Renewable Energy Group, Inc.
Q3 2016 Earnings Call Transcript

Published: 3 Nov 2016

[Operator:]

Good day, ladies and gentlemen and thank you for standing by. Welcome to Renewable Energy Group's Third Quarter 2016 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 call is being recorded. I would now like to introduce your host for today's presentation, Mr. Todd Robinson, Treasurer. Sir, please begin.

[Todd Robinson:]

Thank you. Good afternoon, everyone, and welcome to our third 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 third 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 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 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 website. Now, 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 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 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 for a reconciliation of the non-GAAP measures to the most comparable GAAP measure. 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. Before jumping into the quarterly performance I want to mention a series of videos we are delivering via YouTube which you can find by searching for Renewable Energy Group on YouTube. We are doing this as part of a celebration of our 10-year anniversary as an independent company and the videos will continue to be posted for this series through December. We believe the videos give those invested in REG and excellent glimpse into our capabilities and assets. We achieved solid growth in the third quarter. As shown on Slide 3 you can see we sold 163 million gallons of fuel and generated $625 million of revenue and $32 million of adjusted EBITDA. Although within our guidance, two primary factors caused adjusted EBITDA to be at the lower end of guidance. First, we experienced reduced operating days at Geismar related to local area flooding in August and pulled forward scheduled maintenance from October to September. Second, the risk management losses related to the increase in the ASP prices in the last week of September following OPEC announced reduction in output were substantial. Our 163 million gallons of fuel sold is an increase of 43 million gallons over the third quarter of 2015. In August alone we sold over 50 million gallons of biomass based diesel which was a record for REG. We also saw record production at three of our facilities in August, New Boston, Texas; Madison, Wisconsin; and Grays Harbor, Washington. We completed over $34 million of upgrades at the Danville, Illinois bio refinery. Danville is a good example of our multi-feedstock manufacturing strategy. It has nameplate capacity of 45 million gallons per year and is now fully feedstock flexible with highly efficient logistics. We had a distillation column that enables us to process more types of feedstocks, more than 13 million gallons of additional storage and more low-down equipment. As part of the overall project over time we acquired property surrounding the plants increased Danville's footprint from 8 acres to nearly 30 acres, so we have plenty of room for future opportunities and a buffer zone from the nearby community. Operations at the Geismar renewable hydrocarbon diesel refinery were mixed and are steadily improving. We lost 10 days of production at Geismar due to the local area flooding in Louisiana this summer as employees were unable to get to the plant. Fortunately, we did not experience any flooding at the plant. Additionally, we pulled forward scheduled maintenance from October to September resulting in an additional 27 days of downtime in the quarter. As a result we will be running more in the fourth quarter than we originally planned. Since the maintenance turnaround Geismar has been running consistently at approximately 95% of capacity. The plant produced 5 million gallons of RHD in October after coming online on October 5. That compares to 7.1 million gallons of RHD produced for the whole third quarter. There is no planned downtime at Geismar for the remainder of the year. Now let us discuss Life Sciences. On the last call we told you that in Q4 we anticipated making our first commercial sale of a product from the Life Sciences Technology which we identified as Fragrance 2. As was announced on Monday that sales to ACS has now been completed. We also told you that in Q3 we expected our first large-scale glycerin fermentation runs on our proprietary strands in Okeechobee. As mentioned in our recently released glycerin video, we completed multiple glycerin fermentation runs on our proprietary E. coli strains in the quarter in addition to the runs we did in May with a strategic partner for proprietary non-E. coli strain. With the success of these scale-up runs, we believe we will be able to begin commercially using low-cost, low carbon crude glycerin as a fermentation feedstock in the near future. As has become our recent