Q1 2021 Renewable Energy Group Inc Earnings Call
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Greetings and welcome to renewable Energy Group, Inc. Q1, 2021 earnings conference call. At this time all participants are in a listen only mode. A question and answer session will follow the presentation. When you. Once you require operator assistance during the conference. Please press Star zero on your telephone keypad. Please note. This conference is being recorded.
I would now like to turn the conference over to Jos Chicken Schwegler with Investor Relations for renewable energy. Thank you you may begin.
Thank you Devin.
Good afternoon, everyone and welcome to our first quarter 2021 earnings conference call.
With me today is <unk>, President and Chief Executive Officer CJ Warner.
Our new Chief Financial Officer, Craig Ballmer, and our newly appointed Deputy Chief Financial Officer, Treasurer, and Vice President of Investor Relations Todd Robinson.
So I will be discussing our financial results later on the call. So I am stepping in today to assist in their role normally reserved for the head of Investor Relations.
Let me cover a few housekeeping items before I turn the call over to C. J.
First I would like to remind everyone. On this call is being webcast is available at the Investor Relations section of our website at Regi dotcom.
A replay will be available on our website 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 mainly as we prompt you.
For those of you dialing in.
Slide deck, along with the earnings press release can be downloaded from the Investor Relations section of our website.
Turning to slide three.
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 and uncertainties that are difficult to predict and assumptions that may or may not prove to be correct.
Such forward looking statements are not a guarantee of performance.
The company's actual results could differ materially from those contained in such statements.
Many factors could cause or contribute to those differences.
These factors are described in detail in the risk factors and other sections of our form 10-K.
And subsequent quarterly reports on form 10-Q, which are on file with the SEC.
These forward looking statements speak only as of the day to this call the company undertakes no obligation.
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 from our core business.
Please see the press release or the appendix to the accompanying slide deck for a reconciliation of the non-GAAP measures the most comparable GAAP measure.
With that let me turn the call over to our President and CEO CJ Warner did you. Thank.
Thank you Jacob and good afternoon, everyone before we get into the discussion around first quarter results I want to publicly welcome Craig Bellemare Rmg's, new CFO to the team Craig joined US just two weeks ago, bringing to our E. G. A breadth and depth of the accounting and finance functions with specific senior experience in the world of refining and marketing some of.
You already have had a chance to chat with Craig and he's looking forward to meeting many more of you very soon in turn I would also like to thank Todd Robinson for serving Oh, well as interim CFO and who will now become deputy CFO also retaining his responsibilities as treasurer and VP Investor Relations. These two strong leaders will help us.
Our growth program with operational excellence and their appointments demonstrate our ongoing drive to build outstanding talent.
I am pleased to be reporting today on our strong first quarter results.
One year ago, we reported in the midst of other market turmoil caused by the crude oil price wars, coupled with the on side of the COVID-19 pandemic, though we are all encouraged now that the light at the end of the pandemic tunnel seems to grow brighter. Each day, we did continue to feel an impact on our operations and workplace as well as in our feedstock markets.
During the first quarter of this year.
These conditions have been a stress test for LNG and the bio based diesel industry as a whole we believe our results prove the strength and resiliency of our people our business model and the strength of customer demand for lower carbon fuel as shown on slide four we're pleased to report quarterly revenues of $540 million.
Net income up $39 million, adjusted EBITDA of $56 million and 134 million gallons sold.
These results are a reflection of the Ari G team's capability on determination and our continued drive to act on operate in line with our core values.
Slide five outlines the broad drivers of performance in the first quarter of 2021 as compared against the first quarter 2020.
First quarter 2021 faced several relative headwinds not the least of which was that we remain in the challenging economic and social context to the pandemic, which had not yet taken hold during much of first quarter 2020. We also had the effect of the planned geismar turnaround this year in first quarter risk management also shows.
As a comparative headwind this quarter remembering back to first quarter 2020, there was a huge drop in crude prices experienced as part of the crude price war and the initial onset of the pandemic with commensurate pressure on our margins, resulting in a large uptick in risk management as our system is designed to do and finally margins are.
Down somewhat versus first quarter 2020.
On the other hand, we were able to realized significant upside through commercial optimization and downstream performance both of which also helped to drive increased RIN and L. CFS associated profitability.
Let's go into some of these factors in a bit more detail.
We completed a 31 day turnaround at our Geismar, Louisiana facility in the quarter. The Geismar turnaround was successfully executed safely on time and within budget. In addition to the 2020, one planned maintenance and upgrade projects for the Geismar turnaround our team completed to carryover projects from 2020 debt we intentionally.
Deferred last year due to the workplace challenges introduced by the early days of the pandemic.
We believe the project is completed as part of the Geismar turnaround will increase our competitive advantage for years to come including proprietary improvements that are intended to extend the time between turnarounds increased annual throughput and decreased costs per gallon.
Most importantly, this turnaround was completed with no recordable injuries or on site COVID-19 transmissions. In fact, we're pleased to report no recordable injuries or known workplace COVID-19 transmission across our entire business in the first quarter, our core value on safety always clearly guides the R. A G team as our total total.
Our recordable incident rate, which includes any workplace COVID-19 transmissions shown on slide six remains below the pre COVID-19 industry average as always we are dedicated to continuous improvement in learning with a goal of reaching vision zero.
