Renewable Energy Group, Inc.
Q4 2020 Earnings Call Transcript

Published: 25 Feb 2021

[Operator:]

Greetings, ladies and gentlemen and welcome to the Renewable Energy Group Fourth Quarter 2020 Earnings Conference Call. At this time all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I'll now like to turn the conference over to our host, Jakob Schwegler, Senior Analyst, Investor Relations. Thank you, Sir. You may begin.

[Unidentified Company Representative:]

Thank you, Diego. Good afternoon, everyone, and welcome to our fourth quarter and full year 2020 earnings conference call. With me today is REG's President and Chief Executive Officer, CJ Warner and our Interim Chief Financial Officer, Todd Robinson. While Todd is serving as Interim CFO, I am stepping in today to assist in the role normally reserved for the Head of Investor Relations.

[CJ Warner:]

Thank you, Jacob and good afternoon, everyone. As we stand back and review our 2020 results, I am incredibly proud of the effort put in, focus maintained and results achieved by the REG team this year. 2020 was a singularly difficult year, and maybe one of the most disruptive, volatile and uncertain years any of us will experience in our careers. The RTG team adapted to the challenging environment and kept us operating efficiently and profitably with an unwavering focus on safety and health. Our performance in 2020 demonstrated the commitment of our team, the strength of the demand trends which continue to fuel our growth, despite significant market disruption and the resiliency of our operating model, especially with respect to feedstock flexibility.

[Todd Robinson:]

