Renewable Energy Group, Inc.
Q4 2017 Earnings Call Transcript

Published: 9 Mar 2018

[Operator:]

Good day, ladies and gentlemen. And welcome to the Renewable Energy Group Fourth Quarter 2017 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 follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mr. Todd Robinson, Treasurer. Sir, you may begin.

[Todd Robinson:]

Thank you, Brian. Good afternoon, everyone. And welcome to our fourth quarter 2017 earnings conference call. With me today is our President and Chief Executive Officer, Randy Howard; our Chief Financial Officer, Chad Stone; Brad Albin, our Vice President of Manufacturing; 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, 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 two. 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 measures. As you are likely aware on February 9, 2018, the Biodiesel Mixture Excise Tax Credit or BTC was made retroactive for 2017 and the net benefit of that reinstatement will be reflected in our GAAP financial statements for the first quarter of 2018. Because the credit relates to our 2017 operations, our 2017 adjusted net income and adjusted EBITDA reflect the allocation of the net benefit of the reinstatement based on gallon sold in each quarter. The IRS updated it’s guidance on the process for filing for the BTC refund yesterday and we have begun the process of filing for those refunds. With that, let me turn the call over to our President and Chief Executive Officer, Randy Howard.

[Randy Howard:]

Thank you, Todd, and thank you, everyone, for joining the call. First, let me clarify my title, as we have dropped the word interim. We are in a transition to take REG to the next level of performance and execute on our vision to capture growth opportunities while increasing our returns to our shareholders. I am in place to see that we accomplish that goal. I’m excited to share with you all today our step change in performance for 2017 and her plans for 2018. I look forward to leading REG through 2018 and our plans for 2018. I look forward to seeing us with a growing future. We have a number of strategic initiatives which I will review momentarily, that are designed to prepare REG for its next period of growth and together with a strong leadership team we are committed to make it happen. Now let me review what we accomplished in 2017. We will cover Q4, of course, but we are a long cycle business and I think of the development of the business in terms of year. Last June we conducted an Analyst Day in New York, where we laid out our vision for how we thought REG should develop over the next few years. We also offered tangible financial goals that we thought were achievable, especially given our views of the outcome of the trade case and the likelihood the BTC would be reinstated. The immediate goal was simple, assuming the successful trade case outcome and the reinstatement of the BTC we targeted the generation of at least $150 million in adjusted EBITDA for the year. We not only achieved, we beat that goal. With the reinstatement last month of the BTC, we regenerated $230 million in adjusted EBITDA for 2017. This exceeds our previous best year by $80 million and is more than 50% higher than our previous high of $150 million of adjusted EBITDA. Further, we set annual records for gallons produced and sold. This is an outstanding result. I sincerely want to thank each of our employees, the management team, our Board of Directors, vendors, customers and our legislative champions for their efforts in enabling us to achieve these record results. As you can see on slide four, our 2017 adjusted EBITDA more than doubled our 2016 adjusted EBITDA. This increase was mainly driven by improvements in the HOBO spread or biodiesel equivalent of a crack spread. Impacts from richer sales mix, meaning selling more renewable diesel than last year and less third-party gallons, and an improvement in our co-products price. Our renewable diesel refinery at Geismar reflects our strategic focus, with its high-capacity, lower cost feedstock and the inherently higher margins of renewable diesel. Geismar ran at 95% of nameplate capacity with adjusted EBITDA those approximately a $1.30 per gallon inclusive of the BTC reinstatement. We believe the earnings power of our business is resilient, can generate consistent annual margins and can also continue to grow with prudent investments. By any measure, REG continues to demonstrate strong earnings, and more importantly, our ability to generate cash through a history of reported regulatory uncertainty. Chad will detail our GAAP numbers later, which shows a large net loss for GAAP purposes. The large net loss is largely due to the delayed retroactive reinstatement of the BTC and the impairment of our partially completed biodiesel plant near New Orleans, because we do not expect it to measure up against our other investment opportunities. We’re very happy to see the BTC reinstated retroactively. We are thankful to those in Washington who supported this reinstatement. At the same time we are disappointed that Congress did not do more. The BTC is not in place for 2018 and we’re working with our elected officials to see it reinstated for a longer-term. Let me now turn our own operations. First, I want to start with safety. We achieve these results while lowering our recordable injury rate to 1.4%, which is below the industry standard of 2.1%. I’m very proud of the improved safety culture at REG. The team at REG is an outstanding group and they continue to produce exceptional results, optimizer our operations and capture more downstream margin. In 2017 we sold nearly 590 million gallons of