Another core value that guides us is.
It is a commitment to driving results there.
This focus helped us to achieve solid financial performance. Despite the external challenges I outlined earlier.
Production was down versus the first quarter of last year Unimplanted basis with respect to our D, which was down 8 million gallons due to the turnaround as a reminder, the geismar turnaround in 2020 took place in the early part of the second quarter.
Biodiesel production at our European facilities was also down by 3 million gallons due largely to COVID-19 related international supply disruptions of used cooking oil and biodiesel production at our North American facilities was down 11 million gallons due to our continuing margin optimization efforts as well as unplanned downtime caused by the extreme cold.
Houston and the Midwest slide.
Slide seven shows the impacts of these production declines had on our self produced gallons. In contrast gallon sold were off just 4% versus last year and revenue was up 14%. The growth in revenue was generated by a significant increase in our average selling price for Biobased diesel driven by an increase in default.
RIN pricing and to a lesser extent U L. S day year over year, while sales from self produced Rd gallons were down due to the turnaround total sales of Rd gallons were up driven by third party gallons sold.
Sales of ultra clean our proprietary B D. R. D blend continued to strength and robustly up 47 per cent compared to the first quarter of last year as shown on slide eight.
Both third party R&D sales and ultra clean sales enable us to capture additional margin both through R&D and the BD that we blend with it.
Overall U S market demand for our bio based diesel continues to strengthen.
The chart on slide nine shows petroleum product demand is still recovering from COVID-19 down 7% from Q1, 'twenty 'twenty for gasoline and distillate and down 35 per cent for jet.
In contrast, even in this environment Biobased diesel has continued to grow with demand up 8% in 'twenty 'twenty versus 2019, and 1% in the first quarter of 2021 versus the first quarter of 2020.
And demand for Biobased diesel increases and actual unplanned production ramps up feedstock availability remains top of mind.
Feedstock prices continued to rise in the first quarter as shown on slide 10, with soybean oil price being the primary factor. We believe there are many drivers behind this increase including our harvest delay in South America and increase in restaurant and foodservice demand for cooking oil and continued global supply uncertainty based on delayed impacts.
From COVID-19 I would also like to note our expectation is that higher prices will incentivize more soybean acres to be planted in the U S. This year.
Forward might get market prices seem to support this expectation as shown by the forward soybean curve on slide 11, which is significantly backward dated.
Notably the price differentials between soybean oil and waste based feedstocks were better in first quarter 2021 than first quarter 2020, which we believe provided on optimization upside in the quarter looking.
Looking ahead ethanol production is recovering animal fat from meat production is projected to return to pre pandemic annual norms and the soybean and canola industries continue to announce expansions of North American crushing capacity, which will increase festival oil production.
With that as a backdrop, let me quickly highlight our feedstock performance as a company, we believe that our <unk> wide slate of available feedstock best in class pretreatment capabilities and long term supplier relationships are significant competitive advantages for us and these advantages can be most valuable when the markets are volatile.
Our data shows that we were able to capture a cost benefit versus the market on our slate of feedstocks used in first quarter production.
The ability to pretreat different feeds and optimize the feedstocks, including quickly adjusting the purchased feed mix is a key element to success in this area.
Slide 12 shows our updated feedstock mix shifting subtly from the fourth quarter of 2020, and clearly normalizing from the drastic changes required in the first half of last year, when restaurant closures and lower ethanol production required a rapid shift to soybean oil.
In keeping with our history of regularly expanding our range of feedstock types and sources, we continue to pursue new and novel sources of feedstock. For example in late March we announced a strategic investment and cover Kras as noted on slide 13.
Crest is developing a new oil seed crop intended to be growing over the winter when fields would normally be fallow.
We believe this cover crop derived from field Penny kras could offer significant environmental benefits, including enhanced soil carbon sequestration and soil and nutrient retention and therefore harmful and expensive runoff prevention. In addition, it produces an oil seed from which we expect to derive a high quality low car.
Intensity oil feedstock.
We believe this developing crop and other cover crops like it offer promise as new environmentally beneficial and scalable sources of raw material for producing bio based diesel we are very pleased to be able to contribute to the efforts of this innovative company and to fostering the potential commercialization of cover kras.
Now although feed price is ramped up substantially in the quarter. So did RIN values and to a lesser degree product prices as shown on slide 15, because of the drastic increase in soybean oil prices, coupled with a less dramatic increase in heating oil price the hobo spread fell to a negative 87 cents per gallon for the quarter on subs.
Potential decrease from first quarter, 'twenty 'twenty hobo spread of 29 cents a gallon. However, RIN prices responded accordingly, and the hobo plus 1.5 RIN spread has continued to hold relatively steady at 92 cents a gallon down just five cents versus first quarter last year.
We never predict future moves in RIN prices, but we are encouraged by this trend of renewable functioning as a hedge to hobo and working as designed to incentivize production to meet the RVO.
On the subject of brands, we continue to hear that the EPA should be releasing their proposed 2021 RVO sometime this summer to be finalized later this year.
And there continue to be positive developments on the state regulatory front.
Washington State passed both a clean fuel standard and a cap and trade policy, which is anticipated to begin in 2023.
With our 100 million gallon nameplate Grays Harbor, we file refinery. We believe we are well positioned to help the state meet their carbon reduction goals.
