Renewable Energy Group, Inc.
Q4 2016 Earnings Call Transcript

Published: 8 Mar 2017

[Operator:]

Good day, ladies and gentlemen and welcome to Renewable Energy Group Inc. Fourth 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 conference, Mr. Todd Robinson, Treasurer. Sir, please begin.

[Todd Robinson:]

Thank you. Good afternoon, everyone, and welcome to our fourth quarter and full year 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 fourth quarter and full year 2016 financial results and recent developments. Before we begin, I would like to remind everyone 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. 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. For 2016, we generated over $2 billion of revenue on 567 million gallons of fuel sold. Full-year net income was $44 million and adjusted EBITDA was over $100 million. We had a good year and we are well positioned to have another strong year in 2017. The fourth quarter was a strong finish to a strong year, which in turn was a strong finish to our first decade as a standalone company. We’ve reflected this in the press release and [ph] the two related videos we published last Thursday. In those, we highlighted some significant milestones. First, our Geismar RHD facility has been running well since early October after our catalyst change out. Second, we achieved 100% ownership of what was a Germany-based operation in early January 2017. And third, we sold our second billion gallons cumulatively. That’s a quest in three years after our first billion gallons was reached over 18 years. Demand was high this quarter as you would expect as the biodiesel mixture excise tax credit or BTC lapsed at the end of 2016. Our team did a great job maximizing the value of this tax incentive, selling nearly all gallons in inventory prior to close of business on December 31. We sold $156 million of biomass-based diesel, 86% of which was our own production, generating $560 million in revenue. Our entire fleet ran at high utilization with no major interruptions or issues. Margins were strong and got stronger as the quarter went on supported by both rising energy prices and strong REM prices. Our GAAP net income was $20 million, while our adjusted EBITDA was over $60 million. The most important operational accomplishment was that Geismar ran uninterrupted for almost the entire quarter as shown on Slide 13. This quarter gave just a glimpse into what Geismar can do for us over time. Shortly after we completed the catalyst change out on October 5, the plant on average ran and continues to run through today above nameplate capacity. The biorefinery produced 17 million gallons of RHD in the fourth quarter. As we optimize the facility and further invest in continuous improvement, we expect to see further success. You can see that this asset has meaningful earnings power and can contribute substantially to our corporate profitability as it run smoothly and market conditions are supportive. Demand for RHD on the quarter was so high that beyond the local market, we shipped to California and even exported some overseas. The second important development on the production side is that we completed the acquisition process of 100% of Petrotec. While we have been consolidating the results by a percentage of ownership for a couple of years, there is a very lengthy process in Germany to acquire full ownership. That process was completed in early January and the former Petrotec is being integrated into our European-based operations. Our European operations are part of a broader development of international operations at REG. We are now actively pursuing and sourcing lower cost waste feedstocks from around the world including South America, Australia and Asia. This has the potential to lower our cost of production and reduce risk within our supply chain due to the greater number of suppliers. We’re also working to expand export markets for our finished fuel. Our organizational and leadership structures, production and coordination technologies, financial structures and more, allow us to operate efficiently as one team as an integrated business across product lines and geographies. Now let me turn and put our strong year into the context of the excellent company that has been built here at REG over the past decade. The context can frame how we think about REG today. The track record of growth in cash generation that has been achieved, the sustainable long-term earnings power and the prospect for continued growth both for our industry and the company. We’re very optimistic about the prospects for REG, our shareholders and a continued growing market demand for our cleaner lower carbon intensity products and services. Whether it’d be advanced biofuels or the quality assurance we offer in REMs in LCFS credits, we’re positioned to serve the needs of our markets. In 2016, we sold 567 million gallons of fuel. Our monthly gallon sold run rate is now almost as much as we sold in our first full year of operations in 2007, which was 50 million gallons. That is a 31% annual growth rate over a 10-year period beginning prior to Renewable Fuel Standard 2 being in place. This year our revenue exceeded $2 billion, nearly 10 times the revenue on our first full-year of operations. Revenue in 2006 was primarily from building plants for others, now we are a fully-integrated operating company. Revenue has grown at a 27% compounded annual rate. Still I want to be clear, we are focused and we focus on profit before revenue. This year we produced net income of $61 million, excluding a non-cash impairment charge. Chad will discuss the impairment charge later. Over the past five years, we averaged over $100 million of adjusted EBITDA annually. We started with a single plant in Ralston, Iowa with a nameplate capacity of 12 million gallons per year that used only soybean oil for feedstock. Today, we own and operate 13 biomass-based diesel plants with an annual nameplate capacity of over 0.5 billion gallons. We have grown our production capacity at a 51% annual rate. Additionally, we have a fermentation facility and a