Renewable Energy Group, Inc.
Q1 2015 Earnings Call Transcript

Published: 6 May 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the Renewable Energy Group Incorporated First Quarter 2015 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 introduce your host for today’s conference, Mr. Todd Robinson, Director of Investor Relations. Sir, please begin.

[Todd Robinson:]

Thank you. Good afternoon, everyone, and welcome to our first quarter 2015 earnings conference call. With me today is our President and Chief Executive Officer, Dan Oh; and our Chief Financial Officer, Chad Stone. We are here to discuss our first quarter 2015 financial results and recent developments. Before we begin, I would like to remind everyone that this call is being webcast, and is available at the Investor Relations section of our web site at regi.com. A replay will be available on our web site beginning later this afternoon. The webcast includes an accompanying slide deck, which will appear automatically with the webcast, but you will need to advance the slides manually as we prompt you. For those of you dialing-in, the slide deck can be downloaded along with the earnings press release in the Investor Relations section of our web site. 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 2014 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 and 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.

[Dan Oh:]

Thank you, Todd, and thank you everyone for joining the call. I am going to cover some highlights of the first quarter and then turn the call over to Chad for financial details. As we previewed during our last earnings call, we expected business conditions to be challenging in the first quarter and they were. We are a seasonal business and we have gone through our seasonal downturn and we believe the worst is behind us. In the first quarter, demand was dampened beyond the normal winter seasonality due to the significant global decline in energy prices in the second half of 2014 combined with continuing regulatory uncertainty which caused us customers to lean away from active buying. Prices of our primary feedstock adjusting to energy market conditions while this tends to occur with the time lag. So margins were tied throughout the quarter. Furthermore, while the biodiesel tax credit is not in place at this point for 2015, like last year we believe the industry is selling prices as if it will be reinstated at or near year end and as has been the case several times before. This tough environment was felt across the industry during the first quarter. The National Biodiesel Board has noted that dozens of plants had stopped producing and even large inefficient producers altered some production during the quarter. Looking forward, we are starting to see signs of conditions that are improving and reasonable spreads are returning. I believe the worst of our typically lower performances not only is behind us, here is why? First, it appears that we are ramping in some resolution on the Federal Regulatory Uncertainty. We believe this uncertainty around the RVO caused many refiners an importance to adopt a wait and see mentality until there was more clarity around how many rents they would need. This lesson both demand events for rents. The RVO uncertainty has been a real hindrance to efficient operations across the entire industry and we welcome this upcoming resolution. A concentric issued on April 10 obligates the EPA to propose volume requirements for 2015 by June 01 and finalize the RVO for both 2014 and 2015 by November 30 of this year. Additionally, the EPA has committed to repropose a 2014 RVO by June 01 that reflects volumes as we used while also proposing RVOs for 2016 and 2017 by June 01 and finalize them by November 30, 2015 as well. Actual usage in 2014 for biomass-based diesel is 1.75 million gallons. We do not know what will be proposed for future years. however, in a letter to the EPA, the National Bio-diesel Board has suggested a reasonable growth rate of 300 million gallons per year, will also call in for modest growth in the overall advanced or D5 RIN category which is further supportive of biomass diesel growth as shown on slide 3. We believe that this is the minimum level of growth necessary to support our greater industry, especially in-light of the potential for significant important volumes from Argentina, Asia, and Europe. As a data point, volume and the biomass-based diesel category was 305 million gallons through March 31, 2013, which is down 8% over 2014. This is evidenced of the slower quarter and highlights