fuel. We produced 454 million gallons of that fuel. The rest was sourced from third parties, fulfilling demand created by our sales and marketing team. We generated over $2 billion of revenue before accounting for the BTC impact. We excelled operationally running our fleet at over 90% of nameplate capacity as you can see from slide six. Ralston was down for part of the fourth quarter as planned -- as planned for the expansion to 30 million gallons per year. The expanded Ralston biorefinery is now operating. Madison was down for repair, but work to restore operations was completed on schedule and on budget and Madison is now running above nameplate capacity. We expect our biodiesel fleet to be fully operational with the exception of normal downtime for nearly all of 2018. Our plants in Germany produced 10 million gallons in the fourth quarter, consistent with its annual plan. Our fleet of plants set 119 new weekly, monthly, quarterly or annual production records in 2017. With these improvements we are projecting a 10% increase in our production for 2018. Capital allocation is top of mind for us as we look to deploy the cash generated from our 2017 results and from current operations. We continue on our balanced capital approach with a focus on shareholder returns through a convertible bond repurchases, common stock repurchases, growth capital expenditures, as well as maintenance CapEx and M&A. As a first step, the Board authorized in December a $75 million buyback plan where we can buyback common stock and convertible bonds. As you can see on slide seven, over the past three years we have used capital generated from operations and debt raises to invest in our plants and for M&A activity and the buyback our stock and convertible bonds. As discussed in the past, we have identified short, medium and long-term growth opportunities. In the short-term we look for opportunities to improve our biodiesel fleet where and when it makes sense and we can believe -- and we believe we can deliver high returns. Previously we have indicated opportunities of $15 million to $20 million in profit improvement cost reduction projects with high returns. Now we see upwards to $70 million investment in short-term high return projects that could add up to $35 million in adjusted EBITDA over the next 18 months. Some of these projects have yet to be approved but we plan to deploy capital through the year as engineering and plant schedules allow. I am pleased with the efforts of this team to develop this project inventory. As we look ahead, renewable diesel is a significant opportunity for us to grow and we are committed resources to evaluate the best avenues for growth in this product line. Earlier in 2017 we purchased land in Geismar in connection with our expansion plans. Detailed engineering and marketing studies are in progress, and we expect -- in process and we expect to make decisions soon on the best ways to leverage the existing plant and infrastructure there to grow our capacity. This includes mid-term Geismar upgrade and expansion projects that have potential to add up to $35 million in annual adjusted EBITDA beginning in 24 months. Finally, we continue to see long-term projects to invest in new renewable diesel plants. We are working on ways to derisk these large investments and to maintain a high return on invested capital we achieved in 2017. We will decide soon which of these projects we will undertake. Slide eight shows how these short-term, mid-term and long-term projects give us a steady growth profile over time. You will note that this illustration includes debt financing of a potential new renewable diesel plant. However, all the capital required for the short-term and mid-term projects, we will utilize funding from free cash flow from operations. Implicit in our plan is the repayment or buyback of all of our convertible debt, as well as share repurchases when we believe the stock is undervalued. We are also focused on capturing additional margin through blended fuel sales by expanding our downstream distribution strategy. We highlighted terminal expansion at our Analyst Day in June and in 2017 we added 10 new terminals. We now have a network of 46 terminals. We expect to grow this business further in 2018. In addition we are contemplating our downstream margin enhancement strategy -- complementing our downstream margin enhancement strategy by expanding our fleet customer business. With the additional four major fleet customers in the fourth quarter of 2017 and eight in total for the full year. We concluded the review of the strategic options for our Life Sciences business in December as planned and set direction on how best to monetize the value of the business. This could be through an outright sale, joint venture or a series of joint development agreements. We are in the midst of negotiations with a variety of key players and are not at liberty to discuss the outcome today. In the meantime we continue that business in the mode that maximizes its long-term value. As we look back on 2017, we are very proud of our accomplishments, as the leading U.S. advanced biofuel refiner. We have an outstanding team, great assets and a strong balance sheet that can fund growth. We see a multitude of immediate opportunities both for growth and higher profitability in the near-term, mid-term and long-term, and we’re hard at work to capture them. I’m very excited to be leading REG at this critical juncture and look forward to reporting to you on the goals we intend to achieve. Let me now turn the call over to Chad for the financial update, including details on Q4 and then I will return to discuss our guidance and outlook.