practice, you can see our commercialization progress in the updated pipeline progress slide. We have updated the format this quarter. We are now listing product names in many cases so investors can better understand the value we are creating. On Slide 6 you can see our pipeline progress and Slide 7 is a key mapping the Q3 names of the names used in Q2. We believe this format is clearer and will allow for easier communication about our progress going forward. We remain focused on fatty acids and fatty acid derivatives where we believe we have a sustainable competitive advantage. Products that are difficult for others to produce, such as our first product, the multifunctional fatty acid are in short supply such as Octanol and C8, C10 Esters or our unique in structure like our Performance Chemicals 1 and 2. We are releasing a Life Sciences update video on our YouTube page today that contains more information on our progress and the product pipeline for those interested. Hopefully you noticed the release we put out yesterday regarding our Ralston plant. We expect to increase our capacity there from 12 million to 30 million gallons with a $24 million upgrade. We are finalizing bank financing, but are not in a place now to disclose the details. This project is in support of the facility that for many years has been profitable due to its logistics and bases advantage, co-located feedstock mostly delivered by pipeline and local markets that demand this type of biomass based diesel. Additionally, Landus the Cooperative with which we are co-located just completed an expansion of their soy crush and the expected availability of additional soybean oil is generally in a matching volume to our expected expansion of our facility. So we will further take advantage of that co-located supply. You will see in the press release and in the form 10-Q, we will be filing shortly with the SEC, that during the third quarter 2016 close process REG identified certain errors in the company's previously reported interim financial statements for the quarter ended March 31, 2016. These errors pertain to certain biomass based diesel sales completed in the first quarter that contain bonus tax credit sharing terms, resulted in an overstatement of biomass based diesel sales and a corresponding understatement of Accounts Payable of approximately $7.7 million. The correction including taxes decreased net income by $8.6 million and adjusted EBITDA by $7.7 million respectively for the first quarter. The revised amounts are reflected in the earnings release and the company's unaudited condensed consolidated statements of operations for nine-month period ended September 30, 2016. We've made and intend to continue to make improvements to our internal control over financial reporting. Management with oversight from our audit committee has identified and has begun executing actions that we believe will remediate this issue once fully implemented and operating for a sufficient period of time. We have begun to take certain remediation actions including enhancements to our sales contract review process and are very focused on it. Before I turn the call over to Chad, I want to mention a few items related to our balance sheet. First, I want to share our intentions around the convertible bond we issued earlier this summer. It is our expectation that these bonds will be paid back in cash or refinanced and not converted into equity. Further, in the quarter we redeemed the $100 million GOZone bonds associated with Geismar. We announced the expansion of our line of credit to $150 million from $60 million and we completed our $50 million share and bond repurchase program in six months. We also secured an additional $5 million of long-term credit specifically for CapEx projects at Grays Harbor from Umpqua bank. These actions all serve to improve our financial flexibility and ability to pursue opportunities as they arise. 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. Let's turn to Slide 10 for a review of our financial results. Please note that the biodiesel mixture excise tax credit was retroactively reinstated for 2015 and extended through 2016. We allocate the net benefit of the credit throughout the year to adjust with EBITDA for the quarters in which the gallons were sold. We do not allocate other line items. You can find a reconciliation of adjusted EBITDA to GAAP net income on Slide 19 of the presentation and in the earnings release. Our adjusted EBITDA of $31.6 million was 87% above third quarter 2015 adjusted EBITDA of $16.9 million. The 2015 number includes a pro forma allocation of the benefits of the reinstatement for 2015. The third quarter 2016 adjusted EBITDA result was within our range at the lower end of our guidance. During the quarter we were on pace to hit the high end of the range with the exception of the two items that Dan mentioned