Renewable Energy Group, Inc.
Q3 2015 Earnings Call Transcript

Published: 4 Nov 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the Renewable Energy Group Third Quarter 2015 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I'll now turn the call over to your host, Todd Robinson. Please go ahead.

[Todd Robinson:]

Thank you. Good afternoon, everyone, and welcome to our third 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 third 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 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 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 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 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 developments here at REG, comment on industry conditions and then turn the call to Chad for financials details. On October 14, we updated our guidance for the third quarter because we experienced margins that were tighter than our original expectations in early August. Margins and industry conditions in general are still being influenced by the expectation that the Biodiesel Mixture Excise Tax Credit or BTC will be reinstated for 2015. Economics that do not work without the BTC are reasonable if the BTC were in place. There is no guarantee of reinstatement that we believe the industry has concluded that the probability of reinstatement is high. This is demonstrated most directly by the level of high production in the third quarter. The cost in terms of lost revenue of not producing and selling gallons when the BTC is not in effect, but then gets retroactively reinstated would be significant for most of the industry. So companies with available working capital will often choose to run and produce fuel. As such the industry is producing at a level that results in reasonable profitability with the reinstated BTC when considering contracting and retroactive sharing arrangements. The high production level is supporting elevated feed stock prices beyond what we would consider a reasonable spread in the context of current energy prices. Since we last reported in early August, energy prices trended down meaningfully. As shown on Slide 3, NYMEX Heating Oil from mine was 1.5 RIN to climb around 21% from that time, while our primary feedstock prices declined only 10% to 15%. The margin pressure was exacerbated by lower RIN prices, which is an outcome of the higher production rate. For RIN prices at the start of the quarter were trading in the low $0.80 per RIN, but fell steadily over the third quarter ending the quarter at $0.48 per RIN. On about November 30, we do expect to hear guidance on our years for 2014 through 2017 from the EPA. As we noted in our preannouncement and our earnings press release we too have generated positive adjusted EBITDA if the BTC were in place under current contractual arrangements. We evaluate the decisions to produce or not produce based on current marketing conditions and generally if the margins generated are sufficient to cover our variable cost and contributed to our fixed cost, the we believe it is prudent to run as stopping production would result in smaller profits or bigger losses. Additionally, we must monitor our cash flow and working capital needs and availability when we're making decisions to run or not and as we look at investment opportunities. Regarding REG Geismar, our primary concern remains the injured employees and contractors. It would be inappropriate for me to comment further as the accident investigation is ongoing. Having said that, the extent of the damage is different and far less than what we experienced last spring. At this time we expect repairs to be completed and the plant restarted by the end of January. Our business is set up to be an exceptional cash flow generator as demonstrated by our adjusted EBITDA generation over the last four years which averaged $115 million. At the same time if you looked at our actual cash generation over the last several years, it is often concentrated due to the timing of when the cash on the BTC is collected. Reinvestment of our cash flows has enabled us to grow into an industrial leader by being an opportunistic investor when we feel prices are right for assets or upgrades. An example of one strategic investment is our recently completed acquisition of the Grays Harbor Terminal we have named our REG Grays Harbor. This is now the largest plant in our fleet in terms of name plate production capacity. We have a positive forward outlook and we believe our markets will continue to grow in the U.S. and internationally in the years ahead. Among other things the re-adoption of the LCFS Program in California as well as continued support of state legislation focused on increased usage of cleaner burning fuels along the West Coast of United States should result in increased volumes and improved margins. For REG Grays Harbor we paid a fair price for the assets which also represents a good value to us. We’re excited to