Renewable Energy Group, Inc.
Q1 2020 Earnings Call Transcript

Published: 1 May 2020

[Operator:]

Greetings and welcome to the Renewable Energy Group First Quarter 2020 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.It is now my pleasure to introduce your host, Todd Robinson, Treasurer for Renewable Energy Group. Thank you, sir. You may begin.

[Todd Robinson:]

Thank you, Jessie. Good afternoon, everyone, and welcome to our first quarter 2020 earnings conference call. With me today is our President and Chief Executive Officer, CJ Warner; and our Chief Financial Officer, Chad Stone.Let me cover a few housekeeping items before I turn the call over to CJ. First, I would like to remind everyone that this call is being webcast and is available at the Investor Relations section of our website at regi.com. A replay will be available on our website beginning later this afternoon. The webcast includes an accompanying slide deck, which will appear automatically with the webcast, but you will need to advance the slides manually as we prompt you. For those of you dialing in, the slide deck can be downloaded along with the earnings press release in the Investor Relations section of our website.Turning to Slide 3. We would like to advise you that some of the information discussed on this conference call will contain forward-looking statements. These statements involve risks, uncertainties and assumptions that are difficult to predict, and such forward-looking statements are not a guarantee of performance. The company’s actual results could differ materially from those contained in such statements. Several factors could cause or contribute to those differences. These factors are described in detail in the Risk Factors and other sections of our annual report on Form 10-K and subsequent quarterly reports on Form 10-Q, which are on file with the SEC. These forward-looking statements speak only as of the date of this call. The company undertakes no obligation to publicly update any forward-looking statements based on new information or revised expectations.Today’s discussion also includes non-GAAP financial measures. We believe these metrics will help investors assess the operating performance of our core business. Please see the press release or the appendix to the accompanying slide deck for a reconciliation of the non-GAAP measures to the most comparable GAAP measure.Let me also point out, as you know, near the end of last year, the Biodiesel Mixture Excise Tax Credit, or BTC, was retroactively reinstated for 2018 and 2019. It was also put in place for 2020 through 2022. The net benefit of that retroactive reinstatement for both years is reflected in our GAAP financial statements in the fourth quarter of 2019. Because their credit related to our 2018 and 2019 operations, our adjusted EBITDA and other line items reflected an allocation of the net benefit of the credit to our 2018 and 2019 results by quarter to reflect the period in which the associated gallons were sold. Chad will provide more detail on this when he reviews the financial results.With that, let me turn the call over to our President and CEO, CJ Warner. CJ?

[CJ Warner:]

