FF - NYSE

Paul Flynn – Executive Vice President-Business and Marketing Rose Sparks – Chief Financial Officer and Principal Financial Officer

Craig Irwin – ROTH Capital Partners

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

Hi. Good morning everyone and thank you for participating in our Q2 earnings call. This is Paul Flynn. And today I’m going to discuss FutureFuel’s 2015 second quarter financial review. Joining me on today’s call is our Chief Financial Officer, Rose Sparks. I plan to cover some highlights of the second quarter and then turn the call over to Rose for a more detailed financial review of our results. We have prepared a short slide deck, which should appear automatically with the webcast, which you will need to manually advance the slides forward as prompted. For those of you who are 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 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 also note that the content of this call contains time-sensitive information that is accurate only as of to-date of this call today August 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 over to second quarter highlights on Slide 3. We’ve reported revenues of $104.6 million in Q2 which was up 54% increase from second quarter 2014. This growth in revenue was supported or driven by increased sales of petroleum products on a common carrier pipeline and increased sales volumes of biodiesel products. Chemical sales revenue was essentially flat at $32.7 million, growth of newer products volumes offset sales declines of legacy laundry and legacy herbicide products. We did see some softness in product sales to the energy exploration and ag chemistry markets. Our adjusted EBITDA of $9.3 million was 39% increase from Q2, 2014. Net income for the quarter decreased to $3.8 million from $5.3 million or $0.12 per diluted share in Q2 2014. Some of this was associated with losses on derivative instruments, which Rose can further expand on. We, as a company, continue to develop refined glycerin market, this is a biodiesel byproduct which helps to support our overall biodiesel production economics and we do anticipate sales of knobs our bleach activator product to P&G in 2016 as some of these volumes that we currently are producing are being deferred for sales into 2016. With that, I will turn it over to Rose for a more detailed review of our financials.

Thank you, Paul and welcome to today’s call. Please turn to Slide 4 for a review of our consolidated financial results. For the second quarter revenue, as Paul said, increased 53.7% to $104.6 million from $68 million in the second quarter of 2014. Net income decreased 28.3% to $3.8 million or $0.09 per diluted share, as compared to $5.3 million or $0.12 per diluted share in the prior period. This decreased of net income resulted from higher losses on derivative instruments, increased RIN inventory in our biofuel segment and reduced gains from marketable securities, which will partially mitigate it by improved margins from the chemicals segment. Turning to Slide 5, for our chemicals segment second quarter revenues as previously noted were flat, the decline in the bleach activator revenue of 47% from the prior year quarter was completely offset by increased sales volumes from the proprietary herbicide and intermediates which increased 75% along with 25% increase in our industrial intermediates and other custom products. Gross profit increased 40% or $2.9 million from the second quarter of 2014 to $10 million in the second quarter of 2015. This increase was driven from processing yield improvements, inclusive of the proprietary herbicide plant, as well the benefit of product mix. Also note from the slide our chemical sales revenue was 31% of consolidated revenue, as compared to 48% in the second quarter of 2014. Turning to Slide 6, for our biofuels segment, second quarter 2015 revenue was $71.9 million versus $35.4 million in the second quarter of 2014. Revenues from the petroleum sold on common carrier pipelines, increased $27.4 million. Sales revenue for biodiesel, diesel and biodiesel blends was higher 75% volume increase, reduced by lower average selling prices, following world-wide trends of energy pricing. Gross profit declined to a loss of $4.5 million, as compared to a loss of $0.5 million in the second quarter of 2014. The reduction in profit was attributed to the change in derivative losses of $3.1 million in the second quarter of 2015, as compared to a loss of $0.2 million in the second quarter of 2014, as well as the RINs that were produced in the second quarter of 2015, but not sold, and held in inventory at quarter end. Turning to Slide 7, six months consolidated results, revenue increased $5.6 million or $8.4 million higher than the first six months of 2014. The increase in the proprietary herbicide and intermediates with the other custom chemical growth more than offset a 34% decline in the bleach activator. Net income increased 3% to $11.9 million on improved profit from chemicals and the benefit of the change in costs, determined from the LIFO method of inventory, which carried over from the first quarter of 2015. Net income was impacted by higher losses on derivative instruments again this significant RIN inventory held at quarter end when such inventory did not exist in the prior year period and reduced gains on marketable securities and interest income. In Paul that concludes my remarks, I will turn the call back over to you.

Thank you, Rose, nice job, I have just a couple of quick points, before we turn it over for questions. The first one is around growth in our chemical business. We were anticipating that we would have a stronger Q1 and Q2. In chemicals, we had some softness in product lines being sold into the ag chemistry and energy exploration markets that we probably will see continue through the end of the year. With regard to bleach activator as noted in previous calls we had a contract with P&G which was due to expire at the end of 2016, and had contract minimums in excess of what they could use in 2015, resulted in P&G deciding to exercise an early provision term of that contract. Some of these volumes have been deferred to 2016 and will show up in our financial statements next year. Our current business pro forma reflects these produced volumes for 2015. As again, we are a long-term supplier with P&G. We have a very good relationship and we continue to work hard to extend knobs production beyond 2016. Couple of comments on biofuels, on May 29, we welcomed from the EPA to propose our deals for biomass-based bio-diesel through 2017. We believe this does a lot to reduce uncertainty part of biomass-based industry and we would very much welcome reinstatement of the $1 tax credit being proposed by the Senate Finance Committee, in particular, this was implemented as a U.S. producers’ tax credit. With that, we’ll turn it over to Q&A.

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

Good morning and thank you for taking my questions. First of all, I wanted to ask about the basis of the supply arrangement with P&G in 2016. Is there expected to be an addition to the existing contract or an extension of the existing contract that would govern pricing? Or is there some other mechanism that maybe you can describe for us that would accommodate continued volumes to supply in the 2016?

