Renewable Energy Group, Inc.
Q1 2016 Earnings Call Transcript
Published:
- Operator:
- Good day, ladies and gentlemen. And welcome to your Renewable Energy Group, Inc. first quarter earnings 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 is being recorded. I would now like to introduce your host for today’s conference, Mr. Todd Robinson, Treasurer. Sir, you may begin.
- Todd Robinson:
- Thank you. Good afternoon, everyone, and welcome to our first quarter 2016 earnings conference call. With me today is our President and Chief Executive Officer, Dan Oh, and our Chief Financial Officer, Chad Stone. We are here to discuss our first quarter financial results and recent developments. Before we begin, I would like to remind everyone that this call is being webcast and is available at the Investor Relations section of our Web site at regi.com. A replay will be available on our Web site 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 slide 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 Web site. 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 quarterly report 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 revise 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 for a reconciliation of the non-GAAP measures to the most comparable GAAP measures. With that, let me turn the call over to our President and Chief Executive Officer, Dan Oh.
- Daniel Oh:
- Thank you, Todd, and thank you, everyone, for joining the call. Todd, whom you all know, is our Director of Investor Relations, was recently named Treasurer for REG. As Treasurer, he will still be responsible for investor relations, so do not hesitate to contact him as needed. We will also continue to be supportive via our external investor relations consultants. Jon Schwebach is transitioning from Treasurer to Director, Global Tax. As we grow internationally, our global business structure requires his 100% focus to ensure long-term success. I will review the operating highlights of the quarter and then we’ll turn the call over to Chad for financial details. 2016 is off to a good start. We produced solid results as we focused on execution. After a couple years of regulatory uncertainty that created various opportunities and challenges, conditions are now more stable. The updated renewable volume obligations or RVOs and the federal Biodiesel Mixture Excise Tax Credit or BTC are in effect and we observe energy prices are rising or have perhaps somewhat stabilized. We remain focused on growing and optimizing our industry-leading platforms, while executing on our growth tactics, including international expansion and renewable chemicals. Let me cover the progress in each of our main areas. First, fuel. Our biomass-based diesel products are funding our rapid growth. As you can see on slide three, our performance in the quarter was strong, with gallons sold up 64%. Spreads were still narrower than desired on a normalized basis as feedstock prices are still somewhat elevated. El Niño weather patterns are supporting higher-than-usual palm oil prices and more fat is going into animal feed. Producers are also using more inedible corn oil, elevating the price of what is normally a lower cost feedstock. One near-term catalyst that we believe should favorably impact spreads is a potential increase from the RVOs with updates from the EPA expected sometime in late May or June. We added to our total production capacity with the acquisition of a 20 million gallon nameplate capacity plant near Madison, Wisconsin during the quarter. We were able to acquire the plant at what we believe is an attractive price and then quickly integrated it into our system, something we have learnt to do rapidly through many similar acquisitions. The integration has gone well and the plant contributed to production, revenue and EBITDA for the quarter. We announced $7 million in upgrades at the ribbon-cutting event last week. We are adding an emission control system, 300,000 gallons of additional storage and improvements expected to enable the plant to routinely operate at nameplate capacity. We continue to look for opportunities in the North American biomass-based diesel space as well as internationally. Regarding last week's ribbon-cutting and groundbreaking at REG Madison, you may see a video that covers the events on our YouTube page where many videos related to REG activities and assets are posted. Just search for Renewable Energy Group and you should be taken to our homepage. Meanwhile, Geismar is up and running. So we are, again, producing and selling renewable hydrocarbon diesel or RHD. Our primary focus was safety as we repaired and restarted the plant and will remain our focus as we continue to operate. We expect Geismar will fulfill its potential as a revenue and EBITDA contributor in the second quarter. Operations resumed in early March, so the gallons and revenue in the first quarter were not large, but we anticipate a very substantial quarter of production in the second quarter and our guidance reflects this. Business is improving in Europe as well. Petrotec sold 10 million gallons and contributed $1.4 million in adjusted EBITDA during the first quarter. We plan and expect to pursue