Thank you, CJ and good afternoon, everyone. Before I get into my comments on our fourth quarter and full year 2020 results, I want to discuss the impacts from the restatement of our financial reports for 2018, 2019 and the first three quarters of 2020. Recall the BTC was retroactively reinstated on February 09. 2018, for 2017 and then on December 20 2019, for 2018 and 2019. Accordingly, for GAAP purposes the 2017 BTC benefit was recognized in the first quarter of 2018 and the 2018 and 2019 BTC benefit was recognized in the fourth quarter of 2019. The impacts for the full year 2018 and 2019 have been reflected in the amended 10-k filed today, and the impacts for the first three quarters of 2020 will be reflected in the 10-k for 2020, we expect to file on Monday. There are schedules in the earnings release, which reflect the impacts of the restatement on certain income statement items and adjusted EBITDA. Slide 19 in the presentation reflects the adjustments as well. As CJ mentioned, the tax assessment from the IRS is for $40.5 million, excluding approximately $3 million of interest. The restatement to our financials, however, is $38.2 million. The difference between the $40.5 million and the $38.2 million is made possible through our ability to claim the BTC for $2.3 million from intercompany sales. Now specifically, the impact on our financial statements is reduction of biomass based diesel government incentives revenue of 14.5 million related to the 2017 BTC in the first quarter of 2018, and $16.2 million related to the 2018 and 2019 BTC in the fourth quarter of 2019. For 2020, the quarterly amounts are $1.7 million, $2.1 million, and $3.7 million related to the 2020 BTC for first quarter, second quarter and third quarter respectively, since the BTC was in effect for all of 2020. The other impact to the income statement is an increase in interest expense resulting from the interest due on the tax assessment. The balance sheet impact is an increase in liabilities for the tax assessment and accrued interest and a reduction in retained earnings. The impact on adjusted EBITDA takes into account the allocation of the BTC benefit to the respective periods when the related B99 gallons were sold. While the amount of the restatement in each individual year is not material, the aggregate amount in 2019 is material, thus requiring the restatement of the 2018 and 2019 financial statements included in the amended 2019 10-K and the 10-k for 2020, you will notice a material weakness identified for the failure to detect the issue with the diesel additive system. This is specific to this issue and determined based on the status as of the end of 2020. Since then, we have established the additional policies and controls as CJ mentioned to address this weakness. I would like to reiterate what CJ mentioned, we are not pleased with the error that led to the restatement, but it does not have an impact on the financial health of our business. One more clarification before I get into the financial analysis for Q4 and full year 2020, I want to note that we have included in the presentation information for GAAP results for the fourth quarter and full year on Slide 20 and 21 as well as adjusted results for the fourth quarter and full year on Slide 22 and 23. With the 2018 and 2019 net benefit, net BTC benefit of $491 million all recognized in the fourth quarter of 2019, we have adjusted the results for 2019 to reflect the allocation of the BTC benefits to the respective periods when the gallons were sold, which we believe allows for a helpful comparison. Now let's start by reviewing the fourth quarter results and then I will step back and review the full year. First revenue was down 4% on a GAAP adjusted basis as shown on Slide 22. This decline was driven mostly by selling prices being down reflective of the significant decline in ULSD prices, with much of the decline offset by strong growth and incentives, both RINS and LCFS credits. Total gallons sold also declined slightly versus last year down 1% in line with their guidance. Biodiesel volume in North America and Europe grew nicely. Petroleum gallons were down as a result of our strategic decision to shift to more profitable bio based diesel gallon. Margins were pressured by lower ULSD prices and higher feedstock costs as CJ noted, specifically in the fourth quarter HOBO plus 1.5 RINS spread was down 40% B4RIN prices were up significantly 57% on average, and we monetized more RINS year over year, resulting in an increase in sales of separated RINS of $30 million. We also had $19 billion of risk management loss, which compares to a $4 million risk management loss in Q4 of 2019 as ULSD prices rose during the fourth quarter of 2020, even though they were down significantly versus the fourth quarter of last year. Recall our usual reminder that some of the risk management gains or losses recognized in a period are offset by the final realized pricing when the gallons are delivered in a subsequent period, roughly $11 million out of the $19 million risk management loss in the quarter is related to gallons not yet delivered. Chemical freight and operating costs were down $8 billion. SG&A expenses were down $9 million, due primarily to higher employee related compensation in 2019, caused by the retroactive reinstatement in 2019 of the BTC for 2018 and 2019. In addition, travel costs were lower due to the pandemic. All in, adjusted EBITDA of $46 million was down year over year, but still above our guidance. Now, let's look at the full year results as shown on Slide 23. As CJ explained, we demonstrated our resiliency in a challenging environment. Considering these challenges, the revenue decline was modest, driven by lower selling prices as ULSD was down 36% and significantly lower petroleum gallon sold as we intentionally focused on enhancing our sales mix. In biodiesel, Europe's performance was strong, with more gallons sold in higher prices. Europe also saw growth in renewable diesel as we shifted our sales there for North America to capture better pricing. Petroleum diesel gallon sold were down $49 million, third party biodiesel gallon sold were down $16 million with North American biodiesel gallon sold of $10 million and European biodiesel gallons up $5 million. Renewable diesel gallon sold were essentially flat year-over-year. Rising feedstock costs also impacted margins for the year. Average prices for used cooking oil and distillers corn oil increased dramatically as restaurant closures and lower ethanol production impacted availability. So we shifted our mix to more attractively priced soybean oil. We used 50% more soybean oil in 2020 and in 2019. Our increased feedstock cost was evenly balanced between more usage from higher production and higher prices. Our average feedstock prices for the year were up $0.14 a gallon. Full year adjusted EBITDA was $196 million, which is down from the $211 million generated in 2019. The main driver of this decrease was margin compression. The average HOBO plus 1.5 RIN spread was lower by 40%. This margin compression was offset by a risk management or by a $66 million increase from risk management, as well as $77 million increase from separated RIN and LCFS credits. We also experienced stronger European biodiesel margins driven by volume and price. Additionally, chemical freight and operating costs were down $36 million. Finally, we benefited from our strategy to redirect sales to the most profitable markets as product mix versus 2019 provided an uplift. Slide 24 shows trailing 12 months adjusted EBITDA and Slide 25 shows our trailing 12 months return on invested capital. As you can see, we continue to exceed our internal ROIC threshold of 15%. For 2020, we did recognize a small tax expense, however going forward, we expect our tax rate to continue to be less than 5% for the foreseeable future. Our blended average interest rate continues to be low and is less than 4%. Now let's turn to the balance sheet as shown on Slide 26. Our balance sheet remains strong. At the end of the year, we had over $350 million in cash and marketable securities, inclusive of the long term portion of marketable securities. In terms of capital allocation for the year, we did allocate some capital to convertible bond purchases. We used $76 million of cash to settle $30 million of principal, mostly in the first half of the year at a point in time when our stock price was much lower. We also paid down some term debt in the first quarter. Additionally, we invested $64 million in CapEx in keeping with our capital allocation framework. Our total debt to capital ratio was 5% at year end, which positions us well as we consider options for financing expansion. As always, we will carefully consider the environment, market conditions and all options as we make our capital allocation decisions. We use a balanced approach for non-major capital projects focused on both keeping our biorefinery safe and reliable, while also providing an overall acceptable return through rapid payback projects. Included in our 2021 CapEx budget is approximately $20 million for safety, reliability and asset integrity and approximately $30 million for high return and strategic projects that combined should deliver less than a 2.5 year payback. Approximately $30 million has been budgeted for engineering on future growth projects. Major capital projects such as the Geismar expansion or any M&A or subject to separate board approvals. Our internal threshold for growth projects remains at a 20% IRR. Overall, including safety and reliability investments and our ROIC target remains greater than 15%. Now I’ll turn the call back to CJ to discuss the outlook, CJ?