Thank you, Todd and good afternoon everyone. I’d like to start by saying that I’m both pleased and humbled to report that REG delivered strong adjusted EBITDA for the quarter. We realized this result despite the considerable market turmoil from the onset of COVID-19 and the free falling oil prices first from the rift within OPEC and later exacerbated by pandemic driven fuel demand destruction. I will provide some details behind this later.From a very high level, we at REG maintained performance through a combination of factors. First, strong ongoing operations and continued underlying performance improvement; second, effective risk management; third, our flexible approach to feedstock selection and product placement; and fourth, the relative certainty we now enjoy with respect to the BTC. Biodiesel and renewable diesel production was confirmed as an essential business, which enabled us to continue to operate robustly.REG’s culture of safety, teamwork, resilience and persistence coupled with our strong sense of purpose was also essential to our delivery under the circumstances. We know that operating profitably is critical to our shareholders as well as other important stakeholders. We employed many people support agriculture through our feedstock purchases and contribute financially and otherwise to the communities in which we operate. We also produce an essential and sustainable products for our nation’s transportation network. All of these social contributions are stymied if we’re not profitable and they’re realized when we are. We believe that our successful financial performance reflects our commitment to all of our stakeholders.Since the COVID crisis is on top of mind, let me address that first and then circle back to discuss operations and results. You can refer to Slide 4 to follow along. As we all know, the COVID crisis has changed the equation for essentially all businesses in the near-term. From the outset, REG has taken measured and definitive action to protect our employees, business partners, communities and our business. We activated our newly formed COVID-19 Emergency Response Team or ERT on a high alert basis in January to begin monitoring the situation and planning for possible contingencies, should the virus spread globally.As the pandemic has unfolded, our ERT guides the company and taking decisive action. They provide our leaders with daily tracking and situational updates as well as crisis related services such as orchestrating the distribution of critical PPE across the company. Early on, we adopted best practices in accordance with CDC guidelines for sanitation, travel restrictions and social distancing. We moved all of our office-based operations in Ames and all of our regional offices, including Europe to fully remote work in mid-March. This has gone seamlessly. In all of our refineries, we implemented social distancing, extra sanitation practices and proactive quarantine measures. In order to reduce anxiety, better support our employees and encourage precautionary quarantine when warranted. We granted all of our employees an extra 80 hours of paid time off as needed in order to deal with health or family issues related to the virus.Our Geismar turnaround was successfully executed in April. A turnaround under normal circumstances is complex, but especially so in the context of a virus outbreak in Louisiana. The team performed exceptionally well applying stepped up sanitation and health control practices, including daily health checks for workers, increased PPE requirements and several carefully planned separation measures. This enabled us to carry out this essential work with zero safety or health issues to date. Overall, I’m extremely pleased to report that thus far across the entire company, we have had no COVID related health issues and the business continues to run well.We maintained full operations during the quarter. We were and continue to be able to run all of our refineries even in shelter in place states. Our only plant that was temporarily limited by the virus is our Okeechobee fermentation facility in Florida that was down during the state’s shelter in place. We have all seen the demand destruction that’s come from slowing down the economy. We are affected by this, but as a producer of cleaner commercial transportation fuel, we believe we’re in a relatively resilient position given the primary use of the fuels we produce. According to the EIA, gasoline demand is down approximately 50% and jet fuel demand is down approximately 70% from the beginning of the year.In contrast, diesel demand was relatively stable during the first quarter as essential supplies were being rushed to market generally by trucks with diesel engines. With that effect now stabilizing, IHS Markit projects that diesel demand will drop around 20% by the end of Q2. We are seeing that demand for biodiesel as generally correlating with petroleum diesel demand and renewable diesel demand remains strong with little to no demand reduction thus far.In terms of product pricing, diesel in correlation with crude dropped substantially over the course of the quarter as you can see on Slide 5. ULSD fell from over $2 a gallon at the beginning of the year to under $1 at the end of the quarter, as the crisis took hold. Notably B100 prices were substantially less volatile than ULSD in the first quarter as shown on the same slide.Moving from our outputs to our inputs, the COVID crisis has also impacted the feedstock market. As you know, REG’s feedstock mix is predominantly comprised of low cost, low carbon feedstock. All of these are being curtailed significantly. Based on our market intelligence, restaurant closures have resulted in a 45% reduction in the availability of used cooking oil. In addition, the gasoline demand route is severely reducing the need for ethanol blending. This has led to multiple ethanol plant shutdowns, reducing among other things the supply of distillers’ corn oil by an estimated 55% as of today. Furthermore, COVID related closures or reduced operations at rendering plants are now shrinking the supply of animal fats by an estimated 50% as of this week.Now on the other hand, soybean crush levels have increased, making more soybean available in the second quarter. The net effect of all of this is that over the course of the quarter, feedstock pricing has been extremely volatile with soybean oil dropping and other feedstocks increasing as shown on Slide 6. Our feedstock flexibility allowed us to preferentially use lower cost DCO and UCO through most of the first quarter and then has allowed us to switch to the more advantaged soybean oil towards the end of the first quarter and into the second quarter.Pulling product pricing and feedstock costs together as the chart on 7 – Slide 7 reflects the HOBO spread narrowed sharply over the quarter due to diesel prices falling and more rapidly than soybean oil price. Because this happened relatively late in the first quarter, this compression will have a much larger effect in the second quarter. RIN prices which have remained relatively supportive are helping to provide additional margin as shown on Slide 8.Turning to other controllable aspects of our business. Beyond managing our feedstock mix, I am pleased to say, we had a great quarter and met our objective for underlying improvements. Let me highlight a couple of them. First, renewable diesel. Our team has been tasked with optimizing profit on every gallon of renewable diesel sold and in Q1 they did an outstanding job. Renewable diesel prices in Norway are substantially higher than in the U.S. at present, so we preferentially directed sales there. Norwegian volume continued to grow in the first quarter year-over-year. We fulfill demand by continuing to operate Geismar efficiently. Renewable diesel production was up 3% and we ran it over 110% of nameplate capacity for the quarter. Similarly, moving downstream to sell directly to end use customers is a key element of our long term strategy.Fleet sales continue to be strong. Quarterly fleet volumes have been increasing nicely, as you can see on Slide 9, and we’re up over 150% compared to the first quarter of 2019, proprietary blending which captures margins and drive volumes with also strong. We’re pushing hard to increase biodiesel blending into both petroleum diesel and renewable diesel. Our volumes of biodiesel blended into renewable diesel increased to 71% as shown on Slide 10. This is outstanding progress and is important not only for the economics but also for our environmental contribution.I’m very encouraged by our performance in these key initiatives, especially in this extraordinarily difficult environment. Now I’ll touch on our financial performance as overviewed on Slide 11 and 12. Chad will give details shortly, but for now I’ll provide some highlights. First, our financial position is solid with the receipt of the BTC proceeds, our balance sheet and liquidity positions are very strong. This is particularly valuable given the economic environment we find ourselves in.Second, our profitability is strong. Adjusted EBITDA with $90 million, three times that of Q1 2019. Risk management gain made a significant contribution this quarter demonstrating the purpose of our risk management approach. Chad will discuss this in more detail in just a minute. Other factors behind our strong adjusted EBITDA performance include safe and robust operations with zero health or safety incidents and nameplate utilization of 96%, improvements in underlying performance as I just detailed, application of our flexible feedstock selection and product placement strategy and the support of a more certain regulatory regime.Now let’s move briefly to capital allocation and growth plans. As outlined last quarter, we maintain distill discipline in accordance with our capital allocation framework. We’ve made substantial progress on paying down our debt, including repurchases of our convertible bonds. From a growth perspective, our main focus to drive growth is renewable diesel expansion, and effort we continue to progress at pace.Downstream margin capture is our other primary strategic focus. As I highlighted earlier, we’re making good progress in increased proprietary blending, which both captures the full dollar BTC and enhance the demand for biodiesel. We plan to further improve our carbon reducing offering by selling much higher percentages of biodiesel blended into renewable diesel and petroleum diesel overtime. As you can see on Slide 13, in the first quarter, we were able to display the 1 million metric tons of CO2 from our 121 million gallons of fuel produced.Now I’ll turn the call over to Chad to review our financial performance in more detail for the quarter. Chad?