the need for growing production levels for the rest of the year to meet demand for RIN’s and fuel. Second, our margins are already improving as we enter Q2. Energy prices has stabilized. As you all can see, if you track the market prices of crude oil, heating oil, and other petroleum products prices of our feedstock’s had generally continued to decline, so we are getting better spreads. In April, we saw margin increases in the range of $0.20 to $0.50 per gallon. All of our biodiesel plans, other than Geismar are now profitable and running at higher rates. Finally, we are entering our seasonally strong period. Demand picks up every year as we enter the spring and summer months and so far the market is again following that pattern this year. As I mentioned, we are running all of our operational refineries at high utilization rates to produce as much as we can to meet second and third quarter demand. Let me now cycle back to REG Geismar, as you know we had a fire there in early April, which resulted in an unplanned shutdown. Two employees were injured and we are extremely grateful that their injuries were not life-threatening and that our employees are on their path to recovery. We are thoroughly investigating the cause of the fire. We do not believe the fire was caused by problematic renewable hydrocarbon diesel production process. We believe our production process is well understood, stable and safe. We will reaffirm this before operations resume at Geismar. We currently expect the investigation and damage repair to last approximately three more months. During this time, we have also accelerated scheduled turn around and upgrade related activities that were originally planned for later this summer that would have caused an estimated one month shutdown anyway. We’re pulling forward work on pretreatment, storage, and enhanced logistics capabilities of this facility. REG is working diligently to mitigate losses. We've hired specialists in contractors and are expediting repairs through reducing the time of the outage, and are working with our suppliers as appropriate. Indication will suggest that insurance will cover the majority of repair cost. Insurance company adjusters and consultants have visited the site and are working on the claim. The [indiscernible] will create a near-term impact on our financial results and is reflected in our guidance. Our highest priority is that the plant operates safely. Our next priority is that we upgrade the equipment and procedures so that the plant will be productive and profitable as an asset for years to come. I do want to note that before the fire our ramp up at Geismar had progressed to the point where we had consistently run the plant at over 90% capacity utilization. We were pleased with that progress and anticipate the similar ramp up process once operations are restored. Finally, let me briefly touch on other elements of our operations. As you know, we expanded internationally with the acquisition of a majority interest in the German biodiesel producer Petrotec, which was announced in December and we discussed on the Q4 call. Our tender offer for the remaining outstanding shares at closing Q1, resulted in us obtaining another 15% stake for total ownership in excess of 84%. For the first quarter, we consolidated Petrotec's results into our financials. Petrotec contributed approximately 13% of revenue. Seasonal demand in Northern Europe is similar to the U.S. and that winter months are low demand periods. Additionally, market uncertainty around the EU regulatory environment has resulted in weaker demand. However, at the end of April the European Parliament enacted new legislation that should bring greater stability and certainty to the EU biodiesel market. The renewable energy directive or RED encourages 7% flames of renewable fuels across the 28 states and the European Union increasing to 10% by 2020. The RED is more advantageous to producers like Petrotec that gives non-cropping stocks like used cooking oil and waste animal fats. Over the next year each, each EU country will determine how to implement the directive. Finally, our traditional biomass-based diesel fleet of plans performed well from an operational perspective. We have completed many upgrades over the past couple of years and those are operating as expected. As I mentioned earlier, we are now running the fleet at high utilization rates as demand ramps up into the summer ones. I will now turn the call over to Chad for detailed financial comments and then I will return to discuss our guidance and outlook. Chad.