This major development, along with the biodiesel tax credit RFS, two and other existing low carbon programs, including California's or against that in British Columbia has continued to demonstrate support for growing demand for our fuel.
We are also seeing momentum in other states, including Colorado, Iowa, Missouri, New Mexico, and New York. These states are all making efforts to pass legislation that increases the use of bio based diesel.
Outside of the U S. The Canadian clean fuel standard proposed for late 'twenty 'twenty. Two is on track and a separate proposal has been floated in Ottawa to raise taxes on greenhouse gas emissions market signals and regulatory activity continue to indicate the potential for an aggressive ramp up over the next decade.
Beyond regulatory support we are continuing to see consumer demand poll fostered by their desire and by the desire in turn on their customers to lower their carbon footprint.
Boeing number of commercial enterprises municipalities and other institutions have been announcing significant decarbonization targets and are seeking solutions that enable them to meet their goals. As we have commented before this is why we feel we are at an inflection point in the energy transition moving from a primarily regulatory.
Driven push to a customer pool.
With this strong backdrop, we continue to drive our growth strategy forward. A notable portion of this strategy is the geismar expansion, which is progressing as planned.
Our recent equity raise was an important step in this process Todd.
Todd will provide more color on the res and on overall progress at Geismar in his remarks.
In addition to our plans at Geismar, we believe our downstream strategy will drive growth and margin capture as I mentioned earlier, our E. G. Ultra clean continues to be a standout performer growing rapidly year over year, our downstream growth strategy ties in perfectly with the expansion on geismar with a goal of providing returns on multiple fronts.
As it would give us more high margin renewable diesel exposure and more of our biodiesel gallons on margin uplift through blending and placement in carbon carbon incentivized markets.
In addition to the strong growth of ultra clean we are seeing be 100 and continued to grow as a readily available on easy to adopt sustainable solution through a partnership with Optimus technologies fleet customers in Iowa, Washington, D C and Massachusetts have begun the switch to 100 per cent biodiesel as shown on slide 16.
Customer enthusiasm for this program has been positive as they have been able to operate year round, even during extreme cold weather adoption of B 100 can be done quickly with very low switching costs and it provides one of the fastest path to deep decarbonization.
Today's customers' desire these types of products that benefit both the environment and the economy as a pioneer and a leader in global sustainability Ari G is proud to be a significant and growing part of this movement.
As I mentioned, many businesses have announced significant carbon reduction targets and are seeking options and solutions required to meet those targets.
And many other hoped force solutions are not yet technically let alone commercially available. We are proud to have already adopted a sustainable business model that reduces carbon substantially and does so now as most of you know, we recycle waste product into clean burning fuels that enable our customers to significantly reduce their carbon emissions.
With arguably the simplest and lowest cost of available options.
Slide 17 shows our environmental net contribution of over 800000 metric tonnes of reduced carbon emissions for first quarter 2020 one.
Carbon reduction profile will be highlighted in detail in our second annual ESG report, which will be released soon.
We are proud of our sustainable track record are energized by our plans for the future and we stand right here right now to meet the needs of the low carbon economy at scale.
Now I'll turn the call over to Todd to review, our financial performance for the first quarter Todd.
Thank you C J and good afternoon, everyone.
Slide 18 shows our first quarter results.
C. J mentioned, we had a strong first quarter first revenue increased 14%. This increase was mostly driven by higher average selling prices including returns.
North American biodiesel in particular experienced a significant boost in average selling price up 38%.
As a reference RIN prices were up 73 cents per in over 158% well you LSD prices were 14% higher versus first quarter of 2020 day increase in average selling price was partially offset by a lower volume of gallon sold.
Gallons sold declined slightly versus last year down 4%. This was in line with our guidance based on the turnaround at Geismar.
<unk> produced renewable diesel sales were down slightly because of the turnaround and we optimize our sales by a routing more product to Norway Euro.
European biodiesel sales were down significantly due to increased lockdowns, which impacted both feedstock availability and fuel demand.
Finally as C. J mentioned earlier first quarter adjusted EBITDA at 56 million beat guidance. This outsized beat was the result of multiple factors lower realized feedstock costs than we forecasted higher RIN values.
More wrens monetize as we continue to optimize margin capture across our network and lower risk management loss.
As you May recall last from last quarter. When we provided guidance, we anticipating building RIN inventory in Q1 for a variety of reasons, including short term lack of liquidity in the RIN market due to Houston being shut down from the winter storm, a large number of RIN traders and buyers are located in Houston.
RIN values increased after we provided guidance and liquidity returned to the market. We took advantage of this to monetize more returns and reduce the RIN inventory build.
Q1, adjusted EBITDA was down compared to the 89 million of adjusted EBITDA. We produced in the first quarter of 2020, the largest factor leading to the decrease was at 55 million negative swing in risk management.
As a reminder, we recognized a 54 million risk management gain in the first quarter of 2020 due to the historic drop in U S. D prices last March our risk management strategies functioned as planned the counter to that drop and also because of the timing factors pulled some profitability from second quarter 2010.
<unk> into first quarter of 2020 <unk>.
Additionally, we captured $18 million more profit from Rens and F. CFS credits in Q1 2020 versus Q to Q1 of 2020 excuse me.
