Renewable Energy Group, Inc.
Q4 2015 Earnings Call Transcript

Published: 10 Mar 2016

[Operator:]

Good day ladies and gentlemen and welcome to the Renewable Energy Group Incorporated Fourth Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct the question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce to your host for today’s conference Mr. Todd Robinson, Director of Investor Relations. Sir, you may begin.

[Todd Robinson:]

Thank you. Good afternoon, everyone, and welcome to our fourth quarter and full year 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 fourth quarter and full year 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 slides can be downloaded along with the earnings press release in the Investor Relations section of our Website. Turning to slide two, 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. Such 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 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. My remarks will cover improvements on the regulatory front, our fourth quarter accomplishments and then I will briefly review the year and offer some context. I will then turn the call over to Chad for financial details. REG delivered solid financial results despite challenging markets and declining [indiscernible] fuel pricing that along with RVO uncertainty caused customers to delay purchases for much of the year. Few customers willing to buy forward due to the soft conditions instead we saw a lot of spot buying. When market participants are not willing to commit beyond spot line pricing power is harder to reserve. In the fourth quarter an important development for our business was a substantial reduction in uncertainty around the regulatory environment, positive decisions related to RFS2, the bio-diesel tax credit and LCFS were made, which helped to provide quicker growth for our industry. As we’ve emphasized these incentives created and create enhanced demand for the usage of dense biofuels however the industry and REG are built on a very solid foundation of energy and agricultural economics. Keep in mind that as a nation we have collectively decided that our future is more secure when our energy supplies fulfilled by domestically produced fuel options that are cleaner and lower in their carbon intensity, while these include solar, wind, thermal, geothermal, hydro and others biomass faced diesel fuel is especially important since it is the largest number of the advanced biofuel clean energy category and is liquid and importable. Our government created incentives for private enterprise to help achieve substantial goal especially in liquid transport fuels. The incentives were designed to accelerate the growth of an environmentally friendly economic and socially desirable industry. The biomass based diesel industry is clearly now well into the commercialization phase. Over the past decade the biomass based diesel industry has grown year-in and year-out despite frequent uncertainty created by our political process. We operated in 2015 with full confidence from a sustainability of our industry and the prospects for long-term profitability. Important regulatory actions included the announcement of the final biomass based diesel RVOs for 2015 through 2017 and the reinstatement of the biodiesel tax credit or BTC for 2015 through 2016. The 2015 biomass based diesel RVO is set at 1.3 billion gallons, up significantly over the original proposal of 1.28 billion gallons. It is set to grow to 1.9 billion gallons this year and 2 billion gallons in 2017. Furthermore, biodiesel can satisfy the D5 or advanced biofuel category as well for which the RVO is set at 3.61 billion gallons in 2016. The 2018 proposed RVOs are scheduled to be published this summer. The final RVO is now to create a stable and growing demand environment for our products, which we believe will continue to encourage the growth of our industry. Note that these RVO amounts represent floors on demand not ceilings. Any number of factors can further accelerate demand. Another regulatory action was reinstatement of the BTC. Our industry has come to expect that this incentive may last and then be reinstated and has learned to manage around that instability. Throughout 2015, the industry operated under the assumption that the BTC would come back. Pricing spreads and contracts reflected that assumption. Reinstatement fulfilled industry expectations for 2015 and is creating a more settled spread in contract environment now for 2016. Of course for 2017, the BTC will again need to address by congress. We cannot predict what will happen, but believe the industry has learned to operate relatively routinely. The BTC provided a net benefit of $95 million to REG this year. We expected the result we are reporting today because we anticipated reinstatement as did most industry participants. Along with BTC, other state regulated and related incentives adds a more stable demand outlook. And important one is California’s low carbon fuel standard or LCFS. That regime is intended to encourage the use of lower carbon intensity cleaner burning fuel in the state. This is an objective for which biodiesel and RHD are perfectly suited. As shown on slide five, the law sets up a series of reductions in carbon emissions and