[CJ Warner:]

Thanks, Todd. I’ll now discuss our first quarter 2021 guidance as well as a general outlook for the year ahead. For context, I'd like to touch on the external environment in a bit more depth. Because the pandemic has been part of our lives for so long, it's easy to forget that we're still in it and the markets we’re seeing reflect this. In fact, California went back into lockdown at the end of 2020 and remained that way until recently impacting economic activity in that significant market. The ongoing COVID related shutdowns and supply chain disruptions are impacting feedstock availability and prices. We’re all still projecting a recovery but do not see it happening in the first quarter. Cold weather across the Central Continent has temporarily reduced demand for biodiesel and in Texas, particularly in Houston, where many RIN buyers and traders are located, there's been a significant drop in RIN trading activity which should pick-up once things return to normal there. Having said that, we’re confident that REG has implemented a set of tools that let us manage within our environment as effectively as possible and operate profitably even under tough conditions. First of all, we're taking advantage of the relatively low margin period of the first quarter to undertake necessary annual maintenance at several of our biodiesel plants and at Geismar where our annual turnaround is currently underway. This downtime will have an impact on first quarter renewable diesel production, but will strengthen the plant for the coming year. Secondly, I want to note that for a variety of reasons, we're building a significant inventory of RINs in the quarter that will be monetized in future quarters, we estimate the value at the end of the quarter to be approximately $25 million. With that context, let's get to numbers as shown on Slide 28. For the full-year, we’re targeting gallons sold in the range of 660 million to 700 million, we expect to produce 490 million to 520 million gallons and we'll fulfill the excess demand through third-party gallons. For the first quarter, we expect gallons sold in the range of 120 million to 140 million and adjusted EBITDA in the range of $10 million to $30 million. Of course, any changes to the ULSD prices, margins, RINs or LCFS Credit values are a level of market volatility through the end of the quarter could affect actual results. Shipment timing could also affect timing of revenue recognition. Note that this first quarter guidance includes an $11 million risk management loss as of February 15 2021. Our strong performance in the face of unprecedented economic conditions gives us confidence as things return to normal. We believe we're well positioned to capitalize on our strategy as we pursue long-term outsized growth in renewable diesel combined with near-term tactical growth in the downstream. Finally, though there are near-term headwinds, I want to reiterate that we have the tailwinds of the consumers interest in fuels that are renewable and clean. The grassroots societal movement demanding carbon reduction has led to increased support on the regulatory front, which provides a rising demand for our products and ever increasing opportunities for growth. This demand only continues to grow and we are ready unable to provide that fuel to meet these needs at scale. I’m more convinced than ever, that REG is in the right place at the right time. Now I'd like to turn the call over to our operator for the question-and-answer segment of our call, Diego?

[Operator:]

Thank you. Ladies and gentlemen, at this time we’ll conduct our question-and-answer session. Our first question comes from Craig Irwin with ROTH Capital Partners. Please state your question.

[Craig Irwin:]

Good evening, and thanks for taking my questions. CJ, first thing I wanted to ask is, if we could maybe walk through guidance a little bit, I'm guessing that Geismar is going to have a 14-day turnaround, that means we'll probably have about $7 million EBITDA hit, and the $25 million build points to something more like 42 to 62 in EBITDA, if we didn't have these timing issues, debt in line with consensus thinking for the year. Does this jive with sort of the way you're looking at things? Are there any other major pieces we need to look at, that are causing some of the volatility or short-term timing adjustments we need to make?

[CJ Warner:]

Hey, Craig, nice to hear from you. So the first thing I would say, just keep in mind is this turnaround for Geismar is 31-day shutdown. It's a significant turnaround. And we're doing some capital work, in addition to our normal catalyst change out, which will help to strengthen the units in a number of different ways. So we're excited about the work that we're going to do. And you might remember last year, we did defer some work because we brought that turnaround down right at the peak of the early part of the pandemic. So we've been able to stretch things out for an extra year, and then this is going to be an important turnaround. So what we have in the first quarter is a little bit longer downtime, and then the additional cost of the turnaround. So you need to keep that in mind for first quarter. But given the more narrow margins of first quarter, it's a good trade-off. And we look forward to recovering fully and then some in the subsequent quarters.

