Renewable Energy Group, Inc.
Q1 2018 Earnings Call Transcript

Published: 4 May 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to Renewable Energy Group Incorporated First Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the call over to Todd Robinson, Treasurer. You may begin.

[Todd Robinson:]

Thank you, Mark. Good afternoon, everyone, and welcome to our First Quarter 2018 Earnings Conference Call. With me today are our President and Chief Executive Officer, Randy Howard; and our Chief Financial Officer, Chad Stone. Also on the call to answer questions are Eric Bowen, our Vice President, Corporate Business Development & Legal Affairs; and Gary Haer, our Vice President of Sales and Marketing. Let me cover a few housekeeping items before I turn the call over to Randy. 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. 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. If the deck does not appear, please click Refresh and it should be available for download. If you are on the webcast, it should appear automatically. Turning to Slide 2. 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 for 2017 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 measures. As we mentioned on our full year 2017 earnings call back in March, the biodiesel mixture excise tax credit, or BTC, was made retroactive for 2017 on February 8, 2018. The net benefit of the reinstatement is reflected in our GAAP financial statements for the first quarter of 2018. Because the credit relates to our 2017 operations, our adjusted operating results reflect an allocation of the benefits of the credit to our 2017 results by quarter in order to make year-to-year comparisons more sensible. Chad will give you a little bit more detail on this when he reviews our financial results. With that, let me turn the call over to our President and Chief Executive Officer, Randy Howard. Randy?

[Randy Howard:]

