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Edited Transcript of REGI earnings conference call or presentation 6-Aug-19 8:30pm GMT

Q2 2019 Renewable Energy Group Inc Earnings Call

Ralston Aug 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Renewable Energy Group Inc earnings conference call or presentation Tuesday, August 6, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chad Stone

Renewable Energy Group, Inc. - CFO

* Cynthia J. Warner

Renewable Energy Group, Inc. - President, CEO & Director

* Todd Robinson

Renewable Energy Group, Inc. - Treasurer

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Conference Call Participants

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* Craig Edward Irwin

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

* Hamed Khorsand

BWS Financial Inc. - Principal & Research Analyst

* Patrick Jacob Flam

Simmons Energy | A Division of Piper Jaffray - Research Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the Renewable Energy Group Second Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Todd Robinson, Treasurer. Thank you, sir. You may begin.

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Todd Robinson, Renewable Energy Group, Inc. - Treasurer [2]

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Thank you, operator. Good afternoon, everyone, and welcome to our second quarter 2019 earnings conference call. With me today is our President and Chief Executive Officer, CJ Warner; and our Chief Financial Officer, Chad Stone. Let me cover a few housekeeping items before I turn the call over to CJ.

First, 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 for your reference. This will appear automatically with the webcast, but you will need to advance the slides manually as we prompt you. For those of you dialing in, the slide deck can be downloaded along with the earnings press release in the Investor Relations section of our website.

Turning to Slide 3. We would like to advise you that some of the information discussed on this conference call will contain forward-looking statements. These statements involve risks, uncertainties and assumptions that are difficult to predict, and such forward-looking statements are not a guarantee of performance. The company's actual results could differ materially from those contained in such statements.

Several factors could cause or contribute to those differences. These factors are described in detail in the Risk Factors and other sections of our annual report on Form 10-K and subsequent 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 or the appendix to the accompanying slide deck for a reconciliation of the non-GAAP measures to the most comparable GAAP measure.

With that, let me turn the call over to CJ Warner. CJ?

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Cynthia J. Warner, Renewable Energy Group, Inc. - President, CEO & Director [3]

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Thank you, Todd, and good afternoon to those on the call. I will discuss our second quarter high-level results, margin and regulatory environment and operating highlights. And then Chad will provide more details on our financial results. Then I will come back to discuss our outlook.

Our second quarter reported financial results were disappointing as we and the entire industry navigated through a very low-margin environment. These results do, however, reflect continuing strong underlying operating performance. As reflected on Slide 4, our second quarter adjusted EBITDA of negative $42.3 million was well below our expectations. Since we provided guidance at the last earnings call, customer sentiments around the Biodiesel Mixture Excise Tax Credit, otherwise known as BTC, has started to shift. The decision as to whether or not to reinstate the BTC has dragged on for 20 months. One of the resulting effects is that some customers are telling us that they are reaching their limit to take on BTC exposure. This has enabled us to capture a higher percent of the potential BTC upside and continue to produce at high run rates. In turn, however, we have accepted lower prompt pricing.

Slide 5 puts the adjusted EBITDA results in context with our previous guidance. We came in at the high end of guidance on volume, much lower on adjusted EBITDA before BTC, higher on capture of potential BTC benefits and within guidance at the low end of adjusted EBITDA, inclusive of potential BTC. Chad will give more details later to reconcile guidance to actual results.

Standing back from the quarter, we continue to build a large potential net benefit from the reinstatement of the BTC. If reinstated, our net benefit would be approximately $370 million. That amount represents the potential net BTC benefit for all of 2018 plus the first half of 2019 and represents over $9.50 a share. As I mentioned previously, we are now into the 20th month operating without a decision on the BTC. This is resulting in a market that is caught in the middle.

With high confidence in the ultimate reinstatement of the BTC, the market continues to operate as though it is already there, creating a disconnect in pricing and volumes being produced and sold. Simply said, in anticipation of the BTC reinstatement, marginal gallons are not naturally coming off the market, which is depressing realized margins. Once the decision is made about the BTC one way or the other, we would expect that the market will rapidly adjust for these discrepancies.

Equivocation on the BTC has now been dragging on for far too long. We announced 2 weeks ago that we are closing our New Boston, Texas, biorefinery due to poor economics driven in large part by the indecision around the BTC and the resulting caught-in-the-middle economics I mentioned earlier. We are disheartened by the associated loss of jobs. We continually monitor margins and, unfortunately, did not see a near-term path to profitability at New Boston. Its small capacity made it more difficult to operate as efficiently as the other plants in our fleet. This was an important part of our work to continuously strengthen our portfolio and ensure that our resources flow to the highest and best opportunities.

We also see others in the industry responding to this low-margin environment with reduced capacity and plant shutdowns. We believe that it is likely that this trend would continue with a protracted period of indecision about the BTC.

So what is the status of the BTC reinstatement? We were disappointed that it and other tax extenders were not included in the recent budget deal. We believe though that there are other legislative vehicles to get the incentive reinstated before the end of the year and possibly by the end of September. There remains strong bipartisan support for the incentive, and we continue to be confident that the BTC will be reinstated.

Now back to our financial results. Other factors held us to the lower end of guidance, inclusive of potential BTC. Margins were lower than expected in the quarter. As you can see on Slide 6, our key indicators, the spread between heating oil and -- heating oil or ULSD and 3 feedstocks, soybean oil, otherwise known as the HOBO spread; distillers corn oil, HOCO; and choice white grease, which is HOG, have all compressed across the quarter. Chad will cover this in more detail presently.