[Craig Irwin:]

Thanks for that additional color. So new subject, right, there's actually been some pretty encouraging chatter out there about potential for a long-term BTC reinstatement, so that we don't have to worry beyond the end of ‘22. We can look out for several years, given that there's now growing bipartisan support across the board. Everybody likes clean air. Everybody likes Clean Fuels, because it's so important to get in clean air and a lower carbon footprint. Can you maybe update us on your conversations with our regulators, our congressional representatives, what are their questions and concerns about BTC and the long-term support for the Clean Fuels industry?

[CJ Warner:]

So Craig, it's early days for any one specific thing to get focused in on but what I can tell you in terms of the mood, you're exactly right, there's tremendous bipartisan support for this space and BTC is very much a vibrant part of that conversation. But it certainly isn't the only one. And as I indicated in my earlier comments, you're getting the desire to decarbonize and establish targets and incentives in order to meet those targets, not just from the U.S. federal government anymore, but from multiple different jurisdictions. So we have quite a groundswell of increased demand showing up in many different corners.

[Craig Irwin:]

Great. And then last question, if I may, I've been watching Seneca and Grays Harbor for many years, been to Seneca, not Grays Harbor yet. But I see these as potentially ideal locations for additional green diesel plants, you have the lands at one of these, you have an option on the land at the other, you'd have air permits that are both in place for both facilities that would allow for large expansions there. What are the things that we would need to look for from the investor side to see REGI commit to an expansion or we may be looking for third-party government support some tax packages or something like this? How would you go through a decision process to move forward with two or three plants potentially versus a very nice expansion at Geismar that you already announced?

[CJ Warner:]

To start, we definitely share your enthusiasm for continuing to work on the next project and the next frontier. And there are multiple factors that we take into account. While we're doing that, we've actually put together something that we like to call the location linear program that has multiple factors that we take into account. And we’re definitely taking an approach that for our next project, we want it to be strategically advantaged, that's a winning way, particularly when there's multiple announcements out there. And some of the things that do provide strategic advantage for an RD plant are definitely geographical location because you want to have advantage logistics both for access to a wide variety of feedstocks and access to a multiple different markets to enable optimization and enable operation in a wide variety of economic environment. So location is very important. As you said, government incentives can be a real game changer. And actually, permitting challenges can also be a game changer for the other reason. So a positively disposed environment as well as one that understands what it takes to get permitting done in a timely basis is quite critical. And there are multiple other factors including available utilities, and other types of savings that might be realized in order to accommodate whatever the plants needs are including advantage logistics. So we're looking at all of those things. And we do have some very exciting options that we’re continuing to work. So watch this space. And we’ll keep you posted.

[Craig Irwin:]

Great, congrats on the strong results this past quarter and we look forward to an exciting 2021. Thanks.

[CJ Warner:]

Thank you, Craig.

[Operator:]

Our next question comes from Manav Gupta with Credit Suisse. Please state your question.

[Manav Gupta:]

Hi, my first question is more on the Renewable Fuel Standard, as we see it working its way through, it's causing development of lower carbon fuels. Yet, every now and then you see somebody go out on a RFS rant and say it's completely broken. And I'm just trying to understand from your perspective that you’re developing these lower carbon fuels. How do you feel about the renewable fuel standards and no system is perfect. But do you think it's the force the development of the right kind of tools in a lower carbon world? So just your views on the RFS first?

[CJ Warner:]

Thanks, Manav. The RFS is a program that's definitely been pulling through significant volumes of our low carbon fuels. So it's a very important program. It has had its challenges, particularly in the last four years, because of all the uncertainties around the actual demand that it was pulling. So there is a renewable volume obligation, which sometimes is announced on a timely basis. But if there are small refinery exemptions that go with that, or the uncertainty around whether they would be granted or not, the actual total need is very uncertain. And we've been coming out of a period where we had to live with that for quite a long time. The great thing we're seeing now, as we just mentioned earlier, is there's kind of a groundswell of support from both legislators as well as the public for getting on with the energy transition. And you're seeing that in the RINs market right now, as the greater certainty is helping to drive RIN prices into a place where it’s helping to balance that hobo spread. So that answers your question?

[Manav Gupta:]

Yes, it does definitely. My second question is, one of the reasons we have seen some pressure on the sector and you kind of highlighted is, there are a lot of people who have never actually run renewable diesel facilities, never actually got involved in biodiesel, were coming out and suddenly cleaning that because they have this one shut hydrocracker somewhere sitting and they can restart it overnight, they can become renewable diesel producers. And you have been in this business for a long-time. And I'm trying to understand from you, why is it not that simple? Why is it that we don't have like a simple hydrocracker, which can be restarted it’s not about producing renewable diesel. There's a lot more science and maths goes into that. So if you could comment on that.