used cooking oil processing plant. We are now an international company with plants in North America and Europe. We ended the year with $1.1 billion of assets and $610 million of stockholders’ equity. In 2007, we started the year with about $144 million of assets and $54 million dollars of equity. We’ve grown assets and equity at a compounded annual growth rate of 24% and 37% respectively during our first decade. The growth of our industry has been driven by unique value proposition over the past decade as well. We produce a high-quality fuel that has excellent energy value as well as environmental value. Our fuel is a premium product because it is an easy to use transportation fuel with greatly reduced carbon intensity. Our biomass-based diesel participates in the global distillate market. Diesel itself is a fuel with growing demand globally as you can see on Slide 5. Our biomass-based diesel helps to fulfill this demand while avoiding production of the higher carbon fractions that come from a barrel of crude oil. Beyond energy content and cleanliness, our fuel delivers additional sources of value and demand by society. The first is encouraging food and energy security and diversity. Many of our feedstocks are waste and byproducts of the agricultural sector, by utilizing them we created additional higher revenue streams in support of the food chain, which ultimately supports farming and agriculture. Furthermore, our feedstocks are renewable. So the fuel we supply is an environmentally sustainable and renewing raw material stream. Domestic energy supply is less of an issue today due to the availability of crude oil and natural gas supplies, however, oil and gas will always be depleting assets and our nation cannot be fully secure unless we have the capacity to produce renewable fuels. The second benefit is the creation of more valuable markets and outlets for waste products beyond declining landfills, waterways and other under desirable disposal methods. Most of our feedstocks are waste, fats and oils, which can be a burden to society in terms of the cost and type supposal if not efficiently and otherwise consumed. The clean air and water acts demand recycling and reuse, which production of our fuel helps to fulfill creating a virtuous cycle. Producers of our feedstocks no longer have to find environmentally appropriate disposal options that are generally expensive and instead can generate additional value selling to our industry. The third benefit is the positive environmental impact in the form of lower carbon intensity. Our fuel is cleaner. On average 50% to 80% cleaner and lower carbon intensity through photosynthesis and reuse of waste, in particular, biodiesel an oxygenate fuel. Each of these are benefits that are valued and supported by society and are worth something more than the simple energy value of fuel. Because of society’s interest in the extra value of our product and the benefits our industry delivers to a wide range of constituents, we’re confident in the economic sustainability of the system in place now to encourage growth in our industry. RFS2 is a market focused and tax revenue neutral solution that harnesses the energy of private enterprise to encourage growth. Over the years since inception in 2005, the BTC has lapsed and have been reinstated several times and lapsed again at the end of 2016. We have no certainty a tax incentive will be reinstated either in current form or shifted to production, however, we feel confident that the support for earlier reinstatements remains understood, strong and in place. Beyond the federal level, many states also have incentive programs intentionally to grower our industry such as the California Low Carbon Fuel credit system. Let me summarize the long-term view this way. Together with our customers, vendors, shareholders and the REG team, we’ve grown our production capacity, sales, assets and cash flow at meaningful rates. We’re equally optimistic about the next decade. We make a valuable, premium product, have extensive and unique institutional knowledge in how to produce it profitably, ever growing distillate and biomass-based diesel market globally and we have meaningful earnings power. I encourage all of you to go to our channel on YouTube and watch the series of videos we produced for our 10-year anniversary specially the most recent two videos. They offer an in-depth look at our assets, our capabilities and our strategy. Each video is short and direct and can be watched independently and highlight the excellent business now operating and service to our shareholders and our broader social interests and values chain. Regarding our Life Sciences strategic review, which is progressing well, first, we’ve completed a technical review with a highly regarded third-party expert and financial advisors, which confirm the robustness of the technology platform and pipeline. Second, our existing joint development agreements with third parties continue to advance well. Additional JDA and other collaboration discussions are finding high interest in utilizing the platform, technologies and intellectual property. Our Okeechobee fermentation facility is operating within a contract manufacturing framework and is currently producing product for others. Also, we have identified financial advisors with deep expertise in this space, who are ready to support our execution on any decisions moving forward. Overall, we’re on a clear path toward significantly reducing net expense within this R&D platform, as well as monetizing value for shareholders. On a midyear going forward basis, we project a $5 million to $8 million per year net expense rate of R&D spend within the Life Sciences business. We are working diligently to accelerate this to a positive cash flow situation. Finally, our product pipeline development continue to meet or exceed target performance. We are on a clear path to lowering our net expense and monetizing the fundamental value of the business. Let me now turn the call over to Chad for financial updates, and then I will return to discuss our guidance and outlook. Chad?