Thank you, Todd, and thanks, everyone, for joining the call. 2018 is off to a good start. Obviously, our GAAP net income of $209 million, or $5.30 earnings per share, represent first quarter recognition of the biodiesel excise tax credit for 2017. Our adjusted net income was $4.7 million, and our adjusted EBITDA was $17.5 million for the first quarter. Adjusted net income and adjusted EBITDA reflect the allocation of the BTC benefit based on when the gallons were sold in 2017 and 2018, providing a better representation of the first quarter 2018 performance. Slide 3 shows that for the first quarter we sold the 135 million gallons of fuel, which was at the high end of guidance and 11% above first quarter 2017. We believe the gallons sold would have been even higher, but for a colder than expected March, that push some deliveries into April. As I mentioned, first quarter adjusted EBITDA was $17.5 million, which was over $16 million better than the first quarter of 2017 adjusted EBITDA, excluding the BTC. First quarter is a period generally when we operate closer to breakeven without the BTC, which makes our results all the more encouraging. Relative to guidance, our adjusted EBITDA result was negatively impacted by two items. The first was a risk management loss of $2.4 million. At the time we gave guidance, we had risk management gains of nearly $10 million. As you know, our guidance does not try to forecast market prices. We guide based on approximately where we are at the time. ULSD unleaded -- I mean ULSD rallied strongly at the end of March, and risk management swung negative by $12 million. The second impact was a $4 million dollar write-down of RIN inventory due to the fall in RIN prices late in the quarter. Posting a solid profit without the BTC in place in the first quarter demonstrates the continued improvement in our core business platform. BTC is retroactively reinstated later this year, as expected, we estimate the net BTC benefit earned this quarter would be around $42.5 million. Adjusted EBITDA of $60 million for the first quarter, assuming the BTC reinstatement, continues to support, what we see as a step change in our earnings power. As I mentioned, we sold 135 million gallons of fuel. We produced the 106 million gallons of biomass-based diesel in the quarter, despite a very cold winter that did impact our operations. The Ralston and Madison facilities returned to operation, and our biodiesel fleet ran at 74% of nameplate, as we have scheduled higher levels of maintenance downtime. During the first quarter maintenance downtime of our biodiesel plants, we successfully completed the inspection of 364 vessels required on a 10 year cycle. This was a huge accomplishment, and we believe our plants are set for operation in the remainder of the year. Despite the weather and the downtime in the first quarter, we remain on track to achieve our goal of producing 10% more in 2018 than we did in 2017. Our renewable diesel refinery at Geismar continues to run well, running at 107% of nameplate in Q1. The first quarter margins were helped by lower feedstock costs from an abundance of biomass-based diesel feedstock. The RIN market is largely operating as expected. As lower feedstock prices increase the spread between feedstocks and fuel, RINs correspondingly came down in value as shown on Slide 4. The decrease in RIN prices at the end of the quarter, as shown on Slide 5, can largely be attributed to the uncertainty created by the EPA most recently through their approval of record levels of small refiner exemptions for 2016 and 2017. There is no transparency in the process for granting exemptions, and many, including us, believe the EPA has exceeded their authority in granting these exemptions. The first of what we expect to be several lawsuits challenging EPA actions was filed on Tuesday. Although there was a lot of discussion on the proposed year-around E15 sales and ethanol RIN cap, no changes in RFS policy were promulgated. EPA administrator approve it as publicly stated. He believes any such reform should come from congress, not the administration. The BTC was not included in the March omnibus bill. However, we continued to expect it to be reinstated near to the end of the year. We are working with our congressional supporters and industry allies to enact a multiyear solution for the BTC that would remove the year-to-year volatility. It has only been two months since we released our full year 2017 results, but I do want to provide a brief update on our growth initiatives. We continue to make steady progress on renewable diesel growth. We are moving into the last phase of detailed engineering for a potential Geismar expansion, which would increase capacity to 121 million gallons per year from the existing 75 million gallons per year, as well as reduce logistics costs. We expect a final decision on this project by year-end. In addition, we are moving forward on high-return projects to improve our biodiesel fleet. Chad will update on our capital plans in his remarks. We continue to make steady progress on the expansion of our downstream distribution operations. By moving downstream and selling our products directly to customers through terminals and/or direct fleet sales, we have been able to enhance our margins compared to our historic wholesale channel. A recent exciting development on the downstream effort is our launch of REG Ultra Clean Diesel yesterday at the Advanced Clean Transportation Expo in Long Beach, California. REG Ultra Clean is a patent-pending fuel made from a proprietary blend of renewable diesel and biodiesel. We believe REG ultraclean is among the cleanest diesel fuels on the market today, substantially reducing harmful emissions. Please refer to slides 7 and 8 for tables showing REG Ultra Clean superior performance versus both California and federal diesel-compliant fuels. We have positioned REG Ultra Clean as a premium product targeted environmentally focused markets, specifically in California, where we can take advantage of the extra value associated with the low carbon fuel standard. Importantly, unlike conventional biodiesel, REG ultraclean does not require an additive to meet the stringent carb emissions standards. In the Midwest, the state of Minnesota implemented the first in the nation B20 usage requirement on May 1, which we are well-positioned to supply. From May 1 to September 30, all diesel fuel sold in the state of Minnesota must contain 20% biodiesel, which increases biodiesel demand by approximately 30 million gallons per year. All other months, the usage requirement reduces back down to a 5% RIN. On the east coast, New York City continues to be a consumer of biodiesel and most recently renewable diesel. We announced Wednesday that we are working with the city to supply 900,000 gallon of renewable diesel for using the city fleet over a six-month period. Let me conclude by touching on one of our highest priorities, capital allocation. The prudent investment of our strong cash flow is one of the most important responsibilities of our management team. We divided our capital allocation between investment and new projects, CapEx to maintain what we have and a return of capital to shareholders. As for return of capital, we repurchase shares and convertible notes in the first quarter and during April, under our repurchase plan. As we continue to generate substantial cash flows, we remain focused on the continuous improvement of our core business and our commitment to creating and returning value to our shareholders. Chad will offer more details on the repurchase program. Before I turn the call over to Chad to discuss the financial update, I want to give you an update on the path forward for Life Sciences business unit. We have developed several attractive options to monetize the value of this technology and are in the last stages of finalizing the details. We expect to share those details soon. Now let me turn the call over to Chad for the financial update, and then I will return to discuss our guidance and outlook.

