Renewable Energy Group, Inc.
Q2 2020 Earnings Call Transcript

Published: 5 Aug 2020

[Operator:]

Greetings and welcome to the Renewable Energy Group Inc Second Quarter Earnings Conference Call Webcast. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Todd Robinson, Treasurer. Please go ahead, sir.

[Todd Robinson:]

Thank you, Hector. Good afternoon, everyone, and welcome to our second 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 remind you that 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 was 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. We’re halfway through quite a volatile and challenging year and especially given that backdrop I’m incredibly proud of what REG team has accomplished. We’re operating our business safely within CDC and government sanctioned janitor practices in place and thus far have identified zero cases of COVID illnesses resulting from infection at the workplace. Our biodiesel and renewable diesel plans maintain high run rates throughout the crisis enabling us to consistently supply fuel to our customers and delivery essential products. We’ve supported our people and the communities in which we operate. Most noticeably by maintaining employment, company operations and reliable feedstock uptick from our suppliers. We have provided all employees an additional two weeks of flexible time off to deal with any illness, family issues and alike. We believe that this is both the right thing to do for our people and remove any incentive to try to come to work rather than self-quarantine when in doubt. Finally, we’ve sustained our profitability generating nearly $80 million of net income and close to $100 million of adjusted EBITDA in the first half. This would not have been possible without the dedicated and conscientious effort of every one of our 800 employees. Looking at the first half, obviously first Q was strong one of our best quarters, while second quarter was much more challenging due to the oil price war and the pandemic. Nonetheless, we earned over $8 million of adjusted EBITDA in the second quarter. Please refer to Slide 4. The COVID crisis really struck the US in late March, so second quarter was the first full reporting period with COVID impacts. We sustained our sales and production levels despite significant reductions in overall diesel demand and the need for major internal adjustments such as remote work and highly stepped up hygiene practices in all of our work places. Having said that, margins were extremely volatile and practically narrow in May. We’re pleased that adjusted EBITDA exceeded our revised guidance. This was the result of several factors some price changes were more favorable than we had estimated. Other transactions closed earlier than we have estimated that they would, together these factors coupled with some other smaller elements resulted in better than estimated quarterly performance. Focusing on the macro dynamic for the second quarter, with the economy seriously impacted by effective shutdowns of major business sectors, demand for fuel decreased significantly. Jet fuel was down approximately 62% and gasoline down nearly 30% year-over-year as you can see on Slide 6. For diesel, a primarily commercial fuel in the US and which enabled the ongoing and vital transportation of goods during the shutdown, demand held up relatively well dropping only about 16%. Within that context it is notable, that biodiesel and renewable diesel demand remained stable demonstrating resiliency and in spite of the petroleum fuel demand drop supported by societies continue desire for more renewable lower carbon intensity fuels. ULSD prices responded to the simultaneous large crude price and fuel demand drops defining in April to an historic low of $0.61 per gallon. Since then ULSD has been trending upward although it remains nearly a $1 a gallon below the average fourth quarter, 2019 price. Similarly, feedstock markets were in disarray as the closures of restaurants, packing plants and ethanol production restricted supply of used cooking oil, animal fat and distillers’ corn oil effectively. Despite this situation, a combination of strong contracted relationships and our ability to flex feedstock’s enabled us to stay fully charged with feed and optimize our feed play. For example, we shifted a majority of our distillers’ corn oil supply to the then more attractively price soybean oil. The feedstock used chart on Slide 8, demonstrates how we successfully adapted to the environment. Our feedstock mix changed significantly in Q2, 2020 compared to Q2, 2019 as our usage of soybean oil doubled while usage of distillers’ corn oil and used cooking oil dropped to 50% and 20% respectively. As a result, we held our average feedstock cost per gallon relatively flat year-over-year even with this huge shift in the feedstock market. This helped us to significantly reduce the hit to our margins. As the economy reopens, these feedstock sources have been coming back online bringing our margins back to 2019 levels. The margin