[Chad Stone:]

Thank you, Dan. Let’s turn to Slide 14 to review our financial results. Please note that the tax credit was retroactively reinstated for 2015 and extended through 2016, and our adjusted EBITDA calculations for 2015, we allocate the net benefit of the incentive throughout the year and the quarters in which gallons are sold. You can find a reconciliation of adjusted EBITDA to GAAP net income on Slide 24 of the presentation and in the earnings release. Total adjusted EBITDA for the fourth quarter was $60 million. Adjusted EBITDA includes $15 million recognized in the fourth quarter for a partial and initial settlement of the business interruption, insurance claims for the September 2015 fire at Geismar, that would otherwise have been earned through normal operations at the plant been running. We sold 1556 million gallons during the quarter, which exceeded the high-end of our guidance range of 140 million gallons to 155 million gallons. Gallons sold in the quarter include 22 million gallons from third parties, 20 million gallons of petroleum-based diesel, as low as 12 million gallons sold by pre-acquisition Petrotec. During the quarter, we produced 130 million gallons. We sold 58% more gallons of fuel in the fourth quarter of 2016 compared to the year prior. The higher volume and increased pricing resulted in revenue of $560 million, an increase of 45% year-over-year. Now, turning the full-year results on Slide 16. Gallons sold increased 51% to 567 million gallons, including 77 million gallons we purchased from third parties, 54 million petroleum-based diesel gallons, and 45 million gallons sold by German subsidiaries. In 2016, we produced 445 million gallons. As Dan mentioned, revenue for the year exceeded $2 billion for the first time in company’s history. The 47% increase in revenue was primarily due to the increase in gallons sold and improving average selling price throughout the year as a result of a more stable energy market. Our average fee 100 price, including rents was $3.17 per gallon in 2016 compared to $2.97 per gallon in 2015. Adjusted EBITDA for the year was $102 million, or double what it was last year. This translates to an adjusted EBITDA margin of 5% for 2016 stable with the 2015 margin of 4%. Again, 2016 adjusted EBITDA includes $15 million recognized in the fourth quarter for a partial and initial settlement of the business interruption insurance claim back Geismar. Hopefully, you should see, we have a five-year average adjusted EBITDA generation in excess of $100 per year. Our coverage limits the total claim for business interruption to $29 million and negotiations for the remaining settlement amounts are ongoing. For the year, we recorded risk management losses of $35 million compared to risk management gains of $36 million for 2015. The fluctuation in risk management gains and losses was mainly due to price volatility in the energy markets. Over the last three years, risk management represented an average income of $0.05 per gallon sold. SG&A expenses were $88 million, or 4.3% of revenue in 2016, compared to $73 million, or 5.3% of revenue in 2015. The increase was largely attributed to higher costs associated with growth in the core business, increases in headcount to support regulatory requirements, international expansion, as well as growth. R&D expenses were $18 million in 2016, up slightly from $17 million in 2015. This work focused on life sciences development activities, the development of British soil, advancing our synthetic fuel and chemicals technology, process improvements at plants, and growth of our intellectual property portfolio. Net income for the year was $43 million, or $1.06 per diluted share, compared to a net loss of $151 million, or $3.44 per diluted share in 2015. In the fourth quarter of this year, we recognized an $18 million charge related to the impairment of property, plant and equipment. Most of the impairment charge relates to our partially completed plant and employee of Kansas. Net income for 2016, excluding the non-cash impairment charge of $18 million was $61 million, or $1.50 per share. Note that the net loss in 2015 was a result of a non-cash goodwill write-off of $175 million non-cash. Net income in 2015, excluding the non-cash impact of $175 million, was $23 million, or $0.53 per share on a fully diluted basis. Now, let’s turn to the balance sheet on Slide 17. Days sales outstanding in 2016 declined to 29 from 82 last year. Last year’s DSO was inflated due to the large full-year BTC receivable. Inventory days increased to 28 in 2016 from 25 last year. Cash and cash equivalents plus marketable securities increased by $69 million during the year to $116 million. Accounts receivables were $165 million at December 31, 2016, down from $311 million last year. Inventory was $145 million, an increase of $60 million during the year. Accounts payable at December 31, was $99 million, down from $237 million last year. The large decrease in accounts payable is also related to the tax credit reinstatement in the fourth quarter of 2015. The carrying value of our term debt at the end of 2016 is $218 million. Overall, our term debt is approximately 26% of capital. In 2016, we reduced our term debt by $39 million and redeemed the GOZone bonds with restricted cash. Turning to cash flow, during the year, we generated $75 million of cash from operations. Net cash used in investing activities was $64 million. We used $61 million of cash to fund ongoing capital expenditures and $13 million associated with acquisitions. Net cash provided by financing activity was $58 million, and we used $51 million for the share and bond repurchase plan in 2016. For modeling purposes, our budgeted capital expenditures for 2017 are approximately $65 million to $70 million, and that includes upgrades to our facilities, and of that supported by financing from First Midwest Bank in support of our wealth and expansion. Our blended interest rate on our debt is 4%, and our effective tax rate for 2017 is expected to be between 5% and 8%. Now, I’ll turn the call back to Dan to discuss the outlook. Dan?

