Q3 2020 Renewable Energy Group Inc Earnings Call

Please continue to stand by your conference will begin momentarily should be about two minutes time again, we thank you for your patience and ask that you.

Please remain on the line.

[music].

And the Investor Relations section of our website.

Turning to slide three we would like to advise you that some of the information discussed on the 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 accompanies 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 and the risk factors in other sections of our annual report on form 10-K, and subsequent quarterly report on form 10-Q, which are on file with the SEC. These forward looking statements speak only as of the date of this call and the company undertake no I'll.

Litigation 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 set the operating performance of our core business. Please see the press release or the appendix to the accompanying slide deck for a reconciliation as a non-GAAP measures the most comparable gap measure.

Let me also remind you that end of last year, the biodiesel mixture excise tax credit or VTC with retroactively reinstated for 2018 in 2019. It was also put in place for 2023 2022 net benefits that retroactive reinstatement for both years with reflected in our GAAP financial statements.

In the fourth quarter of 2019, because the credit related to a 2018 in 2019 operations are adjusted EBITDA and other line items reflect an allocation of the net benefits of the credit to our 2018 in 2019 results by quarter to reflect the period in which the associated gallons were sold.

Chad will provide more detail on this when you reviewed their inventory.

With that let me turn the call over to our President and CEO CJ Wanna T J.

Thank you Todd and good afternoon, everyone. Following on from our analysts an investor day from a few weeks ago. We are pleased to be building on that event today with our third quarter results analysts day. Among other things. We described how we are building momentum through a planned major expansion that are guys. My renewable detailed plans as well as with our downstream <unk>.

Energy are current experienced in information leads us to believe that demand for clean fuels continues demand for great ESG investment continues and demand for solutions available now continues and all of this contributes to our feeling that this is the right place and the right time for iron team.

We had solid financial and operational performance in the third quarter as shown on slide forward, we sold 176 million gallons of fuel and produced 137 million gallon generating $576 million in revenue and $58 million of adjusted EBITDA.

Helen sold or at the midpoint of guidance, while adjusted EBITDA exceeded previous guidance, mainly due to ongoing strong performance and incremental risk management gains realized during the period year.

Year to date at dusk adjusted EBITDA performance is $157 million, a result, with which we are very pleased especially considering the overall price volatility in energy demand reduction due to the pandemic.

Primary drivers of change and year over year adjusted EBITDA for the quarter are shown on slide five from an underlying performance standpoint, we continued to optimize profit by focusing on higher margin products and directing sales to the most profitable market.

Sold was down versus last year, primarily due to reduced sales of lower margin petroleum diesel and third party gallon.

<unk> previous gallon sold increased 3% from last year to $141 million has shown on slide six.

Sales of self produced biodiesel increased by 6 million gallon and sales of self produced renewable diesel decreased by 2 million gallon due to timing of a vessel shipments are.

Ongoing sales optimization efforts resulted in 4 million more gallons of already being sold in in Norway sales of biodiesel the premium market as reflected on slide seven declined slightly as we optimize our product disposition based on current market conditions.

Turning to production, we continued to operate safely efficiently and effectively on slide eight you can see our total recordable incident rate of nine to remain significantly lower than the industry average of 2.1 and much closer to the industry leader level of seven.

As we continue our drive to our vision of zero safety incident, we must always stay vigilant and mindful of how changes may affect workplace safety. We have had a recent uptick of incidents as you can see in this slide enter taking strong steps to address the challenges of pre job safety communications introduced by our pandemic related.

Working conditions were resolute in our determination to focus on job safety, while working during this challenging time.

Along with already existing pressures from COVID-19, Q3 presented new challenges from weather related disruptions Ah derecho in Iowa, and the Hurricanes in the Gulf Coast provided challenges for several of our plants, but the team managed well through the disruptions in production for the quarter was essentially flat year over year.

Notably got my production in the quarter was up 3% year on year and over 128% of its nameplate capacity.

Nine shows are biodiesel and renewable diesel production by quarter.

Compared to the highly volatile second quarter, we benefited from a more stable economic environment in three Q, although margins remains significantly compress versus 2019. It is notable that year on year Biobased detailed demand with a table and pricing was far less volatile than two Q.