[Chad Stone:]

Thank you, Dan. Let's review our financial results on slide four. Total adjusted EBITDA for the first quarter was negative $30 million, at the low end of for guidance range. We sold 60 million gallons during the quarter, which included 4 million gallons from energy services. We produced 61 million gallons this quarter, including over 10 million gallons of renewable hydrocarbon diesel from our Geismar refinery. As I compare this quarter to the first quarter 2014, keep in mind, last December the biodiesel mixture excise tax credit was retroactively reinstated for 2014. In our adjusted EBITDA calculation for 2014, we allocated the net benefit of the credit throughout the year to the quarters in which the gallons were sold. We believe this provides a more informative comparison of our performance, since the adjusted EBITDA better reflects when the tax credits [indiscernible]. Any analysis of our results should also consider that the BTC last in 2015 or could be reinstated during the year as it has in the past. You can find the reconciliation of adjusted EBITDA to GAAP net income on Slide 13 of the presentation and in the earnings release. Stable seasonal volumes were offset by challenging pricing as Dan mentioned. Our average price per gallon for biomass-based diesel dropped 13% year-over-year from $3.54 per gallon in the first quarter of 2014 to $3.08. Whereas ultra-low sulfur diesel sulfur contract dropped 40% from $3.01 per gallon to $1.80 per gallon. The higher volume and lower pricing resulted in revenue of $231 million or an increase of 5.4% year-over-year. The significant decline in energy prices in the last of the tax credit led to very challenging market conditions in the first quarter as evidenced by a negative gross profit. This was amplified by low seasonal winter demand and the lack of the RVO. Feedstock prices were down approximately 10% year-over-year and RIN price increased and that offset some of the decline in energy prices. But lower demand for fuel and RINs were insufficient to encourage better margins. In April, we saw a stronger demand and better margins in resounds to warmer weather and the EPA consent decree agreement. SG&A was 7.2% of revenue for the first quarter and decreased by $8 million from the fourth quarter due to year-end accruals. SG&A increased by $5 million year-over-year attributable to being a larger business from our international expansion and adding REG Geismar, REG Synthetic Fuels, and REG Life Sciences in 2014. The increase in R&D is attributable to work to bring products to market, to drive growth and having a full quarter of activity in 2015 for Life Sciences compared to a partial quarter in 2014 due to the timing of our acquisition. Turning to the balance sheet on Slide 5, we improved our financial position during the quarter with a higher cash balance and a reduction in total debt outstanding. Unrestricted cash and equivalents, including marketable securities increased to $217 million as we collected the BTC receivable. We still also carry the $101 million CD in restricted cash securing the Gulf Opportunity Zone Bonds. Gross term debt was $253 million; however, net of the $101 million collateral, our net debt is $152 million or 17% of debt to capital ratio. During the quarter, we generated $154 million in cash from operation. Cash inflow came mainly from the reduction in accounts receivable as the BTC was collected. Cash outflow was mainly driven by the net loss in working capital changes such as the build in inventory and a reduction in accounts payable. We invested $12.2 million in [indiscernible] during the quarter and paid down $16.8 million on our working capital line of credit. Finally, we repurchased 525,281 shares of our common stock in the open market at an average price of $9.52 per share. For modeling purposes, we have Board approved capital expenditures of $50 million over the next 12 months to 15 months, our blended interest rate is below 2% and our expected effective tax rate is in the range of 3% to 5%. Total shares outstanding at March 31 were 43.9 million and weighted average for the first quarter were 44.4 million shares. Now back to Dan to go over the outlook. Dan?

[Dan Oh:]

Thank, Chad. We anticipate increasing demand and improving margins due to the prospect of the clarified RVO, stabilizing energy prices, and lower feedstock costs. Guidance for the second quarter is shown on Slide 10. In the second quarter, we expect to sell between 90 million and 100 million gallons of fuel. We are forecasting adjusted EBITDA in the range of positive $5 million to negative $10 million, including the full carrying cost of Geismar during the shutdown period. Onetime cost of the restoration are not included in this figure. We expect third quarter EBITDA to be neutral to positive with upside, if we see a strong RVO announced. This guidance reflects the improving margin environment and the demand outlook that is supported by declining uncertainty regarding future RVO numbers. This outlook still reflects the lower than margin normal margins that we believe are caused by industry-wide pricing that anticipates a potential BTC reinstatement, standard energy pricing uncertainty and also the potential for important produce to hit you source in growing volumes this year. This reflects that the guidance will revenue second quarter operating results by $5 million to $10 million compared to forecasted results if RG Geismar was able to run throughout the quarter. We anticipate the guys will restart in the third quarter and we’ll contribute to EBITDA in the fourth quarter. Now, I’d 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 Brett Wong with Piper Jaffray. Your line is now open.

[Brett Wong:]

Hey, gentlemen, thanks for taking my questions. I appreciate it. Of course I have to ask kind of what you are thinking June 01? I think the NBB requests are going to come through, just kind of what your view in there?

[Dan Oh:]

Well, I think the market is expecting that the EPA will begin with $1.75 billion galloon number. And in very race in them, the EPA should be growing the number. And some predictable rate of [indiscernible] and I would take personally from the EPAs proactive efforts to bring in other feedstock and to enable important product that they are doing that knowing that they are going to grow the number. So I think it’s going up, I think it will be a reasonable number that’s indicated maybe we will how the market performs or put out one for ’14 and for ’15 which will effectively when they come out of fewer people won’t to and then there will be the opportunity to comment and adjust for ’16 and ’17 based on real performance this year.

[Chad Stone:]

I think it’s overall positive and for companies like REG, where we have despite the uncertainty that building a premium sustaining company, we will be in a great position to take advantage of any opportunity present.

[Brett Wong:]

Okay. So just to clarify, on June 01, are they not growing through provide anything for 2016?

[Chad Stone:]

Yeah.

[Brett Wong:]

Okay. Great guys. Thanks.