have the plant terminal capabilities, deep water port access and storage capacity is part of the REG production and logistics assets we can use to serve the West Coast and they provide a great deal of optionality over time and in service of international markets. We follow the same strategy of buying undervalued assets and the acquisition of the QR equipment. In September we announced that we paid $1.5 million for some valuable equipment being sold in the QR receivership process. We took position of a 12 million gallon hydra treating unit, distillation column and tanks which will be relocated to Geismar. The equipment which is in excellent conditions since it was rarely utilized, could have cost upwards of $20 million to $30 million if purchased new. Our optimistic view of the Biomass space diesel industry extends to renewable diesel chemicals and this was an excellent opportunity to acquire equipment that we believe will make Geismar more valuable and productive over the longer term. Continuing the review of the important initiatives within our fleet, we also announced a meaningful upgrade at our Danville Illinois Bio refinery. We've investing over $30 million for a variety of enhancements that will enable us from producing high quality biodiesel more efficiently. We’re adding distillation equipment which will result in a more pure final product as well as expanding feed stock pretreatment capacity, storage and other logistical enhancements. Those upgrades are on track and we expect those upgrade work at Danville to be completed around the middle of 2016. The final update I want to note is the status of Petrotec in Germany. Petrotec delisted as of October 9 and our current ownership is over 85%. We intent for Petrotec to be a foundation for our international expansion especially in Europe. Europe is a great market for bio mass space diesel and through the renewable energy directive the EU is encouraging increased usage of renewable energy with a target of 10% penetration of renewables by 2020. Similar to the U.S. the European biodiesel industry primarily uses virgin oils, in their case rapeseed oil. However Petrotec produces biodiesel primarily from used cooking oil. Difference that the U.S. margin environment we have seen improving margins in Europe for biodiesel produced from used cooking oil or Eucomi is priced at a nice premium over gasoline and rapeseed oil biodiesel. This is early evidence of the value of the geographic and related regulatory diversification. Let me finish up by circling back to the U.S. market to discuss the BTC and the RVOs. The Senate Finance Committee voted 23 to 3 in support of a tax extenders package back in late July that included the retroactive reinstatement of the BTC for 2015 and a produce's tax credit or PTC beginning on January 1, 2016. The producers credit has currently drafted will limit the credit to fuel produced in the U.S. which we believe would reduce the amount of imports coming into the U.S. We're encouraged by the possibility of producer's credit, but are equally encouraged Congress is considering a two year extension. Regarding the RVOs the EPA has indicated its intention to remain on track and finalize it by the end of November and has posted on the Office of Management and Budget Website yesterday the EPA has formally sent proposed numbers to the LMB. REG and the industry has encouraged the EPA and OMB to consider the impact that imported biomass space diesel and resilient ethanol have on the supply of D4 and D5 rents. The combination of the condition around BTC reinstatement causing strong domestic production along with the imported products has caused RIN prices to remain low. One other positive development is the California Low Carbon Fuel Standard which was readopted by the California Air Resources Board and will take effect in January. The regulation requires California to achieve at least a 10% reduction in carbon intensity of transportation fuels by 2020. As you would expect we believe that this will create additional demand for biomass based diesel in a very large diesel consuming market. The value for LCFS credits has been increasing recently and they’re trading over $80 per metric ton. Strategically we're very well positioned to supply the California market from Grays Harbor, Washington. Our deepwater port there enables us to ship and bulk along the coast, which is most effective than shipping by rail over the Rockies. Simply for logistics and supply reasons the Grays Harbor assets improve our system and the LCFS development has welcome incremental positive for us in that deal. In addition to sourcing biomass based diesel from Grays Harbor we're able to provide supply from other REG plans including from those plants that use feed stocks that generate higher credit value due to lower carbon intensity scores. Let me now turn the call over to Chad for a financial update and then I will return to discuss our guidance and outlook. Chad?