uses a market of carbon credits to encourage compliance. After a court order pause, the LCFS was readopted this year and the price of these credits is rising. Current pricing for LCFS credits is around $125 per metric ton. These credits encourage demand for our fuel especially those that are made with lower carbon feedstocks. We can supply California from our mid-western plants, which are able to utilize lower carbon intensity feedstocks. We can also source products for California from our recently purchased Fire refinery in Washington State which has a transportation cost advantage over mid-western plants. As we examine the regulatory framework and how well it encourages our nation’s objectives, we naturally see room for improvement. One challenge is that biofuel producers around the world are able to sell their products in the U.S. and capture the economics of our RFS2 and LCFS focused markets. Based on information from EIA, in 2015 approximately 300 million gallons of biodiesel were imported as well as approximately 200 million gallons of RSD. Most of these imports satisfy D4 demand. We believe a larger RVO would supply and quickly create a demand environment that both encourages the growth of a domestic industry and accommodates the global carbon reduction that can be achieved by the biofuel industry worldwide. We encourage congress and the EPA to consider the slack in our market today and to look at the growing RVO as a powerful tool to resolve the current excessive import issue. I also want to highlight REG’s specific accomplishments, these accomplishments were announced after quarter end, but the heavy lifting went on during the quarter so they are worth highlighting. First, we restored operations at our Geismar RHD plant and it is currently running. We were sidelined by the second pile [ph] asphalt and have been cautious to ensure that the plant could restart safely. We expect Geismar to be a full revenue and EBITDA contributor from second quarter onwards. Second, we enjoyed a full quarter results from our Grays Harbor plant, this is now our largest plant with the nameplate capacity of 100 million gallons per year. This is a large nameplate capacity plant and we do not expect to run our full capacity in the near-term. However, the added capacity means we are positioned for growth as demand in that part of the country develops. The post closed transition was managed without any significant issues. During the period of REG ownership in 2015 Grays Harbor produced 15.4 billion gallons and sold 12.7 million gallons contributing positive EBITDA. We do not normally breakout per plant data and we generally will not do so in the future, but we wanted assure you that the acquisition was successful. Next, in February we announced the signing of an asset purchase agreement to acquire a 20 million gallon per year biodiesel plant from Sanimax Energy near Madison Wisconsin. We are planning for the transaction close in Q1. The sort of acquisition is right in our will house, it is a midsized biorefinery with local feedstock supply. It is already multi-feedstock and utilizes the very same base technology as our Seneca plant. We can bring our knowhow to rapidly maximize its profit. And we do not foresee any difficulties in the transition to REG ownership for an implementing the operational improvements. We’ve done many similar acquisitions and that experience helps to substantially reduce the risk around this type of acquisitions. Finally in January we announced meaningful progress we are making at life sciences, our subsidiary activities especially on the R&D side out in San Francisco. We’ve been relatively quiet on our activities there as we continue to improve our technology and develop products. We wanted to provide insides seems to be excellent work being done by our scientist and engineers and did so at that meeting. We recognize that we have set challenging goals. What we are building at life science is a complex system from a scientific point of view that we think will be very valuable and difficult to replicate. The value of this asset is growing every day and we expect it to be quite substantial in the years ahead. For those of you who attended or listen to our Investor Day, you had a good overview of the science and markets we are pursuing. For those of you that missed the Investor Day, I highly encourage you to listen to the webcast and view the slides in the events section of website. We will not repeat that presentation, but I’ll point out a more recent validation of our work and the value and potential of our platform. In January, we announced that we will be working with Exxon Mobile to develop a commercial viable production method for biodiesel using our organic fermentation system. Exxon is interested in producing renewable fuels using cellulosic sugars, which are a natural feedstock for our engineered organism. We’re excited to have entered this partnership with such an industry leader and pleased by the level of confidence in our technology. Now having covered recent accomplishments, let me briefly touch on how the year unfolded as well as provide some long-term context. As a high growth stage company we view our opportunities at the moment as open ended and we’ll continue to execute