earlier in the call. The first factor was utilization at Geismar. Our guidance models Geismar running at a high run rate in the third quarter with scheduled maintenance in October. We experienced 10 days of local area flooding where employees were unable to get to the plant and pulled forward scheduled maintenance and plant improvements which resulted in an additional 27 days of downtime in September. This downtime in September resulted in the $6.4 million reduction from expected results. Pulling forward the scheduled maintenance is simply a timing issue between third and fourth quarter when you step back and consider the full-year impact. Next was the OPEC announcement on September 27. OPEC announced that they plan to limit or freeze production. This caused a spike in ULSD of $0.07 per gallon the next day and by September 30 ULSD had risen by $0.11 per gallon for REG this resulted in an $11 million reduction in our risk management gains associated with financial contracts protecting our fourth-quarter forward sales. Risk management gains and losses are largely driven by price movements in the energy markets. Our risk management positions are designed to protect our cash margins when sales are booked. When gallons are delivered that are sold indexed to NYMEX ULSD we realized lower or higher selling price and corresponding risk management gains or losses when the risk management contracts are lifted and adjusted. Both the realized selling price and the risk management gain or loss are reflected in our margin. Now let's shift gear to sales, we sold 160 million gallons during the quarter. This includes 27 million gallons from third parties, 11 million gallons of petroleum based diesel and 10 million gallons from Europe by Petrotec. During the quarter we produced 115 million gallons. Our average price per gallon for biomass based diesel increased 22% year-over-year from $2.50 per gallon to $3.14 this quarter. We sold 36% more gallons of fuel in the third quarter of this year compared to last year supported by a higher average price per gallon. The higher volume and increased pricing resulted in revenue of $625 million an increase of 58% year-over-year. S G&A expenses were $20.8 million or 3.3% of revenue in the third quarter. This compares to $18.5 million or 4.7% of revenues in the same period last year. For comparison purposes, our S G&A expenses per gallon sold in the third quarter of 2016 were $0.13 per gallon compared to $0.15 per gallon in the third quarter of 2015. The year-over-year increase of $2.3 million was largely attributed to higher costs associated with international expansion and an increase in headcount in support of growth. Now let's turn to the balance sheet on Slide 11. Accounts receivable of $105 million represents 15 days sales outstanding. Inventory was $98 million a decrease of $32 million during the quarter. This represents 15 days down from 22 days last quarter. Cash and cash equivalents increased to $83 million from $74 million last quarter. Accounts payable were $86 million in the quarter up slightly from $83 million in prior year. We're pleased to receive continued support from our banking partners. At the end of September we entered into an agreement with Wells Fargo and Fifth Third Bank to expand our line of credit to $150 million from the $60 million previously. The line of credit is now renewed through September 2021 and has a $50 million accordion feature. This will provide needed working capital to allow us to operate our larger North American fleet. In early October we secured an additional $5 million credit facility from Umpqua Bank to fund capital expenditures for future improvements at Grays Harbor. Let me quickly give you an update on the March 2016 $50 million securities repurchase campaign. That plan covered both our common stock in convertible debt and was authorized through March 2008. We did complete the $50 million repurchase in six months or 18 months early. The carrying value of our term debt at the end of the third quarter of 2016 is $202 million including $22 million of term that at the project level. The GOZone Bonds were redeemed and paid off early in September as we told you we would do during our second quarter earnings call. It made sense to pay off the GOZone Bonds in order to eliminate costs such as bond remarketing, expenses and bank fees related to the letter of credit. Overall our term debt is 27% of capital. Turning to cash flow, during the quarter we generated $78 million of cash from operations, cash in investing activities was $10 million and cash used from financing activities was $55 million which primarily reflects share repurchases and other debt repayments. For modeling purposes our average interest rate on debt is 4% and our annual effective tax rate is expected to be 2% to 5%. Now, I'll turn the call back to Dan to discuss the outlook. Dan?