[Chad Stone:]

Thank you, Dan. Let’s review our financial results on Slide 5. So as I compare results from this quarter to the third quarter of 2014 keep in mind that 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 better comparison of our performance since the adjusted EBITDA reflects when the BTC was earned. Any analysis of our results should also consider that the BTC has lapsed but could be retroactively reinstated again as it has in the past. As Dan mentioned, the tight industry margins currently reflected expectation that the credit will be reinstated for the year. You can find the reconciliation of adjusted EBITDA to GAAP net income on Slide 14 of the presentation and in the earnings release. Adjusted EBITDA for the third quarter was negative $10 million. We are estimating that the net benefit to REG of a potential retroactive reinstatement of the BTC for the third quarter of 2015 would be between $35 million and $40 million and we are estimating a net BTC benefit of $80 million to $90 million year-to-date through the third quarter. We sold a 120 million gallons during the quarter, which includes 17 million gallons from third parties, 11 million gallons from energy services as well as a 11 million gallons in Europe. We sold 35% more gallons of fuel in the third quarter of this year compared to last year but our average price per gallon was 27% lower. The higher volume and lower pricing resulted in revenue of $395 million an increase of 3% year-over-year. Energy services volume increased from 1 million to 11 million gallons in the comparable third quarter and energy service continues to increase volumes and we’re looking forward to the heating oil season in the Northeast this winter for continued growth. We produced $85 million gallons in the quarter and with Geismar down, we did not produce any renewable hydro carbon diesel in the third quarter but we did sell 1 million gallons of RHD that we had in inventory. At our new plant at Grays Harbor we sold 4.4 million gallons and produce 7.4 million gallons since taking procession on August 19 through the end of the quarter and we were producing and selling under the REG banner day one following the acquisition. Now let me discuss our operating expenses. R&D expenses of $3.5 million was up 26% year-over-year, SG&A spend of $18 million was up 20% sequentially and 33% year-over-year. The increase versus last year was due primarily to cost incurred for international expansion, added headcount and professional services in support of growth both domestically and internationally. For the third quarter, our risk management gain was $23.3 million. As we've mentioned in the past, our risk management strategy is to protect cash margins on a daily basis to balance our position on existing commitments. However due to accounting rules, we mark to market the risk management contracts which result in GAAP hedge gains and losses that may not match the period of the margins we are protecting. The risk management impact is reflected in cost of goods sold and is the inverse reflection of a tightening margin environment we experienced throughout the quarter. Operating loss was $18 million and net loss was $16 million or $0.36 per share. Turning to the balance sheet on Slide 7, day sales outstanding declined to 12 days from 14 at the start of the quarter, while inventory days declined to 18 from 24 at the start of the quarter. In the third quarter, cash and marketable securities declined by $27 million while debt increased by $4 million from the end of the second quarter this year, recall that debt assumed in Grays Harbor at the asset acquisition was $5 million. The decrease in cash is due primarily to cash used for the acquisition of assets in Grays Harbor the cash paid for related net current assets, the share repurchase plan and other capital expenditures. Cash including marketable securities are 10% of book value and a portion of our cash balances is intended for continued support of our share repurchase plan and other Board approved projects. Our term debt is 27% of capital and if you net out the $100 million fully cash collateralized bonds that is 18% of capital. During the quarter, we spent $33 million on capital expenditures and $8 million in our share repurchase program. At quarter end, we had $22.4 million drawn under our line with Wells Fargo and $32.5 million more of availability on the line. During the third quarter, we repurchased 837,000 shares of our common stock in the open market at an average price of $9.31 per share. Since initiating our share repurchase program, we've bought almost 2.5 million shares cumulatively at an average price of $9.40 per share. Our weighted average interest rate for the quarter was below 2% and our effective tax rate outlook continues to be between 3% to 5%. Now let me turn the call back to Dan to discuss the outlook. Dan?

[Dan Oh:]

Thanks Chad. Guidance for the fourth quarter of 2015 is shown on Slide 11. In the fourth quarter, we expect to sell between 95 million and 105 million gallons. We're forecasting our adjusted EBITDA to be in the range of negative $10 million to negative $20 million. If the BTC is retroactively reinstated, we are forecasting the net benefit to RG to be in the range of $25 million to $35 million. As I discussed earlier, the industry is assuming a BTC reinstatement and is producing accordingly. There are many influences on the industry that are bound to be resolved after which we should have much better visibility on how 2016 is going to occur. In particular we expect to receive the 2014 through 2017 final biomass based diesel RVOs which should get resolution on whether the BTC will be reinstated and if the BTC is converted to produce tax credit for 2016. Now I would like to turn the call over to the operator for the question-and-answer segment of our call. Operator?

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Brett Wong with Piper Jaffray. Your line is open.

[Brett Wong:]

Hey guys. Thanks for taking my questions, I appreciate it. So first I wanted to kind of dig into outlook for next year, so facilities are opening in the red now to receive the BTC this year. Assuming that comes in and you get infusion of cash for all of the facilities, then would we be seeing a similar operating environment like we did this year and next year with high production and low RIN again assuming clients are going to operate to try and receive the BTC and of course that is assuming there are no legislative changes given that it's an election year in that proposed views are the same?

[Dan Oh:]

It's Dan, I'll answer first and let Chad follow-up. So let's make a couple assumptions as we're trying to talk through this. First of all, let's assume that we have the blenders in place through 2017 and let's assume that the RVOs that come out are supportive to the purchase of biomass based diesel and coverage of D5 and D4 obligations. So in that world I think life would be quite different because we will get back to routine purchasing and routine sales where the margin is embedded and it's a much more efficient trade. Right now, not only is there the odd situation where producers are generally if they're highly efficient are still seeing contribution margin. They're effectively financing the activities of vendors and customers. So you have adverse pricing pressure that creates a less efficient situation for producers. So I think producers have their pricing power on all sides, but I think we'll see the margin come in right away. In that world blenders is being routinely and practically monthly being reimbursed. So the working capital is flipping quickly and we get back to places we haven't seen for a few years where the margins in the quarter and the earnings are in the money at the time. I think at that point you really are going to see the power of the system that we've been building which has proven itself right now in terms of cash flow generation, guess with the assumption of when it's returned but still efficient, still running at good utilization still going and I think it will be a competitive advantage situation next year. Chad anything else?