[Daniel Oh:]

Thanks, Chad. Guidance for the first quarter of 2017, as shown on Slide 21. Before I discuss the numbers, let me review the environment we expect to operate in during Q1. The most important impact is the lapse of the BTC. We believe that the anticipated lapse hold some demand from Q1 this year into Q4 2016, how much, it is hard to say. We expect less volume across the industry after the year-end push in Q4. The BTC formally known as the biodiesel mixture excise tax credit is best thought out as an incentive shared across the entire value chain through routine daily trading and negotiation. At lapse and is generally expected to return. I suspect the return will be in a format more focused on supporting domestic production of biomass-based diesel. There are a couple of issues that are likely to delay the near-term reinstatement. So we believe that during 2017, the industry will operate much like it did in 2014 and 2015. Participants will assume the incentive will eventually be reinstated and the economics around production and sales will be negotiated as that reinstatement will happen. Customers will be less likely to enter into trades out beyond 30 to 60 days. This means margins will be artificially depressed since you will not see the final and ultimate real margins until any tax incentive is received. Of course, should it not be renewed or renewed in a different form or amounts than an overall market adjustment is likely to take place. The two issues that are likely to date – to delay renewal are first, the new Congress and administration are preparing proposals for a comprehensive tax reform. Comprehensive tax reform will take sometime just as it did 30 years ago. Second, there’s a possibility of a switch to a domestic production-focused incentive. We think this administration will fully appreciate the merits of a domestic oriented incentive. The prior and expired BTC system allowed more than $1 billion U.S. tax dollars to be sent abroad over the last two years, the foreign producers that import biomass-based diesel into the U.S. In fact, around 700 million gallons, or nearly one-third of total consumption came from foreign imports in 2016. In American First administration, we struggled to understand the merit of U.S. tax dollars meant to support U.S. industry being sent abroad to assist foreign-based competition, especially when U.S. industry is producing at 65% capacity. We have no problem with foreign competition, and in fact, welcome a healthy rival readers for our industry on. However, we believe that any domestic incentive programs are best aimed at domestic producers just as some of our foreign competitors enjoy the support of their own governments. Whatever happens with the tax incentive, demand will still be supported in a healthy manner by the 2017 RVO, which is 2 billion gallons for biomass-based diesel. Additionally, biomass-based diesel was also included in the advanced biofuel category, which is an even bigger pool, which also includes biomass-based diesel and is the equivalent of 2.8 billion gallons. We understand the general concern over any changes to our phase two. However, for now, we will take President Trump and his word when he voiced support for during his campaign and more recently since taking office. Furthermore, EPA administrative approve it, has also affirmed the support. So for now, we are operating under assumption business as usual. Finally, I noted earlier, the wide range of state support for industry and particularly the California LCFS is now positively impacting demand since being revived last year. California was our second largest state for sales volume due in part to this ends our ability to fulfill demand affordably from Grays Harbor. The percentage GHG reduction targets rise this year at a 3.5% from 2%, so we expect demands to remain robust in California. Beyond the regulatory impact in our business, we want to alert you that we anticipate a catalyst change out in April for Geismar, which is a routine activity. This will affect Q2, of course, not Q1. However, we want to give you ample time to assess the impact. The catalyst change normally takes three weeks, which should result in somewhat diminished production in the quarter. Overall, notwithstanding our regulatory uncertainty when it is all said and done, I expect and believe that our financial results for the 2017 fiscal year can and will be the same or better as 2016. We are well-positioned to succeed and grow profit in business even in challenging times. As we begin the year in the first quarter, we expect to sell between 110 million and 120 million gallons. We are forecasting our adjusted EBITDA to be in the range of positive $5 million to negative $10 million. Our adjusted EBITDA forecast does not include any benefit from this – from the tax incentives since it is not in effect. Should the tax incentive be made retroactive for the beginning of the year, we would expect to have a net benefit in the range of $30 million to $35 million from Q1 business. Now, I would like to turn the call over to the operator for the question-and-answer segment of our call. Operator?

[Operator:]

[Operator Instructions] Our first question comes from the line of Tyler Etten of Piper Jaffray. Your line is now open.

[Tyler Etten:]

Good afternoon, guys, and congrats on the quarter.

[Daniel Oh:]

Thanks, Tyler.

[Chad Stone:]

Thanks.

[Tyler Etten:]

I was wondering if you could talk a little bit about the catalyst change that occurred at Geismar. Just what’s physically has changed about it, and what’s the probability that another incident would occur at that facility?