I guess thanks Craig for your question. There’re two questions I interpret that as. So we are working due diligently beyond 2016 to extend supply of knobs to P&G and other companies which were actively pursuing, but until we have some signed agreements in place and that’s really to find, I can't really comment too much on it at this moment.

Okay. And then previously, the last time you renewed this agreement with P&G, it was opened up where you can supply this to other third parties, that may have been using bleach activators, but were not using the knobs proprietary product from P&G and FutureFuel. Can you scope out for us where things are in the process of potentially capturing third party demands, whether or not you have active, serious discussions with different parties and how many parties, you consider could potentially have demand for that product.

So I think that’s a really good question, and thank you for asking it. The challenge we’ve had in the past, we’ve had some patents related to knobs in formulation patents or formulating a detergent, that were kind of really challenge in our ability to grow the business outside of P&G. Since that time we have secured rights to those patents with sublicensing rights, which has really created a much more a greater level of intensity of growing of knobs business outside of P&G. And our competitive evaluations when the product – when it’s added to even commercial detergent it does make a significant difference, where we’re working really, really hard to grow the business outside of P&G right now.

Okay, then my next question was about the rest of the plan not being that’s used for P&G. But I understand you have batch base productions which – is not – there’s not perfect estimate. But by your estimate, what would you say the approximate level of utilization is in your plan, obviously, excluding this P&G unit, and then excluding biodiesel.

So, I can’t give you a specific number, we have lots of room to grow in our plant. And we sometimes will have batch reactors it’s not uncommon for us to substitute out a smaller reactor for a bigger reactor to expand capacity. So we have ample room to grow and expand our batch production as needed.

Okay, my next question is related to biodiesel side. Can you remind us the – well can you maybe confirm for us, historically the company has talked about being blender of record for roughly 15% of the tone production. Can you maybe comment about that, whether or not that cares for today?

Rose, you might take that one.

We actually do not disclose that reference, Craig, I apologize, I’m not sure where that 15% came from, it just appears from what the market is doing as to whether or not where the blender of record. As you know, we sell large quantities to obligated parties, where we have the RINs attached, and in terms of the blender credit and the provision for, is the blender credit were to be reinstated, FutureFuel has a provision on every sale to gain from the value of the blender credit we reinstated. I’m not sure if that’s where you are going with the question Craig, but FutureFuel, it is does make…

While I’m going with straight [ph] I’ll just I’ll cut this [ph]. Historically I’m pretty sure Lee has said in public multiple times when he was President and Chief Executive Officer did roughly 15% of production. You generated your own RINs you were the blender of record. So what I was drawing with that is, if we assume that you produced at full capacity, which is probably an optimistic assumption and we take the RIN price, it’s just a little bit more than $2 million. In RIN generation, on your own balance sheet in the quarter, so I was wondering if you could scope out for us whether or not you were something close to that in your build of RINs on the balance sheet that impacted overall profitability for the company.

Good question Craig. Yes you are spot on with the approximate value of the RINs that we held in inventory, but I can tell you again that as far as actual blend ratio, it just depends on what the market is doing as to whether or not where the actual blender of record and where we are separating the RINs and holding the RINs in the market, but yes, in terms of the RIN inventory to the value of the quarter, you are approximately right.

Okay, excellent. And then my next question, last quarter you biodiesel profitability was surprisingly strong. This quarter if we back out the effect of your hedge positions and back-out the impact of RIN inventory, it looks like you’ve trailed some of your other competitors. Can you maybe discuss with us whether there were something that impacted profitability? If there was a prior feedstock purchase commitment or something else that may be had you perform differently in the market in this quarter?

Paul, I can answer that. Basically for the first quarter we benefited from significant carryover of biodiesel which was held in tank that had the benefit of the dollar blend credit that was retractably reinstated in 2014. And so that’s one significant difference in the first quarter and the second quarter. Another difference is the fact that there was reduced spread on the selling price such as feedstock prices. And thirdly, we’ve already talked about the impact of the RINs that were held in inventory that were produced in the quarter, but not sold. And then…

Okay. But as far as performance versus the market, are you comfortable with the execution in the quarter. Even though backing up of the two specific items that impacted the biodiesel gross margins, that looks like you are more or less breakeven to slightly negative. Are you comfortable with the execution in that segment in the quarter?

Yes. I am comfortable, I think if we could actually – I’m very happy about the EPA coming out and setting some targets of when they might issue their final mandate. I do believe that the industry will benefit a great deal by the final mandate being issued later this year. But in terms of our operation, it is also difficult. I’ll remind you that we do have some of our derivatives, gains and losses. There is not – some of the losses that we’re incurring or probably the losses that we’re incurring aren’t perfectly matched to our cost of sales. And so there is some profitability that potentially will be realized in a subsequent quarter. So keep that in mind as well, Craig.

Understood, understood, so most people that follow your company like myself will agree with you and believe that the blender’s credit is going to be reinstated, specifically, with the Senate Finance Committee activity moving it forwards in the last couple of weeks. One of your major competitors gave some numbers recently the point to them retaining about 30% to 35% of the value of the dollar account blenders’ credit that’s going to be available. They would expect something like that on all of the gallons that they produce. Can you update us whether or not you would expect something similar or if there is something structure-related that would cost FutureFuel to maybe have a different outcome there?

I’m sorry Craig, I’m not little eager [ph] to disclose that at this point.

Okay, excellent. Thank you for taking my questions.

Thank you. [Operator Instructions] I’m showing no further questions at this time. And I would like to turn the conference back over to Mr. Paul Flynn for any further remarks.

No, I don’t have any concluding remarks other than thank all the participants for their continued interest and support of FutureFuel and we look forward to hearing from you again for our next quarter update.