[Daniel Oh:]

Thanks Chad. Guidance for the fourth quarter of 2016 is shown on Slide 16. Let me cover the context and operating environment then give you the numbers and then I'll talk about decarbonization. First, the demand situation is relatively certain, although not as certain as it was at the start of the year. The proposed biomass based diesel RVO for 2017 is in place and we expect it to be finalized this month. However, the BTC will again lapse at the end of 2016. The BTC has lapsed and then reinstated several times, so we expect the industry to operate next year assuming a reinstatement. Nonetheless, with the lapse imminent, we do anticipate an increase in demand in Q4 and are actively planning for it. We recently met with EPA and USDA officials in Washington and remain confident regarding their support of our industry. We are also cautiously optimistic that a producer tax credit could get some traction at some point and we are supportive of this change since it more directly supports the domestic industry rather than sending U.S. tax dollars to overseas producers. Second is in prior quarters when we have provided guidance we estimate the fourth spread between feedstock and biodiesel prices. Again, we have not included any business interruption insurance proceeds from Geismar while we have been working diligently to finalize a claim with the insurance companies in a timely manner. So for the fourth quarter we expect to sell between 140 million and 155 million gallons of fuel. We expect adjusted EBITDA to range between $20 million and $35 million. Back to decarbonization, as you and as we look at our business we really are ideally suited and positioned after 21 years of constant work in investment to help solve the fundamental needs that's a global need and quite frankly was just [indiscernible] and is increasingly embedded in local, county, state and federal regulation concerns around finding every lower carbon intensity solutions. And when you step back and you think about transportation fuel potentially being about 40% of the source in carbon and you think about the practical need to fundamentally blend into transportation fuels for over the road wheel type vehicles advanced biofuels are a wonderful solution. And we see that being taken up in many different ways. You could look at commercial interest, you can look at the actual buying. Our prices are higher than diesel fuel and they should be. We've got a wonderful physical product that performs in a great way and we are delivering massive environmental benefits when you think about our lower carbon intensity. So on the one hand diesel gets blended with advanced biofuel to lower the average carbon intensity of every gallon used. And if you just look at Q3, our efforts and in Q375% would be the number of lower carbon intensity for the average gallon we produce in the sole [ph] versus [indiscernible] sulfur diesel. So in the quarter we reduced when compared to usage 850,000 tons of carbon. 850,000 tons of carbon was not introduced because of the usage of our product. And if you look at the three quarters Q1 to Q3 2.2 million tons year-to-date of reduced carbon intensity. So when we think about where we are we look at our assets, we look at our multi-feedstock capabilities and distribution and supply chain, high quality that exists and gets paid for every day whether it be on the carbon intensity side where people are paying cash for their benefit or the fuel side going into next year it's a very good situation. So at this point I'll turn the call over to the operator for the Q&A segment of our call.

[Operator:]

[Operator Instructions] Our first question or comment comes from the line of John Quealy from Canaccord. Your line is open.

[John Quealy:]

Hey, good afternoon guys. First question Dan or Chad on the guidance in Q4 and typically wide range on gallons, I understand the movement of being a little bit more active in Q4 given some of the planned and unplanned maintenance issues, talk about what would skew you one way or another high to low on gallons produced as we move through Q4 if you don’t mind?

[Daniel Oh:]

So, it's Dan, I'll talk a little bit and hand it over to Chad. Any time we're at a situation like the one we're in where we could see an incentive lapse. As we get closer towards the year, behavior on the buying or selling side will be adjusted at the customer level based on their perception of whether or not it's better to buy sooner or to buy after the year turns. There is a default scenario where a lapse occurs. At the same time it could well be that in the lame-duck session something happens with extenders and we do think that there's a decent chance that producers will be the outcome as opposed to Blenders. But volumes are going to be affected by what happens as we get closer towards the end of year in terms of buying decisions. Chad?

[Chad Stone:]

Yes, I agree completely. The seasonality of the end of the year with the potential lapse of the tax credit and the conversion of the biodiesel to make sure excise tax credit to a domestic producer tax credit is incentivizing a lot of imports we're seeing that as we track the EPA monitoring system. We're seeing a lot of Argentinean imports of SME in the conversion to a domestic producer tax credit would impact that for sure. So we're keeping an eye on that. We're also sort of looking at the opportunities as we close out the year and the ability to drive volume and position for foreclosing strong.

[John Quealy:]

Okay, that's helpful and for my followup congratulations on Life Sciences in getting some product out the door on the Musk side, can you talk about is this an ongoing purchase order, is this sort of a first batch for a commercial viability, just talk to the sustainability of this particular SKU? Thanks again guys.

[Chad Stone:]

Dan?

[Daniel Oh:]

Yes it's Dan and we have Eric Bowen with us on the call so I may ask Eric to weigh in. This is a beginning purchase and a relationship with the company we expect and intend to do substantial business with over time. Eric?

[Eric Bowen:]

Yes, so I appreciate the question. This is anticipated to be a repeat sale. The musk market as you're probably aware is a large global market. ACS, our partner who is taking our intermediate specialty chemical and converting it into the musk compound is a meaningful player in that market. They're very excited about the performance of this particular new musk product and believe that it will improve result in building sales over year and turn into a long-term repeat buying and growth opportunity for us. So this first sale is to begin feeding the market and getting it out to thought leaders in the fragrance industry and then our expectation would be that would lead to follow on sales here in the subsequent quarters.