SG&A expenses were up $4 million driven by an increase in legal and professional related expenses higher stock compensation due to the increase in our stock price larger vacation accrual due to COVID-19 related deferrals of time off and a higher bonus accrual SG&A was flat last year as a percentage was flat to last.
<unk> as a percentage of revenue slide.
Slide 19 shows trailing 12 month adjusted EBITDA on Slide 20 shows our trailing 12 months return on invested capital note that Q2 2020 is included in the trailing 12 months number where adjusted EBITDA was only $6 million due to the pandemic as I mentioned earlier much of the risk management that covered Q2.
Two 'twenty 'twenty performance was realized in the first quarter of 2020, because of this impact and to better illustrate our outlook and how low oh that low quarter is currently affecting the trailing 12 months result, we've calculated a pro forma trailing 12 month view based on the low end of our second quarter 2021 guidance.
<unk>, which she C J will discuss shortly.
As a reminder, our internal threshold for gross project is above 20% internal IRR and our target of ROIC is above 15% and based on our second quarter guidance, we expect to be back above 15% return on invested capital.
We did recognize a small tax expense in the first quarter and going forward, we expect our tax rate to continue to be less than five per cent.
Our blended average interest rate continues to be low and is currently less than 4%.
Now, let's turn to the balance sheet as shown on slide 21 as of March 31, we had over $600 million in cash and marketable securities. When you include the long term portion of marketable securities.
Obviously, our cash position has been bolstered by the recent equity raise the equity raise was an important part of our planning for Geismar as we secured $365 million in cash net of fees.
We remain on track to reach a final investment decision soon and we are submitting permit applications through the normal course of the project we.
We have strong support from the local community and the state of Louisiana for Geismar train B.
Recall that 2021 board approved Capex in keeping with our capital allocation included roughly $20 million for safety reliability and asset integrity, roughly $30 million for high return rapid payback projects and another $30 million on engineering for Geismar and other future growth projects. In addition to our Capex budget.
The framework also contemplates funding of potential strategic projects and acquisitions.
We had three convertible bondholders submit conversion notice recently, so we settled two in March and one in April with $28 $3 million in cash for the principal and approximately $2 3 million shares for the premium. In addition, we provided notification to our bondholders that we will redeem all outstanding 2036 convertible.
On your nodes on June 15th 2021, again, settling the principle with cash and shares for the premium now I will turn the call back over to C. J to discuss our second quarter outlook.
Thanks, Todd I will now discuss our second quarter 2021 guidance as well as the general outlook for the year ahead for context I'd like to touch once more on the current market environment, specifically with respect to feedstock prices current prices, especially for soybean oil are higher and more volatile than the market has seen since 2000 and <unk>.
And any forecast must be made with caution in respect to these price movements.
Having said that we are confident in our optimization abilities and have strategies and approaches that seek to enable us to operate profitability profitably. In these conditions. This includes our multi feedstock capabilities and the optimization upside that offer.
As a reminder, typically over 75% of our feedstocks are lower C I waste based materials.
With that in mind, let's turn to the numbers as shown on slide 23.
For the second quarter, we are targeting adjusted EBITDA of $65 million to $85 million with gallons sold in the range of 155 to 175 million. This equates to an estimated first half adjusted EBITDA performance of between 120 and $140 million and a gallon sold estimate roughly.
Between 290 and $310 million. This guidance includes $14 million of estimated risk management gain for the quarter as of April 26th.
For the full year, we're targeting gallons sold in the range of 630 to 670 million gallons down slightly from $6 60 to 700 million gallons to reflect our lower production in first quarter.
We expect to produce 470 to 500 million gallons, which is down from 490 to 520 million gallons for the same reason.
Of course, any changes to U L. S. D prices margins returns or else, you FES credit values or a level of market volatility through the end of the quarter could affect actual results shipment timing could also affect timing of revenue recognition.
Our strong performance in a volatile first quarter gives us added confidence as the U S economy appears to be returning to something closer to normal we.
We believe we are well positioned to capitalize on our strategy as we pursue long term growth in renewable diesel combined with near term tactical growth in the downstream.
The world today is undergoing a profound and exciting energy transition intended to put us on a path to environmental and economic sustainability RMG has an important and growing role in this effort. Our fuels can drive this transition today right now offering substantial carbon emission reductions with drop in fuels that require lit.
Oh, no change in infrastructure operating cost or customer investment our feedstocks are 100 per cent renewable and support both the AG economy and the circular recycling economy.
Why is the government policies are encouraging the energy transition while the private markets are realizing the benefits. We offer today, we have never been more excited about our growth prospects and look forward to creating meaningful value for our customers employees shareholders and all of society.
And with that I'd like to turn the call over to Devin for the question and answer segment of our call Kevin.
Thank you at this time, we'll be conducting a question and answer session.
You would like to ask a question. Please press star one on your telephone keypad.
Confirmation zone in the K. Your line is the question queue you.
You May press Star two if you would like to remove your question from the queue from participants using speaker equipment. It may be necessary to pickup your handset before pressing the star keys, one moment, please as we pull for questions.
Our first question comes from the line of Craig Irwin with Roth Capital Partners. Please proceed with your question on.
Good evening and thanks for taking my questions.
Most important I guess is the the Rins sold from inventory. So you did kind of state and Theyre more range, where monetize but can you.
