Renewable Energy Group, Inc.
Q3 2014 Earnings Call Transcript

Published: 5 Nov 2014

[Operator:]

Good afternoon ladies and gentlemen, and welcome to the Renewable Energy Group Inc., Third Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn call over to Todd Robinson, Director of Investor Relations. Please begin.

[Todd Robinson:]

Thank you. Good afternoon, everyone, and welcome to our third quarter 2014 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 2014 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, we will need to advance the slides manually as we prompt you. For those of you dialing-in, the slides 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 Reports on Form 10-Q, which are on file with the SEC. These forward-looking statements speak only as of the date of this call. The Company undertakes no obligation to publicly update any forward-looking statements based on new information or revised expectations. Today’s discussion also includes non-GAAP financial measures. We believe these metrics will help investors assess the operating performance of our core business. Please see the press release for a reconciliation of the non-GAAP measures to the most comparable GAAP measure. With that let me now turn the call over to our President and Chief Executive Officer, Dan Oh.

[Daniel J. Oh:]

Thank you, Todd and thank you, everyone, for joining the call. The third quarter was a period of considerable progress for REG. We generated nearly $11 million of adjusted EBITDA on a consolidated basis while achieving quarter-over-quarter double-digit increases in the number of gallons we sold and produced. Both represent record volumes for REG. Our results demonstrate the strength of our business model and the returns that our investors in feedstock flexibility are generating across our fleet. These investments generated and we generated nearly $11 million of adjusted EBITDA while navigating through a tight margin environment. The adjusted EBITDA includes start up activity and investments in REG Geismar and REG Life Sciences as we work to bring new products to markets. In the first nine-months of this year we executed major initiatives to expand our product lines and distribution channels. REG Geismar moves us into new, but related products, grows our capacity to produce biomass-based diesel and expands and improves our intellectual property portfolio. REG Life Sciences is intended to achieve similar goals via higher value chemical products and new production technology. And as we announced on Friday, we are expanding our energy services business to offer more products through additional Midwest and Northeast locations bringing to 34 locations where our customers nationwide may pickup fuel directly from REG. Now let me provide more details on REG Geismar, the plant has been producing commercial quantities of renewable hydrocarbon diesel often known as renewable diesel on spec and the first truckload left to plant on October 23 as we announced last week. Additionally naphtha and LPG are also being produced and sold. We are pleased with the start up process and how the plant is operating. So far, the biorefinery has run upgrades as high as 90% of nameplate capacity. For the past few months we inspected and repaired production equipment, implemented process improvements and focused on safe operations. We incurred several million dollars in operating expenses during the start-up period through September and separately have invested approximately $13 million in working capital at the end of the third quarter for inventory and receivables. To-date we have spent $1.25 million of the $15 million CapEx budgeted, remaining CapEx will be spent on projects such as front-end pre-treatment, storage capacity and improved rail loading access. So far, the plant has produced over 2 million gallons of fuel and we are forecasting sales of 7 million to 10 million gallons in the fourth quarter out of this location. While caution is always warranted during the start up phase at any plant, we are optimistic that we can remain on plan. In REG Life Sciences our progress remains on track, technology platform yields continue to improve and we are nearing the day when we will have our first sales. We are conducting run through samples of Okeechobee fermentation facility. We remain focused on building the portfolio of specialty chemicals. For competitive reasons we do not anticipate announcing the specific products we are developing until after we have began selling those products. Our general approach is to hit a lot of singles rather than swing for the fences with one or two products. We believe this approach is lower risk and leverages our key strengths. The ability to generate many distinct products from one common platform and the ability to switch fermentation runs in response to some market opportunities. In the near-term we are confident the Life Sciences should have introduced product and generated revenue by the middle of 2015. Meanwhile, we foresee a continuing investment of about $3 million for quarters showing up mostly as R&D expense. Over the past few years we have reinvested significantly in growing and upgrading our traditional biomass-based diesel refineries. And those efforts are positively impacting our results. In October, we completed $20 million in upgrades to our Mason City, Iowa plant, so that it can utilize multiple raw materials such as inedible corn oil, animal fats and greases, in addition to the refined vegetable oils the plant was originally designed to process. The upgrades were completed almost two months a head of schedule and within budget. Our $13 million upgrade project at Newton is on track to wrap-up before the end of the year. We continue to be optimistic about the growth potential in the biomass-based diesel market and these investments in our fleet position to remain highly competitive. Our Energy Services business is expanding their product offering by adding locations in the Midwest and Northeast that will offer ultra-low sulfur heating oil and ultra-low sulfur diesel blended with bio-diesel at varying percentages up to 20%. Now let me touch on some external macro issues that impact our business. We continue to wait for the final 2014 RVO. Many believe the biomass-based diesel number will be increasing their original proposal based on comments by the EPA made after the announcement of the proposed numbers. Additionally, we expect to hear by the end of the year or early in 2015 whether the BTC or Blenders Tax Credit will be retroactively reinstated and extended. If the BTC is retroactively reinstated we would expect to receive a significant cash benefit. To give you the sense of the amount you can look at our SEC filings and seeing the impact when the BTC was retroactively reinstated for 2012 on January 2, 2013. For simple point of reference, we sold 188 million gallons in 2012 and are forecasting approximately a 50% increase of gallon volume in 2014. It is important that you understand that the industry has operated all years if the BTC would be reinstated. That means the margins you see on our results are now not normal, negotiated prices for the shale bodies or the press impart because many believe that BTC economic benefit will eventually flow through to us and our partners. Shortly we've reinvested cash from BTC and [indiscernible] acreage and invested in development of technologies, building new assets and acquisitions of companies. Our growth plans have not slowed and we envision more investment in the biomass-based diesel industry and a further M&A activity as we have communicated in the past. Finally, like all companies producing alternative energy sources, we are impacted by changes in the price of oil. Oil has declined significantly in the past couple of months. Clearly lower oil prices are good for consumers in our economy as they flow through to the pump as lower diesel prices. While we monitor diesel prices and their absolute value, our main interest is that there remains a spread between fuel prices, local and state incentives plus RINs and our feedstock cost. In the third quarter, we saw attractive spread opportunities as the bumper crops lowered corn and soybean prices and the price of many of our other feedstocks. Obviously prices and spreads can all change so the key for REG is our flexibility to adapt quickly to those changes. Unlike some bio-refineries or technologies that are only able to utilize refined feedstocks, the majority of our production can shift between feedstocks when better spread opportunities are available. Our national footprint gives us visibility to feedstock price around the country enabling us to arbitrage local and regional variances as opportunities arise. Let me now turn the call over to our CFO Chad Stone to review our financial results in more detail. Chad.