[Operator:]

Thank you. Our next question or comment comes from the line of Brett Wong from Piper Jaffray. Your line is open.

[Brett Wong:]

Hey gentlemen, thanks for taking my question. First just back on guidance, I'm wondering how much of the fourth quarter have you guys hedged given in November is that much fully locked in now?

[Daniel Oh:]

I'd say we've got a fairly robust book of business for fourth quarter. The leverage there is usually around better than expected production capability and the ability to capture additional third-party gallons for incremental sales. But you know, as you know Brett, we typically have a fairly robust book of business on for the upcoming quarter as we get into earnings call timing and have largely risk managed what we have forward sold. So really looking around managing the year-end opportunities and converting anything we can produce into a sale and not over committing.

[Brett Wong:]

Yep, okay. And then you talked about how you are pricing on the heels of the OPEC announcement in the end of September, would that impact your fourth quarter margin opportunity at all and I know we did see feedstock profits rise kind of after that. But can you just talk about kind of that margin, I was just a little surprised by the range that you've given there, seen some good margin opportunities wasn’t right quarter especially there was also some nice growing appreciation at times, so I just wonder if you can talk a little bit more about that?

[Daniel Oh:]

So, a couple of things Brett on that. So first of all the timing of the announcement being right at the end of third quarter meant that that increase in ULSD wasn't helping our third quarter sales. It did improve the outlook for the fourth quarter opportunity and as I talked about our impact to the risk management, you can get a sense that for an $0.11 move to cause a $11 million change to risk management in that short period of time, that's really shifting from the third quarter opportunity into fourth quarter in terms of the margin opportunity. Does that explain what you're asking? Does that answer your question?

[Brett Wong:]

Yes, I mean I was just trying to get a feeling for the margin in the fourth quarter and as you are mentioning because you have that negative impact in the third quarter on the hedge because of the price lift. And that shows up for a favorable fourth quarter and so I'm just wondering if you can talk a little bit about the dynamic of the margin in the in the fourth quarter and how that relates to your guidance?

[Daniel Oh:]

Yes, the other thing to keep in mind is just the normal annual seasonality in addition to the tax credit, potential lapsing. So the normal seasonality a lot of times this time of the year and next quarter there may be lower demand for higher cloud point product and we tend to have favorable feedstock opportunities. So sometimes we are producing at higher rates, but unable to or typically producing and storing for good opportunities that we expect in second and third quarter for some of the winter gallons.

[Brett Wong:]

Okay, and then does this hedge loss I know you are expecting reversal in the fourth quarter?

[Daniel Oh:]

Yes, we think that's a timing issue between third quarter and fourth quarter so associated with that quarter and adjustments.

[Brett Wong:]

Okay and then you mentioned imports coming in with the idea that again we could maybe switch to a producer tax credit so you are seeing an influx of imports. Can you just talk in more detail kind of what you are seeing for those imports kind of talk through biology imports in the third quarter what you've seen so far in the fourth quarter and your expectations for the year?

[Daniel Oh:]

I think overall for the year from memory I think we're tracking to near 800 million gallons of imports and we're tracking well ahead than we've ever seen as a country in terms of the imports and the incentive to import here.

[Brett Wong:]

Okay and is that driven mainly band that driven mainly by Argentina or are you seeing a mix from Europe and Argentina?

[Chad Stone:]

No, I think we're also seeing the low carbon fuel standard in California is encouraging renewable diesel imports and those are the two biggest areas from Asia and now Argentina.

[Brett Wong:]

Okay, and then one last one from me, you guys talked about it a little bit already, but just on the RVO and all that. The fun part takes the group at what are you expecting as we look out on not just fiscal 2017 as you said, but fiscal 2018 RVO and the risk around the RVO in general depending on the election results?