[Chad Stone:]

Thank you, CJ, and good afternoon everyone. Before I get into my comments on the quarter, I want to align everyone on comparisons. As Todd mentioned in December, the BTC was retroactively reinstated for 2018 and 2019 and extended through 2022. Accordingly, we will provide an analysis of the non-GAAP numbers adjusted for the allocation of the BTC to the first quarter of 2019. This creates an apples-to-apples comparison to enable you to better understand the real change in the underlying economic performance.Refer to Slide 14 for GAAP and Slide 15 for the non-GAAP quarterly highlights. Total revenue was down due both to reduce gallons sold and lower average selling price. The decrease in gallon sold is a result of our focus on product mix. Volume of lower margin petroleum diesel and third-party gallons decreased while higher margin renewable diesel and biodiesel gallons sold in Europe increased. The reduced volume of petroleum diesel was caused by an unusually warm winter in the Northeast, and the elimination of blended volumes associated with our New Boston biorefinery, which we closed last year in July.Looking at production, gallons produced were both up in biodiesel and renewable diesel. Now let me further address the risk management gain that CJ touched on. As you all know, prices across the energy complex declined significantly in the quarter. Additionally, we saw soybean oil pricing decline in the quarter as well. With our risk management strategy in place, these changes resulted in a risk management gain of $54 million.The magnitude of the volatility was very much outside of the norm. As a matter of fact, it was historic and our risk management strategy proved effective. Note that approximately 40% was associated with first quarter business and the remainder for future business. As you can see, the first quarter risk management gain offset the decline in prices as designed, protecting our margins as intended.Going down to P&L. SG&A was higher both on an absolute basis and as a percent of revenue. This was primarily due to a bonus accrual in Q1 2020 from our solid results, as compared to no bonus accrual in Q1 2019. Adjusted EBITDA exceeded our guidance and recall when we provided guidance for the first quarter; we estimated $17 million of risk management gains and due to the extreme volatility in the latter part of the first quarter, actual risk management gain was $54 million. GAAP net income reflected our usual low tax rate of less than 2%. Going forward, our tax rates should remain low due to our large NOL balance.Please refer to Slide 16 for a trailing 12-month adjusted EBITDA of $279 million. We believe trailing 12-month analysis is a better way to view our longer term performance than one quarter at a time. Please refer to Slide 17 for our trailing 12-month return on invested capital, which is 20%. Note that these figures are adjusted to allocate the net BTC back to the period in which it was earned.As CJ described, we have a strong balance sheet and liquidity positions. As you can see on Slides 18 and 19, and we’ve collected all the BTC amounts for 2018 in 2019 from the IRS and in addition, we’re also collecting BTC claims for our 2020 business. Year-to-date, we have repurchased $16.5 million in principle of our 2036 convertible bonds, and the current principal balance outstanding for the convertible bonds is $73.1 million, which is down from $78.6 million at the end of the quarter due to repurchases. We have $130 million remaining of our Board approved authorization for additional repurchases.We also paid off $13.4 million in term debt in January. In April, we paid down our credit line and we invested excess cash. Our debt to total capital at the end of the first quarter was 6.5%, and our weighted average interest rate was 3.8%. As of today, we sit here, we’re in a net cash position with over $300 million more cash and marketable securities than we have debt. Further, we have $150 million available on our line of credit for liquidity.With interest rates at generational lows, we may consider new debt to support the growth strategy, while maintaining our conservative approach to balance sheet management. As always, we intend to maintain our prudent capital allocation. As I mentioned, we have – the Board approved the repurchase authorization, recall, we have $60 million budgeted for capital expenditures for 2020 and we have invested $9 million of that in the first quarter. As a reminder, our target for growth capital projects is a 20% internal rate of return and an overall 15% return on invested capital. These projects must compete with debt retirement and repurchases to maximize returns.Now I’ll turn the call back to CJ to discuss the outlook. CJ?