on our growth tactics. To put things in perspective the gallons of our biomass-based diesel business grew at a compounded annual growth rate of 62.4% from approximately 30 million gallons in 2008 to 375 million in 2015 as shown on slide 10. As I described earlier we are helping to fulfill our nation’s desire to have cleaner, lower carbon intensity products and services. We believe this environmental objective is generational and enduring. We intend to keep growing along with the industry by adding capabilities in a capital efficient manner. During the year we expanded to biodiesel platform with the acquisition of Grays Harbor. We also continue to acquire shares of Petrotec in Europe and now own over 87%. And subsequent to year end we announce the acquisition of the plant new Madison Wisconsin. We will have global capacity of over 0.5 billion gallons per year after the Sanimax transaction closes. Our growth is not limited to capacity we are growing geographically with Petrotec being the foundation for us to develop our business in Europe. We are also looking internationally source lower cost feedstock. We are growing technologically with the life sciences in synthetic fuel platforms and the promise they hold. Life science has not only creates a potential for new production technology, it pushes our growth into new product lines. Life science is initially focused on renewable chemicals moving us beyond fuel into higher value, higher margin products. We are also growing our distribution footprint. We now have 32 terminal locations, plus our 10 plants in the U.S. Finally our headcount at year end is up to nearly 600 dynamic, talented and engaged employees here in the U.S. and internationally. As talented innovators are just as important asset as the facilities and equipment in our fleet if not much more so. Our plants generate our cash flow today, but those employees are busy everyday creating the REG of tomorrow. Let me touch on one final subject before I turn the call over to Chad. As we talk to investors, we find that the complexity of our industry calls for continuous education and learning. What can be overlooked is that we have multiple streams of revenue and income. Each somewhat different in its economic behavior. The most obvious of course is that we produce and sell fuel and that economics frame look like and are a fast growth industrial company. The fuel business is a good one for REG because we are not dependent on the absolute price of product we sell nor are we holding to a single feedstock. We only require that a spread is present between our product and our feedstock cost. Slide four shows the historical spread that our markets have offered. While there is some volatility as you would expect that generally is a spread between biodiesel prices and the lower cost feedstocks that we use in the vast majority of our productions. Due to the requirement to apply capital between our various feedstocks and a wide substitution opportunity for the feedstocks across various industries there is a national spread between highly refined high substitution opportunity feedstocks and crude vary and pure low substitution opportunity raw materials. As a business we build and improve a multiple feedstock flexible oriented fleet of plants. This is just one aspect that gives us confidence that are long-term and a sustainable fuel business whether the BTC is there or not and whether RFS2 is there or not. And it reinforces our position that we are not solely tied to the price of oil. We also capture the value of the lower carbon intensity or sustainability component of our biomass based diesel. This is demonstrated for example in the value of rents at the national level blending incentives at the state and local levels, the renewable energy directive in Europe and the low carbon fuel standard in California. Some customers need the sustainable lower carbon intensity aspect of our products others do not. Our largest customer is not an obligated party they buy fuel from us, blend it and sell it through a network of travel centers. Other customers are obligated parties that buy our fuel and collect the rents we produce. Other obligated customers buy only rents from us and do not buy our fuel. The sustainability components of value are essentially offset through carbon produced and used in other ways and industries. So we get income diversification value from the sustainable lower carbon intensity component of biomass based diesel. If this carbon offset value component of our product were to go away, which we do not believe will happen in the foreseeable future. We should still have an attractive and durable fuel business. Furthermore, we are augmenting that fuel business with other adjacent and economically diverse revenue streams such as the renewable chemicals and fuel distribution businesses under development, inter-dependencies for parts of our business support the whole. Some vary based on absolute prices, some on margins. We are rapidly growing a closely related bundle of products, channels and technologies. Our track record is solid both in growth and in mitigating business risk. Let me now turn the call over to Chad for financial update and then I will return to discuss our guidance and outlook, Chad?