[Chad Stone:]

Thank you, Randy. Before I get started, if you are on our Investor Relations website and couldn’t access the presentation, please go ahead and click refresh, it should be available to you and just as a reminder you’ll want to flip the pages as we go along, we will try to give you references to the slides. At this point, let’s turn to slide 12 and review our financial results. First, I’ll cover fourth quarter results and then I will add some color on the year, so any figures I referred to now are for Q4 2017 and all comparisons are year-over-year. We sold 153 million gallons of fuel, well ahead of our guidance, but down slightly from Q4 of 2016, when we had the opportunity and incentive to sell most of our gallons due to the impending laps of the tax credit at the end of 2016. Gallons sold generated $577 million in revenue, an increase of 3%. The strength in volume was due to increased volume of renewable diesel in petroleum offset by lower volumes of biodiesel and third-party gallons -- third-party trading gallons. The composition of sales was 94% produced by us and 6% by third-parties. Looking by product, we sold 91 million gallons of biodiesel, 21 million gallons of renewable diesel and 30 million gallons of other products, such as naphtha and LPG produced Geismar or petroleum-based fuel through our energy services business. Our German operations sold 10 million gallons. Net loss was $17 million or a negative $0.44 per share. The net loss was primarily due to the delay in reinstatement of the tax credit and the impairment charge from New Orleans. New this year, we are reporting adjusted net income for the first time. We hope this metric provides investors with useful information to evaluate our results. You can see the reconciliation of adjusted net income to GAAP net income in our earnings release, but the most significant adjustment again relate to the retroactive BTC reinstatement, the non-cash charges for the impairment of assets and for the convertible debt conversion liability. Our adjusted net income for the fourth quarter was $78 million or $1.97 per share. Adjusted EBITDA was $58.8 million, incorporating the reinstatement of the tax credit in the fourth quarter of 2017. We had a risk management loss of $16.5 million, primarily due to the 15% increase in ULSD during Q4. SG&A expenses of $21.8 million were down $5 million due to some simplification and streamlining of our cost structure. R&D expenses were $3.6 million, down $1.5 million. Now turn to slide 14 which covers the full year of 2017. Again all figures refer to full year and our comparisons are with the full year of 2016. We sold 587 million gallons of fuel, up 3%. The strength in volume was due to strong demand for renewable diesel and Geismar running at high utilization rate throughout 2017, offset by some downtime for upgrades and repairs. The composition of sales was 91% produced by us and 9% by third parties. Looking by product, we sold 390 million gallons of biodiesel, 77 million gallons of renewable diesel, which includes 14 million gallons of third-party renewable diesel and then 83 million gallons of other products, again petroleum-based fuel and then naphtha and LPG produced Geismar. Our German operation sold 38 million gallons in 2017. Our average selling price of $3.06, decrease from the prior year. However, when you take the effect of benefit from the BTC reinstatement, our average selling price would have been $3.48 per gallon. Those combined with higher volume resulted in revenue of $2.2 billion, up 6%. Our net loss was $79.1 million or negative $2.04 per share, which again was primarily the result of BTC impact and the impairment of New Orleans. Our adjusted net income was $207 million or $5.21 per share. While the BTC was reinstated, GAAP accounting requires us to book the impact of the reinstatement in Q1 of 2018. We have included the net benefit of the BTC in 2017 adjusted net income and adjusted EBITDA. 2017 adjusted EBITDA was $230 million, up 125%. The adjusted EBITDA margin for 2017 was 11%. Additionally with $230 million of adjusted EBITDA our return on invested capital is back over 20% and it hit 21% last year. For the year we recorded risk management losses of $23 million, compared to a loss of $35 million last year. The risk management loss in both years was due to recovery in energy market and largely offset with physical product sales that benefit from those higher energy prices. SG&A expenses were up 6%, which is flat when viewed as a percentage of revenue and represents $15.9 per gallon. SG&A expenses for 2017 includes severance costs related to the departure of our CEO last July, as well as the realignment of a few other senior executives following the CEO transition. SG&A when taking out the $3.4 million of severances cost, represents $15.3 per gallon, compared to $15.6 per gallon in 2016. R&D expense was $14.1 million, which is down 22% from 2016. We recorded the impairment charges of $49.9 million during the year, mainly related to the facility in New Orleans. We believe the construction of this facility is unlikely to be completed in the near-term due to other strategic priorities such as the potential expansion at Geismar. Our Board approved capital expenditures for 2018 are approximately $60 million. Our blended interest rate on our debt is just a little bit below 4%. The lower corporate tax rate as a result of Tax Reform reduces the nominal value of our NOLs, but doesn’t change the nearly $1 billion amount of future taxable income we will feel. Our effective tax rate for 2018 is expected to be between 5% and 8%. Now I will turn the call back to Randy to discuss our outlook. Randy?