swing to the second quarter first dramatically downward and then with subsequent improvement can be seen on Slide 9 with HOBO Spread steadily increasingly since late April through the end of the quarter. While we are not yet back to fourth quarter 2019 pre-crude price war levels. The margin recovery trend is continuing thus far in 3Q. Our strong first half results were driven by solid execution in the operational aspects of our business that are within our control or what I’d like to call underlying performance. This was especially important in the second quarter with the extremely volatility in the external environment and the high potential for distraction of our workforce. Our operations remained strong with outstanding safety performance. We’ve had zero reportable injury since January 2020 and our total injury rate is currently at 0.46 which is within industry leader performance. We successfully conducted the planned guide mark turn around, on time, on budget and without injury or infection. As I mentioned earlier, we shifted feedstock use heavily to soybean oil which was in more plentiful supply and therefore more attractively price on a yield adjusted basis. With our key product of renewable diesel, we increase gallons sold in the second quarter by four million gallons and directed sales to the most profitable markets. We sold around 40% of our REG [ph] to the US West Coast, 25% to Canada and 35% to Norway. We also continue to develop our downstream business which is one of our key initiatives to boost margins in demand in attractive regions and channel. As you can see in Slides 10 and 11, we grew sales of REG Ultra Clean, our proprietary cleaning, cleaner burning, low carbon liquid transportation fuel by 107% year-over-year and gallon sold to fleet customers increased 62% as we continue to expand this important channel. Importantly, our sustained profitability in the first half enabled us to improve our balance sheet. This gives us the strength to survive a prolonged economic downturn should one occur, also creates the foundation for sustainable growth. Chad will provide more detail along these lines in just a moment. Looking forward, we’re confident in our long-term strategy and optimistic around 3Q performance while we remain mindful of the [indiscernible] and evolving external situation. My confidence in our future is supported by number of factors. Our great operational execution in the first half, the strength of our strategy and finally the stability and relative certainty brought about through constructive regulatory support and driven by an increasing desire by the public for clean energy solutions. Growth in renewable diesel remains an important element of our strategy. Engineering work continues for $250 million renewable diesel plant and site selection and associated commercial agreements are progressing to plan within ongoing view for late 2023 start up. As you know, expanding into the downstream and delivering products directly to our customers is also a key element of our growth and margin strategy. Even as we make progress with our current products and networks, we are pursuing new initiatives. Last week, as shown on Slide 12, we announced a deal with Hunt & Sons, a leading California based petroleum products distributor to supply and sell branded REG Ultra Clean select Hunt & Sons hardlocks [ph]. This deal is an example of our strategy to drive demand and expand margins for both our biodiesel and renewable diesel by selling to end users. In keeping with our disciplined approach to capital allocation, we continue to act on our repurchase authorization with strong board support. Chad will provide more details on this shortly. We are encouraged by the expanded regulatory initiatives related to biodiesel and renewable diesel. For instance, the State of Iowa has extended through 2026 a differential sales tax benefitting biodiesel. British Columbia also extended their program to 2030 and increases their carbon reduction to 20%. And in Oregon, a recent Executive Order direct State agencies to strengthen the Clean Fuels Programs to increase carbon reduction to 25% by 2035. Before Chad provides details on our financial results. I want to highlight that we issued our first ESG report, which you can access on the investor section of our website. We welcome the momentum around ESG investing and will continue to be transparent in our reporting in order to support investment decisions. Also as shown on Slide 13, our 132 million gallons of production resulted in another 1 million metric tons of carbon reduction for the quarter. Now I’ll turn the call over to Chad to review our financial performance for the second quarter and the first half. 