Spell out in some detail so what the inventory position was at the beginning and end of the quarter end.
How much more so on inventory or are we talking about this quarter.
Yeah, Hey, Craig thought here. Thanks for the question Yeah. We figured this would be a topic of conversation. So yeah. When we gave our first quarter guidance back in February we indicated 25 million value kind of at the end of first quarter based on our forecast and again based on my comments you know we were able to man.
Oh ties more returns and obviously prices were a lot higher in the quarter. So we were able to take advantage of that to some extent. If you look at what prices were when we gave guidance I think they were around a dollar per.
Corinne and then if you look at what they average in the quarter I think it was closer to like $1 20, or something like that and then certainly in March they were even higher than that like around $1 40. So.
We were able to monetize more than what we forecast so our inventory build it didnt get to that $25 million at the end of first quarter as we anticipated.
So just to clarify does that mean that there was a $30 million to $35 million benefit in the quarter from selling those rents or did you exited the quarter with a greater when inventory than where you began at no. So it was it was quite a bit lower than that $25 million number Craig it was probably around $16 million at the end of the quarter on an actual base.
<unk>.
Okay excellent excellent.
Then second question.
Can you maybe discuss how you handle inventory.
Inventory gains on feedstocks that you own.
Was there any change in accounting here.
And you know is there anything that we need to understand as far as inventory carried from the fourth quarter into the second quarter.
Yeah, Craig I'll I'll take this and then just to be clear given that we've got several analysts we need to just kind of limited to one question for for each analyst and then if you want to you can get back in the queue. So yeah. So feedstock prices, obviously are a topic.
Recently and with the run up in soybean oil obviously, that's been a hot topic. So yes, usually when we think about risk management gains and losses, it's usually driven by U S D prices, but.
But recently with the rapid rise in soybean oil prices, we have seen Oh, probably I would suggest a disproportionate amount of risk management impact from soybean oil prices. So we have seen some risk management gains associated with our book as we as we lock in those cash margins at the time of sale.
Okay, but that was that was that differs a little bit from what I think you've disclosed this the risk management gain on the quarter can you maybe talk about that yeah. So we had a $2 million risk management loss in the quarter compared to that significant 50 554 million dollar amount in the first quarter of 2020 so.
If you look at the 2 million risk management gain excuse me risk management loss about you know on about two thirds of that relates to the second quarter otherwise the rest of this first quarter.
Okay and then during the during the first quarter. We saw feedstocks go vertical so you have a gain.
But Europe recording a $2 million loss can you can you just tie that up for us.
Yeah.
Oh.
Are you talking about forecast Craig are you talking about actual I'm sorry.
Let's talk actual.
Oh.
Yeah. So we had we had $2 million risk management loss.
With a big chunk of that with a sizable amount of debt being risk management gains from soybean oil.
Well don't forget that Craig bad product prices were escalating, which reverses risk management for product until it's on it's.
It's a combination of both and I'm, sorry, we really need to let somebody else on the Q and we will answer your question after everybody else gets to go through thanks a lot.
And our next question comes from the line of Manav Gupta with Credit Suisse. Please go with your question.
Oh, Hi, I want to move to slide 12, and I know you don't give exact the color coding, but let's assume for a minute. The green is soya bean oil historically, it was only 25 or less on 30% and then COVID-19 happened everything else disappeared and it became a big part of your feedstock now if I look at the last bar it looks like everything else.
Is coming back so you'll bean oil is shrinking so from the perspective of feedstock I wanted to understand do you see the situation normalizing, where let's say blue is used cooking oil and grease, Oh distillers corn oil those feedstocks are coming back and Richie is going back to a situation where it was like 2025 per cent soybean oil.
And the rest is Lewis the other feedstock.
Hum Thanks for the question and absolutely.
We are back on track with our normal feedstock mix, which is primarily waste based and those differentials maintained their attractiveness first as soybean oil.
Okay, and one quick follow up last quarter call you talked about covered crops alternate feedstocks you have historically looked at new feedstocks can you talk about where Richie is moving with looking for newer feedstocks. Besides just the vegetable oil and I'll leave it there.
Yeah. Thank you we look at new feeds all the time in fact, this last quarter, we processed I believe over 14 different types and some.
Some of them in smaller quantities on the others as we're learning and growing internationally for a different sources.
Of course cover crop oil is one of the ones, we're working on because although its not available commercially yet we believe its got really significant commercialize about potential for scale as well as significant knock on environmental benefits beyond the significant one of making oil that could be converted into bio based diesel.
I'll cover Kras was the one we chose to highlight at this time and what we've invested in just recently because of that potential but we continue to look at novel feedstocks like algae as well as Oh wide variety of other types of waste oil procured internationally.
Our next question comes from the line of Ryan Todd with Simmons Energy. Please proceed with your question.
Great. Thanks, maybe.
Can I just follow up on the last Oh.
The last question there I mean as you think about your highlight recovered gross here on the <unk>.
On the slide deck.
Can you give any more color on how you're thinking about that I mean from a scale point of view.
Theoretically the scale is that applicable across just about anywhere that soy has grown.
What are the obstacles that remain the scaling this up.
Oh.
Oh, you know like a range of the Ci score would be for something like cover kras and with the.
Cost would it be similar to other Lucia.