[Chad Stone:]

Yes, I agree with that Dan. So Brett when I look at 2016 if the tax credit reinstated I think you have a more optimistic outlook for next year where you're able to book the tax credit benefit throughout the year assuming it's reinstated and if it were converted as proposed in the Senate Finance Committee to a producer tax credit that provides an advantage to the domestic producers and a margin advantage. So I think that that would be a boost to RIN prices for example. Right now as Dan was describing you've got continued higher production. We saw elevated imports in the third quarter that basically kept feed stock prices high and RIN prices declining and we're not allowed to take any benefit even though the industry or the market participants are assuming a tax credit reinstatement. So you don't have that matched up. So assuming a tax credit reinstatement I think you see a much better outlook for 2016.

[Brett Wong:]

Is there a scenario that we were in the same predicament as this year where granted we should have the RBOs, but the thing might there was too much of an impact in waiting for what the finalization is going to be with the RBOs this year, but if next year you're waiting for the BTC to be reinstated again at the end of the year would we see at similar operating environment.

[Dan Oh:]

So Brett I think the operating environment will just be better. Let's not forget however though that energy prices are never at the decline have caused the buying complex for all fuel and energy to generally move towards the near term forecast in a near term purchasing situation. So we do have other macroeconomic things that are occurring that are outside of blenders and RINs and the market is kind of in a nearby -- we're leaning back on our heel situation as opposed to leaning forward wanting to buy bio fuel. If we remove through these federal uncertainties, those variables I think we're going to see good fuel movement in particular. I think our company will be highly compared.

[Brett Wong:]

Okay, and then Dan you mentioned the import volumes elevated in the third quarter, can you just talk about where those were coming from kind of what levels you were seeing and then as you kind of move in through the fourth quarter what kind of import you're seeing now.

[Dan Oh:]

Well, one thing that I think is worth noting is we should all be interested in seeing what happens between a blenders tax credit and something around the producer tax credit because they could be near term disruptive activity in terms of supply movements between '15 and '16 based on who has fuel where and whether their fuel will qualify under whatever the forward system is. So for example if you see a movement towards producer tax credit there will be people who have inventory that want to take advantage of this year’s incentive versus next year's incentive. So I would watch that, but that will be kind of a blip. It will be one-off activity that’s recurring as that's going. Anything else Chad?

[Chad Stone:]

No, I think to your point Bret we’re seeing some Argentinean SME north of a $100 million but less than $200 million gallons probably and some product out of Singapore and those are kind of the key driver of imports that we're seeing right now.

[Dan Oh:]

Yeah, and even the Argentinean SME that’s out there the sense I have this is Dan, is that people are waiting to see what happens with the elections and the aftermath of the elections in Argentina because there are retroactive or what might feel to traders like arbitrary tariff and other tax considerations that could occur as they try to figure out their governmental revenue. So again people are kind of buying a nearby basis. I do think that the EPA and the OMB are highly aware of imported product and the volumes and part of encouraging more clean or low carbon fuel is accommodating wherever they think they’re encouraging fuel to come from and I think they appreciate that and are likely to consider when they're thinking about growing volumes.

[Brett Wong:]

Okay, that’s great color. Thanks and then just wondering Grays Harbor was a great acquisition I am just wondering if you are kind of seeing any other additional opportunities out in the current environment, some people are operating rent and hoping for BTC, but hopes are maybe not the best way to go about things if you‘re willing to offer them cash. So wondering if you're seeing anything out there then look at appealing at Grays Harbor.

[Dan Oh:]

Are you asking about other acquisition opportunities Brett?

[Brett Wong:]

No I am Dan.

[Chad Stone:]