[Chad Stone:]

Thank you, Randy. Please turn to Slide 9, and I'll review the first quarter financial results. As Randy mentioned, our adjusted EBITDA was $17.5 million for the first quarter, this reinforces the step change in earnings capability Randy described in the last earnings call. On Slide 10, you can see our first quarter adjusted EBITDA for the last five years on a comparable basis, meeting pre-BTC. This is our best first quarter by over $15 million. In addition, there is approximately $42.5 million net upside to adjusted EBITDA as the BTC has reinstated for 2018 for a total of first quarter adjusted EBITDA of $60 million. Let me try to give you a simple explanation of how we allocated the 2017 impact reflected on Slide 11. For adjusted net income and adjusted EBITDA, we allocate the benefit to the quarters when the gallons were sold. So those metrics are comparable with additional adjustments, without any additional adjustments. The gross amount that we are going to collect from the IRS for the BTC reinstatement is $365 million. Of that amount, we owe roughly $149 million to our customers under tax sharing agreement. The net benefit of the reinstatement to REG is $260 million with 205 million of that attributed to 2017 and $11 million attributable to first quarter of 2018. For GAAP purposes, the entire benefit of the 2017 BTC is recognized in our first quarter financial statements. This means our revenues, cost of goods sold, some expense items, accounts receivable, accounts payable are all higher than they would otherwise to be. So for example, the gross amount of the BTC is reflected in the government incentives line item. In the BTC, customer sharing payment are reflected as a reduction in the revenue line biomass-based diesel sales. So this explains why biomass-based diesel sales revenue decreased $70 million. When you consider the BTC customer-sharing agreements are $145 million, our biomass-based diesel sales revenue in fact increased $75 million, as you would expect with more gallons in a higher selling price. Now let’s begin to the impact of risk management during the quarter and write-down of RINs relative to our guidance. Turning to the ULSD chart on Slide 13. When we provided our first quarter guidance on March 8, ULSD was trading at $1.89 per gallon. After that, ULSD increased through the end of March to end at $2.03 per gallon. This increase in the last 20 days of the quarter resulted in risk management loss. Our guidance in the forward curve for ULSD did not factor in that $0.14 increase, and as a result, the variance between our guidance and actual results from risk management was $12 million. We also saw a decrease in RIN prices, which resulted in a $4 million write-down to lower of cost in market. If you add back these two variances to our actual results, our adjusted EBITDA would have been $33.5 million, which is near the midpoint of our guidance. With the inflow cash from the BTC and current margins, we are focused on disciplined capital allocation with an emphasis on shareholder return. In December, we announced a $75 million share repurchase program. And on Slide 14 you can see through the end of April, we repurchased 1.7 million shares for $21.4 million at an average price of $12.85 per share. We also repurchased $6.3 million of convertible bonds at a 6% premium. In addition to our repurchase program, we are also focused on high return projects with returns greater than 15%. We sold 135 million gallons of fuel slightly ahead of our guidance. Of that amount, 64 million gallons were biodiesel, 17 million gallons were renewable diesel, 6 million were from third parties, 12 million gallons were sold by our German subsidiary and 36 million gallons were petroleum-based diesel. The average selling price excluding the BTC benefit was $3.18 per gallon. Our total revenue increased $270 million or 65%. This is largely due to the net impact of the BTC. Our total revenue, excluding the net BTC benefit, increased $54 million or 13%, which is due to more gallons sold in a higher average selling price. Through the full quarter, we recognized risk management losses of $2.4 million compared to $8.3 million of gains in the first quarter of 2017. Most of the risk management losses incurred in March this year will be reflected in better margins when the gallons are delivered in the second quarter. SG&A expense was 5% of revenue, which is comparable to first quarter of 2017. The increase year-over-year in SG&A expense was driven largely by employee-related cost resulting from the outstanding financial performance for 2017 inclusive of the BTC. Our SG&A expense would've been down 6% year-over-year without the BTC impact. R&D expense was $6.6 million, which is up from $3.6 million in the prior period, yet is less than 1% of revenue for each period. Similar to SG&A, the increase is primarily due to employee-related cost as well as some increased cost for the field trials related to our [Indiscernible] oil product. While we are engaged in the strategic review of our life sciences business, we are still moving forward on our commercialization efforts to maximize the value of this business unit. Net income was $209 million or $5.30 per share, which again was primarily the result of the BTC impact. Net adjusted income was $4.7 million or $0.12 per share. This compares to an adjusted net loss excluding the BTC for the first quarter of 2017 of $13.6 million. Adjusted EBITDA was $17.5 million compared to $600,000 for the first quarter of 2017, again excluding the BTC. The net benefit from a retroactive reinstatement of the 2018 BTC, again, would be approximately $42.5 million, based on business conducted during the quarter, for a total of first quarter adjusted EBITDA of $60 million. For modeling purposes, we expect our growth CapEx to be directed mainly, although not exclusively, to renewable diesel. In the quarter, we spent $17 million on CapEx that was used primarily for Ralston, Madison and Grays Harbor. Our board approved CapEx for the next 12 to 15 month is $65 million. The $65 million is primarily related to maintenance CapEx, high-return plant improvement projects and growth in our renewable diesel platform. Our effective tax rate for 2018 is expected to be less than 5%, and our low effective tax rate is due to a valuation allowance reserve against our deferred tax asset, which is mostly made up of NOLs resulting from the BTC treatment. Without the valuation allowance, the future cash tax benefit of our NOLs was over $200 million at quarter end. Finally, I'm encouraged by the strength of our balance sheet and our strong liquidity that positions us to achieve multiple goals. We continued to empathize shareholder return with our repurchase program, while also investing in high-return projects to optimize our biodiesel fleet, expand our renewable diesel capabilities. We believe our trailing 12-month adjusted EBITDA continues to be the best way to view our strong performance over time, which you can see on Slide 16. You can see our focus on high-return projects is resulted in a return on invested capital in excess of 20% on Slide 17. Now I'll turn the call back to Randy to discuss the outlook. Randy?