profitable expansion in Europe using Petrotec as a platform for growth. We’re also continuing to build our distribution footprint. Energy Services is ramping upward, but had a slower winter heating oil season due to the unusually warm weather. Financial resources are important to build that business, so we put in place a new line of credit for it during the quarter. The $30 million line is with Bankers Trust, a strong Iowa bank that knows us and our plans. We look forward to working with Bankers Trust as a strong partner for REG as we grow our Energy Services business. Additionally, we are highly committed to industrial bioscience as we develop renewal chemicals and next-generation fuel production methods. Most recently, we announced the expansion of our Ames Laboratory, which will geographically expand the work being done in our Life Sciences division and further connect to development and commercialization expertise. Iowa and the Midwest are great sources of scientific talent, so we will seek the best and brightest being produced by Midwestern universities and beyond. REG Life Sciences will now have research efforts ongoing in two of the most important centers for industrial biosciences work, the San Francisco Bay Area and in Iowa. The State of Iowa, in particular, is working hard to encourage this sort of high-value work that creates new markets for agricultural resources. For instance, the state recently initiated tax credits that we can utilize in our work to develop and produce renewable chemicals. The lab expansion will also assist with our work being done with ExxonMobil that we announced in January. Our investment and work with life sciences continues and we're pleased with our progress. Further, the State of Iowa supported value-added agriculture with recently passed legislation to encourage biodiesel production, blending and usage. Once signed by the Governor, the current $0.02 per gallon production tax credit for biodiesel will extend through 2024. The legislation also adjusts the biodiesel blended fuel retailer tax credit. B5 will continue to earn retailers the $0.045 per gallon credit through 2017. After that, B5 will get $0.035. However, B11 will get $0.055. That credit will be enforced through 2024. We expect that this will further stimulate demand in the Midwest. Last, yesterday, we announced our Danville, Illinois bio-refinery purchased a tank complex from the adjacent Bunge Milling facility for approximately $1.5 million. This will increase the bio-refinery’s storage capacity for feedstock by at least 950,000 gallons and biodiesel by up to 12 million gallons. This investment is separate from the $31 million upgrade project we began last year. Through this expansion and the purchase of the Bunge tanks, REG Danville has expanded its footprint around the original facility and now sits on nearly 30 acres. The upgrade project, including connections to this additional storage to enhance logistics capabilities, is scheduled to be likely the August timeframe. Also, please recall that Chester Bank [ph] is providing financing of $12 million for the upgrade project. Let me now turn the call over to Chad for a financial update and then I will return to discuss our guidance and outlook. Chad?
- Chad Stone:
- Thank you, Dan. Please turn to slide six for a review of our financial results. As I compare the results from first quarter of 2016 to the first quarter of 2015, keep in mind that the Biodiesel Mixture Excise Tax Credit was retroactively reinstated for 2015 and extended through 2016. In our adjusted EBITDA calculations for both the years, we allocate the net benefit of the credit throughout the year to the quarters in which the gallons were sold. We believe that this provides a more accurate picture of our performance. You can find the reconciliation of adjusted EBITDA to GAAP net income on slide 16 of the presentation and in our earnings release. With that said, total adjusted EBITDA for the first quarter was $10 million. We sold 98 million gallons during the quarter, which includes 11 million gallons from third parties, 12 million gallons of petroleum-based diesel, and 10 million gallons sold in Europe by Petrotec. Energy Services gallons sold increased from 3.8 million gallons to 13.4 million gallons year-over-year. We sold 64% more gallons of fuel in the first quarter this year compared to last year. This was offset by an average price per gallon that was 8% lower. The higher volume and lower pricing resulted in revenue of $306 million, an increase of 32% year-over-year. At our plant in Grays Harbor, Washington, we sold 9.1 million gallons and produced 8.7 million gallons in the first quarter, with adjusted EBITDA of $1.1 million. Our Madison, Wisconsin plant also contributed to adjusted EBITDA in the quarter after the acquisition closing on March 15. In the first quarter of 2016, energy prices started to rebound after being at historically low levels in 2015, which provided some margin benefit this quarter. This was offset by feedstock prices that trended higher in the first three months of 2016, led by tightness in the palm oil market and strong biodiesel demand for fats and inedible corn oil. SG&A expenses were $19.8 million or 6.5% of revenue in the first quarter of 2016. This compares to $16.7 million or 7.2% of revenue in the same period last year. The year-over-year increase of $3.1 million in SG&A expenses was attributable to higher costs associated with our international expansion and an increase in headcount in support of our growth. R&D expenses were $3.9 million in the first quarter of 2016 compared to $3.9 million last year and in line with our previous guidance. Now, let’s turn to the balance sheet on slide seven. Accounts receivable of $106.4 million represents 31 days sales outstanding. This amount was down significantly during the quarter as we collected 95% of 2015 BTCs during the first quarter. Inventory of $134 million represents 43 days, up from 25 days, where we started the quarter. This reflects our normal seasonal build as we produce and store winter gallons in preparation for the summer selling season. Inventory days were lower than the 44 days we had on March 31, 2015. We significantly improved our cash balance in the quarter. Cash and cash equivalents increased to approximately $164 million from $47 million last quarter. This significant increase in our cash balance was due to collections associated with the reinstatement of the tax credit. Accounts receivable were $106 million at March 31, down from $311 million at year-end 2015. Again, the significant increase is due to the BTC amounts collected in the quarter. Inventory was $134 million, an increase of $48 million during the quarter. Accounts payable were $247 million in the quarter, essentially flat compared to fourth quarter 2015. As reflected on slide eight, our term debt at the end of the first quarter 2016, was $264 million. Of that amount, $127 million is the fair value of our $144 million convertible bond offering issued in June 2014. $100 million are the GO Zone bonds and the remainder of $37 million of term debt at the project level. Net of our fully collateralized GO Zone bonds, our term debt is $164 million. Term debt is 30% of capital. However, again, if net out the GO Zone bonds, that is 21% of capital. For the first quarter of 2016, we generated $163 million of cash from operations. As discussed earlier, in the first quarter, we received approximately $231 million related to the 2015 reinstatement of the tax credit, while the majority of the related payable amounts remained outstanding at quarter-end. This resulted in a significant increase in operating cash flows. Net cash used in financing activities totaled $27 million. We used $15 million of cash to fund ongoing capital expenditures and $13 million associated with acquisitions. Additionally, we used $4.9 million for the share repurchase plan. For modeling purposes, we have Board-approved capital expenditures of around $55 million over the next 12 to 15 months. Our blended interest rate on debt is just slightly less than 2% and are effective tax rate is expected to be between 3% and 5%. Now, I’ll turn the call back to Dan to discuss our outlook. Dan?
- Daniel Oh:
- Thanks, Chad. Guidance for the second quarter of 2016, as shown on slide 12, let me cover the context and operating environment, then give you the numbers. As I mentioned what I opened the call, the market environment is more stable, enabling us to focus on executing our growth strategy. In planning for our business, we expect the relative stability to continue through the third quarter and through all these new developments. For instance, RVO is in place, yet in June we should see the proposed volumes for 2018 for biomass-based diesel and 2017 for other categories. The BTC is in place for 2016, but at some point Congress will start the process of contemplating the extension. Blend prices are supportive, yet we are keeping an eye on how the import situation develops, especially since a lapse in BTC would often impact imports in the fourth quarter. State incentives are generally supportive. The California Low Carbon Fuel Standard, or LCFS, is solid and LCFS carbon credits are trading around $120 a metric ton. Minnesota is now requiring diesel to be blended at 10% during the summer months. That blending level will move to 20% in the spring of 2018. So within that context, we anticipate another solid quarter. In the second quarter, we expect to sell between 130 million and 150 million gallons, which includes a full quarter from both Geismar and Madison. We’ve taken a conservative stance on feedstock prices and the resulting spreads, so expect adjusted EBITDA to be in the range of $10 million to $25 million. 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 Brett Wong of Piper Jaffray. Your line is open.
- Brett Wong:
- Hey, gentlemen. Thanks for taking my questions. First, wanted to just dig into the second quarter guide a little bit. So just looking at the curve for ULSD, it’s in the kind of low to mid dollars and thirty cent range. Your RINs have been pretty stable in the high 70s, your D4s. And, yeah, feedstock costs have increased to start the year, but we’re actually seeing kind of a decline here recently, specifically in soil. So just wondering what the assumptions are to get you to that $10 million to $25 million guide for 2Q.