[CJ Warner:]

Thanks, Chad. It’s probably safe to say that we’re all working in one of the most uncertain periods of our lifetimes and this does need to be reflected in our outlook. We have already covered several of the costs currents and uncertainties, and I’ve summarized what we believe are the major relevant market forces both up and down on Slide 20. At the moment, we can’t predict how any of these will pan out. We are laying them out here so you can all consider and track along with us the forces that will impact our business.One area, I haven’t covered yet, would like to now, is overall diesel supply and demand. The diesel picture is currently challenged, but there is some potential upside here. Many refineries are having to cut back on utilization, because of the collapse in gasoline and jet demands. Gasoline inventories are far above the five-year averages as shown in Slide 21, and this could become throughput limiting for the refineries.With refineries having to cut back on gasoline production, overall petroleum diesel supply could be constrained depending on the degree of product switching the refineries can achieve. Because current diesel inventories are actually slightly low on a five-year average basis and in contrast, the gasoline crack spread, which have dropped precipitously.Diesel cracks are fairly supportive, as you can see in Slide 22. Any further costs in refining utilization would likely be supportive to diesel prices. With all of that in mind, let’s move to guidance, as shown on Slide 23. In the second quarter, we expect gallon sold in the range of 155 million to 175 million and adjusted EBITDA in the range of $20 to $35 million. Second quarter guidance includes $8 million of risk management gain recognized from the first of the month through last week.Also our risk management gains in the first quarter included some gains that were protecting Q2 business, because of this to understand our value creation for the period, it’s best to consider both first and second quarters together. We are looking at $110 million to $125 million of adjusted EBITDA in the first half.As noted on Slide 23, any changes in the assumptions used to inform our guidance could affect actual results. Looking farther ahead, we are widening our volume guidance range for the year by reducing the low end. This reflects the far greater uncertainty of the current environment.Now I’d like to turn the call over to the operator for the Q&A segment of our call. Jessie?

[Operator:]

Thank you. We will now be conducting the question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Craig Irwin with ROTH Capital Partners. Please proceed with your question.

[Craig Irwin:]

Good evening, and congratulations on a strong result. First thing, I wanted to ask about is use of cash, right? The $500 million from BTC, $180 million plus I guess at the end of the quarter, maybe you generate a little cash between here and there, maybe used a little, I guess considering, you’re still buying back those converts. But give or take $700 million in cash. And you did mention possibly go into the debt markets given historically low rates. What are the priorities for cash? How do you fit that in the different opportunities that you’re looking at for construction over the next couple of years?

[CJ Warner:]

So it really, Craig, falls along the lines of the combination between our capital allocation framework and our strategic gains. So the capital allocation framework does call for ensuring that we’re considering returns between buybacks, debt restructuring and growth. So we’re definitely keeping a close eye on all of that and balancing it. And in terms of growth and forward strategic choices, we are working hard to develop them in the areas of renewable diesel growth and downstream expansion. So lots of good choices, and in fact, I think with the current market dynamic, it’s making things even more interesting than before.

[Craig Irwin:]

Okay. Okay. Excellent. So then green diesel, right? Everybody wants to hear an announcement. Obviously, you didn’t make one today, but when we do our diligence, your Grays Harbor facility I remember years ago that had rights on the neighboring property, some very interesting permits already there for much greater capacity than you had in place, and the rights for a deep-water port right there. Second site, I think you showed at the Analyst Day years ago was, if I believe – if I’m correct, I believe it was Seneca, where again, I think you bought the land next door. And if I remember correctly, you also have River Lights there, so be barge. Can you maybe give us some color on where you’re at as far as a decision process? Once you make an announcement, would we be looking at an expedited timeline? And do you have some approximate capital commitment goals for green diesel over the next couple of years?

[CJ Warner:]

Yes. Those are all great questions, Craig. So and this is an area, we’re focused on and making great progress in. Some of – we haven’t made an announcement because we’re trying to hold a few things proprietary. I want to tell you some of things that I can share. First is in keeping with what we talked about last time, the engineering for the 250 million gallon a year plant has not slowed down. And we continue working on the ISBL design at pace, making really great progress and we’re very excited about that. We do have some outstanding choices for location. And this has been a gratifying project and a process for selection. We are making good progress. An announcement will be forthcoming. We just can’t say exactly when, but we are working on it. And because we can work on the ISBL design, it is really not slowing down progress versus what we were looking at prior with the green apple project. So we will continue to keep you updated as we’re able to without sacrificing commercial sensitivity. But rest assured we are moving forward at pace, continuing to progress the continuing work.

[Craig Irwin:]

Great. And just to ask about gating factors there. So would we be looking at maybe environmental permits or construction permits or financing as the gating factors that would lead to a probable announcement?

[CJ Warner:]

The permitting that we’re looking at seems to not be a significant gating factor. Although, you can never say never. So of course, we’re keeping great focus on that and moving forward. Partnership is also making great progress as options, financing as well. And on the other one is easements for the property. So all of those are things which have some commercial sensitivity, which I’m sure you can appreciate why we’re not disclosing quite as much, but we’re balancing all those things as one does when you’re building a project of this magnitude.

[Craig Irwin:]

Great. Thank you for that. So my next line of questions is along the guidance for adjusted EBITDA. So massive number in the first quarter, $53 million benefit from your hedging. I guess most people on this call understand your functional hedges that you don’t have commodity cash flow hedging available to you, just given the underlying commodities. But can you maybe talk a little bit about this $8 million hedge gain that you expect in 2Q? You did say in your prepared remarks that 60% of the hedge book was sort of rolled forward. We did see, I guess heating oil come off more than being well, so I’m going to guess that that pinches you a little bit in the second quarter. Can you kind of walk us through the puts and takes as we go from I guess $37 million, $38 million adjusted number down to a $20 million to $35 million number?