[Daniel Oh:]

Yes, hey Brett, it is Dan. I will field that. And back to the guidance I think it is better that we be tempered in our guidance. There are many factors that could cause it to be volatile to the downside. In general we're in a pretty good place and so we've had. Except for the Blenders lapsing we have stable markets. The facilities are running at high utilization we are moving a lot of advanced fire fuel into the marketplace right now and optimizing everything from the fixed cost base that we have to the supply chain and products move all over to the country and including bodies move all over the country including California right now. And Geismar is running well right now. So overall, we're being tempered in our guidance. So again, we got Blenders lapsing. We got a bunch of important product that we would expect to come until we're told it is not lapsing. We have our RFS2 numbers coming out. We think they are going up. Well how steep the slope is going to be I'm not sure, but advanced biofuels are a superb way to manage decarbonization. And as we slowly move past corn ethanol hitting their maximum numbers which is just a short time away I think in terms of RFS2. Yes, to the extent that there is any tension around growing the advanced biofuel side I think it starts to fade away. And the EPA and others I think are very focused on smartly growing the advanced biofuel category over time and understand that 50% plus lower carbon intensity is a big deal. So we expect it to go up. We're not sure what the slope is going to be. The conversations are favorable and at the same time we do have politics occurring in the background. So it will all be done with presidential election in a week. I think on the advanced biofuel side at least as I read the tea leaves that will continue. Most of the conversation is around more conventional biofuel, how much of that should be out there, not the advanced biofuel account side of things. So I think we're going to eventually get to the producer. If you sit here and you look at how much money is going overseas that otherwise could be dedicated towards the Musk production it is a growing number. And we see product coming from Singapore and Argentina in substantial volumes. The easiest way to manage all this is simply to grow the RVO. If the country would prefer to not engage in picking which regions that comes from, just grow the RVO. In the meantime if that's not occurring I think there will be substantial pressure for anti-trade and for PTC reasons to create a disincentive to import. But the RVO is the easiest solution all they way around.

[Brett Wong:]

Thanks a lot. That's great color. Thanks a lot Dan.

[Operator:]

Thank you. Our next question or comments comes from the line of Craig Irwin from ROTH Capital Partners. Your line is open.

[Craig Irwin:]

Good evening and thank you for taking my questions. So Dan, can you comment a little bit about the feedstock price disparity and some of the developments in the quarter? You know, when we look at the numbers it looks like there was an increased opportunity to generate margins in the quarter. We're looking at a better situation going into the fourth quarter. Can you comment about some of the underlying fundamentals that are driving Blended products down in price and helping with your spreads? Thank you.

[Daniel Oh:]

So I'll talk a little bit and will have Chad talk as well. The market is in all areas getting smarter and that's helpful at the same time when one negotiates I think the market is aware most days of where the prices and the opportunities are. And we have generally fewer, smarter, stronger, counter-parties all the way up and down the value chain. So as we're running and operating the beauty of the system that is getting built out and exists in our fleet is that we can look at the multi-feedstock opportunity, look at the temperature, the region, things are going to be going to look at the relative carbon intensity benefit and where the best price will end up being. We have had some turbulence in the quarter around Geismar and when Geismar doesn’t run it can create distortions in our supply chain that have to be temporarily fixed. At the same time the biodiesel business outside the RHD side has been running strongly, smoothly, Geismar is at that point now and has continued to maximize on a return basis and our profit basis that volume. So what I do see is that feedstock producers as one would expect are tuning into the carbon intensity benefit that exists based on different kinds of raw materials and that on a daily bid basis is affecting and affected by LCFS pricing and RIN pricing. So we are in the market every day. We may have some if not best knowledge around low carbon intensity, accrued raw materials. I think we're maximizing that in a good way and as we move forward into the quarter as the regulatory footprint settles, I think we'll be in a very good position to end the year well.

[Craig Irwin:]

So, I'm somewhat, I'm a little bit surprised that you didn’t include a discussion of the growth in head on feed right cattle in feed lots over prior years and the oversupply of rental products into the market. Is this something where you have a cautious view and are not anticipating a benefit in the near and intermediate term from what looks like will be an interesting farm cycle if you are bearish on rental paths?

[Chad Stone:]

Craig, I was just going to add on I think Dan was handing off to me to talk a little bit more about some specific in feedstock and where I was going to start with first was on tightness in the palm oil market where first of all that is a big driver relative to soybean oil and canola. So that is a big overall macro driver of feedstocks it's caused a supportive floor for feedstocks recently. Next I was going to refer to the fact that we now have a lot of domestic production capacity, a lot of our - thanks to a lot of our recent upgrades that can handle lots of inedible corn oil and used cooking oil supporting those feedstocks which are otherwise pretty challenging to convert without the right capability. Another factor that that affects feedstocks and supports them are export demand into other markets largely Europe for fuel and then this is in the colder months of the year or entering that timeframe you tend to have from the rendering perspective growth in supply and a weakness in pricing on that front. So I think the strong or increasing rendering numbers are impactful here too. So I think what I'm saying is, I was agreeing with your question on that front.