[Randy Howard:]

Thanks, Chad. As we look at the market conditions at the start of 2018, we see a good margin environment for the first quarter, resulting from supportive HOBO spread and the normal seasonal advantage of low cost feedstocks. The energy complex looks strong for the future and coupled with abundant feedstock availability gives us confidence in strong first half margins. Based on the current environment as shown on slide 22, we are forecasting gallons sold in the first quarter to be 120 million gallons to 135 million gallon and are forecasting $25 million to $40 million for adjusted EBITDA without the 2018 BTC. This includes $11 million associated with sales that qualified for the 2017 BTC, but are recognized in 2018. With the retroactive reinstatement of the BTC for 2018, we are forecasting $60 million to $75 million for adjusted EBITDA for the first quarter. The BTC has lapsed at the start of the year and we believe that it could be reinstated for all of 2018 in March as part of the omnibus spending bill. If not, we believe we will be looking again reinstatement at year end. As I said, margins are starting the year well above historic first quarter margins and we expect that to continue through the first half of the year as the industry runs to replace approximately 600 million gallons of Argentine and Indonesian imports. We are monitoring the feedstock complex closely and are anticipating a tighter margin environment in the second half as competitors add new production capacity. With the BTC we expect our 2018 performance to exceed our 150 plus earnings power. But we may or may not ultimately reach the record levels we achieved in 2017. We continue to see good results in capturing downstream margins and continuous improvement in our plant operations. That gives us confidence that we can maintain this step change in performance. Obviously, as we monitor the market we will update these forecasts as we did last year. We believe our strategy is working well, the business is generating strong cash flow and with the balance capital approach I laid out, we believe we can invest in growth and provide attractive returns to our shareholders. Now I would like to turn the call over to the operator for the question-and-answer segment of our call. Operator?

[Operator:]

Thank you. [Operator Instructions] And our first question comes from the line of Chip Moore from Canaccord. Sir, your line is now open.