[Chad Stone:]

Yes, Craig, this is Chad. I just wanted to start with first quarter first. So I dropped a little hint in there, basically saying, 40% of that risk management gain was associated with the business we did in first quarter. Meaning the rest of it, north of $30 million was for future business. We’re typically 90 days sold out and we don’t get too far long, especially in volatile commodity cycles. So you can imagine a lot of that is the second quarter impact. And then what I would discreetly say is, then as we go to forecasting and preparing to provide guidance, we kind of know a little bit of how April started off and through basically the end of last week, the volatile energy complex generated some additional risk management gains since the beginning of April. So we know we’re sitting on a position that we track regularly that already reflects some risk management gain and that’s built into our forecasting and guidance that we provide.

[Craig Irwin:]

Okay. Excellent. And then most people in the country are optimistic that this COVID situation’s going to be behind us, hopefully sooner rather than later. I guess that means we should be bullish on a gasoline and diesel prices. And I guess if we look at the world, pretty much everybody that owns a tanker is bullish on oil prices, because they’re buying it for the future price, right? So do you have a strict regimen that you follow in your hedge book that would expose you to hedge losses, when we finally do see this rebound in oil prices? Or would you be more likely to sort of go naked to the ultra-low sulfur diesel, heating oil, low-sulfur diesel market over the next couple of quarters?

[Chad Stone:]

Yes, go ahead, CJ.

[CJ Warner:]

Yes. I’m just going to – I’ll let Chad speak to the details, but I want to say something just from a high level from that standpoint is that, I don’t think anyone expects the recovery to be a precipitous as the crisis. And that’s actually very significant when you’re thinking about risk management because sometimes it’s the rate of change that makes a big difference. And so the hedging strategy really protected us from a very precipitous drop. And in terms of a slower recovery, and we’re with you, watching that recovery is critical and we all believe it’s coming. It’s not going to hit us in the same way, even if the approach was perfectly balanced just because it’s a little slower.

[Chad Stone:]

Yes. And I would add to that, Craig, we are producing the physical commodity and risk managing. We’re actually moving these things. We’re not just trading financial contracts. So when you think of our trade desk, their goal is not to make money trading. Their goal is to protect our cash margins and so we take really, really conservative approach to risk management. Yes, we do have a position and forward view, where we can within a limit governed by our risk committee. If we feel the commodities are going one way or the other, we can be on the higher low-end of our allowed position. And so we can do a little bit of that. But we were lucky we followed our risk management strategy to a T, when we had this historic drop in energy prices and it worked just as designed. And so we don’t want to stray too far, because as a matter of fact, it could go down even further as witnessed last week. So I guess, the short answer is yes, we can to a limited extent governed by our risk committee. But we kind of have to stick to a conservative risk management policy. But we do take forward views and try to optimize, but we don’t – we’re protecting cash margins.

[Craig Irwin:]

Okay. And then last question, if I may, your adjusted EBITDA guidance range $20 million to $35 million, what would have you land at the high end of the range versus the lower end of the range? What are the specific items we can watch for that will cause that kind of high versus low performance?

[CJ Warner:]

Yes. Craig, it’s pretty much the factor that I outlined, particularly thinking about things like well the margin, of course, is one of them. And demand is going to be one, but from a controllable factor standpoint, our underlying performance is a big part of it.

[Chad Stone:]

Yes. I’ll add a recovering of the energy complex is helpful for us for future gallons sold. RIN prices appreciating would be helpful. Some of the things, CJ highlighted, like in a recovery scenario with restaurants opening up and ethanol plants and meat packing plants, supplying more of the feedstocks that we’re currently seeing are limited, would help rebalance the value equation between those feedstocks and make them more available. And those are the types of things that I would point to as well. Those would encourage higher volumes. And higher volume is the other driver.

[Craig Irwin:]

Great. And just to clarify in there, there’s no risk element in your guide for a potential plant outage, related to staff COVID exposure and COVID infection. That’s not something you factored into your guidance because you don’t expect it.

[CJ Warner:]

I wouldn’t say directly. We have looked at what the projections are for diesel demand to drop. And so we’ve looked more along those lines for volume versus needing to shut down for any COVID-related reason.

[Craig Irwin:]

Great. Thanks again for taking my questions. Congratulations on the really impressive results.

[Operator:]

Thank you. Our next question comes from the line of Mike Webber with Webber Research. Please proceed with your question.

[Mike Webber:]

Good afternoon, guys. How are you? Good. Good. Just a couple of questions must have been asked already, but what are the follow-up on one of your recent, I guess the second of last answer you just gave on feedstocks. And just given kind of the unprecedented times where we’re looking at now and some of the shifts – the sizable shifts you kind of mentioned, I’m just curious, what kind of indications or insights you guys have thus far around how much – what kind of shifts do you think might be permanent or semi-permanent? I’m thinking specifically about waste cooking oil or and it could be any one of a number of different commodities. So just trying to think about how – what kind of insights do you have, at least today, kind of looking out for the remainder of 2020 and 2021? How about that forward mix could end up looking a bit more – a bit different just on long-term basis?