[Chad Stone:]

Thank you, Dan. Before we get into the financial results, I want to highlight a number of important factors during the quarter. To start, in the fourth quarter, we made a significant accounting adjustment to our financial statements. Our market valuation has been under significant pressure in light of persistent decline in energy prices. We’ve been trading below book value for an extended period of time and during the fourth quarter as we performed an interim assessment for goodwill impairment it became clear that our valuation would not support the carrying cost of most of the goodwill we had on our balance sheet. In the fourth quarter, we booked a $175 million non-cash adjustments to write-off goodwill from our biodiesel and renewable chemical reporting units. This non-cash charge does not reflect our outlook for the potential of these reported units. But became necessary under GAAP due to our stock price. The second item I want to point out is that energy prices continued their rapid downward trend in 2015, which resulted in tighter margins compared to 2014. If you turn to slide 11, illustrate that crude oil drop from $93 to $37 per barrel over the last two years NYMEX Heating Oil which is the future’s contract for wholesale diesel dropped 39% and 41% over the same period. B100 on the other hand has been more resilient declining 10% and 16%, reflecting as Dan pointed out that we are not just tied to crude accrued barrel of oil. Third, the tax credit was reinstated in the fourth quarter of 2015 and extended through 2016. Our net benefit recognized was $95 million as Dan pointed out earlier. Last week our Board approved a $50 million repurchase plan that authorizes the repurchase of both equity as well as convertible bonds over the next 24 months. This is in addition to the $30 million share buyback plans we’ve been using to buyback shares in 2015. That original share repurchase program that was authorized through October 2016 is expected to be fully utilized six months earlier. Now let’s look at our financial results on slide 14, as I compare results from the fourth quarter of 2015 to the fourth quarter of 2014 keep in mind that the biodiesel mixture excise tax credit was retroactively reinstated for 2015. In our adjusted EBITDA calculations for both years 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 accurate picture of our performance since the adjusted EBITDA reflects when the tax credit was earned. You can find our reconciliation of adjusted EBITDA to GAAP net income on slide 23 of the presentation and in the earnings release total adjusted EBITDA for the fourth quarter was $21.6 million. We sold 99 million gallons during the quarter, which includes 12 million gallons from third parties, 14 million gallons of petroleum based diesel as well as 10 million gallons sold by Petrotec. Energy services volume increased from 2 million gallons to 14 million gallons in the comparable fourth quarter. We sold 33% more gallons of fuel in the fourth quarter of this year compared to last year offset by an average price per gallon that was 11% lower. Higher volume and lower pricing resulted in revenue of $388 million, an increase of 15% year-over-year. We produced 82 million gallons during the quarter and at our recently acquired plant at Grays Harbor we sold 8.4 million gallons and produced 8 million gallons in the fourth quarter. Now turning to full year results on slide 15, our full year gallons sold increased 30% to 375 million gallons. This increase is due to a full year inclusion of Petrotec versus only a few days in 2014, the addition of Grays Harbor in 2015 and a significant increase in petroleum based diesel sold through energy services. Of the 375 million gallons sold, 40 million gallons were purchased from third parties, 30 million gallons were petroleum based diesel and 40 million gallons were sold in Europe by Petrotec. We ended the year with 432 million gallons of U.S. nameplate capacity, an increase of 30% from 2014. Full year revenue was up 9% to $1.4 billion. The increase was driven mostly by first the year-over-year volume increases in 2015 as a result of our International expansion and domestic sales. Second, an increase in the gross amount recognized from the tax credit and third an increase in revenue from sales of separated RIN inventory. These increases were largely offset by the decreasing biomass based diesel prices as a result of drop in energy prices. Our average B100 price including RINs was $2.97 per gallon in 2015 compared to $3.62 per gallon in 2014. Adjusted EBITDA for the year was $50 million down 53% from 2014 and this translates to an adjusted EBITDA margin of 4% for 2015 compared with 8.5% for 2014. Adjusted EBITDA is down from 2014 primarily due to the tighter margin environment from lower energy prices as well as from the lack of production and carrying cost from Geismar. For the year our risk management gain was $36 million compared to a $62 million gain in 2014. As we’ve mentioned in the past our risk management strategy is to protect cash margins on a daily basis, balance our position on forward commitments. As a result, the accounting rules we mark-to-market the risk management contracts, which result in GAAP hedged and losses that may not match the periods in which the margins were protecting. The risk management gain is reflected in cost-of-good sold and is the inverse reflection of the tightening margin environment we experienced throughout the year. Selling general and administrative expense is increased to 5.3% of revenue from 4.9% last year. SG&A expenses increased $10.7 million in 2015 and this increase was largely driven by $7.5 million in international expansion with $7.2 million of that amount attributable to Petrotec’s operations and a $1.5 million increase in legal and professional fees. R&D expenses were $17 million in 2015, up from $12 million. The increase in R&D expenses was primarily driven by increased activities in our life sciences business focusing on microbial fermentation. Net loss including the $175 million non-cash goodwill impairment charge was $151 million or $3.44 per diluted share compared to net income of $82 million and $1.99 per diluted share in 2014. Net income excluding the non-cash impact of the $175 million was $23 million or $0.53 per share on a fully diluted basis. For modeling purposes, our average interest rate on term debt is just under 2% and we are forecasting an effective tax rate next year for 4% to 6%. Now let’s turn to the balance sheet on slide 17. Day sales outstanding in 2015 declined to 81 from 83 last year. The day sales outstanding amount at year end for both years reflect the large tax credit receivable. Inventory days declined to 24 in 2015 from 32 last year. Cash and cash equivalents plus marketable securities decreased by $33 million during the year to $47 million. Accounts receivables were $311 million at year end, up from $295 million last year. The increase was due to the gross amount of the BTC receivable booked in the fourth quarter of being higher than the amount booked in the fourth quarter of 2014. Inventory was $86 million a decrease of $12 million during the year. Accounts payable increased by $34 million in 2015 and again the increase is due to the higher amount of the tax credit. Total restricted cash of $106 million does include $101 million of collateralization for the CD supporting the letter of credit for the GO Zone bonds related to Geismar. Our term debt at the end of 2015 was $257 million and of that amount $126 million is the fair value of our $144 million convertible bond offering issued in June of 2014. $100 million are the GO Zone bonds and $30 million of term debt at the project level. Net of our fully collateralized GO Zone bonds, our term debt is $157 million. Term debt is 30% of capital and if you net out the $100 million fully cash collateralized GO Zone bonds that is 20% of capital. Our budgeted CapEx for 2016 is estimated to be between $55 million and $60 million. For the year, we generated $74 million of cash from operations, net cash used in financing activities totaled $26 million, used $64 million of cash to fund ongoing CapEx, $37 million associated with acquisitions and $23 million for the share repurchase plan. With that now I’d like to turn it back to Dan to discuss our outlook.