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 comparison. As Todd mentioned, the BTC was retroactively reinstated for 2018 and 2019 and extended 2022 in December. Accordingly, we will provide analysis of the non-GAAP numbers adjusted for the allocation of the BTC for the second quarter of 2019. This apples-to-apples comparison will allow you to better understand the real change in underlying economic performance. Slides 15 and 16 contain our results for the second quarter and first half of 2020. Revenue was down due to both reduced gallons sold in significantly lower average selling prices. Average selling prices were impacted by the drop in ULSD prices. This was partially offset by substantially higher LCFS credit revenue recalled that in the second quarter of 2019, $29 million of LCFS credits were pushed from the second quarter into the third quarter due to a one-time administrative change enacted last year. Gallons sold exceeded our guidance and the reduction in sold gallons was entirely from fewer petroleum and third-party gallons. This reflects our ongoing emphasis on improving our product mix toward higher margin elements of our portfolio. We continue to optimize our sales mix in order to boost profitability. Most notably by directing more renewable diesel to the more incentivized markets. Renewable diesel gallons sold both our owned and third-party were up meaningfully. Sales of REG produced renewable diesel increased 25%. Production was solid despite the impact of COVID. We produced 4% more gallons than the second quarter of last year with renewable diesel production up 17%. We had catalyst turnaround in the second quarter of both years. But this year, we did in the midst of the pandemic and still increased production year-on-year. We think this reflects the strength of our operations team and our ability to act on our core value of safe operations. SG&A was up $1.4 million primarily due to higher wages and benefits and an increase in legal and professional service expense. Not surprisingly travel and meeting expenses were substantially lower. As a percentage of revenue SG&A remained around 5%. As CJ mentioned we are pleased to have reported positive adjusted EBITDA for the second quarter in such a challenging environment. Taken together, our first half results were quite good, reflecting strong ongoing underlying operational performance. Considering the volatility of energy prices. We think the full first half results best represent our progress so far in 2020. As mentioned in our first quarter earnings call, some of the risk management gains we recognized at that time applied to second quarter gallons. Off the $54 million risk management gain we booked in Q1 around 60% of that reflected risk coverage of future sales beyond Q1 most notably second quarter. This is a main reason that for 2020 we are emphasizing full first half results for a better sense of our true economic performance. This move out the quarterly volatility, we also tracked trailing 12 months in figures. Slide 17 shows trailing 12 months adjusted EBITDA and Slide 18 shows return on invested capital which is an excess of 18%. Part of our ability to sustain profitable operations in such a challenging environment is our strong balance sheet. The highlights are shown on Slide 19. At quarter end, we had cash and cash equivalents of over $320 million and net current assets of over $500 million. We collected all the remaining the BTC amounts for 2018 and 2019 from the IRS in April and have been making tax sharing payments to our customers. In addition, we still tax sharing receivables from customers. At the end of the second quarter, we were in a net BTC receivable position of around $10 million. Furthermore, we’re collecting 2020 BTC amounts due as expected despite the government administrative challenges presented by COVID. A major topic in the current market environment is liquidity. We entered the quarter with plenty of cash and liquid securities. Over the course of the first half, we reduced our debt substantially as well. With cash and marketable securities of $328 million and debt of $72 million, we’re in an excess cash position of over $255 million. In addition, we have nothing drawn on our asset backed line of credit as we fully paid that down in April. We continue to follow our capital allocation framework. Midway through the year, we’ve spent $31 million out of the $60 million CapEx budget. Recalled that we budgeted roughly $20 million to each of the following three categories; first, safety, reliability and asset integrity for our existing fleet. Next, high return, rapid payback projects that we tend to recoup our investments in less than two years and third; board approved growth projects. We’re progressing well and tracking on budget even in the current environment. As a reminder our target growth in capital projects is 20% internal rate of return and an overall l5% return on invested capitals. These projects compete with debt retirement and repurchases to maximize return. We also allocate capital for return to shareholders through our repurchase authorization which includes convertible bond repurchases. We use $30 million to repurchase convertible bonds in second quarter and we have $110 million of remaining authorization. Now I’ll turn the call back to CJ to discuss the outlook. CJ?