[Randy Howard:]

Thanks, Chad. Market conditions were good in Q1 and remain attractive as we look at the second quarter. Energy prices are supportive with recent EIA numbers showing diesel inventories low. And feedstock prices are lower than usual for the season. As I mentioned, RIN prices have trended lower, we think partially in response to the large spread between fuel and the cost of feedstock. We expect feedstock prices to strengthen later in the year as markets return to their historical price ranges and competitors create additional demand for feedstocks as new production capacity comes online. We expect RIN markets will adjust upwards as the spreads between fuel and feedstock contract, maintaining healthy profit for our refining assets. During the first quarter, we did most of the annual maintenance required on our biodiesel plants. In Q2, our Geismar renewable diesel plant has planned downtime for approximately three weeks for its maintenance turnaround and catalyst change. We continue to see improved performance of our Geismar facility year-over-year as it ran nine months at 100% of nameplate since its last turnaround. Based on the current environment as shown on Slide 22, we are forecasting gallons sold in the second quarter to be a 165 million to 180 million gallons and are forecasting $30 million to $45 million for adjusted EBITDA the without 2018 BTC. Assuming retroactive BTC reinstatement, our adjusted EBITDA would be in the range of $80 million to $95 million. Adjusted EBITDA for the first half, without BTC, should be in the range of $47 million to $62 million. And with the retroactive reinstatement of the BTC, it is approximately $150 million, which demonstrates our substantial earnings power. With a BTC reinstatement for 2018, we expect our 2018 performance to reinforce this step change we saw in 2017 and could ultimately exceed the record levels we achieved in 2017. This estimate is based on actual performance through April, existing forward contracts expected to be fulfilled in existing spot margins through the end of the quarter. Any changes of the price of diesel, RINs or LCFS credits through the end of the quarter would be expected to affect the estimated results. Now I would like to turn the call over to the operator for the question-and-answer segment of our call. Operator?

[Operator:]

[Operator Instructions] Our first question comes from the line of Craig Irwin of Roth capital Partners.

[Craig Irwin:]

First thing I wanted to ask about is your EBITDA guidance. Adjusted EBITDA, excluding BTC of $30 million to $45 million, it seems kind strong after the first quarter. Can you maybe comment for us if this includes risk management gains or losses? And what portion of the June quarter is sold out? Do you have a lot of available capacity to sell spot in the market between now and the end of the quarter?