[Chad Stone:]

The ’16 and ’17 maybe there will also have some stuff in, but that’s not we’ve been signed up.

[Brett Wong:]

Right, just about ’14, ’15. Okay, thanks gentlemen. And just looking at the feedstock side of things in this quarter, obviously we will talk to the difficulties within the quarter. To your operations adjust or your breakdown by feedstock change given kind of where prices were, that would historically are in terms of your breakdown?

[Dan Oh:]

I’ll let Chad speak that first and I’ll make an operational comment.

[Chad Stone:]

Yes, Brett. I think you’re right. We’ve seen feedstock compress and decline, but they haven’t been declining as quickly as energy prices, which is the main theme that we try to highlight. But to your point I think if for example a premium feedstock like soybean oil were to get cheap relative to some of the other feedstocks we can adjust and shipped in-between them if that’s what you are asking about.

[Dan Oh:]

Yeah. Our upgrades at Newton and Albert Lea and Mason City and the continuous improvement at Seneca until we had challenges at Geismar there as well. It’s really made an important and I would even say material difference in our logistics ability to optimize feedstock. It’s was arbitrage exists across the Midwest and the related markets. In the old days, we would have maybe one plan where we could shift something too and you just had to live with the logistics cost. Now, we can see a lot more flexible as we look at not just feedstock arbitrage but in an increasing way with ex-arbitrage too.

[Brett Wong:]

Okay. Excellent. And then before exit your cost around import expectation, obviously you commented about that in your prepared remarks. As a team, I am brining more production or more gallons and I guess this does relate to the RVO but just kind of your expectations on the import level.

[Dan Oh:]

Well. I think the U.S. becoming the best destination for free treated oriented advanced biofuel. And you see Argentina winding up. I am convinced that companies down there, that are long argued for the ability to export to the U.S. or going through their process right now that have certified successful for the EPA. So the companies that also operate around the world, necessity has been already out there. Delivering fuel, quality company, quality fuel and they can nor northern Europe. And so we other feels who are focused on even the D6 RIN category conventional biofuel category, out of the things like efforts around full Methyl Ester. So, I think that we have to expect that the course when feedstock prices and transportation are supportive, we will see product hitting in opportunistic ways. And over time I think we will start becoming a little more ratable in terms of maybe a year from now or two years from now you just start seeing reasonably frequent shipments coming. The biggest destinations are the Gulfs in the West Coast and [indiscernible] time of the year it gets with the New York harbor area. And when we look at the NBB request and recommendation for growth in the RB over time that creates growth opportunity for the domestic market first and also some important project come in, I think it’s a recognition of the EPA's desire for highly competitive feedstock and highly competitive RIMs no matter where they originate, we are ready to compete, we are ready to participate our international expansions over time get us in positions that will help us with that as well. And we have one of the best distribution network and take finished fuel and move it around, I think we will be able to participate as well.

[Brett Wong:]

Excellent, perhaps some great color Dan, thanks a lot guys.

[Dan Oh:]

Thanks.

[Operator:]

Our next question comes from the Katja Jancic with Sidoti & Company, your line is now open.

[Katja Jancic:]

Hi, thank you for taking my call. First, I just want to clarify one thing, you said all of the facilities are currently operating at a profit.

[Chad Stone:]

Yes, Katja this is Chad, so I think what Dan referenced is, right now if you look at current feedstock prices then in spot biodiesel prices margins have improved here going into the second quarter from where they were in first quarter in basically the biodiesel plants that are operated are operating profitably. The one plant that’s down is the Geismar plant with expectation of three months before that's back up and running.

[Katja Jancic:]

I think you mentioned that the margins you see right now are between $0.20 to $0.50 per gallon...

[Chad Stone:]

I think just to clarify Katja, I think what Dan said is that margins have improved from the end of first quarter into April by, between $0.20 and $0.50 plant-by-plant.

[Katja Jancic:]

Okay that makes ...

[Chad Stone:]

First quarter was tight margin environment.

[Katja Jancic:]

One more question, regarding the current bird flu epidemics, is there any fear that this could have a negative impact on the feedstock prices?

[Chad Stone:]

So, what I've seen, so it will have a small impact, I believe but the volumes aren’t as large as you would see in some of the other for example choice like [indiscernible] or even these cooking oil and inedible corn oil, but it does have an impact on the complex. We don't expect it to be very significant. Our outlook for the feedstock is that there is – we’ve talked before that there is a good supply of fats and oils out there and so I don't - we're not seeing a major impact.