[CJ Warner:]

Thanks Chad. Turning to third quarter guidance. Although the COVID crisis no longer new news, the intense impacts are still being felt and a forward look is far from certain. With that in mind, to formulate our outlook we are once again taking into account both potential positive and negative market forces. As you can see on Slide 21, on the positive side. Our outlook is that renewable diesel and biodiesel demand will remain robust. There will be improved availability and pricing for low carbon intensity feedstock, distiller’s corn oil and choice white grease. Overall margins will continue to recover and the broadening public support for cleaner fuel solutions with low carbon intensity will continue. Now on the downside, low crude prices will continue as will currently high diesel inventories and resulting depressed diesel prices. Low jet fuel demand will very likely continue to drive refineries to push lighter diesel cost normally used for jet fuel into diesel resulting in ongoing over supply. Used cooking oil availability will likely remain lower than typical due to ongoing restaurant closures. And finally, we must keep in mind of potential for a significant COVID resurgence. With all that being said, as shown on Slide 22 for third quarter we expect gallons sold in the range of $165 million to $185 million. We expect adjusted EBITDA in the range of $35 million to $50 million. Given biodiesel and renewable diesel demand stability even in the face of COVID, our outlook for the full year 2020 has been revised slightly upward. We expect to sell from 625 million to 675 million gallons and intend to produce 490 million to 530 million off those gallons. Of course any changes to ULSD prices, margins, RINs, LCSF credit values or a level of market volatility through the end of the quarter could affect actual results and note that this third quarter guidance includes $2 million of risk management loss. Building in our first half track record, we remain optimistic about the year ahead and we’ll continue to focus on underlying performance, optimization, shareholder value and implementation of our strategy. At this time, I’d like to turn the call over to the operator for the question-and-answer segment of our call. Hector?

[Operator:]

[Operator Instructions] your first question comes from the line of Craig Irwin with ROTH Capital Partners. Please proceed with your question.

[Craig Irwin:]

So first I should say congratulations for stronger quarter than I guess what everybody was looking for, just a few weeks ago. As we look into the third quarter, your guidance of 35 to 50 is pretty clear. It seems to indicate that your switching to soybean oil has continued and maybe accelerated in the third quarter. Can you maybe discuss your feedstock flexibility and the opportunity the arbitrage different feedstocks? And if soybean oil this dislocation versus other feedstock was to collapse what your opportunity would to switch on to the most profitable feedstock at that time, if this does happen sort of later in the quarter?

[CJ Warner:]

Hi, Craig. Thanks for your question. And for congratulations, we really appreciate that. So as we said in the script, we’re actually seeing a rebound and a change because the market is starting to open up particularly with respect to ethanol production as well as the rendering industry. So while Newco [ph] isn’t quite back to where it was before with restaurants continuing to at least only be half open. We’re getting a rebound in distiller’s corn oil as well as choice white grease and the mix that we have planned and already primarily purchased for third quarter reflects that.

[Chad Stone:]

I was just going to add to that Craig, it’s Chad. If you look at our feedstock slide in the deck. You’ll see that distiller corn oil because of the downtime of ethyl ethanol plants is a shut-ins, inverted it went north of the soybean oil in a converted price and you can see that correcting later in June in that slide and so that really intensifies and shows the effect of why we had to switch the soybean, where we traditionally use lots of distiller corn oil which is low carbon intensity and designed for premium incentivized markets, whereas soybean oil is destined for more of the local Midwest market because they don’t have the same carbon intensity benefit and it may not justify quite yet getting to California. So I just wanted to highlight that one slide to support what CJ just said.

[Craig Irwin:]

Excellent, thank you. My second question is the $6.1 million in other non-operating income that you reported in your abbreviated results, right. Is that the same as the gain on lease termination that you back out in your EBITDA disclosures or is it potentially backed out elsewhere. Can you maybe give us a little color?

[Chad Stone:]

Yes, it’s Chad. That is exactly what it is. There is also some interest income and other income down there because of the large cash infusion in April that we’ve clicked in some interest-bearing accounts.

[Craig Irwin:]

So then just a follow-up in that. What would the interest be excluding this one-time gain in the quarter? Is it, can you share an adjusted interest expense for us?

[Chad Stone:]

Yes, I think, no I mean it’s just in A1 [ph] [indiscernible] securities, really, really safe. So pretty low but it’s a big dollar number. But you know the lease gain was like $4.5 million, the rest was largely the interest. There’s little cats and dogs in there other than that.

[Craig Irwin:]

Okay, understood. I’ll jump back in the queue. Thank you.

[Operator:]

Your next question comes from the line of Sameer Joshi with H.C. Wainwright. Please proceed with your question.

[Sameer Joshi:]

The first question relates to the buybacks and I think you mentioned $110 million remaining and authorized buybacks. What is the timeline for that? And what is cadence that you’ve planned?

[Chad Stone:]

Sameer, it does not have a limitation or a requirement. So it’s just governed by the boards will and authorization that they provide to management. So it doesn’t have an expiration.