[Daniel Oh:]

Okay. This is Dan. Thanks for the question and the opportunity to highlight the reliability and great work we’ve done at Geismar, especially over the last 12 months, in particular. So I’ll direct people’s attention back to page 13, Geismar production history. And this is in the video that we put out last week, so somebody can watch that to see a little bit of the explanation from our VP of Manufacturing, Brad Albin. But if you look at the history of the facility, early Days 11 and 12 under different ownership, the facility never really got above 50% utilization rate. And one of the sale process that was down four years while they were figuring out what to do, we came in. And if you take a line and you draw a curve from the beginning of October 14 to 17 and take out the year, where we had two fires, you see a progressive ramp of continuous improvement in utilization. We lost a year when we had two incidents. We investigated deeply change process practice, the technology was validated, very good technology, but we learned from that. We do not believe those issues will repeat. We had a good safety profile going in with even more time and effort ensuring the training and everything else is a top tier. And as we have been going through the process not only have we improved that facility from that learning, but we continued the upgrades we already planned. We continued the catalysts for a pretreatment work, the integration with our business. And we have been improving our catalyst and pretreatment interaction as we’ve been operating. So today, the stability of the facility should be forecasted to move ahead. This kind of facility was kind of activity as you push into more affordable feedstock with higher impurities. You make tradeoffs between catalysts life and profit, as we work through this iteration in this session. We’re getting good life out of catalyst that we use. And this anticipated changeover in April is on a timeline of our liking. So I think it’s a stable, reliable, profitable facility now. It has lots of opportunity to improve whether it would be logistics, or expansion, or simple efficiencies on the side, and it’s here now and it has meaningful earnings power.

[Tyler Etten:]

Great. Thanks for all the detail. Maybe shifting gears a little bit, could we talk about the – your expectations for imports in 2017, where they said compared to 2016, and if there’s any sugarcane ethanol imports involved in that?

[Daniel Oh:]

Yes. So I appreciate the question and Chad chime in if you have anything. Generally, imports are down as one would expect. Imports ramped up at the end of last year, because they wanted to participate in the lapsing tax incentive and we track, I guess, generally speaking the flow is down. The flow would normally be down this time of the year anyway. Sugarcane ethanol is something we watch. We’re not seeing any significant participation today at all. I think that there are a few factors that should be watched as we move ahead. There is greater momentum than ever if you see a returning incentive, which I think will return come back in a different format. The political, industrial, and economic logic is strong. And the – it had support a year ago. If you look at the extenders package that was approved a year ago, I think it had legs then. What happened is the extenders package was moved ahead without anything changing in any way. So the requirement to get overall extenders approved was to have zero change, which I think is the plain and simple reason why it didn’t occur a year ago. So answering your question if it were to move towards a producer oriented domestic production supportive incentive again shared by the entire value chain, that will probably once it’s announced bring a little accelerated imported products quite a little bit and then it will balance out. If we don’t see any change, there’s no reason to think we’re not going to keep seeing a lot of imported product given. If we saw E15 change and the adoptive, which is a high discussion point in theory that might create some demand for additional sugarcane ethanol of the flow as American octane, corn ethanol is used broadly and continues to be exported. There might be some more room for lending that would bring that in. I don’t think that’s a thing happening today. We’ll see what happens. Any of the things that have been talked about in the news lately require a legislative and/or regulatory process. And even though somebody might create a rumor around it, the effect can’t actually happen quickly.

[Tyler Etten:]

Right, because that’s a Congressional decision not a…

[Daniel Oh:]

It’s a leased EPA rules and review and most of it’s Congressional too.

[Tyler Etten:]

Got it, thanks. All right last one for me and then I’ll get back in line. Could you just talk about the margin profile that you’re seeing in Q1, obviously, a little bit off of what’s the Q4 margin was. But just how you’re positioning yourself in terms of hedges and feedstocks going forward here? Thanks.

[Daniel Oh:]

Yes, we have always had a balanced book approach to the market. And practically speaking or any near, it’s not a spot market entirely, but it’s a nearer market in terms of when people are willing to buy new things. And we’re seeing the overhang of supply clear. So production margins in different parts of the country are not that great. We’re inefficient, so I see a lot of positive contribution margin. I also see companies on the customer side leaning into the idea that the incentives will come back more quickly in higher probabilities. So the comfort around doing the trade, the comfort around doing contracts and knowledge around how to do it that’s there from three other times before. I guess, I’m looking at the margin profile thinking not surprised, and I think it will gear as we get into second quarter and we get into the busy season.

[Tyler Etten:]

Great, thanks. I’ll pass it along.

[Operator:]

Thank you. And our next question comes from the line of Chip Moore with Canaccord. Your line is now open. Q - Chip Moore. Thanks. Maybe if we circle back to Geismar, you can expand a little bit on the ability to serve LCFS markets for that product. And then secondly, I guess with the catalyst change out in April running at full utilization here for several months, is there any ability to do some work in parallel to try and boost that, or how should we think about that?