[CJ Warner:]

Yes. So I’ll throw a few things out there. Although, I would defer to some of my agriculturally inclined friends to be better experts, but I think particular in the area of tallow that liable to recover fairly quickly. I think that’s kind of a short term thing and it came on pretty fast when it’s definitely strongly COVID related in terms of the workers themselves. And because that’s actually generating a bit of a food crisis, we think that’s probably going to come back pretty fast as well. Used cooking oil was reasonably temp result. So, but people are wanting to get back to restaurants. So we feel pretty confident that that’s going to come back to about where it was as well. The distiller’s corn oil is another story. We’re going to all have to watch really carefully. The ethanol industry really got hit hard. And so we’re all wanting to be supportive of them and understanding it’s a difficult time right now. And so we’ll have to watch what happens with ethanol restarts.

[Chad Stone:]

And I’ll add. All this stuff has happened really, really recently. I mean it was a month and a half ago or so that restaurants started closing. Ethanol plants have been closing pretty rapidly in the last three weeks I would say. And then the meat packing incidents have been within the last couple of weeks, a spate of these things have closed down real quickly. I’ll remind the folks, like a quarter ago, we were talking about our fear and concern of the used cooking oil supply coming out of China and we were warning people – early warning, that we’ve only got about till July, bought of Chinese used cooking oil and international used cooking oil. Thankful to reporter, that backed open and the supply chains backed open. So we’re no longer worried about that specific risk that we brought on a quarter ago. So that’s just an element to think about and consider. So I think of those are leading indicators that we’re watching closely, and we’re kind of in the eye of the storm.

[CJ Warner:]

And I think, it’s a fascinating world, because there’s a tremendous number of interconnections in the agricultural world. So if corn usage for ethanol goes down, then corn usage is going to go somewhere else. And then there’ll be other available feedstocks. And there are other sources of animal feed, which then changes other levels of crush. So usually, it’s kind of circular and there turns out to be a balance. And so you just have to keep an eye at all the interconnections.

[Mike Webber:]

Got you. That’s helpful. Just as a follow-up, CJ, I think actually to one of your earlier comments too around I guess some of the commentary around the cracks and some of your different – some of the different dynamic hedges you guys have on, but that the notion of bloated storage and inventories through I guess a number of – not all, but a number I guess a tangential sectors. I’m just curious, are you guys getting inbounds right now on storage opportunities? I know, you’re actively kind of hedging your core business, this is not something you’re typically focused on. I don’t know, but I know they legalized B20 storage in California last summer. I don’t know how much actual capacity is there to be utilized, but based on everything we’re seeing around us, I’m just curious, are you getting any interesting inbounds now and/or how are you kind of positioned for those kinds of maybe kind of tangential kind of harbor carry trades?

[CJ Warner:]

Yes, that’s a great question. So actually in our industry and in REG, we’ve gotten pretty familiar with doing that automatically with seasonality. So we tend to store in the winter months and then sell it higher rates than we’re capable of producing in the summer months. So this year is no exception to that, which actually gives us an added opportunity.

[Mike Webber:]

Okay, great. I appreciate the time guys.

[Operator:]

Thank you. Our next question comes from Amit Dayal with H.C. Wainwright. Please proceed with your question.

[Amit Dayal:]

Thank you. Good evening, guys. Just a couple of questions for me. On the cash operating costs side, I don’t know apologize if you’ve already highlighted this. But Q2 and Q3, should we expect the cash operating cost to be lower than maybe what you saw in Q1, and if yes, how much lower?

[CJ Warner:]

I think, if you separate feedstock from operating costs that our view is there’s not a substantial change. It’s interesting. We’re probably going to have a little bit lower travel as everyone will, but that is not a real substantial percentage of our total expenditures. So we haven’t really seen cause to think that it’s going to change radically. We are – when we do our monthly financial performance reviews, we are seeing that we’re coming in under cost for the quarter and that’s not too surprising given the activity and we have a lot of remote work. But we don’t see a reason to drive radical change between second and third quarter. Chad, do you have anything to add to that?

[Chad Stone:]

Yes, I’ll just add to that. Generally we see – when energy prices go down, we generally tend to see the feedstock complex follow it down. You’ve got some unique things with some of the used cooking oil, distiller corn oil and animal fats right in this immediate point in time. But the higher volume feedstock, soybean oil has been trending down. And so the leading indicators of the feedstock complex going down are going to be soybean oil and then worldwide palm oil. Those tend to pressure the rest of the feedstocks to keep them into a relative balanced position. And as CJ mentioned, when there’s less used cooking oil available, there tends to be more soybean oil available and it’s going down in price. So that’s an offsetting opportunity and it’s very abundant.

[Amit Dayal:]

Got it. Thank you for that. Markets we are seeing good pricing and demand like say, Norway and California. It looks like they’ve been pretty supportive to the overall business. How much more room do you guys have to keep supplying into those markets at the prices – the favorable prices you’ve been seeing? Or are they getting a little bit saturated?

[CJ Warner:]

We are seeing no slowdown, which is very interesting. But because of the draw for carbon intensity reduction and then relative lack of options to do that, there’s a continued desire to purchase, especially renewable diesel as available and the blends of renewable diesel and biodiesel. And both of those have sort of had no slowdown in demand and we’re not seeing any sort of cap coming in the future.