[Sameer Joshi:]

Okay and then. Are there any plans, I mean I know you mentioned the capital allocation? But now you’re sitting on a bunch of cash. How do you plan to spend that or use that for the next few quarters?

[CJ Warner:]

Thanks Sameer, this is CJ. The big items that I was highlighting in our strategy really pretty much [indiscernible] at that, so we’re progressing those very well and we’re positioned nicely to be able to take advantage of the arrangements that we’re working on in short order now that the cash is in the bank. So that helps us progress our strategy robustly.

[Sameer Joshi:]

Okay, understood. One last one from me. Is there any - can you give us - elaborate some more on the downstream strategy and what is the progress being made on that front?

[CJ Warner:]

A pleasure. The whole idea of the downstream strategy is really getting closer to the customer. We’ve got some excellent experience now through distribution business that we own, that selling direct to the customer does a great job of helping now understand the value of the lower carbon fuel as well as the quality of it and with that confidence of blending levels that we’ve experienced come up rather robustly, once we’re in those channels. So there’s a dual element of capturing the full value across the whole value chain as well as being able to increase the uptick of our products more rapidly, by being able to sell direct to customers. So that in essence is the purpose of the strategy and the progress of course is about defining the channels where we can sell. So we’ve seen uptick with 107% increase in the blends of biodiesel into renewable diesel. The Hunt & Sons deal has a very good manifestation of that and that will help us to continue that sort of uptick.

[Sameer Joshi:]

Understood, thanks again and congratulations on a good quarter.

[CJ Warner:]

Thank you so much Sameer, appreciated.

[Operator:]

Your next question comes from the line of Greg Wasikowski, Webber Research

[Greg Wasikowski:]

I wanted to start with the EBIT to [indiscernible] versus your guidance. You mentioned some favorable prices changes and maybe some timing in your prepared remarks. I was just wondering if you could dig a little deeper. Give us a little bit more color on what drove that.

[CJ Warner:]

Well without getting too much more granular in some cases, there were some really good opportunities that we identified because of price changes being more favorable than what we’ve seen, so we’re able to make some select sales. We have a really good example from a pricing standpoint. Our co-product glycerin which normally doesn’t really receive much attention had extremely favorable pricing this quarter versus normal and that’s of course because with COVID, the demand for glycerin had gone up for hand sanitizer etc. and although, our glycerin is not of the same grade that would go into hand sanitizer. It was backing into the glycerin that was going into hand sanitizer. So overall, we were able to supply into that market need and it did give us a nice uptick on our co-product.

[Greg Wasikowski:]

Okay, got it. That’s helpful. And then jumping to the potential renewable diesel new facility. Can you just update us how are those conversations going versus any potential partners operationally or financially to the extent that you can get us any color on that? And then what would you say is the biggest remaining hurdle and or hurdles to getting some beat down and making an announcement.

[CJ Warner:]

We have a few things that we’re monitoring closely and actually progressing very nicely to plan, that all kind of converged together and we do not want to make an announcement ahead of that. So as you imagine, we have certain arrangement related to the site and commercial access to things. So we don’t want to make a final selection for site until we get that nailed down. Those are progressing well but we need to finalize and that will help us finalize the selection. There are some incentives related to the site that we’re working on, that’s working quite nicely also. And we’re also speaking with varying partners commercially to contribute to the overall value of the venture.

[Greg Wasikowski:]

Okay, awesome. Thanks for your time.

[CJ Warner:]

Thank you and thanks for your questions.

[Operator:]

Your next question comes from the line of Hamed Khorsand with BWS Financial. Please proceed with your question.

[Hamed Khorsand:]

So my first question was, are you changing your strategy at all and seeing any kind of competitive pressures as far as the sourcing feedstock is concerned?

[CJ Warner:]

Hamed, thanks for that great question. We’re not really changing our strategy, but we’re definitely doubling down because we’re expanding our desired need and we’re expanding our horizon to off places that we can go for feed, which is giving us greater optionality. It is a great history of REG that we have excellent relationships with suppliers that we continue to enjoy and that enables us to stay full [ph] under volatile circumstances like what we’ve experience over the first half and then meanwhile we continue to expand our horizons of with whom we’re speaking, what feedstock we’re developing to get into the market and the types of optionality that we can bring to bear.