[Chad Stone:]

Craig, I will start. This is Chad. Thanks for the question. If you look at slides 4 and 5, they kind to show you -- I’m sorry, there’s the slides with the [total] spread in the monthly average RIN price. It’s 4 and 6. What you’re seeing is margins have been improving throughout the quarter. Slide 6 shows a heating oil to bean oil spread that is kind of at its peak. So first of all, you’re right in expecting that the risk management losses that we described were largely related to our second quarter gallons that were committed, and we've got a pretty substantial book already committed to locked in for second quarter. As you know, if we tend not to get too much further than like 90 days out, but we usually have pretty good visibility into the quarter ahead. But what we described was roughly in those last three weeks of the quarter, about a $12 million risk management loss that we expect to be reflected in the either better margin or risk management turning around in the in the second quarter. So that is factored into that guidance.

[Randy Howard:]

The other thing, Craig. I think the thing you should also note is obviously the big increase in gallons sold in the second quarter that we are projecting in the first quarter, not only did we have very low by our standards plant operation and production but also sales. And so both of those -- both of the fact that our productions fall back online with the caveat that Geismar is down for its turnaround, the gallons sold has dramatically increased. So I think it's all coming from that.

[Craig Irwin:]

Great. In your prepared remarks, you shared that for the first quarter your initial guidance that you gave, the guidance for EBITDA of $25 million to $40 million included the assumption of a risk management game of $10 million that materializes a $2.4 million loss because of the commodity volatility. Can you maybe share with us what the risk management assumption is for the second quarter?

[Chad Stone:]

Are you talking about what's in the guidance the amount that's in the…

[Craig Irwin:]

What numeric base is in the guidance far as a contribution in EBITDA or risk management?

[Chad Stone:]

Roughly $10 million.

[Craig Irwin:]

So 10 million in gains?

[Chad Stone:]

The $10 million is the reversal of the risk management from first quarter into second quarter turning around through either better margins or gains in risk management.

[Craig Irwin:]

Okay, excellent. So basically, if we combine the first half together, that's a much more natural sort of flagged environment representation. Is that a fair way to think of it?

[Randy Howard:]

Yes, that's how we are thinking.

[Chad Stone:]

That’s how we’re – yes.

[Craig Irwin:]

Excellent. So then operationally, as we look at the sort of the beginning of summer driving season, I know you don't have a lot of retail consumers driving on biodiesel yet, but the fleets are obviously pretty excited. A lot of people at expo this week were talking about the availability of your new biodiesel product. How should we look at the potential for margins to continue firming the way they have been over the last number of weeks? With feedstocks on the weak side and energy prices going up, do you feel this is a constructive environment for continued expansion crush margins as we head into the summer demand season?

[Randy Howard:]

Well, I mean, like I said, we -- who can project energy prices? But right now, again if you look at EIA, diesel inventories are much or out of range on the low side. So we see that as strength. Obviously the example of Minnesota, as of this week ramping up to a B20 I mean there is in the California, continuing to drive a lot of both renewable diesel and diesel. We do see demand continuing to increase and prices firm. So like I said, were positive that -- I mean, we are very bullish on kind of where we sit for the second quarter.

[Craig Irwin:]

Excellent. And then last question, if I may, your capital projects. In past calls you shared that you've identified, I think, well over $50 million. I think was $70 million in short-term projects that you are targeting that you thought could deliver 50% EBITDA returns over an 18 months’ time period. Can you maybe frame out for us where we are in selection and execution on these projects? Do you expect that the vast majority of what you're putting into you capital program right now to be on the on the high end of the EBITDA return site or some of these may be preventative in strategic investments that allow you longer-term access to certain markets.