- Chad Stone:
- Yeah. Brett, this is Chad. I’ll start with what our assumptions are basically looking at forward curves and expectations for fuel and feedstock market. As Dan was talking about, we have seen energy prices starting to rebound and going the other direction. A continuation of that trend would be positive for us. RINs, we’ve seen fairly stable at the level they are at. As Dan pointed out, we’re mindfully watching the flow of imports that we expect to come from South America, from Argentina, as well as Singapore in terms of keeping margins in check. We’ve seen strong demand for feedstock into biofuels this year to start the year. We’ve also seen real strong demand into animal feed for some of the feedstocks we use as well and then oleochemicals. So we’re kind of taking the current outlook or the current prices considering forward curves and extrapolating. Anything, you’d add to that, Dan?
- Daniel Oh:
- Yeah, I guess, what I’d add, Brett, is we tend to be selling forward couple of weeks to a few months depending on what's happening in the market. And as you can see, our volumes are growing. So one needs to commit volume. So on a rolling basis, we tend to see and benefit from the margins, but they may not be as immediate as people would guess because we’re selling forward as we make markets.
- Brett Wong:
- Okay. So just following up on your forward selling there, Dan, can you just provide a little more color on that? Is that impacting kind of what your energy prices are going to be? Have you locked anything in for the second quarter?
- Daniel Oh:
- Well, we’re through half the second quarter right now. So one would typically already be mostly sold through the second quarter when you’re halfway through. So if you see, for example, a spread improving in the month of June, you're not likely going to see that captured in June. You’re likely going to see it captured in the next quarter.
- Brett Wong:
- Yeah. I guess I was kind of – what I was getting at, if you’re looking at forward selling a couple of weeks to a couple of months in advance and you’re seeing a positive trend with energy prices, are you shorter on that forward sell?
- Daniel Oh:
- We adjust orientation on how far forward or nearby we are willing to sell. However, we’re not in a speculative mindset. So we’re still buying and selling it and locking in our contracts as we move ahead. So second quarter is largely done and that is considered when we talk about our guidance.
- Brett Wong:
- Okay, fair enough. And then can you just talk a little bit more about imports which you kind of saw through the first quarter. I know they’re typically later in the year. And then just any idea on kind of expectations for those volumes towards the end of the year. I know, again, that’s pretty uncertain, but just some color there is helpful.
- Daniel Oh:
- Yeah. I think it’s a little early to call it. There’s product that is sloshing around a little bit, left over from the year-end, as you recall. Blenders tax credit didn't go through until pretty late in the year. So some stuff was brought into the [ph] country to meet those requirements because they were not sure whether it was going to turn into a producer credit. And there was quite a good chance that it could have become a producer credit. And for reasons unrelated to biodiesel, things just got left the way they were for all incentives and credits. We, today, on a forward-looking basis, would anticipate a lapse in the blenders tax credit only because we don't necessarily see a funding vehicle to which it would be attached. That’s been the case many times. And funding vehicles have appeared – so we just don’t know right now what’s going to happen. But to your point, Brett, if it becomes obvious that it is going to lapse, which probably does not occur until late third or early fourth quarter, one would expect to see more important product coming to take advantage of that. And assuming the spreads work, that would cover the shipping and storage stuff that would enter into the country. So, that, we’re going to see towards the end of the year. In June, we expect to see the RVOs go upward, but we’re not certain what the slope is going to be. That’s probably the most important mid-term marker for people to be looking at in terms of what will encourage greater demand and greater spread opportunity. But we see a pretty constant flow of RHD. We see a variable flow of SME or soy methyl ester and we see a strong production in the US right now.
- Brett Wong:
- Okay, that’s very helpful. Thanks, Dan. And, sorry, just to go back real quick on the guide, just wondering if you have kind of locked-in the second quarter largely. I’m just wondering why the large spread in the guide.