Anything more that you can give us on where that's headed.
Sure Ryan. Thank you for the question. This is an important area and well cover kras is very exciting it's not the only cover crops. So bear in mind that each type of cover crop is going to have its applicability, that's geographic as well as.
Oh yeah.
Better or worse possibilities between different types of crops.
Which is why you really want to look at a variety of things covered kras Oh is.
Being developed to grow in between us soybean and corn cycle, So, it's particularly well suited for the Midwest and other cover crops are looking at potentially being planted between say cotton crops and some.
Some of them are for more arid climates, and others are far wetter and hotter climates. So there's a variety of different types of crops that are suitable but the reason I go to that point is that it illustrates that I'll cover crop can be used in multiple areas in between multiple crops, which makes it particularly scalable.
Because it has these knock on environmentally beneficial effects and they're actually economically beneficial as well for the farmer because they do prevent the soil runoff didn't need to purchase additional fertilizer. They enable the farmer to actually process them, you know more or less.
Lower carbon intensive way and they enable them to monetize when they would otherwise simply just have a raw expense to plan to cover crops. There are multiple benefits both from a social as well as an environmental standpoint, they don't have additional land use implications because they are playing to between crops.
Which makes them very good candidates for a very low Ci scores and we don't have specific scores to share at this point, but I think one can assume that theyre going to be classified very closely to many of our other low C. I waste based feeds.
Thanks, that's really helpful.
Maybe can I just ask Oh.
A follow up on one other earlier questions as well I mean I appreciate the guidance that you gave some of the color that you gave around the risk of inventories, but as we think about your Q1 result versus the guide that you had given for Q1 outside of the of the Delta in RIN inventories and pricing what were the biggest.
Any color on what were the biggest meaningful drivers of the outperformance relative to your prior guidance, Yeah, I mean, I'll, let todd to embellish as needed, but theres a significant factor associated with optimization in particular feedstock costs.
Yeah, I think Brian one thing to think about is you know.
We were booking sales at.
Opportune times, not necessarily pro rata throughout the quarter. So we will be opportunistic when we see the spreads widen and we will take advantage of that and book sales dream than versus.
Just straight through the quarter. So you know being a being a little nimble helps in terms of optimization.
Okay. Thanks, Todd Inc.
Our next question comes a lot of Bertrand dogs. The truth. Please proceed with your question.
Good afternoon guys.
Could you maybe talk to the difference you're seeing.
In international markets.
Oh, and maybe the ability for international market.
Paul Bieber.
Yeah.
In Europe, I'm Yuko as is treated a little bit differently than in the U S and it's because they're statutes are different but used cooking oil based.
On biodiesel basically you get a double a credit for our renewable ready and that makes it a very attractive product in that market, having said that this particular corridor with the tougher one in Europe, because Europe has gotten hit a lot harder by COVID-19 and the shutdowns are a little bit more firm and if you combine that with the fact that.
Much other you called out Europe uses comes from Asia, and the shipping lanes and shipping volumes have been challenged over the quarter.
Oh, Yeah, we did reduce our volumes for the quarter, which Todd reported but our overall the market is very attractive in Europe because of the R&D too.
Alright. Thanks.
Oh.
Our next question comes from the line of Amit Dayal with H C. Wainwright. Please proceed with your question.
Thank you.
We expect true the downstream strategy.
Could you talk about you know how you use this in the first quarter on how are you.
You saw that Optionality in managing margins.
For the rest of the year during this volatile period.
So the downstream strategy is very exciting for us because it enables us to accomplish multiple things, possibly the biggest one is getting on direct to that end customer.
And enabling that on customer to Decarbonize more rapidly what we've been learning every time, we do it is there a level of enthusiasm for escalating their blending level and taking on more either renewable or biodiesel continues to.
Continues to grow.
So theres, just a connection and volume enhancing.
Approach and result from doing this but the other thing that we're able to do it particularly in the carbon incentivised market.
Expand the blending with biodiesel and renewable diesel and that's our ultra clean approach an ultra clean is a proprietary blend them, which provide reliable high quality.
<unk> and properties and the two blended together actually give the best of both worlds because biodiesel actually has a high lubricity factor, which improves mileage and our renewable diesel is a very high cetane number which is a very high quality burning indicator. So you put those two together you get.
Excellent and Jim performance and then the two together also have really enhanced tailpipe emissions reductions from criteria pollutants standpoint. So that's why when we report the escalation of ultra clean diesel sales. We believe is happening because as we get our branded sales out in front of customers their receptivity has been high.
And of course as we go downstream, we collect more of the rent along the value chain and in our business in particular that means taking a higher share if not the whole share of the incentives because the end consumer is typically not the obligated party and so the incentives aren't part of the.
Proposition for them, they just want a high quality very low carbon intensive fuel.
Understood.
On the feedstock again do you think the feedstock volatility risk is higher or lower from here for the rest of the year.
Oh.
Well, it's going to be an interesting market as you can see from the forward curve, it's pretty heavily backward aided but there are a lot of multiple factors going on including.
Planting levels harvest capability on the.
The success or failure of that and then we've got issues in China with swine fever again, there there's a lot of unknowns.
And of course with the recovery from the pandemic the available supplies are going to move around as recovery takes place.