[Dan Oh:]

Thanks, Chad. Guidance for the first quarter of 2016 is shown on slide 20. A few things to point out related to the first quarter guidance. First, we are pleased to have the tax credit in effect started 2016 since this was not the case in 2014 or 2015. The economics from the credit allow margins to be known at the time of the transaction for all parties which tends to mean that the market participants are more confident, more forward buyers with respect to their known margins. Second, as in prior calls when we have provided guidance we estimated the forward spread between the feedstock and biodiesel prices. Third, we are not including any production or sales from the Sanimax plant since the transaction has not closed. Fourth, we have not estimated any impact or business interruption insurance proceeds related to Geismar in this guidance. In the first quarter we expected to sell between 90 million and 100 million gallons of fuel. We are forecasting our adjusted EBITDA to be in the range of $5 million to $15 million. Now I would like to turn the call over the operator for the Q&A segment of our call. Operator?

[Operator:]

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

[Brett Wong:]

Hey guys, thanks for taking my questions. I was wondering first Dan if you could talk a little bit more about the margin environment really kind of expectations as we move out of the slower blending winter timeframe and just with all of those positive trends that you talked about on the call kind of where do you think or see margins going?

[Dan Oh:]

We are seeing margins slowly improving to the extent of this as we have seen in the market I think a lot of it has to do with two factors, one is what’s happening with crude oil derivative DOSP pricing for those customers who must they are buying fuel and then the other side is what is the positive impact going to be out of RFS2 RVO activity in June. So generally we’re moving into the part of the year where blending needs to occur the heaviest business occurs in second and third quarter. We do see markets responding to carbon intensity and some feedstock pricing is becoming a little more sensitive for that. There are a lot of opportunities there around finding the best carbon intensity raw material, optimizing logistics, converting it getting it out to customers. But generally it’s an improving market and I think it will be an improving market until we start feeling overhang from blenders’ tax credit and whatever that will be coming back or not. We of course are think it will be reinstated if it lapses because that’s been the pattern in the past, but sometime around fourth quarter that will be a big topic of discussion again.

[Brett Wong:]

Okay. And obviously not a whole lot of inside right now in terms of kind of the political standpoint, but are you hearing anything in terms of the different support for the RFS and the blenders tax credit?

[Dan Oh:]

Well I think all of the Presidential candidates have learned this important to be supportive or at least not overtly negative. So it’s kind of hard to call right now mostly it’s going to be I mean I would say based on past president over the last 10 years whichever party continues and takes over will have a lot to do with what happens with budget and whether budget is just the continuation where it’s a complete rework. We find that in the last conversation and the conversation before the ones we are having now that there is no practical opposition to blenders or even in produce of credit which was a big topic of discussion last year. It’s more about the vehicle that it gets attached to what the other extenders packaged items and when it rolls through. Even last year the discussion was just fully attachment to not as it kind of go. So we feel good about it, I do think it’s a fairly routine activity now having done in a couple of years the industry customers, vendors everybody understand so we can manage it. And it is a activity where when it’s going it’s prolonged it you have a really strong balance sheet going to position the benefit it’s one reason that we care about a really strong balance sheet.

[Brett Wong:]

And then one last one from me, I know you talked about imports earlier in the call what’s the higher RVO just wondering what you’re kind of thinking about imports this year?