[Daniel Oh:]

Yes. So, when we think about LCFS, what we’ve been able to do through really three things, optimizing our procurement, so the delivered raw material that is more filling in carbon intensity to the LCFS markets is optimized towards assets they go that way. That’s not simply Geismar, it’s also within Western leaning and easily traveling by diesel plants that tend to be on the western edge of our biodiesel complex. So our procurement is pretty highly tuned now. We did benefit from additional package that we put in, in the facility, which reduces problems we used to have. We used to have problems with the merge, rail being a little chunky in terms of coming in or not at the right time. We have the ability to build slack in our raw material chain and have the right guidance. Secondly, we’ve increased and enhanced our sales force activity on the West Coast. That not only is in response to LCFS, but it’s also a benefit from having our Grays Harbor facility. So we have great offers out there. We have offers on the dissolute side. We have offers on the biodiesel side, and we can get RHD out there, most RHD that goes that way is moved by rail. And we have hundreds of railcars under lease and we have customers that have railcars that they want to use themselves. So we’ve got a good rail capacity and good rail management capability. So that along with high utilization has allowed us to have a portfolio approach. Now, we have at Geismar the ability to sell local, because we can distribute to terminals locally. We can sell the truck, that’s a benefit that we’ve got. So we can be particular around how and when we sell and when we get into B99 versus B100 sales, we can make choices and optimize around tax benefits. We also are able to establish Transload and other facilities that we have to have access to deepwater. And that has enabled us to go after markets that are even more lucrative in Europe. So we have had, I’ll call it, regular shipments now that we’re sending to some European markets that are willing to pay a high price for a very good fuel with great carbon intensity, high enough to persuade it to leave the market even when we have these other incentives locally, and then, of course, we’re shipping it out to California. We also are willing and able to pursue and be a part of Federal contracts. But we look at those on a best profit basis and price accordingly. So whether or not we participate in any bidding, we’ve been full upon sales. At the site, we have been doing engineering and planning to continue to grow our capabilities there. And I think there are a few phases of growth that we can go through, as we validated our technologies, we validated the way we do business not only look at increasing capacity, but also the breadth of raw materials and the breadth of products beyond RHD. Geismar is a place, especially with a fixed cost in place and already covered by our RHD business is profitable, it’s a very logical place to continue to upgrade and grow.

[Chip Moore:]

Perfect. And maybe if we move over to Petrotec now that that’s fully owned, obviously it’s been closely held for a while, does having full ownership now accelerate any plans or was it sort of what was already underway? Thanks.

[Daniel Oh:]

Yes, thanks for that question. So when we look at international operations, the strategy is to be in the two best markets in terms of usage and price North America and Europe. And to also be able to go back and forth across the water as we see sales opportunities. And to be able to acquire waste and low carbon intensity raw material from global locations and ship it to either Europe or North America for the best conversion price, as well as buying finished fuel and shipping that to the best delivery location. So the team that we acquired and has already been integrated and supplemented is helping us to do that. So we have international shipping expertise in the team resident there, they’d already been buying internationally and delivering to our facilities. We had already been doing similar things here. We have two facilities there that are immediately benefiting from our engineering invitees or upgrade expertise. We generally run at good capacity there, I think the capacity can increase. And then we have migrating capabilities. So our financial, leadership, communication all of the systems that we have enable a 20 hour a day company. So we can have sales operating in both regions, we can have raw material procurement, we can have accounting operate in both regions. We’re not building two businesses or two geographies, we have one business that’s operating over multiple geographies and gives us the ability to be more efficient just like we have been here in the U.S., but we aggregated G&A cost that aims to serve all of our locations. So, pleased with the progress. It is still early days in the integration, because we were never in a controlled position on that business, in particular with respect to German law. We were not able to integrate ahead of time, but of course the companies we’re talking and working together on an arms-linked business basis and we know each other really well. The knowing each other really well is the most important, so that culture and team fit is tight. And it looks like it’s going to continue to deliver the promise of potential, while having positive cash flow. So it’s a positive cash flow business coming in a base to build on and a good team that’s already together.

[Operator:]

[Operator Instructions] Our next question come from the line of Craig Irwin with ROTH Capital Partners. Your line is now open.

[Craig Irwin:]

Good evening and thank you for taking my questions. So Dan, I wanted to ask if you could give us a little bit of color, an explanation on why are REG Geismar is able to operate at a premium to its nameplate capacity, while essentially all of the other Honeywell UOP plants out there making Green Diesel operate at a discount and typically a pretty hefty discount to their quoted nameplate capacity. Is this the catalyst that you guys move to, and if so, do you expect this to be a sustained advantage? Or is there other fundamental design characteristics to give this facility superior performance?