So I think it's probably fair to say, we still have a measure of volatility in front of us and which direction that takes us in terms of absolute price its going to be interesting to follow them as I said the futures market is making its a view known through a pretty heavy backwardation, but the thing to keep it.
In mind is regardless of whatever happens with feedstock prices, what's really important is a couple of things for US one is the differential between soybean oil and the lower Ci feeds that we are actually operating greater quantity and abundance than soybean oil by a lot and the other one is the.
Way that the hobo spread in the Rins worked together so the reason you're seeing the escalation in RIN price is because feedstock prices were going up faster than the heating oil price suppressing that hobo spread and the rains come into balance it in order to make sure that the RV all gets produced.
Right.
Thank you for indulging me.
Appreciate it thank.
Thank you.
Our next question comes from the lineup on Med courses with B Ws financial. Please proceed with your question.
Hi.
Sure understand from a competitive standpoint are you seeing any pressures as far as being able to source.
Oh hi.
Carbon intensity.
Oh, okay.
Is that going to be contributing to the further price increases on that front.
Oh, Yeah, Oh man I'm not sure I caught the first part of that your question where was it the increasing low carbon feedstock prices.
There are competitive pressures on being able to source and also the pricing pressures that come from that as well the price of price inflation.
Yeah, you know obviously, there's a lot of potential new entrants keep in mind that many of them are either 100 per cent soybean oil or a higher percentage of soy than anything else, having said that for us.
No.
Our multiple feedstock strategy. We have are finding serves us well. So if one particular type of theatre, one particular source becomes scarce, which obviously it did during the pandemic, which is a good example of this we pivot to other feeds and so theres something about the combination of being able to pivot and be flexible.
Having a lot of different sources, and then having the deeper relationships that we have has been an incumbent with many of our suppliers being very very long standing suppliers gives us confidence of our ability to continue to source and in fact, continuing to grow our sourcing, which we've been able to successfully do now for the last 10 years at about a 12.
3% CAGR Oh.
It helps us feel confident that regardless of some of the other issues that are going on we will be able to continue to source successfully.
Okay. Thank you.
Hmm.
Our next question comes from the line of Matthew Blair with Tudor Pickering, Holt <unk> company.
You May proceed with your question.
Good afternoon, everyone. Thanks for taking my questions here I thought the Q2 guidance of six.
From so congratulations there could you break out what is included in this estimate.
For one sales of rooms from inventory into risk management gains and losses.
Yeah. So I think we noted risk management of about $14 million was in our second quarter guidance.
We're not going to you know, we don't want to get in the habit of providing that level of information around rins just because it does you know there is some competitive intelligence there in terms of what that is and how valuable it is but you know.
Suffice it to say that the the balance of the RIN inventory from the beginning of second.
Excuse me from the beginning of second quarter to the end of second quarter is going to be about flat. So it's not again. The reason we had such a significant build in the first quarter is seasonality. So some of the you know some of you guys are new to the story first quarter, we're building inventory.
Finished goods as well as his rens and then generally throughout the rest of the year you don't see that in by the end of the year, our RIN inventory is trading down.
Okay. Thanks per pod and then I just wanted to clarify.
We just started earlier is that your ending RIN inventory at the end of Q1 or was that the boost that we saw.
For the Q1 results Yeah, I think you broke up there a little bit Matt, but oh.
I'll try to interpret what you want on asking so yeah. So what we indicated when we gave first quarter guidance back in February we indicated we're going to have about a $25 million RIN inventory at the end of first quarter that number ended up being lower than that because we were able to monetize more so it's about $16 million on an actual basis at the end of this first quarter.
Yeah.
Great. Thank you.
Our next question comes from the line of Christian with Weber Research. Please proceed with your question.
Hey, guys, Chris on for Brent cover you.
Yes.
Hey, Tom.
Just wanted to get a lot of people from covered.
Your stock price volatility so on.
But I guess.
You mentioned earlier on the Q&A section.
Hum.
Let's see you guys deploy longer term contracts.
Isolate the volatility.
Yes.
Yeah, Chris we're having a hard time with you to operators, there's something happening that we can't hear the.
Calls very well.
Oh, it's probably just sell servicer.
Please proceed with your question. He was asking if third party supplies are longer term contracts helped to reduce volatility okay.
So.
You know Oh, we are.
Focused on having some longer term contracts and that's actually one of our targets to continue to increase and at this point, we have about 30% of our feed in and sort of belts categories. Having said that many of them are index. So it gives us sourcing confidence but are the reason we risk managers, because the pricing will still be India.
In order to protect the supplier and balance things out with us.
I think that was what you asked if we if we get that wrong. Please repeat.
T. J you got that right that that's kind of looking forward and maybe just a quick follow up just to sneak in.
So last quarter, you guys mentioned about pulling some maintenance forward into Q1 in addition to Geismar.
What are you guys able to eat it oh by the end of quarter with some slipped into Q2.
Yeah, everything that was planned for first quarter I got completed so we've been really pleased with that and are ready for a focused second quarter.
Oh, okay.
Thanks from me guys. Thanks.
Thanks.
And once again as a reminder, ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad. Once again, if you'd like to ask a question. Please press star one on your telephone keypad. Our next question comes from the line of Jason <unk> with Cowen and company. Please proceed with your question.
Yeah, Thanks for taking my questions Oh.