[Amit Dayal:]

Just maybe last one for me. In terms of how you guys emerge in the market from this COVID situation, do you think you end up taking more market share relative to other companies whose balance sheets aren’t as solid as yours. Any sort of view on, what you feel you will look like once all of this has settled and you go back to sort of the normal levels, will you be combining a little bit more share in the market?

[Chad Stone:]

Yes. I think you’re right to point out that the industry had been going through a challenging time. There a number of folks that really needed the BTC funds to begin operations back up and buy feedstock. It had been suspended for a long period of time and some people were still waiting for those check. So yes, some of that going on, but I think that short-lived and they’ll have the financing to ramp up, I don’t think we’ll have any problem with demand for our fuel. And as CJ mentioned, we’re finding newer and deeper markets for renewable diesel and we expect that to continue. And so we’re growing on that front and improving the sales mix or optimizing, maximizing the profitability and then we’re seeing growth while we go downstream with higher blends of blended fuel into both renewable diesel and biodiesel. So I’m optimistic of our growth opportunity on those fronts in the recovery scenario.

[Amit Dayal:]

That’s all I have. Thank you so much. Appreciate it.

[Chad Stone:]

Thank you.

[CJ Warner:]

Thanks, Amit.

[Operator:]

Thank you. Our next question comes from Hamed Khorsand with BWS Financial. Please proceed with your question.

[Hamed Khorsand:]

Hi. First off I want to ask you, if you’re seeing that there’s really no slowdown in demand. Why are you guiding down production of gallons sold when produced? Are you trying to manage the margin? Are you trying to manage the market?

[CJ Warner:]

Yes. Hi, Hamed. So the – no reduction in demand is definitely focused specifically on renewable diesel and we will continue to produce as much renewable diesel as we can. We just finished the Geismar turnaround, so we’ll be working hard on cranking up the volume. Biodiesel depending on the locale, we think it’s probably going to trend it down along with petroleum diesel.

[Hamed Khorsand:]

Okay. And then, are you seeing adverse activity as far as just from the EPA actions with the blend and the mandate?

[CJ Warner:]

I’m not sure I understand what you mean with the blend.

[Hamed Khorsand:]

Given COVID-19 and some refiners being allowed to not having to mix as much as before or keep up with the pollution rules. How does that adversely affect you at all, if any and if you’re seeing any that?

[CJ Warner:]

Yes. So at this point it’s all discussion. So you could add it to one of the uncertainties, although the salient points really are that although refining definitely is hurting, it’s not happening because they have to blend. In fact, they have to blend a lot less if they sell a lot less fuel. And so it really – the cause and effect actually isn’t there. And as the government is working hard to figure out how to help all sectors of industries, which is actually really important, helping one by really hurting another is probably not a good approach. And we think that some of what we’re hearing in terms of decision making. So anything of course can happen. And there is a lot of discussion about possible waivers. But that would actually be outside EPAs authority to grant because of the law that’s in place. And as I said, it doesn’t really solve a holistic problem. So our view is that different ideas will prevail.

[Hamed Khorsand:]

And finally on the competitive front, you were talking about Norway having increased demand for soybean beneficial. How do you keep a moat around your business given that one market’s performance so well? How do you take advantage of that before your competition? How can you divert if another market is doing better than using Norway as an example?

[CJ Warner:]

Well, it’s really about awareness diversification, having great customer service, connecting with your customers, being able to provide the quality and the quantity and when they want it, where they want it. So that’s really what our sales team does.

[Hamed Khorsand:]

Are you able to stay ahead of this? I mean, as far as demand goes, that’s really becomes the main question right now.

[Chad Stone:]

I’ll take a stab at that just to give you a sense. A couple of years ago, every gallon of renewable diesel that we produced disappeared into California without exception. It was the best market. It was really strong. And since then we’ve had increasing demand pull from Canada and particularly the Nordics. And so last year we probably increased the sales mix to about 25% of international sales of renewable diesel in the first quarter, it was more like 30%. So it gets to CJ’s sales mix.So I think of it in my mind is, we’ve got a great market to California, which we love that market and then we have customers coming to us willing to pay a premium over that low carbon fuel incentivized market. And so it’s a great problem to have. And those things kind of act like arbitrage opportunities someday this customer is willing to pay more and other days our California customer is the premier choice. So we’re just balancing the sales book that way. But we’re finding increasing and growing opportunities on all fronts for that.

[Hamed Khorsand:]

Okay. Thank you.

[Chad Stone:]

Thank you.

[CJ Warner:]

Thanks, Hamed.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from Alex Wong with Parsifal Capital. Please proceed with your question.

[Alex Wong:]

Hi. I have a few questions. First some housekeeping items. What was the basic share count at the end of the quarter? And also how much more BTC to be collected that which you guys actually collect that you in April? That wasn’t captured in the balance sheet.

[Chad Stone:]

So at the end of March, I think we collected about $150 million, right at the end of March and the rest of it came in by April 15. So that net benefit to us would be the $500 million remaining with after you take care by tax sharing agreements. So if you look on the balance sheet, you’ll see a really big $754 million accounts receivable. A lot of that was the BTC, we collected first half of April. On the share count, $39 million, yes, $39 million.