[Hamed Khorsand:]

Okay and then my other question was, how much can the industry consume of your blend and how much capacity do you have on the blend? I’m referring to you’re the biodiesel and renewable blend.

[CJ Warner:]

Well there is a view expressed occasionally by CARB 100% and the diesel demand in California, which is a very large market, could go to RD [ph] or an RDBD [ph] blend. So that’s a very significant volume and I don’t actually have that in hand, but there’s quite a bit more phase, two substitutes in a market like California. And California is not alone because any of the markets that are actually incentivizing low carbon intensity have a good thirst of renewable and biodiesel and that’s because it’s carbon reduction that’s fairly significant available now. It’s not waiting for new infrastructure or for new technology development. So it’s been a very robust and steady uptick in those markets.

[Chad Stone:]

Yes, I happen to have been looking at those numbers over the weekend and California is about 4-billion-gallon market. It was like 3.8 billion last year and the recent blend data which is, includes biodiesel and renewable diesel into California has been growing almost each quarter and it’s all the way up to 23% now and to CJ’s point, it can go higher particularly with renewable diesel at high concentration rates.

[Hamed Khorsand:]

Okay, thank you.

[Operator:]

Your next question comes from the line of Ryan Todd with Simmons Energy. Please proceed with your question.

[Ryan Todd:]

Maybe just a couple of quick ones, the follow-up on some of the earlier questions. You’re seeing significant growth and interest right now amongst traditional refiners here in the US and I guess in Europe as well. In renewable diesel quite a bit more capital is being put to work, which I think is a testimony that strength of the market that you guys find yourselves in. How do you see as more players come into it? How do you see the competitive landscape changing? Is more clear end of the market? How much is at risk for increased competition versus an opportunity for greater partnerships? Just any thoughts on how you see that evolving in the coming years?

[CJ Warner:]

Definitely a dynamic picture, isn’t it? Right now. I believe the dynamic for refiners in general are extremely challenging because of the lot of things that I talked about earlier with demand of the fuels of they produced being done but not a uniform way, which makes it quite challenging to operate and schedule properly. We’re seeing announcement of whole refinery closures now as a result of it, so it is a very distressing time. And the attractiveness of switching over the renewable diesel is becoming obvious because renewable diesel is attractive and customers are wanting to pull that at higher levels all the time. So we’re seeing more announcements of course we need to recognize that those require permitting exceptions as well as feedstock procurement in order for them to be actually viable. So some of them will go through and some probably won’t and to your point. It’s very likely that some of them could constitute excellent partnerships for us. So we have an open wind and as always change can create risk or it can create opportunities depend on the way we look at it.

[Ryan Todd:]

That’s great to hear. Maybe a quick follow-up on your comments earlier on the downstream efforts that you guys are making, in particular the Slide 11 that shows pretty material uptick in the second quarter fleet customers, yourselves to fleet customers. How do you - is that - as you see that upper trend goes to the right? Is the volume full to fleet customers, is that all sustainable or is there anything unique or is that just a new partnership that was [indiscernible] entered in the second quarter? And on the fleet side how big is the market do you see in terms of the opportunity you continue to grow that?

[CJ Warner:]

This is definitely the result of the consolidated focus of our sales team getting closer to the customer and this is an important channel for us and it’s very early days in terms of tapping into it. So we’re quite optimistic about the opportunity there.

[Ryan Todd:]

Great, thank you.

[CJ Warner:]

It’s basically a shift if you think about the history of the company where we started producing and then selling pretty much right outside the plant gate into the wholesale market and as we become more sophisticated and more capable and have high quality product, we’re able to sell right down through the channel.

[Ryan Todd:]

Great.

[Operator:]

[Operator Instructions]. Your next question comes from the line of Craig Irwin with ROTH Capital Partners. Please proceed with your question.

[Craig Irwin:]

I wanted to ask a series of questions to better understand the moving parts in the quarter, if I can? The first is, earlier in the year you had indicated that the majority of Geismar’s [ph] production had gone to Norway. Can you maybe update us on where things stood in the second quarter? And should we expect much of the production to be sent to Norway maybe in the third quarter or is that not planned at this time?