First on Rens, you mentioned that RIN should essentially compensate for the difference between soybean oil and petroleum diesel are you seeing that until a full extent now as soybean.
Soybean oil prices have rapidly increased and and if you assume that relationship is going to play out is that something that's contemplated.
In your <unk> earnings guidance.
Yeah, you can really see from the charts that we share do you can really see how.
RIN price escalation has come into it pretty much stabilized at hobo, plus 1.5 range margin and that's been pretty stable now for quite a while which gives us a pretty good luck as to what we should use for our assumptions going forward.
Okay, Yeah, because that chart.
Which I believe is on slide 15, it looks like it's just through the end of the quarter. It's tough to tell if that's capturing April and May which saw some of the more rapid appreciation of feedstocks and it seemed like the.
Relationship broke down a bit.
But I'm not sure if maybe that's not the other interpretation of what's going on yeah. You know if you get really granular theres a lot of breakdowns you in this whole curve that you see and so sometimes it takes a while for things to catch up do you need to give it a little bit more time to draw a conclusion and you're exactly right. There's been some pretty wild volatility, which is actually why we wanted to show.
That forward curve on soybean oil because that's a pretty crazy shaped curve.
And Oh, what we'll have to watch and as we said, we don't like to predict markets too much but history being our guide you can kind of see how the market is functioning from a market fundamentals standpoint, and at the end of the day the obligated parties still need to achieve that RV, Oh, so other rens need to come in and help.
Make sure that that marginal gallon gets produced.
Got it and remember just yes, it's hard to remember right. So that that soybean oil rate and we're running you know whatever 75% 80 per cent of the low Ci. So we are seeing much better spreads for you know choice white grease used cooking oil in the low Ci feedstocks that we run.
Yeah for sure under understood if I could just ask.
Separately about the downstream.
Oh integration initiative that you have you are now.
Oh, I'm selling B 100 strength of fleet customers does that does.
Does an agreement like that essentially enable you to capture a majority of the regulatory benefits that you wouldn't otherwise be kept capturing on what what's what's kind of the opportunity set there too.
Oh strike agreements with with other fleets.
Oh, yes, it absolutely does because it's a win win and we're able to capture the incentives, which keeps us developing more and theyre able to get this rapid decarbonization and when you think about these municipalities now starting to have zero carbon goals are significant carbon reduction goals. This is probably the.
<unk> away from them to do it it's certainly an option that's available right now, whereas many other things they're looking at are going to take awhile to get their and they don't have to retool Oh and completely change their fleet over and there's not a big infrastructure change. So there's some real attraction there to being able to basically do what they're doing now.
You know 85 per cent lower carbon so that's a pretty big win.
Great. Thanks.
And our final question comes from a lot of Manav Gupta with credit Suisse to true two question.
Oh, Hey, thanks for letting me back in I had a quick one C. J you mentioned looks like Washington is moving ahead, they could have debt on a clean fuel standards pretty quickly in your opinion, how does that benefit and support a carbon price in California, because we're hearing that too many projects that are coming on so there could be downward pressure on California Fob on price.
So in your opinion, whether it's Canada, Washington, and some other states how does it help support the carbon price net of CFS credits.
Hey, Manav.
Yes, it's a you're you're right in the sweet spot on that one do more municipalities states and others establish targets to take on more of these types of feeds or at least to decarbonize more rapidly the renewable diesel on the biodiesel are available now and you know.
Oh in California, right now renewable plus biodiesel it makes up over 50 per cent of the credits that are earned because they're available today. So as you have new states coming in and they have the same mandates in the early days when there is not much de carbonization theres, a little bit more of a wide variety of types of credits that are going to come into.
Play, but that pull is there and its signals they need for greater volumes and it's kind of predictable because you can see what the de carbonization level as each year. So definitely it's very good news for our industry that Washington has passed these targets.
One of the primary ways Theyre going to meet it is through more renewable on biodiesel consumption.
Thank you so much for taking my questions.
Oh.
And what's that ladies and gentlemen, we have reached the end of our question and answer session and I would like to turn the call back over to Mr. Todd Robinson for closing remarks.
Thank you Devin we have two virtual investor conferences scheduled for me and one in June which is shown on slide 24.
Before I walk through the conferences. Please note that all upcoming conferences will be will be virtual due to COVID-19 attendance at these conferences is by invitation only for clients of each respective firm. So interested investors. Please contact your respective sales representative to register and for one on one meeting to secure time. The first is <unk>.
13th when we will participate in the credit Suisse renewable and utilities conference, we will host virtual one on one meetings with institutional investors throughout the day.
On may 19th we will participate in the 16th annual BMO farm to market conference, we will be participating in a fireside chat at 10, a M eastern and we will host virtual one on one meetings with institutional investors throughout the day. In addition on June nine we will participate in the 2021 Baird global consumer technology and <unk>.
This conference we will be presenting at the conference at $2 30 eastern.
And we will host one on one meetings with investors throughout the day Lastly, as noted on slide 25, we will be holding the annual meeting of stockholders on May 18 at our offices in Ames, starting at 10, a M central the meeting will be in person only.
Thank you all again this concludes the call you may now disconnect.
Thank you everyone for joining today's conference call. You May now disconnect. We appreciate your participation and have a wonderful day, everyone Goodbye.
Oh.
Oh.
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