[Alex Wong:]

Got it. And then moving onto mark to market gains in Q1. I just wanted to make sure…

[Chad Stone:]

Sorry, I shortcutted you there. That’s our basic shares outstanding. The diluted shares would $43.7 million.

[Alex Wong:]

$43.7 million, got it. Okay.

[Chad Stone:]

And of course, we’ve continued to buy convertibles. So that’s part of the dilution you’re seeing.

[Alex Wong:]

Understood. On the mark to market gains in Q1, I just wanted to make sure I understand how to think about. You mentioned that was about $53 million in Q1, 40% of which is associated with Q1. And which means about 30 – a little over $30 million should really be booked in Q2 if you have hedge accounting. That would mean your Q1 EBITDA really should be kind of into high 50’s, which is in line with your Q1 guidance. But that would also mean Q2 guidance of – that you guys put out today, I really should be adding about $30-some-odd-million there. Is that right?

[CJ Warner:]

Yes, Alex, that’s exactly right. And that’s why we suggested just kind of looking at first half for value creation because two of them sort of work together, precisely because of…

[Alex Wong:]

Exactly. Because if you look at it, you basically expecting sequentially Q1 versus Q2 that you’d be thought to be relatively flat, which I would say is actually pretty impressive in light of what’s going on in the world. Can you maybe talk a little bit about what was going really well to allow you to do – I don’t think I could find another company who has some sort of leveraged to oil price that can show flat EBITDA quarter-over-quarter from Q1 to Q2.

[CJ Warner:]

Yes, it’s really Alex and I’ll let Chad pipe into it. It’s really all the parameters that I talked about. So first of all, there’s a little bit of forward planning that goes on, which is how the risk management is able to help us. But our demand remains robust for renewable diesel and it really has been quite resilient versus so many other things for biodiesel as well. And even pricing has been resilient. We have a strategy to optimize feedstock mix and we have the capability to do that. And the same thing with product mix. So a lot of the things we’ve talked about with what our feedstock selection is and how we’re moving that around and where we’re placing our product, all helps us to manage our realized margin as other things move around.So to a degree, some volatility actually is something we can deal with in a positive way, because we have the ability to be flexible. And then meanwhile, some of the underlying margin is starting to come through. So that bolsters things even if the rest of the market is moving in a slightly different direction. So all those things have helped us. We’ve been running very, very well. So we have robust volumes. And we have some really good stable customer base and that has served us well also.

[Chad Stone:]

Yes. And I’ll just add to that. I mean, we have been in a resilient sector, right? So we’re selling into the diesel market as CJ was talking about. If you look at Slide 5, you can see when ULSD was collapsing, biodiesel prices were pretty resilient. And the immediate response to the COVID virus was to ensure that store shelves were stocked and a lot of people were shipping things to residences and all those diesel engines were moving across the countryside or gently trying to keep the shelves stocked. Once that happened, we’ve got – we’re getting into the Midwest into the robust demand for diesel into the planting season.So I think diesel has been resilient relative to gasoline and jet fuel. And I would say clean burning fuels have continued to be resilient relatively as well. Not to say that, things couldn’t continue to decline. There are forecasts that diesel demand was down 13% and expected to go down 20%. So it’s still possible for this to continue to play out. But those are some of the things I would point to. And then of course, our nimble ability to switch between feedstocks proves useful. We’re not just sitting in the middle of one feedstock. We’re able to source many different feedstocks and that’s useful. So you’ll see – I think distiller corn oil mix was up like 33% over the previous period that it was compared to. So that is taking an opportunistic approach to turning up one of the lowest cost feedstocks with the best premium incentive over into California, for example. So that is another factor.

[Operator:]

Thank you. [Operator Instructions] It appears we have no further questions at this time. So I’d like to pass the floor back over to Ms. Warner for any additional concluding comments.

[CJ Warner:]

Great. Thanks, Jessie. And just in closing for our investors, I’d like to point out that the near-term difficulties don’t diminish our enthusiasm for our business long-term. And I think that comes through in our Q&A. We believe that the U.S. economy is resilient and has survived other very large challenges over the decades. We also believe that demand for energy is resilient and sustainable, because it’s so integral to our way of life. And finally, we believe that the social interest in renewable and clean energy is a trend that’s here to stay.Even in the face of those strong headwinds we all see today, we’re confident in the strong tailwinds that will drive our business in the years ahead. We will take the actions necessary to prudently manage our business during this crisis, but we will also take the actions and make the appropriate investments to drive a robust value creation and profitable growth over the long-term. And now before we close, Todd’s going to mention upcoming investor events for REG. Todd?

[Todd Robinson:]

Thanks, CJ. As noted on Slide 24 on May 14, we will present at the Bank of Montreal Virtual Farm to Market Conference. The presentation will be webcast live on the Investor Relations section of our website. We will also host investor meetings throughout the day. Attendance at the conferences by invitation only for the clients of Bank of Montreal, so if you’re interested, please contact your Bank of Montreal sales representative to secure a meeting. Additionally, our Annual Meeting will take place on May 12, at 10 o’clock at our office in Ames as noted on Slide 25. Doors will open at 9