[CJ Warner:]

Well Craig its part of our optimization to keep some of that open, so we’re able to switch where we’re shipping based on what the margin drive is. So you’re going to see some stability because of our underlying contractual agreement similar to what we’re talking about a minute ago with fleet customers. And then we have some that enables us to flex, so that as margins move, we’re able to capture those increased margins depending on what’s happening in a particular region. And we do see that it moved around so at times we’ll have a strong signal for Norway at example and at other times we’ll have a stronger signal in California.

[Craig Irwin:]

Okay, so my - really the question that I want to get to the bottom of, is did you have additional sales into California or renewable diesel to backfill any gallons that might have gone to Norway in the second quarter and is that potentially something that’s happening in the third quarter that might help economics and I guess as part of that question, are you still looking at roughly a third of your gallons going into the California market this year?

[CJ Warner:]

Well for commercial reasons we wouldn’t speculate exactly where things are headed in any given time, but I would say if you just continue to think about cutting roughly a third. You’re not going to be too far off.

[Craig Irwin:]

Okay, excellent and then self-blending has been an important initiative at REGI over the last couple of years. You guys have obviously been gaining a little bit attraction there. Can you update us on the run rate sort of what you think is a fair number for us to use for either the full year or quarterly number? And what sort of growths do you think is fair over last year and sort of moving forward?

[CJ Warner:]

I think if you projected Slide 10 through the rest of 2020, you’d be in great shape in terms of that slope.

[Craig Irwin:]

Understood. And then, the unfavorable treatment of soybean oil and canola oil product in the California market has that [indiscernible] that your Grays Harbor and Ralston, Iowa product probably does not end up in a California, is that a fair assumption? And then also is it fair for us to assume that the Grays Harbor facility is maybe above industry profitability again given that it’s one of the largest canola only facilities in the industry.

[CJ Warner:]

Well you’re correct in your observation that low CI feedstock is going to preferentially find its way or a product from a low CI feedstock is going to find its way into the carbon incentivized market. So a canola-based product it will not go to California and neither will [indiscernible] unless it’s nearby. But the logistics wouldn’t be justified versus the netbacks for incentivized markets closer to those producing plants. The plants that even in the Midwest due process lower CI feeds can justify getting to those low carbon incentivized markets because the improvement override the logistics requirement.

[Chad Stone:]

Yes, I would say on the California the carbon intensity for call it distiller corn oil relative to soybean oil and canola is about half and so it gets almost twice the benefit. And my view I agree completely with what CJ just said, my view is that when this goes to eight and three quarters and then 10% reduction and 12.5% and 20%. There’s not enough distiller corn oil and used cooking oil and you’ll have to start to incentivize other animal fats and use cooking oil and potentially canola unless those producers are getting pulled into stake canola gets pulled back in and incentivized into Canadian programs or local tax incentives that override the willingness to pay the freight to get out that way with a little bit less of carbon intensity benefit. But I view that it will be needed in future years in that market, if they want to achieve their goals.

[Craig Irwin:]

Understood. And then it’s not just California that has those goals, I guess there’s something like 24 states and then Canada in the process or some stage of the process to adopt a low carbon standard. Can you maybe share with us what sort of conversations or discussion you might be having with different regulators from other states as they look at potential ways to meet their low carbon mandates that they’re going to put in place? Is there a broad slate of potential shooters facing REGI that would want you to cite a renewable diesel facility in their local state or providence? Is this something that you think is building to larger commitments from these different geographies?

[CJ Warner:]

Focusing on the first part of your question, Craig. There are some very interesting ongoing conversations in multiple geographies about expanding their programs to improve their carbon footprint and it does come in a lot of different flavor. Some of it is municipality seeking to completely convert their fleets to 100% low CI. We didn’t talk about B100 today, but that’s actually an option, that’s very attractive to some of these municipalities. And when that does happen, it does create very interesting opportunity because B100 isn’t necessarily readily available, so it gives us the opportunity to collocate at least from a blending and service standpoint. There are regions looking at increasing their biodiesel requirement for heating oil. There are states looking at adopting low carbon fuel standards. I think it’s well known that Washington State has been debating that for a while and continues to get fairly close to the finish line as they work through what the details of a program like that would entail. Colorado is actually having the early stages of those conversations as well as is the entire country of Canada. So there are lot of different things, we haven’t really spoken much about Europe. But Europe has IED 2 [ph] which is currently now being promulgated by the members of state and they’re each defining exactly what that will mean for them and that is creating some very interesting opportunity as well.