[Randy Howard:]

It’s a blend of the different capital buckets, some safety capital, some maintenance capital in high returns, but more and more the capital focus these high-return projects. Again, it’s just been a couple of months. We’ve just finished getting Ralston and Madison rebuilt. We’ve done some major cost reduction capital and actually profit improvement at our Grays Harbor facilities that improves some of the byproduct glycerin value there substantially. So there's projects like that we’ve just wound up. We kicked off a variety of projects already for the year. I think the next two or three months we’ll have a summary of those so we can tick off so you can really see how we’re gaining traction there. Part of some of the projects we were able to begin implementing with the downtime we had in the first quarter. So I think you'll see some, again, consistent improvement not only cost but the profit improvement and rate from our plant, but it'll – they’ll be rolling out through the year.

[Craig Irwin:]

And actually I just follow up in there. The turnaround that REG Geismar other than the catalyst bed change out, are you making the upgrades or technology adjustments there that might impact performance in the second half of the year.

[Randy Howard:]

There are some few things that we’re doing to improve -- make some improvements there. Nothing that I would – I can call out that would move the dial significantly. There's a lot of what we've done that’s really improved the onstream efficiency. So there are some projects there. I am just pleased that we've been able to run. I mean, first quarter this year, we’ve got that plant dialed in, and so yes, we keep making improvements and so I'm always hopeful that the plant has stretch goals if they reach. But nothing significant, no significant new capital at this turnaround.

[Operator:]

[Operator Instructions] We have another question from line of Craig Irwin from Roth Capital Partners.

[Craig Irwin:]

I can keep going as always.

[Randy Howard:]

Yes, the floor is yours, Craig.

[Craig Irwin:]

Thank you. So the biodiesel tax credit. I know our representation in Congress is working hard and that the last-minute negotiations may be were not completely transparent as some of our advocates would really like. Do you feel that there is a vehicle that we could see a five-year reinstatement of the biodiesel excise tax credit attached to? And what’s your confidence in seeing that’s potentially changed to a producer’s credit with a possible ramp down at some point this year?

[Randy Howard:]

Well, like I mentioned in my remarks, Craig, I think the experience these last -- even in the last 12 months has I think taught us and taught the industry that we do need to come together with a multiyear plan. I'm really pleased with the industry is starting to call us around that. We look at the examples of wind and solar. Both of them at approximately the same period of time were able to get a long-term extension, and we believe that we can seek that too using those as good examples. So that's what we are working on now. Like I said, for me, I believe it’ll be in the same form as a BTC. I think that brings everyone in the industry or common understanding in a common point and allows us a much broader support. So I don't -- I think you'll see it in the form of the BTC.

[Craig Irwin:]

Great. That’s good to hear. Next thing I wanted to ask about is the expansion of REG Geismar. It’s something you've talked about at different times. Obviously, you said in your prepared remarks that the engineering and technical studies are ongoing right now. You bought the land necessary to make the expansion. Can you maybe share with us when you might move towards placing orders for some of the very long lead time capital items necessary to execute a project? And what we would expect to see as far as permitting or other items within the next couple of quarters, if this project is going to back ground in 2018?

[Randy Howard:]

So as I said, we passed or we did preliminary engineering, which gave us a good order of magnitude on cost and schedule. We passed that stage gate. We have now gone into what's detailed engineering for the project. That may include some long lead time items, although in this case, because it's an expansion using some existing facilities that we purchased prior from -- the level of long lead time items is pretty -- there is not many of those. So it's mostly getting to the detail engineering down so we can execute it quickly. And like I said, our targeted is to finish that detailed engineering and sanctioned the project later this year.

[Craig Irwin:]

And then when you describe this project for everybody at your Analyst Day, you gave some significant detail about the logistical handling capacity there and what you envision as potentially significant as far as being able to enhance the profitability of the existing and then future footprint. Can you comment whether or not there are existing projects in your capital plan for '18 that maybe would be a start on this logistical upgrade -- the infrastructure upgrade for logistics at the site that may be would be a step on the path that already benefits the existing footprint.

[Randy Howard:]

Yes, and as I mentioned in my remarks, the detailed engineering includes some logistic upgrades. So yes, it's part of the detailed engineering they’re working on now.