[CJ Warner:]

There absolutely is a lot of challenge. There are some good analogies and similarities to hydroprocessing. However, these feedstocks in our space are more challenging to convert, and some of them are much more challenging than others. Refined vegetable oil is relatively simple to process in the hydroprocessing systems for renewable diesel, even they have different quality specifications and so an operator does need to be cautious. And we do see problems with some of the new units starting even on refined vegetable oil. But as you get to the lower carbon intensity, lower cost feeds, they’re harder and harder to process. So it does take some experience with feed pre-treatment as well as a really good understanding of even the construction requirements of the plant in order to have the type of feedstock flexibility that we've built-up over time in our fleet. Those are probably the biggest challenges and you do see other ones, I don't think over time any of those are absolutely insurmountable. But I do believe that they’re going to create some issues. And there will definitely be differences in the types of netbacks that operators will be able to realize from the different RD plants that they contemplate building.

[Manav Gupta:]

And one last one is we have seen Canada move ahead with clean fuel standards. Again, there aren't that many biodiesel facilities being built over there or renewable diesel. Is this the market, which could be your sort of foreseeable time just because they want to produce lower carbon fuels. But the investments over there are not even starting-up. So is this a new market you could look at, the Canada market?

[CJ Warner:]

Well, we actually already work in Canada quite a bit. We have some very good customers in British Columbia, where they have an LCFS like program. And Canada overall does have a carbon tax, which they're contemplating ramping-up quite significantly over the next couple of years. I do believe it's an expanding market of tremendous interest. And they’re very actively talking about a country-wide LCFS program, which as currently envisioned would start-up in 2023. And this would give us additional opportunity in other parts of the country besides just the Western portion.

[Manav Gupta:]

Thank you for taking my questions.

[CJ Warner:]

Thanks, Manav.

[Operator:]

Our next question comes from Ryan Todd with Simmons Energy, please state your question.

[Ryan Todd:]

Great, thanks. Maybe on the Geismar expansion. I mean can you talk about how we should think about steps along the timeline for the Geismar expansion, what permits are required? When should we expect them? What's the timing of ordering of long lead time items? When do you anticipate construction commencing and just trying to get a handle on what things we should be keeping our eyes open for assuming the project is progressing on schedule?

[CJ Warner:]

Hi, Ryan, very good questions. Actually, for some of our longest lead capital items, we've actually started the order process. So things are well underway. And we expect to have final investment decision sometime within the next couple months. So watch this space. And once we have that, we'll be able to lay out a very specific projects plan that will give you a little bit better sense of milestones that we'll be watching as well. From a permitting standpoint, there is kind of a normal schedule where you apply at specific periods of your construction plan and everything there is well on schedule. So, we're very pleased with the location and with our partners in Louisiana.

[Ryan Todd:]

Great, thanks. Maybe on you always have the slide in there in the presentation on the sales of blends of biodiesel with renewable diesel, you were effectively flat versus the third quarter, I was under the impression that the previously announced Hunt deal wasn't fully reflected in 3Q results, there was little surprise to see a flat versus third quarter. Any thoughts on the driver there? And then your commentary on how we should think about the pace of growth in those blended volumes over the course of 2021? How are your discussions going with additional partners to kind of increase penetration there?

[Todd Robinson:]

Yes, thanks Ryan. This is Todd. Good question. So yes, obviously, we're very focused on our Ultra Clean branded product. And we’re excited about the opportunity there. California has been impacted by the recent ramped-up kind of stay at home orders. So demand is a little bit slower than what we would have expected. But we have seen great uptake from the Hunt & Sons agreement and that relationship. And as CJ mentioned, we're looking for further and further opportunities to either do further branding agreements similar to the Hunt & Sons or even potentially doing acquisitions. So stay tuned in, be looking for something to happen in that space.

[Ryan Todd:]

Great, thanks. Maybe, if I could just squeeze in one more because we get this. We get questions on this, a lot of them. I'm sure you do as well. There's always a lot of concern about biodiesel economics going forward. But I mean, as you think about increasing competition for feedstocks, I mean across your whole system, you run quite a high percentage of low CI feedstocks, as additional plants start-up in the coming years and you see increasing competition for those. I mean, can you talk a little bit on the biodiesel side about how you view you might be, your relative positioning relative to kind of a typical biodiesel producer in terms of your access to your competitiveness and attracting the right time for the right kinds of feedstocks?