I was talking about Grays Harbor because you think that’s a great addition to our system not only is it in an excellent position to serve the Pacific Northwest and by water the California market it also in and of itself can be a strong terminal and has fundamental value on the terminal side for those times when it may not make sense to run bio diesel. The market is very synergistic to ours because generally the West Coast was a little harder for us to service because we were delivering more by rail and buying from local producers and reselling. So with the basic supply position out there now we’ve got a base load and then we can supplement that as we’re getting in and around the market which we service for ten years at least. It's not a market that's unknown to us. We know the market. And the company is working right now to expand the logistics and distribution capabilities beyond what was there before. Both companies are stronger for being together and I think that plant will realize more of its potential over the next 18 months. We do see opportunities to improve the logistics efficiency and operational efficiency of our fleet and it's on one hand just by the continuous improvement that we do in our systems to improve the yield and the throughput and the volume capabilities along with greater processing to complete plans that we have and also to look at people we have done business with for a long time in some ways and bring them into our business. I do think over the next 12 months, they're going to be good values for both the company that will join us and our company will get stronger, but I will also temper that by saying there are fewer and fewer opportunities that fit into our system well and that is one reason why internationally especially in Europe I think there are great opportunities over there, a good value that will fit in and that business over there has the potential to grow from an advanced bio fuel perspective like our business here has with patients, with the application of our existing technology and with the combined teams that are already looking towards the future but are not yet together, we don’t yet wholly own that asset and it has independent minority investors that are considered every day. I think this industry is a global industry on the lipid and oil and fat side, the diversification on the geographic and regulatory side makes a lot of sense. You have seen already in the large Ag businesses that are out there that focus on value added crushing and separation of different kinds of Agri products and slowly and carefully I think you will see us continue to pursue this one.

[Brett Wong:]

That's great Dan. Thanks for the color. Just quick one on Grays Harbor, do you think that there is opportunity there to display some of the European gallons that come in access the California LCFS?

[Dan Oh:]

I do think there is the opportunity to displace. At the same time, we're focused on just providing more fuel. The California market is a huge diesel market and the West Coast is served more by water delivery than it is by rail that's the way most energy moves in and out of the refineries whether it's up and down closer from overseas, LCFS favors our kind of fuel, very great carbon scores from waste and other co-products out of rendering and other live stock industries. There is room for both, and there is room for both to serve the community as well with great fuel and also make some money.

[Brett Wong:]

Okay, thanks a lot guys. Really appreciate it.

[Dan Oh:]

Thank you.

[Chad Stone:]

Thanks Brett.

[Operator:]

Our next question comes from Craig Irwin with ROTH Capital Partners. Your line is open.

[Craig Irwin:]

Good evening gentlemen and thank you for taking my question. So Dan over the last several years, you've invested a lot of money in leadership at the company on being a low cost producer in the biodiesel industry and the benefits of that seem to be obscured by a number of the growth initiatives. Can you maybe just flush with us the different things where you're investing better that are costing you on the EBITDA line, Grays Harbor was a positive contribution in the quarter but REG Life Sciences, Geismar, Petrotec and any others, can you maybe help us back out what EBITDA would be if you didn’t have such an aggressive growth program at the company at the moment?

[Dan Oh:]

I’ll comment and will have Chad lay in a little bit too. Thanks for the question, Craig. So we have a combination of investments that are occurring and this is typical of our business as we’ve grown diversified and expanded geographically. We have the near term projects that are continuous improvement projects that are generally always going on within our fleet and through R&D and I call those six months to 12 month projects. We have more substantial, more visible upgrades for example the roughly 15 month upgrade at Danville is common to get out from one to two years anytime we are looking at $10 million to $20 million range investments. That's happened quite a bit. We’re in the middle of one of those. Right now I discussed it earlier and then as we are looking at diversifying our fuel line and then diversifying into chemicals we're getting into medium and longer term investments. So I will remind you that Sunoco was a multiyear investment. So if you go back to Sunoco we bought a business really we bought the assets, but we bought the essence of a business in 2010 had been broken over $100 million roughly going to the private company not all that into that site. It has three lines, couldn’t run one and within a couple of years was producing lot of cash flow and now we continue to invest and grow that asset. That's happened over and over again when you think about buying good value and getting cash flow to come back and do it. That was a multiyear activity. So we have investment through expense or investment through CapEx or investment into durable things that might it look like IT systems in three categories. One is to build the foundation of the business infrastructure of the company. So we've got people, IT systems, compliance, things that go along within a public business, things that go along with an international business. That's occurring that expense is in the background probably a few million dollars of extra costs as we're running through. Next we have R&D or R&D which is principally focused super majority and turn into chemicals now, smaller amount into constant R&D that's always been occurring in our chemical engineering business. If you think about R&D pretty normal for it to be 6%, 7%, 8% of revenue for a company who is focused on technology like we are, we're down in a few percent. It's not a high number at all. That's meeting the long term investment somewhere around $1.5 million a month that has continued and I just spent much of yesterday with our team in South San Francisco. Pleased with what they're doing. See a lot of great progress, everything from tools to pipeline development to building and shrinking the staff processes and systems there. Todd will announce it soon, but we're going to have a Analyst Day middle part of January in New York. That will be a great opportunity for us to talk in detail about many of these initiatives you're describing and then at a place like Geismar like we've had two accidents there, not acceptable from a safety perspective and from an operations perspective. There is no question that the loss of the ability of employees to operate and run the injuries and so forth have laid us down. It's laid us down, It's also laid us down in terms of getting it right, making sure that what we have is what we have is what we need, ensuring that all the systems and everything are good. There is some time and management attention, management put on that as it should be and at the same time, the technology is good, systems are good. We're making adjustments that we need to not running has created leakage in terms of profit, profit that otherwise would have been there this year. We will end up we think having business interruption coverage for a good piece of that, but when you argue with underwriters of insurance, their motivation is to do what they said they should do, not give us what we think we might need and we have that kind of negotiation all the time. Great group of underwriters, but we have leakage there. So we'll end up seeing that money come back, but we have foregone profit and opportunity which would have been there and instated bio diesel tax credit and other benefits as well. And then when we look at our synthetic fuels business and our business development efforts, Geismar I think is going to end up being just like Seneca. We'll get it right in every way. We'll continue to invest there. The ability to improve profit by improving logistics, delivery to customers and down on feedstock, expanding their renewable diesel site. You've seen some of the stuff we did with our acquisition of assets really get opportunity there to just make a battleship that's very important to the energy complex and very important to all the constituents first and foremost the shareholders in that part of the world. So yes, we've got investment occurring at the same time. I think what we're going to see is that in this world where energy prices crashed and we saw Ag prices trailing energy prices and we've seen our business not be at full utilization and we had a couple accidents at Geismar, we're still getting approved significant positive cash flow compared to our industry brother and we're going to come out of this stronger, which good companies do, Chad?