[Chip Moore:]

Hey. Thanks. Hey, guys. I guess, first, maybe you can talk a little bit more about the expanded set of near-term growth opportunities and provide a little more color and along with that how we should be thinking about capital deployment next -- this year and into next?

[Randy Howard:]

Sure. Basically our plans have gone through an exhaustive kind of scrub of all the opportunities that they have before them. These are projects that are anywhere from small $100,000 type projects to upwards maybe $2 million projects that fundamentally reduce costs or add capacity or yield improvement. So that last year in June when we did our Investor Day. We had this estimate of $25 million to $30 million of projects like that, now that we’ve scrub that, I’ve just been really pleased with this inventory of high return projects. Like I said, most of -- we’ve started improving those. We will accelerate the approval of those projects as the engineering gets done and as we again see an opportunity where plant downtime allows us to install those facilities. If you look at it at total, my guess is that, we will accomplish two-thirds of them this year and maybe one-third next year. We won’t be able to get them -- get to all of them this year. I am just pleased that we have this really high ROI inventory of projects.

[Chip Moore:]

Yeah. I agree. That’s great. And I guess, if we look more on the policy side, any thoughts on LCFS smoothing going on there, any impact, does that change anything and RFS, sounds like there is a meeting on Monday, but what’s the latest from your perspective? Thanks, guys.

[Randy Howard:]

Yeah. Let me speak the LCFS first. Again, the carb just came out with the new smoothing rules couple days ago. We are still digesting the 360 pages. But what I would say is that, it gives us a longer pathway of growth. So I think we are excited about that. I don’t think we are at this point that concerned about the fact that in the next few years the growth might be tapered -- tempered from what you saw before. The LCFS credits are still today well below, I mean, well above, excuse me, well above our average that we used in our -- used last year or captured last year and used in our projections. So at this point, I -- we don’t -- we think it’s probably positive, because it just gives us a longer runway and a smoother transition. We hate to see public policy that bumps up against the ceiling for a long time and we think the smoothing will back that off a bit and again result in probably a better project -- better policy going forward. As far as RFS, all I would say is puts your air plugs in because the noise is deafening and most of its just noise. Clearly, certainly, in the meeting I was in, it is really all about the ethanol blend wall and refiners trying to figure out how to work with the ethanol producers on how to get around that issue. It was pretty clearly stated in the meeting I was at that biodiesel in our business isn’t part of that discussion. So we will continue to monitor the situation as we get into the year later and begin to set RVOs for future years. I think the EPA will see what we told them last year is that there is feedstock available, the biodiesel industry can produce to meet well -- to produce well above the RVO numbers that we were given and I think that that will give them confidence as we perform. So we will see how that goes.

[Chip Moore:]

Okay. Appreciate that color and nice job guys. Thanks.

[Chad Stone:]

Thanks, Chip.

[Randy Howard:]

Thanks, Chip.

[Operator:]

[Operator Instructions] And our next question comes from the line of Craig Irwin from ROTH Capital Partners. Your line is now open.

[Craig Irwin:]

Good afternoon. Thanks for taking my questions. So we stack the hedge losses on top of your results this quarter, sort of points to maybe minimal hedge losses in the first quarter of the year. Can you maybe talk us through the assumption for hedge losses and then the factors contributing to strengthening in the processing margins as we head into the first quarter?

[Chad Stone:]

Yeah. Craig, it’s Chad. I think that the main story between the risk management activity is, we have seen very attractive margins and when that happens it tease up some near-term risk management losses but that’s because we see energy prices, we have seen particularly the lowest cost feedstocks it’s going through their seasonal pattern of weakness, so we have seen very good spreads and attractive margins. So that is supportive of Randy’s guidance for the good margins throughout first quarter. And I think that’s kind of the main factors right there is sale price improvement, attractive feedstock prices and margin [Technical Difficulty] throughout the first half numbers.

[Craig Irwin:]

Okay. So can you maybe comment about whether or not the ITC is helping here and whether or not you would hope that this would be sustainable as we progress into summer and hopefully the back end of the year, I mean, fundamentally…

[Randy Howard:]

Yeah.