- Chad Stone:
- The $15 million spread on the guidance, Brett, is to allow for risk-management gains and losses, if we do see volatile energy and commodity markets.
- Brett Wong:
- Okay, great. Thanks, guys.
- Daniel Oh:
- Thank you.
- Operator:
- And our next question comes from John Quealy of Canaccord.
- John Quealy:
- Hey, good afternoon, folks. Just a couple of housekeeping things. Geismar, talk to us about, if you could, insurance recoveries. That process, I assume, starts in earnest now that we're back up and running. Again, if you could bracket that for us.
- Daniel Oh:
- I’ll start, John. So the Geismar recoveries, as you know, it was fully insured, so there's the process of writing off some damaged assets. Then there is reimbursements for replacement cost of the repairs. And the majority of it, we’ve collected already, probably near 80% of what we expect the total claim to be has been received in cash. And we’re working to closing down that claim. And on the second claim that the damage – the property damage was not as high. We’re working through that as well.
- John Quealy:
- Chad, do you think that you have a resolution in 2016 or does it extend into 2017 for this?
- Chad Stone:
- Well, I would hope that we would have that resolved in 2016.
- John Quealy:
- Okay. A couple more. The repurchase plan, does that get reauthorized or where does that sit?
- Chad Stone:
- You have the repurchase plan. So the initial $30 million repurchase plan that was authorized was largely finished in the first quarter. There was a little that trailed into April and that’s then completed. We also have announced that the Board up to $50 million of repurchases associated with either the equity or the convertible. So that is the authorized and it was for a two-year window.
- John Quealy:
- Got you. And I’m sorry, one more for you, Chad. Petrotec FX, is there any major things we need to focus on in terms of the models in your guidance around FX rates for Petrotec?
- Chad Stone:
- Nothing major in this quarter specifically. You’ll see a little bit of a gain in the financial statements. I think it’s other comprehensive income. But there’s a little bit of a gain associated with that, but nothing like you saw foreign currency rates, say, a year or so ago or, a little bit more, 15 months ago when that was a lot more dramatic.
- Daniel Oh:
- John, it’s Dan here. One thing to comment on, diesel and energy is largely traded in dollars. And a substantial amount of the raw material is traded in dollars. So while it’s not exact, we need to be careful about the specifics that would be shared in this venue about that business. I think it's helpful to think about it is, something around 60% to 75% of the business is often done in dollars. So it's more about converting dollars to euros than it is about converting euros to dollars.
- John Quealy:
- Got you. Thank you for that. And then, Dan, while I have you, so you folks have been real busy not only repowering and getting Geismar back up, but buying facilities, repowering some other ones. What's the sort of – and Chad gave us some CapEx thought, but if you could put that into some qualitative talk, what's the next 6 to 9 months look like for you in terms of facility upgrades or, again, the ever-present M&A pipeline? Thank you, guys.
- Daniel Oh:
- The CapEx that Chad is referring to is all post-acquisition improvements and upgrades across the fleet. So, today, we continue to look at strengthening the core platform and going through the continuous improvement, everything from $10,000 projects to many millions of dollars of projects. We get opportunities to grow, to expand, to improve and just be more efficient in our yield and productivity at our plants. We also have the opportunity to complete plants. And I think there will continue to be attractively priced assets, especially now that our purview is expanding from North America to include Europe and other select geographies. And as we’ve worked in the last few years, and in particular the last 12 to 18 months, to get our infrastructure in place, to lead, manage and finance activities outside of North America, I think we’re going to be able to be more patient in North America. We have a history of being patient for the right opportunities and the right prices. But that is even more the case because now the range of opportunities broader and I think we'll see a rich target list in terms of opportunities that want to be in our business. So you hear the CapEx, and CapEx is debt financed and cash financed. When we think about where the money is going to come from, it’s not all announced and it’s for internal improvements. And then, we have the ability to continue to do M&A when we think it’s right thing to do.
- Operator:
- And our next question comes from Craig Irwin of ROTH Capital Partners. Your line is open.