Really important feedstock availability started to return to normalcy after the Covid driven disruptions of the second quarter.

To get a sense of the dynamics of 2020, and the fuels market Slide 10 show as market demand for a variety of fuels in both 2019 and 2020.

The pandemic has had a strong negative effect on petroleum fuels demand with gasoline down by 14% year to date, distillate down, 9% and jet fuel down 38% versus last year. In contrast filed a seasonal demand has been relatively stable and on a year to date average is down only one person.

Year over year.

As I mentioned earlier margins have been quite challenging following along with the drop in crude prices you LSC average price per gallon declined 37% Accordingly, our average product selling price in North America was also down on the other hand, we did see a price increase for biodiesel in Europe.

Given by an increase local environmental mandate and increases in fuel consumption and significant holiday traffic there moves from airplane to on road vehicle.

The U S hobo drop in the quarter, what's significant with you LSD declining as mentioned and soybean oil prices increasing.

D for when prices have helped to offset some of the decline supporting the market with a 46% year over year increase taking all of those factors together the hobo plus one five times rinsed spread was down 41% year over year, although it has stabilized after the covid induced decline in the first half.

As you can see on slide 11.

Although relative feedstock pricing remained volatile as reflected on slide 12 options for feedstock supplied selection did improve in the quarter relative the second quarter are flexible seedstock strategy enabled us to change our feed Scott MC year over year significantly in response as shown on slide 30.

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Soybean oil usage increased 26% animal fat usage increased 20% distillers corn oil usage decreased 14% and canola oil usage decreased 26% year over year with overall feedstock prices up this changing mix enabled us to limit the increase in our weighted average feedstock costs.

To only four cents per gallon.

In contrast to the significance swings in the economic environment, the regulatory environment provided a stable foundation for demand <unk>.

Biodiesel tax credit RFS, too and the Lcs's programs in California, and Oregon, All provided welcome stability slide.

Slide 14 shows the pricing for both the California, Elsia best market as well as the Oregon clean fuels program.

America come to appreciate it clean low carbon value proposition as shown on slide 16 sales of blends of biodiesel and renewable detailed grew 70% year over year.

Sales to end use are also a key element of our downstream strategy and they drew 26% in the quarter versus last year as noted on slide 17.

As I look back on third quarter and ahead of the opportunities in front of us I feel more than ever that we are in the right place at the right time demanded moving from regulatory pushed aside all pole and we believe should increase as people understand the tremendous environmental benefits are fuels are delivering today well.

While we applaud the efforts in recent momentum behind electric semi and large equipment vehicles. These ideas and prototypes, maybe several years or even decades away from being available at full commercial scale. In contrast, we offer a fuel today at scale and growing that enables our customers to substantially reduce carbon emission.

<unk> with no capital costs and no performance compromise, we provide the best solution now for reducing transportation related carbon emissions in the third quarter alone is shown on slide 18.

He has produced fuel resulted in a reduction of 1.1 million tons of carbon that is the equivalent of 2.7 billion miles driven by a passenger vehicle.

That is the right results at the right time right now.

He is committed to making a difference for our planet our customers are stakeholders and our shareholders in the years ahead.

Now I will turn the call over to Chad to review, our financial performance for the third quarter chest.

Thank you and good afternoon, everyone before I get into my comments on the quarter I want to align everyone on comparisons.

Todd mentioned that biodiesel tax critic was retroactively reinstated last December for 2018 in 2019, and then extended through 2022.

As such will provide an analysis of the non-GAAP numbers adjusted to the allocation of the BTC to the third quarter of 2019.

Apple's to apples comparison will allow you to better understand the real change underlying the economic performance.

Slide 19 shows third quarter results and FPGA mentioned margins were down year on year.

Diesel sales were up.

Renewable diesel sales were down due to the timing of a vessel shipment plus total renewable diesel production was up.

Finally, we brought down sales volumes of petroleum diesel quite significantly as we shifted our blending strategy to higher margin opportunities.

CJ noted are gallon installed.

We're at the midpoint of guidance.

That reflected very encouraging relative stability of the Biobased diesels demand during the pandemic recovery.

Prices were down across the board, except for European biodiesel, which increased modest week. The price reduction reflects much lower diesel prices, partially offsetting this was an increase in value.