[Chad Stone:]

Yes, Dan I'll just build on what you said there. So if you go back and look at core bio diesel, Craig for example as you know slight negative EBITDA margin for the quarter before taking into account what I described as a $35 million to $40 million BTC or tax credit potential benefit. As Dan said, we continue right around the same range of roughly $3.5 million per quarter on the life sciences line. Geismar not running was probably less than $5 million or so of an impact for the quarter and then as Dan said in his earlier remarks, the German asset turned modestly contributing positive. And then we also are gaining traction within the energy services sector, which is selling heating oil and transportation fuel as well as allowing us to blend more and sell more renewable fuels as well. So that’s a little bit of kind of different parts of the business and how they're contributing.

[Craig Irwin:]

Great. Thank you for that. Next question I had was REG Life Sciences, it's been a significant investment for the company. I know you've had some fairly positive expectation for those assets, but you don’t like to announce anything until it’s really ready for prime time. Can you update us a number of projects that REG Life Sciences is working on right now? Whether or not we’re likely to see customer commitments to those assets in the next year and whether or not you would look to maybe taper down or raise the amount of investment in those assets based on what you're seeing today.

[Dan Oh:]

Craig, thanks for the question, it's Dan. As you would expect, we're constantly reviewing the opportunities this year and that was part of my time with team yesterday, we spent time together all the time and its major focus of the business. I did say earlier in the year in fact last year that I thought we would end up with some commercial products in 2015 where somebody would write a check to us, would not be cash flow positive but we would have something that would be useful. That is not going to happen this year for a variety of reasons and I'll get into some details on 2016 at that Analyst Day. Overall still very pleased with the pipeline development and the focus of the team and what they're working on. So we are -- we're in three space where the business has been evolved for a long time. Fatty acids, esters and alcohols and that’s where the primary investments has been, that’s where the primary investment continues and as we continue to expand our branches and opportunities chemically, it’s an exciting place to be. Our focus has mostly gone towards higher values smaller volume type opportunities, largely because and I think any company that’s in this general space of industrial biotechnologies is thinking similarly largely because we've also seen the macro commodity complex go down. So the major long-term sources of petro and other chemicals are historically palm oil and vegetable oils and on the chemical side and petroleum. So those are all way down. The substitution effect is there, but fortunately our philosophy in terms of the technologies we go after is allowing us to think about this and I think carefully and astutely just we're still in that process. So remember it’s a multi feed stock, flexible platform that can create different kinds of products. That’s consistent with you heard us talk about many things. So different kind of sugars whether it will be Glycerin or Dextrose or some sugar coming out of South America and Ecoli platform or each organism itself is, it’s on a little factory as we evolve and engineer them for different kinds of chemical and product outcomes. And then the flexibility even around that main fermentation process to then get into certain different kinds of downstream separation and finding on that product. So that flexibility has proven itself. I'll tell you a couple products that we were very interested in, don’t cancel out any more because of some of the commodity price changes. At the same time the work we’re doing is getting us a better and stronger platform, and we’re moving ahead with that while we're focused on other products, that were either farther down the pipeline or are now of interest because we've innovated something we didn’t have before. So I don’t expect that the investment there is going to decline. Whether it grows is dependent on a few other things that are being discussed and analyzed internally which really gets back to are we going to accelerate our pipeline development because the pipeline development is fairly predictable in terms of time, money and investment of people. The more teams you have the more shots and goal you have and the shots at goal that I see are very interesting. At the same time, we look at other things like a balanced capital approach. How do we take care of our shareholders? How do we get money back into their product -- pockets either it's through share price appreciation, which is our fundamental goal to the growth of earnings and the reduction of general risk of this earnings over time through share repurchases or other mechanisms we look at making sure the fly wheel or the core business is strong, lots of opportunities grow the basic bio fuel business which is a great lead business. And then we’ve got lots of other interesting things you get into co products, used co products, grows for dissolute business and otherwise. So over time I expect the life sciences investment to grow as we build our portfolio and we can justify building a plant and building a plant will take capital but we need to have a fulsome portfolio to do that and will talk about that more in January. But today its worth continuing investment. It’s a desirable technology platform. It’s one that we almost wholly own in terms of clean patent and licensing and at least I believe every time we invest a $1 into it we’re getting a good IP return and I think we’re going to get great products out there.