[CJ Warner:]

Yes, this is part of the reason why I'm emphasizing optimization for you so much. It's really there's quite an optimization game to play here. And the name of the game is different depending on the plant and its processing capabilities, as well as its geographical location. An advantage that many of our biodiesel plants have is their geographic location and the advantage logistics they have with access to some of the more localized feeds that really don't have a good outlet to some of the big international markets. So that's an important thing to keep in mind, particularly when it comes to biodiesel, because the biodiesel plants have a reasonable net backup smaller scale than an RD plant, which has to really be built larger in order to have economies of scale, and therefore tends to rely more on access to a wide variety of internationally sourced feeds. So keep that in mind. There's an optimization game to be played there. Some of our long standing relationships, as well as just our local access does give us some feedstock reliability and assurance that you wouldn't have otherwise. Then there's a whole variety of other things that we're working on from both near-term, medium term and long-term feedstock access, which actually gives us a lot of encouragement and excitement about the future and our ability to grow and the whole industry's ability to grow because it really isn't about just cutting up the existing slice of pie. It's about baking more pies when it comes to feedstock availability. And one of the things I like to point to folks when they're looking at me puzzled when I say that is, this industry has grown quite a bit over the last 20 years, and in its inception, it started on soybean oil and as it grew different types of feedstocks, which are now considered to be staples were really novel in their concept when they were introduced. So we added use cooking oil, and we added distillers corn oil, and fats and now we use a wide variety of things, including trap grease, and we're experimenting with other types of plant oils. So there's a really exciting world out there and there's a lot of growth opportunity in sort of both near, medium and long-term for feedstock.

[Ryan Todd:]

All right, Thanks, CJ.

[Operator:]

Our next question comes from Jordan Levy with Truist Securities. Please state your question. Jordan Levy, your line is open. You may have yourself muted, please mute yourself. Okay, we're going to move on to the next question.

[Jordan Levy:]

Hello.

[Operator:]

How are you doing?

[Jordan Levy:]

All right, made it just in time. Hey CJ, Todd. Wanted to start out by getting your thoughts on potential M&A. Todd, you kind of touched on this in your prepared remarks. You guys have previously discussed desire to both grow the Midstream, or the Downstream marketing segment through a couple of different means. And so I wanted to first kind of see if there's been any progression in your thinking on that front. And then kind of as a follow-up on the same question, once I get your thoughts on how you think about a more vertically integrated model, at least for some of your facilities, whether it be in kind of established markets, or some of the more emerging feedstock markets, like cover crops and things like that. So just wanted to get kind of your thoughts on either of those sort of potential options?

[CJ Warner:]

Hey, Jordan, well definitely within our Downstream strategy, we're very focused on opportunities to continue to grow both organically and inorganically. So I would say that's a good watch this space area, and we definitely have some very interesting prospects within our near-term focus. When it comes to feedstock, we're also looking at different ways to expand our portfolio of types of feeds. And we have some exciting potentials, with new sources of feed that we hope to be able to announce potential use of actually by the end of this year. There's a lot going on there. Much of it is somewhat commercially sensitive as you can imagine. So we don't talk about the specifics, but we’ll keep you posted and I can assure you strategically, both of those areas are in high focus for us.

[Jordan Levy:]

Great. That's great color. And then just to follow-up on Manav’s question earlier about Canada, I just wanted to kind of get your thoughts on any progress you're seeing in other potential emerging incentivized markets, whether it be in the States or different international markets, you're seeing progress toward an LCFS type program?

[CJ Warner:]

I think probably the nearest-term win to keep your eye on is Washington State, who has been talking about an LCFS like program now for a long time, and it's progressively getting closer and closer to coming across the finish line. And we're hearing some very positive feedback about the progress taking place in that jurisdiction this year. So I would watch that very closely. Actually, New Mexico is starting to talk about the potential of an LCFS program, which I think is very interesting. And as you pointed out, Canada is, the EU continues to be a space to watch closely because they have RED II, but they're also trying very hard to determine what they're going to do with sustainable aviation fuel and how to incentivize that in a way that actually draws the most decarbonization across the whole system. And while I'm talking about sustainable aviation fuel, I think it's really important not just to think about these programs, but think about the types of spaces where the existing types of products that we make are finding applications. So aviation is a very important space and marine is as well. We’re having some extremely encouraging views into the marine world and their desire to continue to decarbonize. And I think there's some very exciting opportunities there in the near-term.

[Jordan Levy:]

Great, my follow-up was going to be about, you covered that. Thanks so much, CJ.

[CJ Warner:]

Thank you.

