with the market, but maybe you can comment on that.

Ben Cowart: Yes. So, just a little bit about on the strategy, as you know, we hedged about 36% of our gasoline, Chris. That was again, kind of getting our programs in place, getting back into a routine of taking advantage of attractive cracks when they presented themselves on the forward curves. We felt like that gasoline spread and/or late summer that carried through the end of the year was unusual. We also had, so we took advantage of that. That was a very favorable outcome on those hedges. Obviously, we wish we would hedge more, but on the other hand, you always wish you would lose money on the hedges, because you are making more money on the product, right. So – but that turned out to be a good position. We took the same mindset for first quarter on diesel, where we saw very strong strengthening in the crack spread for first quarter late in the fourth quarter, well above our margin targets.

So, we took advantage of that for about half of our production. And again, those have been, we feel comfortable on those hedges. I think they are – the market held up the whole time surprisingly. So, in this case turns out they weren’t really necessary, but we still believe it’s a prudent approach when you see cracks present themselves on certainly the front quarter that they are well above what you are planning for in terms of budget. So, that’s the approach. I would say that, so as we look at this quarter and we look at second quarter and third quarter, as James mentioned, we are positioning the plant to gear up for driving season, make sure we can run max rates and capture. We expect to be healthy margins for the summer. So, we won’t – at that point, my expectation is that this, at this date that we would not hedge second quarter and third quarter of gasoline or diesel.

The forward curves aren’t telling us to do that at this time. But I would expect in third quarter or really throughout the summer if we see the gasoline cracks present themselves as very attractive in the fourth quarter, we will plan to take advantage of that at that time for a material portion of our fourth quarter production. So, if you think about it seasonally, that’s kind of how we are looking at it. If gas is strong going in the winter and we want to take advantage of it, and if diesel’s unusually strong going into the summer where we normally see a bit of a drop off, not nearly as seasonal as gasoline, but still there. We would look at that for first quarter position.

Noah Kaye: Okay. Helpful. Last one really around cash and capital expenditures. So, guiding for an uptick to that sort of $20 million to $25 million range in 1Q, I think a good portion of that should really be for maintenance, correct? So, just help us understand how much this can occur for growth versus maintenance and then how much is left to spend on the Phase 2 expansion for the RD operations?

Chris Carlson: Yes. This is Chris. Noah thanks. The majority of that $20 million to $25 million is around maintenance. As James noted, we are heading into a few turnaround opportunities that have been planned. So, the majority again is maintenance and there is a small piece that is growth and then a little bit RD.

Ben Cowart: At least two-thirds of that is the maintenance section. So, that’s catalyst change and doing the work inside the reformer.

Noah Kaye: Okay. And then how much is left to spend on the RD expansion?

Ben Cowart: Yes. For Phase 2, the balance is about $30 million.

Noah Kaye: Okay.

Ben Cowart: In future quarters.

Noah Kaye: Sorry, go ahead.

Chris Carlson: And most of that’s loaded to the back half of the year.

Noah Kaye: Okay. That’s what I was going to ask. Maybe just the last question, I mean it looks like we have got our math right. Some progress on inventories here in terms of the working capital. How do we think about 1Q, you mentioned that you are in a leaner position now on the RD inventory side, but what should we be thinking about in terms of working capital impact, at least here to start the year?

Ben Cowart: From an inventory perspective, which as you guys know is the biggest driver of our working capital. I would say, we are in a pretty good spot. The inventory has come down during the fourth quarter. So, going forward, we don’t see a huge build or a large build in inventory. But I would say, your working capital is going to remain fairly flat. Your big driver draw on cash is going to be CapEx.

Noah Kaye: Right. Great. Thanks. I will turn it over.

Ben Cowart: Thank you.

Operator: Your next question comes from the line of Amit Dayal with H.C. Wainwright. Your line is open.

Amit Dayal: Thank you. Good morning everyone. Ben, with respect to the Bank of America process, what are your options right now that you are considering sort of the best options that they might be exploring for you and have you only maybe one of those options that they might be presenting? The reason I am asking this question is you potentially have expansion efforts for already in play as well. But at the same time, you are still not max utilizing the available capacity. Just trying to get a sense of how 2024 will play out with this Bank of America process in play, and how that impacts all of the other activities and what the timeline might be to get some sort of a decision on the next steps on that front?

Ben Cowart: Yes. Good question and fair question, Amit. But let me let me start by saying that this BofA process started probably 10 months ago because we know that the RD investment was sizable for the company and more on the development front. So, starting new business from nothing and bringing it to life like the team has done is nothing short of undertaken. As I have said in my comments, we have spent $260 million at the end of the fourth quarter in new cash. So, we don’t have that much in long-term debt. So, that really speaks to the health of the crude side of the business and what it’s brought to the table in contribution. The BofA process is designed to bring the liquidity back to the balance sheet for the investments that we have made on the RD side, And that that process was focused, obviously we knew as we went to the market, it would open up other conversations and that’s certainly what’s taking place.