[Chad Stone:]

Thank you Dan. So you can find our reconciliation of adjusted EBITDA to GAAP net income on Slide 14 of the presentation in the earnings release. Now let’s cover our financial results on Slide 7. Adjusted EBITDA for the third quarter was $10.9 million inclusive of [indiscernible] Ed Geismar and research and development efforts. During the quarter, we sold 88.8 million gallons of biomass based diesel an increase of 14% year-over-year and 15% sequentially. The average B100 sales price per gallon decreased 3.5% sequentially to $3.54 per gallon. This quarter, we generated revenues of $384 million of 15% year-over-year decrease, revenue did increase 15% sequentially tracking again in gallons sold. Sales of separated RIN inventory were $46.4 million up 6% year-over-year. Turning to Slide 8, you can see the feedstock prices fell during the quarter, the anticipation of record soy harvest cause soybean oil prices to drop during the quarter and also record ethanol production is resulted in available inedible corn oil. That price is declined with the rest of the oil complex in the third quarter as well. We have seen inedible corn oil prices increased a little bit after the end of the quarter. For the third quarter, our risk management gain was $19 million and as we’ve mentioned in the past our risk management strategy is to protect cash margins by offsetting sales and feedstock exposures with futures and forward contracts and fiscal matching contracts. Accounting rules required us to reflect risk management gains and losses in the current quarter. Again, this quarter was large as a result of rapidly decreasing energy prices. Many of our contracts are protecting future sales and this large gain does reflect tightening margins and pull in some fourth quarter margins poured into third quarter. Selling, general and administrative expenses expanded to 4% of revenue from 3% last year, the increase is due to a lower revenue number. The increased depreciation and the amortization expense, and the investment in research and development which is included in SG&A. For modeling purposes, our average interest rate on term debt was 1.9% at September 30 and we are forecasting an effective tax rate of 3% to 5% going forward. Now, let’s turn to balance sheet on Slide 10. Cash, cash equivalents and marketable securities increased by $2.7 million during the quarter to $128.6 million. We generated cash from working capital management as we drew down finished goods inventory during our busy summer season and improved on our collections. Inventory days decline sequentially from 20-days to 12-days representing $21 million of cash. While DSO declined to 8-days from 13-days representing $13 million. We had a lower cost to market adjustments in the quarter of $1 million associated with finished goods inventories and payable increased by $4 million. For the quarter, we generated $47 million of cash flows from operations and we have $13 million for capital expenditures and $3 million to pay down term debt. Our debt-to-capital remains flat in the second quarter at 27%. For planning purposes, our remaining board approved capital expenditures expected for the next 12-months is roughly $40 million. Now I will turn the call back to Dan to discuss the outlook. Dan?