[Operator:]

Our next question comes from Amit Dayal with H.C. Wainwright, please state your question.

[Amit Dayal:]

Thank you. Hi, guys, I appreciate you taking the questions. With respect to the outlook, CJ, gallons produced for 2021 roughly flat in that range, and then a small increase in gallons sold. Could there be some upside to these numbers, if the economy opens up et cetera?

[CJ Warner:]

Definitely in the world where the economy is growing faster, an easy place for us to grow gallons sold rapidly is in third-party gallons. And of course, we continue to focus on organic growth with the existing portfolio. So I think what you saw this year was a bit of a mix improvement that we were undertaking. So Todd described this in a little more detail than I did. But we were trying to focus on selling the same number of gallons, but selling more premium gallons. And what you're seeing is if you look at total volume, underneath that hood is as we increase our blending of biodiesel and petroleum diesel, and our blending and biodiesel into renewable diesel, we may be selling the same number of gallons, but the margin to those are much different than the margin with petroleum gallons. So in particular, as we get closer to the customer, and we're selling more of the higher level of biodiesel blends. I think we've given you an example before with our distribution business where customers that haven't even been blending biodiesel at all relatively rapidly started purchasing diesel with a 20% blend and we have other customers that are actually interested in higher level blends. Every time we make a sale like that, we're selling more biodiesel and less petroleum diesel but the same number of gallons. So underneath the hood of the total number of gallons, you have quite a bit of change going on, which is adding value to our portfolio.

[Amit Dayal:]

Thank you for that, that was really helpful. And then feedstock price trends in Q4 was so far in Q1, are you seeing any stability or feedstock prices continuing to rise for you, any color on that would be helpful?

[CJ Warner:]

I don't think we can say that the crystal ball is very clear right now in the world of feedstock, actually, in any market as long as the pandemic continues to roil. I would say what we're hearing in the news just this very minute is that for soybean oil, the soybean oil inventories are actually very, very low. And that's creating quite a bit of volatility in pricing. We actually this week have a pretty significant spike in soybean oil prices. We probably need to get through this year’s growing season, to give everyone a different level of confidence as to what the inventory situation might be. So we're probably entering into a fairly interesting and volatile period. As the market starts to open up, remember there will be more used cooking oil and more distillers corn oil coming onto the market right now both of those are constrained in terms of supply versus what would normally be experienced. But at the same time, we have some new feeds that are coming on the market. And that's going to create some interesting supply and pricing dynamic. So it'll be an interesting space for us to all watch.

[Amit Dayal:]

Okay, and then just in your inventory right now, Todd, is it mostly finished product? Or is it feedstock or the mix if you can share what is in the inventory right now?

[Todd Robinson:]

Yes, so it's a kind of a combination of both Amit and generally speaking in the first quarter, seasonally, we're building inventory because it's a slow period. So yes, we've got finished, more finished inventory in the first quarter build than we would throughout the rest of the year when it's warmer and we're running hard.

[Amit Dayal:]

Okay, just one last question with respect to the restatement, the $38.2 million that you potentially could claim back, is there a timeline within which this could take place?

[Todd Robinson:]

Yes, Amit, a good question. So, it's really hard to tell we've every dollar that we've, we will pay to the IRS, it's a recoverable dollar. But, we need to work with our customers to get the dollars back. And so it's kind of an individual customer by customer analysis. So I don't really want to go out on a limb and give you a timeline. But we're certainly working aggressively to recapture every dollar if we can.

[Amit Dayal:]

Okay, thank you. That's all I have.

[Todd Robinson:]

Thank you.

[Operator:]

Our next question comes from Greg Wasikowski with Webber Research. Please state your question.

[Greg Wasikowski:]

Hey, CJ, and Todd, thanks for squeezing me in. Most of the good ones have been taken out. So I’ll just throw a couple quick ones out. I think you've given enough color on Q1 adjusted EBITDA, why that might be a little bit lower than expectations. But if we zoom out a little bit, just thinking about the outlook for 2021. And I know that there's a ton of unknowns, with everything right now, but at least right now, how do you see 2021 EBITDA comparing to 2020?

[CJ Warner:]

Hey, Greg, Well, as you know, we don't tend to opine specifically past the first quarter or the quarter in front of us with respect to EBITDA. But generally speaking, we’re bullish on the year assuming that economic recovery that we all expect continues to march forward.

[Greg Wasikowski:]

Okay, fair enough. And then maybe just digging a little deeper on the Downstream expansion and potential M&A there. Can you give any color on specific technologies or products or especially geographies that you guys would be focusing on?