[Dan Oh:]

Well I think the import situation is slowly growing and you saw it come on quite strong last year, but this has a fair amount to do with international politics. So for example SME or [indiscernible] out of Argentina used to go to Spain and when Europe shut off Argentina it really started flowing to the U.S. Now you have seen the government in Argentina changed and is different policy down there now in terms of tax tariff and usage. I think that in combination in terms of how that turns out in combination with LCFS we’ll continue to encourage imported fuel hitting the country where it’s easily delivered by water. So the government on the U.S. side has a really easy way to manage this, they have all the data I think they acknowledge it in many ways, they understand what’s coming and they can just take up the slack by increasing the D5 and D4 categories as we move ahead. It’s important to increase D4 to reinforce the biomass based diesel industry, it’s important to diesel D5 because it lefts the most efficient fuel compete and sometime the product line sometimes it does. But I think we’re going to see it generally go upward and the federal government and just to try not to overheat anything while at the same time encourage growth. While we looking at June I think we should be looking at the D5 category to see some of the segue we already know D4 for this year.

[Brett Wong:]

That’s good color thanks Dan. And so just one more from me on the repurchase authorization. I know you’ve talked about it being opportunistic, but given where shares are, can you just talk a little bit about expectations for buyback?

[Dan Oh:]

Well we look at capital market repurchase programs as investments and we analyze and just like we analyze investments internally. And we don’t comment around our opinion of share or bond pricing. At the same time, we got to program out because we think that we’re a great company and there is probably good opportunity in the next two years to buy some shares and bonds back.

[Operator:]

And our next question comes from Craig Irwin from ROTH Capital Partners. Your line is now open.

[Craig Irwin:]

Hi, good evening and thank you for taking my questions. Dan first question is, can you remind us the headwinds on the P&L for life science and Geismar? Maybe if you could give us an EBITDA level quantification of the investments that you’ve made to support and carry these assets this past quarter?

[Dan Oh:]

Yeah thanks. I’ll have Chad comment on this first and then I’ll come back. But roughly at Geismar when it is fully staffed and intending to run. If it has no revenue and no flow it’s around $2 million of EBITDA a month to keep it in a ready position. And on the life sciences side, we continue to invest somewhere around $1.5 million of expense it’s mostly expense because of stage of the products. But that also it’s not simply in the labs it’s working through commercialization running samples at open show we keeping our patent state growing filing patents. So I mean there is a lot interesting stuff is occurring to build the IP base there. Chad?

[Chad Stone:]

Yeah I agree with that Dan. What we’ve described in the past is on a quarterly basis, for Geismar that the carrying cost are about $5 million to $10 million per quarter Craig and that’s consistent. Another way to look at that though is the opportunity cost now that we have the dollar tax credit back in place. You can see what some others reported around their renewable hydrocarbon diesel profitability and result, there is a big upside to the -- to that production when it’s online. So the $5 million to $10 million per quarter represents the carrying cost so it’s probably $10 million per quarter upside with just based on prudent economics. On the life sciences I would -- I’d just echo what Dan said.

[Craig Irwin:]

So it’s really $0.08 to $0.12 EBITDA per gallon headwind on the P&L versus your core operations is that fair in the fourth quarter?

[Chad Stone:]

Can you repeat that? I missed it.

[Dan Oh:]

He is asking the per share cost for the operations at Geismar and life sciences annualize.

[Craig Irwin:]

Per gallon actually would be preferred.

[Dan Oh:]

Excuse me, per gallon.

[Chad Stone:]

Yeah I think that would reflect about $0.30 to $0.60 per gallon of carrying cost at Geismar and life sciences is difficult to compare. I guess if you look over $17 million to $18 million for the full year $17 million over 375 million gallons.

[Dan Oh:]

So life sciences it is slowly growing in investment there as we forward down the commercialization side. So we are in a disciplined way building our R&D capabilities through investments in tools and product development teams as you get closer to introducing the market we are going through registration cost, running [indiscernible] running sample in other production activities. So these are good things that are occurring as we are in a disciplined way increasing our expenses around that business.

[Chad Stone:]

Okay. So then as we look at your guidance for the first quarter just taking the approximate middle of the range on both gallons and EBITDA, it looks like you are guiding us for around $0.10 a gallon in EBITDA. Can you talk about what we are seeing as far as potential headwinds in there that are not allowing the release of full economic benefit of the approximate third of the blenders credit in the first quarter?

[Dan Oh:]

One thing I would point to Craig is the feedstock prices have gone down, but not as much as energy prices. We do have an inventory build that we normally see seasonally for us when demand for higher fund product is lower and I think that’s probably the two biggest points.