[Daniel Oh:]

Craig, the trend is good. The call for gallons in the near term maybe the best way to say it is the call for gallons in the near term expecting the lapse and with people wanting to trade before the end of the year may mitigate a little bit of the trend that is there. And we have had feedstock situations that are more supportive than in the past and over time I think it will be good. We also as a business, although we have a year-end coming tend to make the decisions for maximizing cash flow. So, again back to guidance, its tempered guidance so that we can maximize cash flow and think through what is the best next 2, 3, 4, quarters should be as we go through the year.

[Craig Irwin:]

Great, thank you and then a question from a high level. So the aviation industry is more than a mid teens percentage of fuel consumption U.S. liquids are distal consumption in the U.S. and when emissions are counted from aircraft really it is something like 2000 feet where they stop counting emissions. But we all know that there is a disproportionate contribution to emissions from airlines given that there is very high sulfur content compared to on-road even off-road fuels in the U.S. Can you comment about whether or not you are seeing increased attention from the airlines as a potential customer given the superior resisting [ph] of green diesel visible hydrocarbon diesel. And potential for 5% lends to be reasonably economic and help make a difference in the emission's footprint in the airline industry. And if you can sort of give us an updated picture on how you think this sort of tug-of-war takes place, if we do see consumer awareness help drive emissions controls onto the airline industry? Thank you.

[Daniel Oh:]

Thanks Craig and the only thing about decarbonization opportunities to serve society and make money it is pointing in that direction. So transportation fuel which includes over the road and rail and then you add in aviation and then one adds in maritime, that's a huge amount of carbon that's been introduced and to the into extent that each one of those categories can be addressed in a gradual and steady way. I think we're in a great position to help manage that. So if you step back and say our synthetic fuels capability, what can we do to get involved in jet fuel, well the technologies are known. Taking RHD, further refining that, getting it into jet fuel format is something that can readily be done with capital and a little bit of time and it's mostly a function of cash flow and economics. So as we see lower carbon intensity requirement start to get monetized which I think will eventually happen on the jet fuel and the maritime side that will create the capital investment opportunity to go ahead and start making things we already know how to make. Then it becomes a logistics optimization activity in terms of where are those locations, how do you serve major transportation hubs and how do you do it in a manner that's appropriate. So as we look at our existing network of facilities we're already in positions that serve quite a few areas in an interesting way when you think about feedstock aggregation and sales and distribution. So let's take for example our facility at Seneca. That would be a pretty interesting location to put a smaller frame RHD/jet facility in at some point to serve O'Hare and the O'Hare region. We just saw announcements out there where the State of Washington and SeaTac and so forth are very interested in promoting the production of jet fuel and the servicing of fleets with jet fuel soon. Grays Harbor is an awfully interesting place to think about having a co-located biodiesel and RHD/Jet facility that could serve that region. When one looks at Geismar and you think about the opportunity to expand that facility over time to not only make RHD but jet fuel and also other renewal chemicals and come out of the synthetic fuel side of the place again quite interesting. And then we're involved in ASTM. We're said on ASTM we're involved in industry discussions. We certainly support and have been involved in that fuel related discussions both with industry and also in different ways in and around the Department of Defense. The call and the willingness to do this I think is growing and quite frankly the industry especially on the airline side would rather self regulate than be regulated by somebody else. I think that's why we see this very productive conversation occurring around how to get to a schedule that provides growing volumes at lower carbon intensity fuel can be blended in. And then to your point I think it is highly likely even without going to a jets back that RHD could find its way to blending [indiscernible] directly into jet fuel and be sold in that manner. So we see it as a logical path forward. It's a question around when will we see comparable or perhaps greater pricing on the carbon intensity side and then how does it get managed. One of the ways one might be looking is to see jurisdictions that start saying landing or docking or delivery will need to have a certain amount of blend on the vehicle as it shows up. That would be a way to ensure that things are occurring in that way. And in Europe we certainly see similar discussions. So decarbonization when you think about comparison cords [ph] and everything else that's literally coming to a head right now makes this discussion much more timely and it makes it much more logical that companies start paying higher prices for greater value a fuel that has fundamentally excellent engine value in terms of processing the fuel and greater carbon intensity value should be high priced.