- Craig Irwin:
- Good evening and thank you for taking my question. So you mentioned in your prepared remarks, the $0.04 a gallon headwind from your hedging program, I guess, about $4 million impact to EBITDA on quarter. Just, seasonally, we typically see the inventory villages build, which is another mild headwind. And then, I guess, I should say congratulations on the smooth startup at Sanimax and Geismar this time. But maybe, can you parse out for us the expenses of starting these two facilities in the quarter and whether or not these are likely to continue into 2Q, so we can sort of build a sequential bridge on profitability?
- Chad Stone:
- Yeah. Craig, so you pointed out a couple of things there. On the risk management front, you’re right, as the energy prices begin to rebound, that reflects in our financials as a risk management expense for the business that we’ve already got booked, for the risk management financial contracts we have protecting our future obligations. So we do show a risk management expense associated with that, and that’s attributable to gallons that will be sold out into the future. So that’s one point. And you're right, it was $0.04 on a per gallon basis. On the inventory build, when you look at our inventory number, you should see a very, very large inventory number because we’ve got more production capacity. Seasonally, what you're describing is demand for fuel in the winter generally declines and it generally – and it also has lower concentrations of high cloud point biomass-based diesel. What happens there typically, though, is that results in lower demand for animal feeds, for high cloud feedstocks during the winter. We’ve got sufficient storage capacity where we can continue to produce and store as feedstock demand weakens, keep that in storage for basically the warmer weather, higher demand period and try to capture that value. So that’s kind of a – I think that was $134 million number, a very large build. And then from that, I think there are some upfront integration efforts to bring plants online that are kind of a one-time thing. Largely, much of that is in-house and we don’t know if there’s anything new to attribute to the upfront integration or costs…
- Daniel Oh:
- I think at REG Madison, two things worth noting. The first one is, as the business gets ready to hand off as it was from the sellers to us, you're making different decisions. You’re optimizing your final business, you’re working down the inventory. So we needed to build up and get the business running in our integrated system. So it'll be a full set of business as we get into the second half of the second quarter and all of the third quarter. As well, the capital improvement program that we have there, some is for logistics, some is for just the site maintenance, but most of it is to improve utilization. It’s a multi-feedstock facility. We know it really well. We had a great opportunity to review and assess and have gotten right into our CapEx upgrades. As is often the case with a new acquisition, this facility was not historically running at full 100%. So there's an opportunity as we go through this capital program to bring it from something like 80% utilization to 100%. And that will add gallons and those gallons are mostly marginal income as they’re coming online. At Geismar, because you talked about that, of course, there's about $2 million a month of expense that we talked about in the past that’s now being covered. And along with that, as the plant comes online, you have to go through different stages of readiness and getting up and running. Then you also have to enter the market. So we had not sold forward that plant. We entered the market at spot market and had to push into a market that typically is selling forward because it's selling forward in for the regular diesel supply. And we talked in here about how it's coming online, not operationally, but in terms of full volume. It takes about a month, month-and-a-half to get into the market, get contracts on to be able to run full tilt and actually sell. You may be able to run it at the full rate, but you’re storing your gallons until you get the gallons and start penetrating the market. So when we get into the second half of second quarter and third quarter, it should be running full tilt. And those gallons will be there as well. So you’ve not seen the full utilization of the facility in sales right now.
- Craig Irwin:
- Okay, thank you for that. Turning to the LCFS in California, can you maybe quantify for us approximately how many gallons you sold into California in the first quarter or if there have been sales in the second quarter? And is there maybe an opportunity for volumes at Grays Harbor or other locations to increase into the second half qualifying for LCFS?
- Daniel Oh:
- So I think the answer is, we've been selling into the market. It’s also smaller minority of our market share going there. And as prices have steadied and demand has increased, we've been focusing on shipping more out there. There is some limitation on how much you can get there and how quickly by different forms of transportation. The second half of the year, I think, will have substantial participation in the LCFS from any plant that has a good carbon intensity score that’s tributary. Most of our facilities that serve that market are in the multi-feedstock zone and they’re not in direct incentive states. So if you're in a direct incentive state like Illinois, you’ve got great local incentives. You’ve got superb lending infrastructure, so you can release lots of RINs locally and there’s high incentives for blenders to just buy it and sell it with the greatest efficiency on logistics. When you get into the western end of our fleet, that starts to be a much more natural movement out to the west. And, yes, RHD in the Gulf region, from anyone, has an opportunity to go out to California.