Finally, I'd CJ noted are actual full quarter risk management game, where $9 million larger than when we gave guidance.

Recalling a risk management approaches designed to lock in cash margins as best we can when we make the signal.

You OSB prices decline during the quarter risk management gains increase to balance out the decline in our approach did the job is intended resulting in these risk management gains.

Moving from revenue to margin, let's look at feedstocks on slides 12 and 13.

Because fuel production was essentially flat.

Year over year. So is feedstock usage feedstock production costs were up around 1%, however, due to winter at higher prices and certain feedstocks as the world's continued to adjust to the to the pandemic.

Notably used cooking oil was more expensive than the quarter at supply remains constrained with restaurants closure still prevalent.

In response, we used our feedstock flexibility and optimization efforts to shift among feedstocks for example, soybean oil prices were down so we increased our usage significantly.

As we often emphasize feedstock flexibility is an incredibly important advantage grows.

When you look at the actions we took in the quarter you can see our margin optimization strategy and action on the sales side, we directed product to the highest margin market and on the production side, we shifted between feedstock based on supply and price.

This quarter, we did taken impairment charge for equipment. We had initially planned to use a geyser for a small renewable feasible production expansion project.

Since that time, we've been able to increase our production.

Capacity organically without major capital expenditures and we are now planning a much larger 250 million gallon expansion to the plant.

With this new design that equipment is no longer needed it was written off.

Now onto SG&A SG&A as a percentage of revenue was 5% compared to 4% last year.

The increase versus last year was driven primarily by bonus accruals, we do not have those accruals last year, given the low profitability prior to the biodiesel tax credit reinstatement.

Looking at the bottom line adjusted EBITDA exceeded our guidance due to ongoing strong performics, an incremental risk management of game.

We're very pleased with this performance considering the challenging economic environment. We are all still operating thing.

To smooth out quarterly volatility, we tracked trailing 12 months figures.

Slide 21 shows trailing 12 months adjusted EBITDA and slide 22 shows trailing 12 months return on invested capital.

Was in excess of 17%.

Now, let's turn to the balance sheet shown on slide 23, and discuss our capital allocation strategy.

The balance sheet remained strong we have 286 million marketable securities with $100 million of those classified as long term.

Are multi quarter debt reduction program has resulted as planned and a low leverage ratio and a net cash position as we consider the necessary finding a thing for the plan the guy's murder expansion.

Remain relatively robust choice white grease availability and pricing will remain attractive and public support for cleaner fuel solutions with low carbon intensity will continue to broaden.

On the downside potential developments and factors include that low crude prices appear to be with us for a while depressing diesel prices.

Both distillers corn oil and vegetable oil prices are rising and both of those are putting our margins under ongoing pressures.

And our first question comes from the line of Manav Gupta with Credit Suisse. Please go ahead.

Hey, CJ target team.

Just could be referring back to slide Cody.

Do you obviously the restaurants are closed last that's in our facilities are killers. So you are running a much heavier soybean right now it looks like disciplines gone has made its way back into your feed slate USIO is looking a little better and soya bean has shrunk a little.

As you look towards for Q, what's the supply situation looking and also what we are seeing is there's a little bit of a compression in spread between soybean and some of these lower CIO feedstocks. So would it still makes sense to more runs soybean like which we would sure how should we think about calc you as it relates to your feet.

Stock mix.

Yes, thanks, good to hear from you.

Well, what we are seeing is the need to optimize not just price differential but of course, the type of yield and as well as the high potential of each of the different feed. So we have a pretty sophisticated optimization system that we utilized.

We are seeing as I mentioned, we're getting a return of supply back, but you do see some pretty big pricing differential that theres various market dynamics going on there.

So we are actually.

Any way to look at things like choice White grease, as well as writing oil a little bit more heavily than some of the others.

But our procurement team is active and out in the market all the time, so it's a little difficult to say how the whole thing.

Going to work out as you look out in the further months away.

John I think you were saying.

Okay.

No I would just reinforce that for the most part I think in the second quarter, we saw the extreme movement toward soybean oil away from what we traditionally emphasize and kind of a returning to normalcy like TJ said in the third quarter, but not quite all there yet.