[Daniel Oh:]

Well, thanks Craig. And while I’m familiar with the other technologies, we don’t know the great work that’s occurring in other plants. And I’m not in the business of propping the model. So I’ll talk to you about what we’re doing. We brought to this facility, and notwithstanding the QFARs [ph] we had, and we learnt from that and that’s behind us. We brought to this facility capabilities that were fundamental. So the first one is, the best understanding our pretreatment, buying, selling, manipulation and movement of very wide range of lower carbon intensity waste and byproduct raw materials. I don’t think anybody has a better database than we do around what counts from each location of the country, what the profile is, what the relative cost is, what the conversion value is and so forth. The work across many plants before we got into RHD around logistics kind of buying with the economic value is, how to trade, how to buy right, I think that’s been a really big deal. We then brought that knowledge and we applied it to the front end. So if you are looking at Page 13, one of the fundamental reasons why Dynamic Fuels had problems, which is one of the ideas behind the investment thesis upfront was that they were a team who designed and built the facility, who are now part of our team, and who are excellent engineers but back then they were really good at taking petroleum or waste petroleum and turning those products into something useful. And when you got into the wide array of biology and pollution that comes with bio-waste and byproducts, they know what to do. So they went through a lot of pain digging that out. We immediately brought our talent together, including our great engineering staff, our upgrade teams, our construction management teams, our logistics teams, we improved pretreatment, we put pretreatment in, we improved logistics, we improved the tank-adjusted [ph] facility. We went through a brought our safety and EH&S and reliability teams in and that total business system is making what was a good asset that wasn’t quite right into a well performing activity. We have lots of room to improve at this with this facility. So, while we’re at a level, which is a good performance level based on nameplate, I think we can improve our margin profile by getting in a waterway of raw materials. We have the ability to improve our logistics and our connection costs. We have more handoffs going into this facility than I’d like to have. Every time you take something, get somebody loaded – unloaded, you got an action cost, somebody get to that quarter dime, which we’d rather have. We also have on that side one of the best locations for industrial gas through pipelines. So we’ve agility to expand and increase our capacity of volume on the hydrogen and other side. And with our landlord and others there, I think we are going to be able to find ways to expand our footprint and grow our gallons over time. As we do that, we’ll be able to improve even further the reliability. You know as an example, look, we can get to a point where we have a additional expanded train. We might bring one train down to change catalyst, we keep the planned route and because we got another unit that’s running and unit operations continue. So, Craig overall, I call a combined team effort that’s an RG way of talking anyway, but in this it’s really true that the technology had to be adopted and adapted. We did it together, one team now which in the old synthetic, the old plant and the existing RG we came together. The health and communications is very good now and the team that’s there is trained and stable as well as the equipment. So I think it’s just accelerated business activity from a company that’s done that many times.

[Craig Irwin:]

Great, thank you for that. So then just to return to the concept of a producers credit, and if we still get a Presidential order or a statement of Presidential policy supporting the conversion of the blenders credit to a producers credit, you know there has obviously been discussions about changing it to a five-year credit with a ramp down. I know you can’t really comment there, but those of us that have followed this company for a number of years are acutely aware that reinstatement usually happens very late in the calendar year. What would you say about the potential for an FTC complaint to stanch the flow, some of this dumping that’s going on sort of the import from South America, Argentina in particular and then obviously from Asia into the California market with the renewable hydrocarbon diesel. Is this something that REGI would support, given that clearly the administration wants to put America first, the idea of $1 billion in subsidies going overseas where there is no financial benefit for U.S. consumers, for U.S. taxpayers, how should we think about your alignment around potential FTC action?

[Daniel Oh:]

I’m going to have Chad Stone talk after I make a couple comments. First of all, we are all about trade. We want to have an even playing field when we compete. One of the things I like about RFS2 is, while the market demand is enhanced by what’s put out there, the priority is, we don’t have a guarantee of business and watch for a good company with competitive offer, that’s how we get to do what we do. That’s not the case in all situations with folks that are bringing their product in, we have differential export taxes, if you’re in Argentina, for example, you get paid to refine and sell versus move raw material out. Let’s take that as an example. If you are listening to the speeches from the Trump administration, whomever it would be with the President’s team, now that doesn’t feel right from their perspective. And if you look at our country, who are just paying the freight plus rewarding people for having the differential export tax, why wouldn’t we be getting all the stuff on the coast. And what’s the net effect of that? The net effect of that is, how we see that? Since we don’t make any sense when we’re putting all the stuff into our North American infrastructure, including plant production on the coast, including distribution on the coast, so that raw material has grown in support of agriculture can make it because we convert it, it’s kind of discontinuous. So, I think it will ring true, it probably already is ringing very true without whatever the method, whether it be in any trust activity, a producer tax credit, why not? Both wouldn’t surprise me to see that stuff happening. Chad?

[Chad Stone:]

Yes, sure Dan. Thanks for the question, Craig. It’s interesting because you saw Europe go through that process just a couple years ago, which is largely import that we’re seeing were redirected to our shores. Dan talked about Europe and the U.S. being the two best markets, recently Europe has blocked some imports and we’ve seen since then growing imports into the U.S., Dan talked about how that impact fourth quarter with the tax credit lapse, and then the third quarter’s inventory in the first quarter and how that’s affecting current margins. Couple that with a tax credit that’s available to imports, we’d also support the – strongly support producer tax credit to at least put the North American or the domestic biodiesel producers kind of first-in-line, particularly if you’re competing against subsidized products, I think that would be really good for U.S. producers.