[Dan Oh:]

Yeah. So couple of points. First of all, it’s been long time since we have forecast positive EBITDA on our first quarter. So that’s a good thing when you look there and you see positive EBITDA. It’s historically the worse quarter in terms of financial performance as we are forecasting in the four quarters of the year. Secondly, we normally are carrying the expense the run while we are putting product into inventory. We don’t disclose how much it’s going into inventory soon enough you will see Q1 results and it will be much clear at that point. But we are very typically making product putting it into inventory and that expense gets embedded in the inventory and doesn’t come out in terms of profit until the actual sales in product is delivered and accrued. Otherwise we carried Geismar for a good amount of the quarter. We are not disclosing how much right now for competitive reasons in terms of actions at the facility. But we are telling people and you heard it in the guidance here that it will be a contributor in second quarter. So we are continuing to carry that facility as it goes through the startup, initial inventory build, product qualification and shipping and the normal AR process. So it is running, but it is not contributing like it would have been had it been running for starting the quarter itself. So all of these are factors right now, they are not excuses pleased with where we are right now as we are starting to move into the year.

[Craig Irwin:]

Okay. So two things you did not include in that discussion, which I just like to clarify. So one is potential for an inventory overhang last year there was a fairly sever impact in the market from sort of the rush for RINs and the jam to catch the blenders credit at the very end of ‘14 and that reflected in excess inventory being liquidated in 1Q ‘15, are you seeing this now? And then the second thing is imports, you didn’t mentioned imports as impacting the crush margins or quantify that, is this having a real significant impact in the first quarter or is this something more related to the off seasoned crush margins?

[Dan Oh:]

So on the import side I think there is a smaller amount of overhang in the market compared to how it was a year ago. A year ago it was well known that the lapses going to occur and there was an anticipated build up in sale. This year it was more of a feeling in the market that it would occur before the end of the year. So I do not think that we saw as much imported product hit. Although there was important product shift I believe personal opinion because there was a worry that it would turn to producer credit. So we have seen imported product increased on the biodiesel side, on the RHD side and on the biodiesel side. I think generally things are down a little bit first quarter because they are seasonally down first quarter anyway. It was just an activity because the transportation sector starts to grow at the end of first quarter and second quarter and crescendo towards Christmas and then it slows down again. So overall you are not hearing us heavily emphasize because we are in a position to compete. At the overall market level for RINs yeah it will affect prices somewhat as they are out there.

[Craig Irwin:]

Great. And then last question if I may Sanimax, I know you don’t like to talk about economics of individual plants. But you have talked about the Seneca facility being your most profitable facility for significant stretches of time. I know there is volatility in there and a bunch of other things that impact short-term relative profitability. But same technology used in Sanimax as there was in Seneca the same original construction group with the nova assets. Can you talk to us about the potential timeline for you to make the same upgrades that you usually made to the Seneca facility and how we should look at the contribution from this plant in the back half of the year?

[Dan Oh:]

Thanks Craig for the question. So we are quite pleased with the facility not only because it fits in very nicely and really does not have much overlap with our existing customer footprint in terms of distribution. So it’s complimentary as oppose to coming in and cannibalizing sales it fits in very nicely. We are quite happy to be further in business with conservative family in the Sanimax business overall we done feedstock business with them for a long time and they have been through a fair amount of upgrade and maintenance with the facility themselves. They got a plant way back when it was build, it had trouble and they’ve worked through the years to get into a place where it’s productive. I believe have really great knowhow in terms of how to make it even more productive and we already know exactly what we are going to do when we gain control of that facility, which we believe will be this quarter. So it does not have the scale that Seneca does, but Seneca is three plants that are side-by-side, that are essentially the same plant that you have at DeForest, Wisconsin and we are going to come in and do improvements. The difference though is that this plant is running and operating and making fuel today. When we took over Seneca before it was completely broken and we had to fix it. So this facility will come on board running and operating generating cash flow and then we’ll improve it on the go as we know how to do. So it should at least be contributing like one of our average high quality multi-feedstock facilities and then over time and we think it can be very logistically efficient and except for small economy of scale factor very comparable to our Seneca facility.

[Craig Irwin:]

Great. Thanks again for taking my questions.

[Operator:]

[Operator Instructions] Our next question comes from John Quealy Canaccord Genuity. Your line is now open.

[John Quealy:]

Hey, good afternoon guys. So on the forward look I know you gave us Q1 but as we look for the full year are you assuming near 85 whatever the capacity utilization as we look at for both Sanimax and Geismar in Q2 or how should we think about that as a modeling issue?