[Craig Irwin:]

Okay. Excellent. Europe, the volatility of the European market is similar to our volatility over here. Obviously it's not as tighter focus for people like ourselves and I guess many of your investors. Can you maybe sketch out for us what you see as a longer-term opportunity for REG in Europe? Is this really predominantly an arbitrage opportunity given your strong feedstock sourcing capabilities over here and the ability, I guess, they call it double counting in Europe as far as the available subsidies for cleaner, greener more economic biodiesel?

[Randy Howard:]

Sure. I mean, there are a few things going on in the Europe. First quarter, let’s just say the subsidized Argentinean boats were flooding into Europe and the margins were pretty poor. Our second quarter, the margins look much better over there. They are improving. And specifically for our facilities, again, which are based on largely use cooking oil, not vegetable oil. And so because our product is produced as eco methyl ester, we do get the double counting. We do get into markets and get the higher value. So that's really what we’re -- some of the strategies we’re using here, we’re also using there to take our product into specific customers where we get the highest value. So we see that as a way to expand our margins over there.

[Craig Irwin:]

Great. And then last question, if I may. Longer term, the potential for renewable hydrocarbon diesel in the US looks like it’s seeing some pretty nice tailwinds. You have discussed the opportunity or the potential to build a couple of very large RHD facilities in addition to Geismar. Can you maybe just recap for us what you would want to see that would provide the kind of environment necessary for you to make those decisions to move forward on the plants? How would you expect this picture to come together?

[Randy Howard:]

Well, there are two things. We are, as part of our -- we are doing the preliminary engineering on a project to essentially the double the size of Geismar and build another RHD plant there. So part of the decision making again will be obviously what the total cost of the new plant would be, what the timing would be. And we’re also looking at how to derisk that both with partners and lending and all those things. So it’s going to be a variety of those things that come together to make that final decision. From a market standpoint, everything we see with the low-carbon fuel markets in California, Oregon, Canada, emerging and we believe Washington State will go there sometime suggest that there's plenty of upside for growth in renewal diesel. Like I said, even we’re excited because New York City is now buying our renewable diesel to run their fleet. So next time you see one of those city vehicles, you'll know it's running on our renewable diesel, Craig.

[Craig Irwin:]

That’s good to hear. I definitely keep my eyes open. Thanks again for taking my questions and congratulations on the strong guidance. It’s obviously little better than what I was thinking for the second quarter. So that’s healthy.

[Operator:]

And our next question comes from the line of Michael Gentile from Formula Growth.

[Michael Gentile:]

Really pleased to see the buyback again in action here in the last the two months. I just want throughout there if you guys get your thoughts on capital allocation. In terms of your stock trading and 65% of book value. Your capital allocation priority is building a new plan at 100 cents on $1 versus buying back your stock at $0.65 on the $1. And how the board feels about those two priorities here going forward?

[Randy Howard:]

Well, again, we continue to take steps to return capital to our shareholders. That's one of our big priorities. Again, I think at the end of the day, you'll see us continue to work within the balance of certainly first the $75 million authorization we have from the board, and like I said, we’re not even halfway through that. So you’ll continue to see us take steps to improve our cap structure both on the converts as well as possible share repurchases. So again, we’re trying to do both to ultimately improve our cap structure.

[Michael Gentile:]

I still like the lower risk of it here would be buying your existing plans at a discount to replacement cost it's probably a lower risk/higher return proposition for shareholders at least in the short term until the stock reflects the value of your base business?

[Randy Howard:]

Understand, we certainly believe that we are now quarter-on-quarter, year-on-year showing consistent earnings growth and performance from our platform. So we think you and other investors will recognize that.

[Operator:]

[Operator Instructions] I'm showing no further questions at this time. I would like to turn the call back over to Randy Howard, President and CEO, for closing remarks.

[Randy Howard:]

Thank you, Operator. To wrap up, I want to emphasize that we are very optimistic about our future that builds on our strong first quarter, our strong balance sheet and the great opportunities we see going forward to grow this business. Now before we close, Todd is going to mention upcoming investor events for REG. Todd?

[Todd Robinson:]

Thanks, Randy. Our Annual Stockholders Meeting is next week May 9 at our offices in AIMS and the meeting begins at 10