[Daniel J. Oh:]

Thanks Chad. We’d like to provide the following financial guidance for the fourth quarter of 2014 as shown on Slide 12. On this call we are only offering guidance for the fourth quarter of 2014 as the RVO has not been finalized by the EPA and we do not know if the BTC will be reinstated. We expect to provide the first half 2015 guidance on our fourth quarter earnings call. Our Q4 guidance incorporates several assumptions. First, we estimate the forward spread between feedstock and biodiesel prices. Second we are providing guidance as if the BTC will not be reinstated in 2014. However, we have positioned ourselves to benefit if it returns. Finally, keep in mind that our growing business now includes investments in renewable hydrocarbon diesel, energy services, and renewable chemicals as we work to bring more products to market. These investments are reflected in more assets on our balance sheet and also in R&D and other expenses we are now occurring. Our plans with Geismar now operating, we expect to see sales of renewable hydrocarbon diesel as mentioned along the sales of naphtha and LPG to pickup. As planned we expect our Life Sciences investment will continue before generating sales of positive EBITDA. We do believe we will be selling renewable chemical sometime in 2015. Specifically for Geismar, as I mentioned, we have started selling renewable hydrocarbon diesel, naphtha, and LPG and are forecasting between 7 million to 10 million gallons we sold in the fourth quarter. As with the BTC, we expect Geismar to turn positive cash flow from operations in the second quarter of 2015; with the BTC we expect it to be the first quarter. In the fourth quarter, we expect to sell between 16 million to 17 million gallons of biomass-based diesel inclusive of biodiesel and renewable hydrocarbon diesel or RHD. In the absence of the BTC and tight margin environment for Q4 we forecast adjusted EBITDA and the range of breakeven to negative $20 million. Now I’d like to turn the call over to the operator for the question-and-answer segment of our call. Operator?

[Operator:]

Thank you. (Operator Instructions) The first question is from Chip Moore of Canaccord. Your line is open.

[Chip Moore:]

Hey, thanks for taking the question. Congrats on a number of achievements this quarter. I guess, maybe first as you could just on election night here to talk about your thoughts on RFS currently? Thanks.

[Daniel J. Oh:]

Yes, on RFS and the RVO, it’s a little bit uncertain when we’re going to hear 2014, but that has more to deal with whether or not the EPA needs to look at all the things around declining energy prices and so forth, I would guess that their models have changed a little bit, but we still expect numbers will be positive and increasing, we are just not certain when we are going to hear those. With respect to Democrats or Republicans, as we interact with the broad spectrum and array of politician of local, state and federal level, we continue to find this a bipartisan of renewable [ph] activity. And while it’s appreciated for many perspectives including energy diversity and food security and environmental benefits and it might even be countered intuitive but as energy costs get lower, the ability to pay for a better environment increases. So I think we are going to continue to enjoy support no matter who is in-charge.

[Chip Moore:]

Okay, thank. That’s helpful. And on Geismar you gave some good color on at least next quarter how that’s ramping, how should we think about that ramp next years in terms of getting to full capacity, et cetera?