[Craig Irwin:]

…if this is ITC we would expect a pretty strong contribution now that the excess inventory, the dumping and the last-minute sort of jam at the tanks is fully behind us. Is that fair to say?

[Randy Howard:]

Yes. Yeah. Basically we see the impact of that. You can look, I mean, simply at the spread and see that there has been good margin in there.

[Craig Irwin:]

Excellent.

[Chad Stone:]

Yeah. Randy mentioned, earlier that -- effectively that represents about 600 million gallons of supply that was taken out of the mix when the countervailing duties were put into place back in August. We haven’t seen any imports since then. Couple that with -- now we’ve got an RVO that’s 2.1 billion and it will make it attractive for domestic producers, so that is playing into the long-term.

[Randy Howard:]

Yeah. Let me clarify one thing, Craig, the -- we haven’t seen, of course, Argentine or Indonesian imports. So we have reduced the imports from Europe coming in. but again they are coming in at higher prices that leaves the better margins for us.

[Craig Irwin:]

Great. That’s good to hear. So then next question really is about financing the -- at least double at Geismar and then hopefully one or two RHD plants over the next couple years. I know the uncertainty we’ve had. It’s sort of an unfortunate sort of complicates things, but you guys are really stand still. Can you maybe talk us a little bit about the financing options that you’ve been discussing with the various partners, how you could potentially see something come together. I mean, would we possibly be looking at a joint venture partner? And can you maybe share any other additional color that would help us understand the potential timing and structure of how you would approach a couple new plants in RHD?

[Randy Howard:]

Yes. Craig, let me take this. So when I say that that long-term project we are actively working to kind of derisk that investment and that really comes in three ways. The -- we are doing that preliminary engineering to give us a much better -- much higher confidence in the cost of that project and the schedule of such a project which helps to get lower the risk. And then we are looking and talking with the -- we actually have a bank that’s wind up to help us finance it. We’re -- we haven’t consummated anything yet, but we are through the details of that. And thirdly, we are talking and considering different partnering aspects on those projects. So and again the large single plant renewable diesel projects. I can’t give any more detail on that.

[Craig Irwin:]

Excellent.

[Randy Howard:]

But we are working on all three of those fronts.

[Craig Irwin:]

Okay. And then Life Sciences, you guys have done a really good job of reducing the cost there, the burden on the EBITDA. Can you update us on potential partners to work with that as far as whether or not you have joint funding agreements that could facilitate the potential elimination of any related cash burn and how we should look for progress on the Life Sciences side?

[Randy Howard:]

I wish I could give you more detail. All I can say is we are in negotiations as we speak and to give you any more details would be counterproductive to that effort. Like as I have said, we completed the review part. We are actively engaged in the implementation part and we will let you know as soon as we can.

[Chad Stone:]

And some of the improvements you have seen are costs getting offset by some of the things we have disclosed like the working we are doing with Exxon and bringing in revenues that is part of that project.

[Craig Irwin:]

Yeah. Excellent. Well, congratulations on the strong progress and look forward to seeing you guys next week in Orange County.

[Randy Howard:]

Thank you.

[Chad Stone:]

Yeah. Thank you, Craig. See you next week.

[Randy Howard:]

Yes.

[Operator:]

And I am showing no further questions. I would now like to turn the call back to Randy Howard, President and CEO for any further remarks.

[Randy Howard:]

Thank you, Operator. To wrap up, I want to emphasize that we are very optimistic about our future and now before we close, Todd, is going to mention the upcoming investor events for REG. Todd?

[Todd Robinson:]

Thanks, Randy. Yeah. Chad, Randy and I will be attending the ROTH capital partners 30TH Annual Growth Conference next week in Dana Point and that conference is by invitation only, so please contact your ROTH’s sales representative if you want to attend or schedule one-on-one meetings with us. Thank you all again. This concludes the call and you may now disconnect.