[Dan Oh:]

I will add - this is Dan, I will add, over the last couple of years when you heard about TD or [indiscernible] epidemic disease, not that’s a major feedstock that goes into biodiesel and from a quality perspective it is highly substitutable and to different kinds of oil chemical and animal feed applications. Poultry fat, while we use some is not a primary feedstock in our system, so the impacts would be more indirect through substitution effect where otherwise lessen in poultry’s ad availability will affect other industries. Poultry’s ad does go into buy fuel, but not nearly as much as other categories.

[Chad Stone:]

Yeah, Dan just to add to that, when I think of the primary drivers of the feedstock markets it’s going to be, one is energy prices two is palm oil, pricing and volume, three is going to be what is the soya bean oil complex doing just because of the huge volumes relative to the fat and oils otherwise out there. Those are driving things more. Last year is the end that we did see a big impact in what’s a higher volume commodity with the PED virus, but so cattle and pork would be bigger drivers than poultry.

[Katja Jancic:]

So it’s not the same danger as it was last year basically with the pork issue?

[Chad Stone:]

It does not appear to be out of the same magnitude.

[Katja Jancic:]

Okay. That’s all from me. Thank you.

[Chad Stone:]

Thank you.

[Operator:]

[Operator Instructions] Our next question comes from the line of John Quealy with Canaccord Genuity, your line is now open.

[Chad Stone:]

Did we lose John?

[John Quealy:]

Hey, you got me?

[Chad Stone:]

Yeah.

[John Quealy:]

Hi, sorry about that, I’m on the road. And sorry if I missed this. Dan, can you give us an update on Life Sciences. I know we have been looking for some small batch commercial sales or some viability there. Can you give us an update? I apologize, if this is remedial.

[Dan Oh:]

Yeah, we continued with our programs around product development. We continue to be focused on fourth quarter launch of a product that would be contributing cash flow as it complex not yet be profitable, but we think we will start seeing positive commercial results and higher value, lower volume product entry towards the end of the year.

[John Quealy:]

Okay, great, thanks. And I’m sorry, in Q1, did you talk about capacity utilization ex-Geismar?

[Chad Stone:]

So, John, the way I describe – this is Chad. The way I describe utilization given the tight margin environment, you are typically looking at what are the feedstock and sales price and you are managing to kind of optimize around what your margins are. And in cases where there is negative margins or you are not able to cover variable cost, you are going to shutdown. So there were times where we were running at lower rates or making production decisions based on the margin environment. So we ran at a lower rate than we could. There were also times when we were opportunistically building inventory at places, so you got to manage every single plant individually. So there are opportunities to build some inventory in the store. But there were also – we weren’t encouraged to run at full capacity.

[Dan Oh:]

Our utilization was higher than sales. But for pricing reasons, we prefer not to talk about what we put in inventory.

[John Quealy:]

That’s fine. And then lastly, your relative satisfaction in terms of the newly acquired European operations. Can you just comment how that relationship is progressing, integration activities, ability, I think Dan you mentioned ability to be a bit more opportunistic for logistics those types of considerations? Thanks, guys.

[Dan Oh:]

I think the important first ones are no surprises. We have a excellent relationship between companies in terms of interaction and dialogue. Petrotec remains a public company. It remains arm’s length and operates as an independent entity. So what you would think of this formal integration has not occurred because it’s not yet appropriate. At the same time, where collaboration is appropriate, the companies are getting to know each other, but no surprises. We think it’s a highly competent theme and they are moving ahead with their plans.

[Operator:]

[Operator Instructions] I’m showing no further questions in the queue at this time. I’d like to turn the call back to Mr. Dan Oh for closing remarks.

[Dan 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 conference appearance for REG. Todd?

[Todd Robinson:]

Thank, Dan. On May 20 and 21, we will present and host meetings at the BMO Capital Markets Farm to Market Conference in New York City. The conference is invitation is only. So please contact the sales representative if you want to attend or schedule one-on-one meetings with us. The formal presentation at the conference will be webcast and available in the Investor Relations section of our website. Thank you all, again. This concludes the call and you may now disconnect.

[Operator:]

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program and you may now disconnect. Everyone have a great evening.