By Ian Gilson, CFA
Futurefuel Corp. (FF) reported its second quarter 2012 results on August 9, 2012 followed by a conference call on August 10, 2012. Although both diesel sales and chemical sales were ahead of our estimates operating income for both groups were in line with our forecasts. Earnings were slightly below our estimate of $0.23 a share. The shortfall was mainly due to the lack of RIN sales derived from the company's sale of blended diesel.
The improved margins for chemicals and reduced margins for biodiesel are, in part, due to the allocation of certain expenses based on that groups proportion of revenue versus the prior year's allocation.
The productivity of the biodiesel plant continues to improve. The rated capacity is 59 million gallons a year but when the plant switched to mixed waste grease the output dropped to 39 million gallons a year. Steady optimization of plant variables have moved the effective capacity up to 45 million gallons. At current soy bean prices plants using beans as feedstock are not profitable, and many have closed. This opens up the market for FutureFuels, and others. With the company's extensive distribution system it should be able to grow blended diesel sales as long as soy bean prices stay at the current level.
The tax credit ended on December 31, 2011. We have assumed that, at some point, the reduction in tax credits is matched by an increase in income from trading RINs. Since the RINs do have expiration dates, and are currently on the balance sheet as intangibles, we assume they will be sold before they become worthless. There are moves in the US Senate to reinstate the biodiesel credit back to January 1, 2012, as we had assumed it would be, but it is still not certain that will occur in the near future.
The chemicals business was impacted by the decline in herbicide sales to Arysta but sales to P&G increased. Other chemical sales increased by nearly 40% Y/Y.
FutureFuel has been discussing the terms of the contract with Arysta regarding prices and volumes of the herbicide and its intermediates. They have been unable to reach an agreement and FutureFuel has exercised its right to terminate the contracts effective September 1, 2013 for the herbicide and October 1, 2013 for the intermediates. It is possible that Arysta may purchase these products after that but this is not certain. Revenue from this business was worth $30 to $38 million a year from 2009 to 2011. We have assumed that this will decline to $5 million in 2013 and will be zero after that.
The company had announced that it will produce carbon anode materials for lithium ion batteries in electric automobiles. The recent problems of EV battery companies and some EV cars has affected this business. We have assumed that there will not be any significant revenue in 2012. This plant was built on a take or pay contract and the terms of any payment will be discussed between both parties later this year.
Please visit scr.zacks.com to access a free copy of the full FF research report.
By Ian Gilson, CFA