[Dan Oh:]

Yeah John we are reluctant to give you a guidance because we have some significant things coming up in the future in terms of RFS2 and so forth. However, I think you should be thinking -- everybody should be thinking that the DeForest facility and the Geismar facility will continue to run at high utilization as we move into and through second quarter.

[John Quealy:]

Okay. And then more book keeping, the $55 million to $60 million in CapEx, can you breakout maintenance versus retrofit perhaps or refurbishment you mentioned Sanimax doesn’t need much, but can you quantify some of that for us?

[Chad Stone:]

Yeah generally break it out 40%, 10% between continuations of things that were started and ongoing from previous year new CapEx and then probably maintenance CapEx in that order.

[Dan Oh:]

So first category 40% for example finishing the end, so everything appears to be on schedule and on track there and that will be finishing up this coming summer in terms of its upgrade and enhanced production capacity. 40% for new projects, which would include things at Sanimax. But there are wide variety of things in that category and then 10% pure maintenance CapEx.

[John Quealy:]

Okay, okay. And then back to Sanimax for a minute, so I assume the supply side on the raw still comes from the Sanimax folks or can you talk about -- do you put them into the logistical chain or what sort of your commitments are for that facility given the high FFA type of capabilities?

[Dan Oh:]

Yeah. So the way to think about that facility as it buys from the most efficient area it can and it will sometimes buy local and sometimes it will buy within the region. And we have a feedstock relationship is long standing with Sanimax and we’ll take advantage of that, but we are not bound to take it, we are not bound to buy there. This is originating from a pool of raw material that is in the same world that we’re in today, but it’s additive raw material. The plant is already running, it’s already feeding now that the world that’s around it and doing so in a good way. And we expect that to continue.

[John Quealy:]

Okay. And final two question, now that Diamond Green, you’re soon to be back up in Geismar, Diamond Green obviously trigger along. Can you talk about the potential for pricing impacts on raws in that neck of the world or as corn oil is so good that it’s not a real big deal logistically for your folks now that hopefully ‘16 will have the majority of you guys online for most of it?

[Dan Oh:]

Yeah I think we all have to careful to ensure that we’re all supporting a growing, driving ever more efficient and collecting more feedstock system. So you see Darwin [ph] out there. They’re optimizing the world they’re also buying from the market. But we’re doing the same thing we’re out there constantly finding new opportunities, encouraging new collection, encouraging facilities to invest in the growth of the raw material. Generally speaking John I think there is plenty of raw material and the balance between fuel price and carbon fuel standard credits RIN prices and blenders. They just kind of adjust every day in the market, one of the real advantages we have with the centralized mine power and capability here and aims and then kind of distributed throughout the country in different ways is that we’re in and out of the market every single day and our distribution system allows us to arbitrage across our plants. So one of things that I think is pretty cool about having a multi-location network is that when we find something we’re now starting to sit here and say not only where is that market for that low carbon intensity raw material will add what’s the plant that has the best capability process, what’s the most efficient delivery and how do we end up managing our logistics cost not just our production capability or customers are. So a very interesting optimization system. I think there is more than that raw material and these volumes were all disciplined and reinforcing through good business a strong and thriving vendor system I think it will be fun.

[John Quealy:]

Okay. And then last question from me, on the Analyst Day you guys gave a great overview life sciences pipeline progress thing like that can you just encapsulate what we should be looking for qualitatively or quantitatively in life sciences in the ‘16 timeframe? Thank you, guys.

[Dan Oh:]

So we are working internally to commercially launch the product towards the end of this year and that will be the main focus. At the same time there’s more than one product underway, but we will be talking about that more and I hope to speak more specifically at our second quarter call.

[Operator:]

Ladies and gentlemen that is all the time we have for questions. I would like to turn the call back over 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 continue support. We appreciate your interest and look forward to reporting to you again next quarter on our progress. Before we conclude Todd is going to mention an upcoming Investor Event for REG. Todd?

[Todd Robinson:]

Thanks, Dan. We will present and host meetings at the ROTH Capital Partners Conference on Monday March 14th in Orange County, California. Attendance at the conference is invitation only. So please contact your ROTH sales representatives if you want to attend or schedule one-on-one meeting with us. Thank you all again. This concludes the call you may now disconnect.

[Operator:]

Ladies and gentlemen thank you for your participation in today’s conference. This concludes our program you may all disconnect. Everyone have a great day.