And we are tendering those conversations as we speak. So, the process could not have been executed better by BofA. I think they have done an amazing job. We have got really good people, really strong companies at the table that’s interested in the work that we are doing both around the renewables long-term, because I think everyone sees the target being the 2025 renewables business. We are kind of at the end of a policy cycle both at a RFS and Federal level and also at a California CFS level. And so we have got some insight for ‘25 around our A, which is some new frontline opportunity as well as LCFS, we got some insight. We just haven’t yet seen the new RVOs that we hope to see from the RINs side of the business. So, with all of that in mind, the interest in RD is very focused in that direction and also in SAF, SAF seems to be the next leg of this industry and so we have got a great platform to continue evolving the renewable business in that direct.

Second, is the broader interest in the asset. So, we have got some really interesting infrastructure capacity opportunities, property scale and so we have entertained some non-conforming conversations that take a little bit more time to check out. And so we have had management presentations. We have had site visits. We have had initial indication of values. And we are moving towards some firm offers to partner with the company. So, that’s the best update I can provide and kind of where we are at. As you said, liquidity is important in the current RD market. So, we are very measured in managing our cash. We have got a very good cash focused system that we are exercising weekly. And so we are going to continue with a diligent preservation of cash, focus on margin and reducing our costs.

And like Doug said, we have got a lot of things out of our way today and we have got the people in place and they are doing a really good job of fine tuning all fronts of the business.

Amit Dayal: Thank you, Ben. Well, I will leave it there. I will take my other questions offline. Some of my other questions have already been discussed, so thank you so much.

Ben Cowart: Thank you, Amit.

Operator: Your next question comes from the line of Brian Butler with Stifel. Your line is open.

Brian Butler: Hi. Good morning guys. Thanks for taking my questions.

Ben Cowart: Good morning Brian.

Brian Butler: Just on the first one, on the conventional based on the hedges that you have in place and your expectation on the downturn as well as just kind of the production for 1Q, how should we think about the EBITDA of the conventional business for 1Q assuming prices stay where they are? I mean are we positive, a little positive, a lot positive, negative?

Ben Cowart: Yes. I mean as we look at the forward curves right now, Brian, and then based on the cracks that Doug laid out, yes, I would say we are positive at the moment.

Brian Butler: Okay. And then on the CI scores, when you look at the new scores, can you give any color around maybe the magnitude of the benefit, I mean how much of an improvement are we looking at relative where the baseline is? And with that improvement, does that make RD pass breakeven on an EBITDA basis, or is it still need feedstock – other feedstock improvements?

Ben Cowart: That’s a good question. It’s about the improvement varies by feed. But it’s 20% plus improvement over the defaults, in some cases, better than that. So, it’s helpful, but I would say that while it’s – yes, it’s probably – that probably gets you pretty close to a breakeven margin with those. But I would say that in general, as fast as RINs have continued to decline, I mean we have lost another $0.40 of RIN just this quarter, so almost $0.70 a gallon since January down, right. So and we lost – who was it, James, over $1 a gallon in the fourth quarter on RINS. So, the LCFS has been depressed, and that’s certainly a factor and these CI values will help us recover a little bit more value out of that even at these levels for sure.

But the impact of that is muted because LCFS is so depressed anyway, right. So, you get a little bit higher value or more credit generation, but the credits are still worth a lot less than they were a year ago, as an example. But the real killer for RD margins right now is just the RIN performance. On D4 RINs, we were down almost – well, they are 50% off where they were between January and February. And some of that move was very violent in just a week. So, when we are trying to forecast run rates and plan our volumes against the available margin, it’s an extremely volatile next year when you add RIN moves of that magnitude within a week. So, that’s what we are facing with. So, I think the industry – I think we and the industry frankly need feeds to recalibrate to the current margins picture, pretty good amount from where they are.

They have come down a good bit from last fall, obviously, but there is more to give there or else RD margins are going to be very tough for everybody.

Brian Butler: Right. I mean I guess unless we see the feedstock come in, I mean I don’t think RINs are going to improve until we get a new RVO and that’s probably a couple of years out. It’s – sorry, if RINs aren’t going to improve and feedstock remains persistently higher than expected, is there other options for the RD infrastructure, or is it really you just got to hope these things improve and then RD starts to work?

Ben Cowart: Brian, I think that’s a good question. And the answer is yes, I mean the assets that we have had their own life prior to the investment. The investments that we have made are robust improvements and can be recaptured in a different way long-term. And so we always have options, and we constantly review those options as we look at these current market conditions.

Brian Butler: Okay. That’s helpful. And then one last quick one. On the first quarter ‘24 with all the balance sheet changes, what’s the expected interest expense now?

Chris Carlson: Yes, interest expense should run for the term, the term loan, which is the biggest portion, right at $8 million to $9 million.

Brian Butler: Okay. Thank you very much.

Ben Cowart: Thank you, Brian.

Operator: There are no further questions at this time. I will now turn the call back over to the speakers for closing remarks.

Ben Cowart: Yes, operator and thank you everyone for joining the call today. We appreciate your interest in the business and we look forward to keeping you informed as we complete this quarter and come back with new information on the progress we are making here with the business. Thank you.

Operator: This concludes today’s call. You may now disconnect.