[Craig Irwin:]

Great, thank you for that.

[Operator:]

Thank you. [Operator Instructions] Our next question or comment comes from the line of Ryan Greener from Carlson Capital. Your line is open.

[Ryan Greener:]

Hey, guys, thanks for taking the time. Just a quick question, are you still committed to your Life Sciences business or do you have any intention to sell it? Thanks.

[Daniel Oh:]

Our Life Sciences business is a very logical place for the company to be. When I say Life Sciences, I think about it in terms of several different dimensions and platforms. So fermentation as an idea, the use of biotechnology, it's been in biofuels for decades. Ethanol is a biotech conversion process. There are enzymatic processes in advanced biofuel today. When we think about production of only renewable chemicals it has been there a long time. We certainly expect and plan to be in that level of Life Sciences over time. When one thinks about fatty acid metabolism, fatty acid metabolism as a platform and as a product as a channel that gets managed, manipulated, transformed, we've been in that for decades. We certainly think that's a very logical place. On the specific E. coli platform that is an evolution in engineering and product development capability that we have. We're seeing real value being created. We're seeing fundamentally useful technologies we've shared. And if you go look at the video that's out there and I don’t mean you Ryan, I mean everybody that we've got a very interesting series on Life Sciences, five videos out now. I think soon to be six. The talk about the industrial logic, the utility and being in this space I think it is quite clear that the abilities for glycerin which we're the largest producer of, the ability to create products that are in the same space that we're in right now makes sense. At the same time Ryan, we look really hard every six months at what we're doing and what we're investing at. And we are open to venturing, licensing, making products ourselves, doing whatever it is shrewd in terms of maximizing value out of this platform. We're at a point right now where we see real value being generated from the great work before and currently and we're out there exploring in all the commercial ways one would expect of a company that is in the development and commercialization stage how we get better value. One good example is our joint development agreement with Exxon Mobil. We have success there. Already I have talked about a little bit. That is an effort to find the cheapest as possible and then eventually get involved in biodiesel production which is science proven. Eric?

[Eric Bowen:]

Yes, thanks Dan. So as it pertains specifically to Exxon Mobil we're doing good progress on that particular project building off of the key fermentation technology related to the earlier work done on fermentation to biodiesel products and now porting that technology over to a lower cost, lower carbon intensity cellulosic sugar platform generating good revenue for the business unit and achieving all of its objectives and creating capability that will be broadly applicable across the technology platform and across a variety of microbes. So we continue to be very happy with that and Exxon's been a fantastic partner in that effort and together with Exxon we're the process of not which particular leaders in the cellulosic sugar world are the right ones to bring into the collaboration to make sure we've got everything aligned to maximize the chance of long-term success for that particular initiative.

[Daniel Oh:]

Other products in the pipeline are very logical candidates to be commercialized with other companies. We're first and foremost focus on shareholder value Ryan and we're looking for the smartest ways to maximize that as we think about this specific space.

[Ryan Greener:]

Thanks and just could you remind us how much you spent on R&D on now in the quarter and now much revenue was generated? And that's my last question thanks.

[Chad Stone:]

Ryan, it's Chad. R&D for the quarter was $4.8 million and then revenues around $0.5 million.

[Operator:]

Thank you. I'm showing no additional audio questions in the queue at this time. I'd like to turn the conference back over to management for any closing remarks.

[Daniel Oh:]

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 question on our progress. Before we conclude, Todd will mention several upcoming investor events. Todd?

[Todd Robinson:]

Thanks Dan. We have one conference coming up in December [indiscernible] this opportunity. The conference is open to clients of ROTH Capital, so please get in touch with your contact to schedule a meeting with us. Thank you all, again. This concludes the call. You may now disconnect.