[Daniel J. Oh:]

We’ll mostly be market focused and as we continue to improve and invest in the facility, its flexibility and its durability will improve. We shared when we announced that we are going through start up that we had about $15 million of CapEx in the per share to put in place, others items still matter and they will help it to improved the competitiveness and profitability and the durability of the facility.

[Chip Moore:]

Okay, and then just last from me. On the services expansion can you talk, bring a little more color how many gallons that adds, how you are thinking about that next year?

[Daniel J. Oh:]

Yes. As we go through I don’t think that people should count it as something that’s material in terms of earnings. I believe that this business will be positive cash flow as it’s growing by the first quarter, probably in the fourth quarter of this year and its real purpose is to serve our customers with an additional channel where they can gain access to the [indiscernible] and then also sell conventional high quality products, it help us to make money that we can reinvest in the business. We see all that occurring, we see it occurring at a pretty steady rate, but it’s not going to be a material impact in this winter.

[Chip Moore:]

Yes, okay. Thanks Dan. Thanks Chad.

[Chad Stone:]

Thank you.

[Operator:]

Thank you. The next question is from Craig Irwin of ROTH Capital Partners. Your line is open.

[Craig Irwin:]

Good evening gentlemen, congratulations on the strong execution in the quarter. Chad, I was hoping you could breakdown for us the P&L contribution of including the operations of REG Life Sciences or LS9 and then REG Geismar in the quarter.

[Chad Stone:]

Sure, I guess consistent with what we've talked about in the past. Right now that in the development phase we are expecting basically $1 million a month of R&D related expenses for Life Sciences and in the ramp up of Geismar it was consistent or a little bit better than what we gave you in terms of guidance last quarter.

[Craig Irwin:]

Are you able to share a more precise number with us, as you did last quarter or is this something you are going to be cautious about because of competitive reasons?

[Chad Stone:]

No there is a number we disclosed associated with Geismar, which we will basically see it’s about $4.8 million for the quarter.

[Craig Irwin:]

Great. Thank you for that. So given the things really kind of moved in your direction quite nicely during the quarter that you are able to capitalize on some of the feedstock variability even though we've seen some diesel price pressure, heating oil price pressure, how do you see the setup for the fourth quarter, what are the basic assumptions that you are using to give us the guidance zero to minus 20, is this basically status quo are you expecting modest deterioration improvement. If you can give us a little bit more color there?

[Chad Stone:]

I think as you follow the commodity prices, as we've seen timing margin environment is being described that has resulted in some risk management gains that I mentioned, earlier that that we've pulled some of the margins forward that we expected to earn in fourth quarter as a result of those moves, which explains the adjustment, otherwise we are looking at normal seasonal winter demand cycles where we tend to see opportunities for production and storage versus some of the higher demand quarters like second and third quarter.

[Daniel J. Oh:]

Eric I’ll add, we are cautious and I think people in the industry should be cautious, because energy prices have been dropping on a conventional level. When that occurs, customers are less – they are more reluctant, less willing to buy a lot. So it tends to be more of a spot market as you needed, as you are moving with the market. The good thing about our business is because of our risk management policies and the way we approach the market follow the market as its going up or down, because we are matching our book and as we go through that. But the ability to sell forward the entire industry is less than it might otherwise be and then as energy price is decline Ag and Ag related prices tend to follow, but they don’t follow at the same speed. It tends to trail when it’s going up and trail when it’s going down. So we are just cautious as we are looking at things.

[Craig Irwin:]

Great and then my last question if I may. Today there was a press coverage of a bankruptcy auction of a small competitors of yours and basically with its plants for sales, or its people like expect to be relocated potentially maybe operate at some point the future. With the significant challenges for the industry this year, do you see an alternated landscape as we go into 2015, is there potentially a different environment for competition or do you expect this to be very much the status quo as you have seen for the last few years just with more fiscal disciple across the industry.