You know certainly saw the ethanol plants come back online in force versus second order for sure and then we did see both some restaurant openings, making you feel a little bit more available and then some.

Closures after that causing it to be a bit tight.

So we still watch that every day as we are in the feedstock markets for sure.

Thank you for taking my question.

Thank you went up.

Thank you. Our next question comes from the line of Craig Orphan with Roth Capital Partners. Please go ahead.

That was that was the differential there and then C. J in the guidance section for risk management.

In the forecast that we've given.

We've been included $1.5 million of known risk management as of basically last week or up to October 26, I think it was.

That measurement date, when we liberalized all the commodity prices.

So your other point, though was wrens did improve during the quarter, we've seen in those strengthening in response to the tightening of the.

Hobo spread and he can see that.

A little bit on slide 11.

And may.

Well, especially on financing strategy, but keeping.

Keep in mind too that our downstream strategy is enabling us to start expanding our EBITDA and we're very much focusing on that because thats nearer term and we will be continuing to do that between now and when Geismar actually comes up and Thats going to help us continue to fuel our growth. So if we think about our strategic approach from a big.

Picture standpoint, I think that's your answer.

And.

Hi, how are you.

Doing well, thanks for taking our questions I'm gonna start with Geismar.

It's.

It's on construction set to begin I guess like mid to late next year I'm just curious what's what's left to do there and then considering the like the the benefit in progress that you guys had from the pieces 56 furniture, how how much is that benefiting that timeline.

Yeah, we were able to take our.

All engineering and just continue to progress it without really neat sandi from that project for that has probably.

Jordan Levy with Truest. Please go ahead.

Afternoon, Peter CAD.

Wanted to get a sense on you know I know you've got a lot of questions on feedstock.

Is that the blended level and inclusion blend of biodiesel and renewable diesel has been going up so I think thats, probably the biggest trend that we're seeing.

And thats happening in multiple regions. It obviously, it's happening a lot in California is driven by the L. CFS and Oregon as well.

Thanks, and then maybe.

Maybe maybe turning to the feedstock for one follow up question on some of the earlier ones any as we as we think about the Geismar expansion.

You guys are obviously know that market down there very well.

As you think about feedstock availability and I'm sure you've obviously done.

The work on this as you thought about approving the expansion, but you know in.

In terms of the availability the low CIO feedstocks down there in the market you Didnt do you anticipate that coming from.

We do optimize really flexibly, that's one of the things we.

I'd like to emphasize for you is that as the market moves around we are capable of moving pretty quickly and there have been some really good opportunities that we can chase because of that so though the arbitrage between domestic and international is very much part of that as well as the arbitrage between the low CPI fees in some of the higher key customer.

Because the margin between them move around quite substantially.

Okay. Thanks again.

Alright, Thank you Howard.

Our next question comes from the line of Samir GRC with H.C. Wainwright. Please go ahead.

The down year on year.

About the sales and the premium markets the the decline sequentially and what does seasonally it pretty good.

As far as the mix is concerned well you just divert more to direct versus other markets.

Yeah.

It's a wonderful opportunity emerging if you're in the Rd market because there is not a substantial investment required to produce renewable jet from your rd process or at least.

Our proprietary process, we can with with some minor finishing so we're watching it closely we've used our equipment to approve that we can make it.

Of regulatory environment, we are well positioned to execute on our growth strategy, we optimize margins by focusing on higher margin products and selling into the most profitable market with our planned expansion at Geismar, we will grow renewable diesel production and thus balancing our product portfolio and accelerating our downstream stretch.

To achieve that approach is designed to enhance margins and is gaining traction our partnership with Hudson SUNS is progressing and both our IGI ultra clean volumes and sales to end users are growing well.

Looking at our strong performance now even in the face of an extremely challenging year and the opportunities in front of US. We think you can agree that this is the right place and the right time for our E. G and now before we close Todd will announce our upcoming investor event for R&D Todd.

Thank you Dave we used during the slide 20 so.

First I want to say, thanks to those who participated in our virtual analyst and Investor day earlier in October for anyone who misses a replay is available on our IR section of our web site under past events, we have one upcoming virtual Investor Conference scheduled in November very 2020 virtual global Industrial conference.