[Chad Stone:]

Yes, one other area I’d highlight is the Northeast region has a very strong desire and the Northeast heating oil market to introduce an encourage higher and higher blends of biodiesel into bio-heat. There is a lot of momentum there and there’s also a lot of green initiatives on both costs that could be attractive.

[Craig Irwin:]

Great and then last question, if I may. It’s really a clarification. So the renewable diesel facility you’re talking about hopefully announcing later on this year. 250 million gallons, is that incremental on top of the 75 or we talking 175 net additions. And then can you share with us what the cost would be on that facility?

[CJ Warner:]

We did purely incremental and the cost we’re looking at is very competitive. I think you probably know the range of capital cost is anywhere between maybe a lot of $2 up to 450 or five a gallon and we’re short on the low-ish end of that.

[Craig Irwin:]

Excellent, well congratulations on a really strong quarter and it sounds like we’re going to have a pretty great quarter and third quarter. So keep on doing what you’re doing. Thank you.

[CJ Warner:]

Thanks, Greg. [Indiscernible].

[Chad Stone:]

Thanks Greg.

[Operator:]

[Operator Instructions] Ladies and gentlemen, we’ve reached the end of question-and-answer session and I would like to turn the call back to CJ Warner, CEO for closing remarks.

[CJ Warner:]

Thank you, Hector. To conclude we’re cautiously optimistic about near term outlook and highly confident about our long-term prospects. Looking at the balance of the year, there are three key things to keep in mind. First, our fuels are essential and demand is relatively good. We fuel national transportation networks and goods still need to be delivered. Furthermore because we produce a low carbon clean burning fuel, we create significant environmental value. Second, our feedstock markets have stabilized. With our multi-feedstock strategy we’ve been able to adapt and keep burning despite significant feedstock disruptions. As the economy continues to recover, our sources of various [indiscernible] oils are producing again, bringing back supply and reducing price pressure on these lower carbon feedstock. This bodes well for an improving margin environment going forward. Finally we’re performing well on the elements of our business that we control. We’re maintaining a strong safety record, operating at robust utilization. We’re directing fuel sales to the most profitable market and we’re executing on our strategies. All in all, I’m very proud of the outstanding performance this team is delivering and look forward to more success in the quarters ahead. And now before we close, Todd will announce upcoming investor events for REGI. Todd?

[Todd Robinson:]

Thanks J. please turn to Slide 23. First off, I’d like to announce that we’ll host an Analyst Meeting on October 13 at the Nasdaq MarketSite in New York City. At this point we plan to have a live in-person meeting with appropriate precautions of course. We’ll also webcast the meeting for those who are unable to attend in-person. Due to COVID situation not allowing in-person meeting, it will be fully virtual. So mark your calendars for October 13. Formal invitations will be sent around a month before end. In terms of investor conference on Wednesday, August 12. We will participate at BWS Financial Growth and Value Virtual Summer Investor Series. The company will host investor meetings throughout the day. Attendance at the conference is by invitation only for clients of BWS. Interested investor should contact your BWS sales representative to secure meeting. On August 13, we’ll present at 40th Annual Canaccord Growth Conference which will be virtual. We’ll host investor meetings throughout the day and attendance at the conference is by invitation only for clients of Canaccord. So if you’re interested please contact your Canaccord sales rep to secure meeting. On September 2, CJ will participate on RD Panel at the Piper Sandler Gleneagles Virtual Conference. We will also host investor meetings throughout the day. Attendance at this conference is also by invitation only for clients of Piper Sandler. So if you’re interested please contact your Piper Sandler sales representative to secure meeting. Lastly, on September 14, we will present H.C. Wainwright Global Investment Virtual Conference. We will also host investor meetings throughout the day. Attendance at this conference is also by invitation and clients of H.C. Wainwright should contact their sales rep to secure meeting. Thank you all again, this concludes the call. You may now disconnect.