[Chad Stone:]

I do things there is more fiscal disciple, I also thank that companies that are well capitalized and in good positions logistically have a relative advantage. One of things we’re seeing as a benefit out of our investments over the last few years in our feedstock capabilities is not only an ability to be very competitive in efficiency level, but also very competitive in terms of market participation and seeing and often being able to arbitrage feedstock dislocations as we’re working through. So this multi-feedstock capability is essential and the way we’ve been able to amplify it at a larger system level is becoming pretty powerful. Folks that don’t have that appear to really need to have something else, another product across something on a processing side, you got to be at a certain level of scale or you need to be in other product at the same time and we are really please with biomass--based diesel business and we see lots of line extensions overtime as you can see our platform expanding.

[Craig Irwin:]

Thanks again for taking my questions.

[Daniel J. Oh:]

Thank you.

[Operator:]

Thank you. (Operator Instructions) The next question is from Katja Jancic of Sidoti & Company. Your line is open.

[Katja Jancic:]

HI, thank you for taking my call. Regarding the RFS, in the worst case scenario how much of an increased could receive.

[Daniel J. Oh:]

Any answer we give you speculative…

[Katja Jancic:]

And just based on your opinion, let’s say.

[Daniel J. Oh:]

Yes, I would chart the year saying that we were going hear it in the second quarter and last quarter, I said we are going to hear it soon and now I’m not sure when we are going to hear it. So I Katja, I’m not sure how good my opinion is. One way to think about it is as the year goes on; I have to believe the EPA is conscious of how much production has occurred in the historical context of last year, RINs can be pulled forward into production that’s occurring now. So calibrating against that is probably a useful way to think, but I don’t know what they are going do I just fully expect that it’s going to be going up based on the signals on the D4 of RINs side.

[Katja Jancic:]

Are there any export market opening up?

[Daniel J. Oh:]

There is export that routinely occurs into Canada at certain times of the year. There is a strong desire to use biofuels and the environmentally friendly. So we see it certainly in second and third quarter fuel moving into Canada. Otherwise the U.S. is for the most part a destination market now and we see imports coming in more.

[Katja Jancic:]

I know you mentioned you could potentially be looking at further acquisitions, what is the situation with the four plants that have been idled. Are you looking at restarting them or its still priority or cheaper to buy other facilities.

[Daniel J. Oh:]

[Indiscernible] work and preparing to be able when we think the market can support additional production to bring those on, as Craig made alter alluding to earlier, there are likely there are going to other opportunities to acquire quality assets and good locations. So we will continue to make versus buy decision when we find it appropriate to add production.

[Katja Jancic:]

Okay. That’s all from me. Thank you.

[Operator:]

Thank you. (Operator Instructions) And at this time I would like to turn the call back over for closing remarks.

[Todd Robinson:]

Yes. [indiscernible].

[Operator:]

Yes sir.

[Todd Robinson:]

It looks like there is one more question. Let’s go ahead and land it, let that last one come through.

[Operator:]

Okay, one moment. The next question is from Daniel Baxter [ph] Private Investor. Your line is open.

[Unidentified Analyst:]

Hi, thank you very much for taking my question. How does the future look for military contracts?

[Daniel J. Oh:]

Well, I appreciate the question, this is Dan. The federal government especially in Department of Defense is pushing to increase the usage of biofuels for energy diversity which then that make those energy to security and environmental resource. So there are contracts that are available to the defense logistics agency and we can’t comment, but confidentially only the competitive reasons, whether or not we are trying to compete for those, but I will share that mostly this contracts require the ability to deliver a blended fuel where you have ownership of regular petroleum product and you are introducing blended fuel through that. So when you look at our energy services business that is a new capability that we really and have in the past to be able to address government contracts and we do carefully look at that market, I can’t tell you whether we are doing anything at it or not, but we have the ability to compete now in a way we didn’t have one-year ago.

[Unidentified Analyst:]

Okay, that sounds good. All right, thank you so much.

[Daniel J. Oh:]

Thank you.

[Chad Stone:]

Thank you.

[Operator:]

Thank you. (Operator Instructions) There are no further questions in queue. I’ll turn the call back over for closing remarks.

[Todd Robinson:]

Thank you operator. Thank you all for participating on 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. This concludes the call. You may now disconnect.

[Operator:]

Thank you, ladies and gentlemen this concludes today’s conference. You may now disconnect. Good day.