[Craig Irwin:]

Great, and then last question if I may you made comments in your prepared remarks about the potential benefits of producers credit versus a blenders credit, can you may be expand on that discuss whether or not the call backed structures in your contracts by directional and how we should expect that to work for you.

[Dan Oh:]

So when people are in the market right now and I look I can speak for all competitors I’m just talking about what I see on an everyday basis. This is not more than a 30 day forward market; it’s first that way because energy prices are uncertain. What is happening with diesel fuel, what is happening with jet fuel all these other distillers? So people are just not leaning forward. So we’re not practically at a point where that matters in any material way to us Craig in terms of whether it’s a blenders tax credit or producer tax credit situation, we will write things so that we are not disrupted in our ability to make money as we go through the end of the year. I do think that all companies that have inventory are going to pause at the end of the year and figure out whether they are going to sell it or not and then we ought to know some time before Christmas what is going to happen and as we look at all of this, for example transportation bill needs to get dealt with at some point, that maybe an opportunity for the extenders packages to get attached and to move forward. But back to some of the differences a producer tax credit scenario as we think about it, it does not bar or prevent any foreign product from coming in, it’s just a question of where the incentives first get applied and the practical reality is most of the opportunity that is out there for foreign product come in already has multiple incentives from where they are at, so when you think about a place like Argentina they’ve got different export tax, they have got specialized treatment, they’ve got all kinds of other things and they coming in taking up a dollar out of U.S. Citizens pocket and then they’re collecting their rents. So are they disadvantaged if they don’t participate and producer I doubt it. It may just be more even playing field. If the needs for rents are high and their movement can be supplement U.S. producer prices or U.S. producers are for some reason not able to expand which I think they will be able to do readily, it will so come. And qualifying D4 wins out of Argentina can work for D4 or D5. So that is why it matters to see whether we’re going through 2017 what those numbers are going to be. I think it’s going to actually be not that, I don’t think it would be painful, I think it would be pretty simple for people to figure out we just need to know it soon or versus later.

[Chad Stone:]

And Craig I will just add to that to just say, I would expect very little 2016 business to be booked until that is resolved one way or the other.

[Craig Irwin:]

Great, thank you for that.

[Operator:]

Our next question comes from Katja Jancic with Sidoti & Company. Your line is open.

[Katja Jancic:]

Hi, Dan you mentioned the California low carbon fuel standard is going to increase the demand, but isn’t that also premium attached to the fuel you saw there under this law?

[Dan Oh:]

So Katja are you asking if it’s more expensive fuel how does that going to grow demand?

[Katja Jancic:]

No once you get a premium, you as a producer if you sell your fuel there and there is something in that sense?