[Todd Robinson:]

Yes, Greg, good question. So, it's kind of in keeping with the Hunt & Sons kind of playbook, if you will, California is a very strategic market for us. We want to move a lot of blends of biodiesel and renewable diesel into that market. So it's really strategic. That's kind of the area of focus for us. And then of course, we're also looking at other opportunities. But for the most part, it's in those LCFS type markets where we can blend our biodiesel and renewable diesel and then get that margin uplift.

[Greg Wasikowski:]

Okay, sounds good. That's it for me. Thanks, guys.

[Todd Robinson:]

Thanks, Greg.

[CJ Warner:]

Thanks, Greg.

[Operator:]

Our next question comes from Hamed Khorsand with BWS Financial. Please state your question.

[Hamed Khorsand:]

Hi, so the first question I had was, given what happened middle of last year now, given this restatement process, what are you doing as management to keep investor confidence that these kinds of things aren't going to happen again? And what kind of ongoing costs is that going to do to the operating structure?

[CJ Warner:]

Thanks for your question, Hamed. It's a very important one. I think it's important for us to get across to everyone how seriously we take this and how strong our reactions have been, actually in both cases to follow-up on the identified issues. And it really is about putting in place stronger systems of assurance. And the company actually has some really excellent ones already. It's been actually a history of the company to be very strong on compliance when it comes to the types of things that we engage in, which can be very complicated like LCFS and RFS Credits. The situation at Seneca was a one-off, it was a design issue, and it was intermittent. So putting in place, the extra assurance processes give us confidence that if there were something like that, we would become aware of it. Although I think it's also very important for you to understand the investigation that we did was comprehensive and not just isolated to Seneca but rather being system wide. And with us passing our IRS audits as well as including now, everywhere, these extra assurance measures, we have high confidence going forward.

[Hamed Khorsand:]

Okay, my other question was just on your supply chain disruptions that you're highlighting in the outlook, is this anything beyond just being able to source feedstock? Is it just being able to ship more to Canada and Norway?

[CJ Warner:]

I think when it comes to thinking about logistics and supply chain, the flexibility is one of the most important things to keep in mind because there is an optimization game to pre-play because margins do move around. So if you’re a plant that has a single market and access to a single market, whatever that margin is, at the time is the margin, you're going to be able to realize, if you have a multi-plant structure and portfolio that can take multiple feedstocks from multiple locations and ship to multiple markets, it gives you a tremendous amount of flexibility to react and work within the dynamic of a market and there is going to be a lot of dynamic going forward.

[Hamed Khorsand:]

Okay, great. Thank you.

[CJ Warner:]

Thank you, Hamed.

[Todd Robinson:]

Thank you, Hamed.

[Operator:]

And that's all the questions for today. I'll turn it back to CJ Warner for closing remarks. Thank you.

[CJ Warner:]

Thank you, Diego. And actually, I'm going to pass the baton to Todd, who's going to talk about the upcoming investor events.

[Todd Robinson:]

Thanks, CJ. We have quite a few investor conferences scheduled for March which are shown on Slide 29. Before I walk through the conferences, please note that all conferences upcoming will be virtual due to COVID-19. Attendance at these conferences is by invitation only for clients of each respective firm. So interested investors should please contact your respective sales representative to register for one-on-one meetings to secure time. The first one is next Monday, March 1, when will participate in the Credit Suisse 26th Annual Energy Summit. We’ll host virtual one-on-one meetings with institutional investors throughout the day. The next day, Tuesday, March 2 at 5 P.M. Eastern, we’ll present in a Virtual Fireside Chat at Morgan Stanley's Energy & Power Conference. On March 15, we’ll present in a Fireside Chat at the 33rd Annual Roth Conference. We will also host virtual one-on-one meetings with institutional investors. In the second half of March, we have four more conferences. On March 18, the company will present at the UBS Virtual Conference. We’ll host one-on-one meetings with institutional investors throughout that day, on the same day, March 18, we’ll also make a presentation at the Gabelli Environmental Services Symposium later that day. On March 22 at 4 P.M. Eastern, the management team will present in a Fireside Chat at the Piper Sandler 21st Annual Energy Conference. We’ll also host institutional investors during the day. Lastly on March 25, we’ll participate in the Fourth Annual Truist Securities, Utilities, Midstream & Alternative Energy Summit. We’ll host virtual one-on-one meetings with institutional investors throughout the day. All above conference information has been included in our latest press release on our website in the Investor Relations section. Thank you again. This concludes the call and you may now disconnect.

[Operator:]

Thank you. All parties may disconnect. Have a good day.