[Daniel Oh:]

Yes, so I’ll just kind of finish on top of it. RFS2 and the bonds that are there are going to encourage important product in common that’s fine. We are happy to compete within the RFS2 framework. What is there that should bother everybody is that the incentive structure make as such an important product that’s already subsidized in many cases, not all cases, is sometimes the first purchase with higher margin going to the outside, when it really should be a marginal gallon. You know first gallons are to be domestic based on the economic structures that you would see if there weren’t incentives creating issues. So I think form product will so come, it’ll just be the marginal gallon. It will be the gallon that’s getting produced and delivered when they’ve got positive contribution better than elsewhere, ship it to the coast. That sounds normal, so we got to get back to normal state. And if that happens…

[Chad Stone:]

All right, thanks.

[Daniel Oh:]

Craig, if that happens for us, then assets like our New Orleans facility is on a great position. Assets like our distribution that we’re doing out on the coasts, they are in a great position. Houston, it’s a much more likely place to be upgraded, when that’s the case.

[Chad Stone:]

Okay, great, thank you for that. My last question is about stock price performance. So, you know, many investors would view your strategic evaluation of the life science assets, potential disposal or other actions you could take to move that $15 million in cash burn. Also P&L, are optimistic that you get a multiple on that increased EBITDA and maybe you do some extracts from EBITDA, extract some value from those assets. I have no idea what price you’re actually going to be able to sell them for, but we see that as a pretty shareholder-friendly action. Now, as we look at the other levers that you can pull this year, you’ve been pretty consistent in wanting to reinvest your cash flows and CapEx for your plants and facilitating growth through acquisitions with some repurchases. Can you maybe discuss with us whether or not you’re thinking of shifting as far as moving to a different priority list, as far as what you think will benefit the equity investors that hold your stock now or could become holders in the next couple quarters as you prioritize stock performance?

[Daniel Oh:]

So, Craig, we’ve always prioritized stock performance. We’ve always put shareholders first. It’s clear when you look at our share price performance that share price has been challenged depending on the perspective you look at over time. And in pursuit of that we’ve done many things that I think are all logical business activities. And one of them – and I’ll let Chad talk a little bit about it is, share repurchase on a steady pace over last few years and we have put money out there and brought shares a good value. We carefully manage our balance sheet and worried about 25% leverage. We very carefully manage our tax structure. We very carefully manage our cost of debt. We do put money back into the business, but we’re putting it back into a generally fast pay their projects to generate cash flow and sustain the activity. But we take a balanced shareholder approach. One of the most powerful things that I think will occur is the performance at Geismar, and the performance of assets that had debt capital. We’ve had debt capital go in to support equity and improving assets like our our Danville facility and our Geismar facility, and they have repaid their debt quickly. They have generated high cash flow and that has continued to support the company. But Chad will talk a little bit about share repurchase.

[Chad Stone:]

So, as you know, we’ve done two share repurchase campaigns; the first one was $30 million, the second one was $50 million. And the second one interesting, we expanded from just a share repurchase authorization or for us to execute on and execute that to be able to repurchase bonds. And it’s particularly when we have seen them trading at a discount, we’ve – we really like to do that to reduce the outstanding amount there. I do think that recently with the activity around the life sciences announcement, we’ve got to be more – we’ve got to be careful whatnot share purchases currently. But once we’re free to move forward, we most of that when we’ve got it capital to allocate. I will say that this year with the opportunity to reinforce a business for smart trading around forward tax incentive probabilities, working capital is well invested in ensuring that trades – following trades supporting the business and that we are participating with our best information around maximizing those incentives should they return because they’re money earned. And kind of going back again, Craig, what we need to do is ensure that this excellent business is well appreciated. We’ve had good liquidity over time. We’ve had good trade. We’ve got great investors. If you look at the book of investors that are invested in our company, it’s a great group that are dedicated to what we do and we appreciate the support. We have returned capital. We have paid down debt. We have managed slightly life sciences good asset. We are in the process of monetizing value and makes sense for that. We’re sensitive to expense management. There is a fundamental challenge around forward forecasting. And what I hope people are starting to realize is that, this business under just about any condition makes money. And when you think about that and you think about the reliability of cash flow and you think about the assurance of cash flow, no guarantees. But if you look at the history, it generates a lot of cash and it should be valued well.

[Craig Irwin:]

Great. Thanks again for taking my questions and congratulations on the progress with both Grays Harbor and REG Geismar. Thank you.

[Daniel Oh:]

Thank you.

[Chad Stone:]

Thank you.

[Operator:]

And this does conclude today’s Q&A session. I would now like to return the call to Mr. Daniel Oh 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 quarter on our progress. Before we conclude,. Todd is going to mention an upcoming Investor event for REG. Todd?

[Todd Robinson:]

Thanks, Dan. We will present and host meeting at the ROTH Capital Partners Conference on Tuesday March 14, in Orange County, California. Attendance at the conference is invitation only, so please contact your ROTH 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.