- Chad Stone:
- I would add to that. Right now, inedible corn oil is the best carbon score for California. Next year, I think that becomes used cooking oil. And it's also a very favorable market for renewable hydrocarbon diesel. The one really important thing is, when you think of the volume of those feedstocks that are even out there and available and can get there logistically at a reasonable price, when you start going from a 2% GHG reduction requirement next year to 3.5% to 5%, you’re going to need more than just inedible corn oil, more than just used cooking oil, and more than just some of the imported renewable diesel that goes in there. And that will have impact on pulling feedstock from the Midwest and from areas around there. It should be beneficial to the Grays Harbor plant, which is logistically nearby as well.
- Daniel Oh:
- So we’re focused on establishing logistics to better serve for Grays Harbor. There’s nothing to announce right now that we’re comfortable with in the competitive market.
- Craig Irwin:
- Great. Last question, if I may, the $55 million capital program, can you maybe break that down into its component pieces, maintenance CapEx and discrete projects? And if you can just speak generally about the way you look at returns or expectations, financial expectations, for your capital projects?
- Chad Stone:
- So I’ll start with – maintenance CapEx would probably be in the $5 million to $10 million, so not a huge component of that. Of course, we’ve announced upgrades at Granville. Dan has talked about $7 million worth of upgrades at Madison. We've had financing offered for some upgrades at Grays Harbor. So that’s all included in there. And of course, there’s been ongoing work at Geismar. So that’s the context I would put it in. And of course, you’ve got the as-you-go improvements that are identified out at the plants and among the upgrades and logistics improvements that we work on as well.
- Daniel Oh:
- Yeah, we have a lot of continuous improvement projects that are immaterial individually, but material in aggregate. So they made a big difference. Back to return profiles and how we think about things, we have the opportunity and the challenge of forward uncertainty, which makes it more likely that we have other companies who want to do business with us and figure out how to do things together, whether it be contractually or through merger. And at the same time, that uncertainty that encourages others to combine with us focuses us on near-term paybacks. So we tend to see things that are winners in our internal capital campaigns as paybacks on the one to four year time frame. And that makes a lot of sense when you look at our regulatory opportunity, regulatory uncertainty, when we want to see the cash come back, the challenge in raising capital in the market overall. And it’s a reason why you see a lot of internal CapEx occurring because those projects are the easiest to quantify. And with our technology and construction upgrade opportunities inside the business of the teams that do that, they happen efficiently and quickly. But I think it's typically about a one to four-year time frame in terms of payback that tends to win. And the other thing that I’ll share is that when we look at repurchase programs, we think about them similarly. We’re looking at repurchases as an investment opportunity. We often think that we are the best business one could invest in. And when we’re repurchasing shares in that category of capital, we’re making votes against our internal projects. So we will get it all together.
- Craig Irwin:
- Great. Thank you for that. And I’ll hop back in the queue.
- Operator:
- I would now like to turn the conference over to Mr. Dan Oh for closing remarks.
- Daniel Oh:
- Well, thank you, operator, and thank you all for participating in today's call and for your continued support. We appreciate your interest and look forward to reporting to you again next quarter on our progress. Before we conclude, Todd will mention several upcoming investor events. Todd?
- Todd Robinson:
- Thanks, Dan. We have a substantial amount of investor activity coming up and wanted to alert you to these opportunities. First of all, our annual meeting will be held at 10 AM on May 10 here at our headquarters in Ames, Iowa. Of course, all of our shareholders are welcome to attend. After that, we will have a number of conference appearances. Each of these is open to clients of their respective firms, so please get in touch with your contact to schedule meetings with us. We will be at the BMO Farm to Market Conference in New York on May 19. Then on June 1, we will attend the CleanTech Track of the Cowen TMT Conference also in New York. On June 21, we will attend the ROTH Capital CleanTech Day in London. And finally, on June 18, we will be hosting meetings at the Seaport Global Energy Conference in Chicago. Thank you all again. This concludes the call and you may now disconnect.
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