[Dan Oh:]

Yes there is. So along with fuel qualifying for a reinstated blenders tax credit or produced tax credit and generating rents additionally get a calculated carbon credit that can be used within the system out there for companies that need to offset the carbon. And for example right now it’s about $80 for some of the stuff that we would trade into that market. So it’s a nice incentive. That’s very helpful in terms of covering transportation or paying a slightly elevated price for that lower carbon raw material because as you see greater demand for the kind of products we make at times it will flatten somewhat the raw material pricing because people can look at and calculate what the conversion rates are into extent somebody selling something clearly more in way side can charge higher price it will. Well California is offsetting their pollution by encouraging the higher price paid, if necessary to get the right fuel in place. So we are already participating and selling into that system. I think Grays Harbor will help us do it more biodiesel is just a fantastic low carbon fuel in terms of count and California is asking for more of it.

[Katja Jancic:]

And you would get higher value for renewable diesel, is that correct?

[Dan Oh:]

For biodiesel, very. Our biodiesel made out of waste products has really the best carbon score you can get.

[Katja Jancic:]

Okay. That’s helpful.

[Dan Oh:]

Renewable diesel is going into California in a nice way because it flows right into the diesel distribution system as diesel normally would. Most biodiesel historically has been shipped by rail into a terminal and distributed from a terminal and as was the case with ethanol, California didn’t have ways to receive ethanol large volumes and terminals has to be developed for unit trains of ethanol equipment and California now is growing its biodiesel demand is seeing fuel come in from water and from rail and increasing quantities and little bit is being produced locally. In general biodiesel has a better carbon intensity score than renewable diesel what it comes out of things like use cooking oil.

[Katja Jancic:]

Okay. That’s all from me, thank you.

[Chad Stone:]

Thanks Katja.

[Dan Oh:]

Thank you.

[Operator:]

[Operator Instructions] Our next question comes from Heather Jones with BB&T Capital Markets. Your line is open.

[Heather Jones:]

Good evening and thank you for taking my question. I had a question on the California market again and based upon the research we’ve been doing, it seems like diesel specifically biodiesel from waste products like you just said is the best positioned as well as renewable diesel. So do you -- what is your estimate of what the size of that market could be for biomass based diesel by 2020 and it seems like even with Nifty's import into that market, even with your plans with some of the local plants that still a lot more of volumes would have to come into that market and just wondering what your thoughts on that – are on that?

[Chad Stone:]

So there is an interplay between what the EPA is calling for which is a very small percentage over the countries total usage of fuel and were in the country that fuel is going to distribute in these first. So the most efficient play is historically has been in the Midwest where you had the first adoption, the first distribution systems, the plants builds and lot of raw material look nearby so high density there then we saw fuel go into the Gulf Coast region and support of heating oil in New England and as predicted now with low carbon fuel standard California is a great market that’s growing. So I do think that the development of infrastructure to receive and distribute biomass based diesel in California is going to continued to see a growth. On the one hand renewable hydro carbon diesel like we make a guides from our can go right into the system and directly displace diesel field and the on the biodiesel side there is a huge amount of opportunity to get more fuel in there blended in and you see it occurring anywhere from a B2 to B20 level. California is a top five diesel market in the U.S. and worldwide probably to 20 diesel market and diesel is growing fuel I think you’re right it has the opportunity to pull lots of fuel from within the U.S. and elsewhere into the market and absorb it for many, many years. And that the estimate which I won’t give you of how much more I can take is a yearly attention between infrastructure being put in place to receive it and the RIN versus LCFS versus transportation cost advantage intention and delivery into the market.

[Heather Jones:]

Are you with seen estimates of $400 million to $500 million gallons of renewable and like $600 million gallons annually of traditional not - oil but waste feed stock based biodiesel does that number sound crazy?

[Dan Oh:]

No, it doesn’t sound crazy because it’s a huge diesel market and if you want to use biomass based diesel it’s a great fuel I mean it’s the most fungible, easy to deliver and new fuel that’s made in the bio fuels complex and it’s a big reason why it’s a leading growth category for the EPA and everybody else I mean it’s a multibillion gallon market worldwide.

[Heather Jones:]

Okay, thank you very much.

[Dan Oh:]

Thank you.

[Operator:]

And I’m showing no further questions. I will now turn the call back over to 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 some upcoming investor events for REG. Todd?

[Todd Robinson:]

Thanks Dan. We will host meetings at the ROTH Capital partners, Cleantech Corporate Access Day on Tuesday, December 15 in Chicago. 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. On Thursday January 14 we will host an Analyst Meeting in New York City as Dan mentioned. We will be announcing details in the near future, but wanted to mention it now so you can make a note in your calendars. Thank you all again. This concludes the call and you may now disconnect.

[Operator:]

Ladies and gentlemen, that does conclude today’s conference. You may all disconnect and everyone have a great day.