In terms of self-help actions, underlying performance continues to be strong. We grew gallons sold 15% over last year, a very solid result. This volume increase offset much of the headwinds of a lower average selling price and the 1-quarter lag in LCFS income, which we discussed last quarter. We work to continuously and safely improve our production efficiency and to maximize our feedstock flexibility. We believe that both of these are key competitive advantages for us, and they both positively influenced this quarter's results. Most notably, we produced 127 million gallons in the second quarter, which is 2.5 million more gallons than Q2 2018. Yet our feedstock usage was identical. We consumed right at 1 billion pounds in both periods.

Some of the efficiency gain is due to operational improvements and some due to feedstock usage. Our feedstock flexibility allowed us to use more soybean oil this quarter compared to the prior year. At times this quarter, soybean oil was cheaper than animal fat on a yield adjusted basis, so we switched some production to soybean oil when and where appropriate. Across most of our fleet, we can switch back and forth as pricing dictates, optimizing operational profitability.

We are starting to see real traction in our downstream strategy, which is key to boosting biodiesel demand and margins and we believe, therefore, will significantly expand our long-term profitability. So let's talk about the progress we are seeing in our downstream efforts.

Turn now to Slide 7. In our first quarter earnings call, I mentioned we would be opening our first REG-branded cardlock station to drive higher blends of biodiesel and enhance margins. We opened the Seneca cardlock fueling station on July 17 and are pleased with the early progress there as well as the future profit opportunity for REG in selling fuel directly to end users.

The other downstream effort I mentioned in the first quarter call was our fuel distribution business in Iowa, which is also driving higher blends of biodiesel and enhancing margins. This business has achieved many promising developments thus far. We have converted several customers from a B5 to a B20 blend. These customers range from a large metropolitan fleet to a mining company to a large utility company. In addition, we continue to convert our own fleet of delivery vehicles to B100. Through these efforts, we're proving that B100 biodiesel makes a great fuel and does not need to be blended with petroleum. We believe this demonstrated success will increase overall biodiesel demand, open up new higher-margin markets for us and accelerate environmental improvement in the locales where the fleets operate.

As an illustration of why distribution participation makes sense for us, over half the volume we sold in our Iowa fuel distribution business in June were blends of B11 and B20. These blending levels are 2 to 3x the industry's nationwide on-road biodiesel blending level of 7%. Although it is early days, our direct-to-fleet sales are growing rapidly. And in second quarter 2019, they are 250% higher than the second quarter of 2018.

The average REG Ultra Clean gallon, our proprietary blend of biodiesel and renewable diesel, contained 10% biodiesel for the first 6 months of 2019. We believe our ability to blend biodiesel with renewable diesel is a real differentiator for REG and uniquely positions us with scale in both products. We have filed for a patent to protect our proprietary blending know-how. REG Ultra Clean diesel gives us a significant uplift in the value of our biodiesel.

These examples of downstream progress indicate why we are focused on this element of our growth strategy. Speaking of growth, we are highly confident in the outlook for renewable diesel. Pricing is good. Demand is very strong, and new potential demand draws such as aviation and other incentivized geographies are on the horizon. Produced volumes at Geismar continue to grow organically, and we continue to advance our work with Phillips 66 on our potential joint venture.

As we look at our major investment opportunities, our focus is on renewable diesel. We are progressing with our planned joint venture with P66, which is an important example of how we can grow our renewable diesel business through strategic partnerships. We expect to make final investment decisions towards the end of this year following completion of scoping and design engineering. Our current plan has the project coming online in late 2022. We are carefully managing our capital investments in response to the market environment and are continuing to invest in the key projects that look to provide high returns and long-term growth. Chad will elaborate on capital investments shortly.

Finally, let me provide updates on a few nonoperating items. First, we announced the sale of our Life Sciences business to Genomatica. We believe Genomatica is an outstanding home for this business and our former Life Sciences team members who have joined them. We wish them great success as they carry forward our efforts. Secondly, I want to highlight our contribution on the environmental and social front. We are very proud of the carbon reduction we achieved in the second quarter.

On Slide 10, you can see that the 127 million gallons of low-carbon renewable fuel we produced displaced approximately 850,000 metric tons of CO2. This tremendous environmental benefit is integral to our fuel forward strategy. In addition, we maintained a stellar safety track record, again achieving 0 reportable incidents in the quarter. Our 12-month rolling average injury rate through June is at record low levels. The goal to achieve industry leadership is -- this is our goal to achieve industry leadership in this very important KPI.

Let me now turn the call over to Chad for the financial update, and then I will return to discuss our guidance and outlook. Chad?

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Chad Stone, Renewable Energy Group, Inc. - CFO [4]

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Thank you, CJ. And good afternoon, everyone. Before we review the key line items, I want to summarize our results relative to our guidance. As a reminder, our Q2 adjusted EBITDA guidance, excluding BTC and LCFS, was a range of negative $10 million to negative $25 million. This was based on a historical ratio of shared BTC benefit with our customers. Our actual result was negative $42 million. As CJ mentioned, this before BTC result is lower than expected because we took on a greater-than-historical portion of the expected BTC value this quarter. Our estimated BTC benefit was $81 million compared to our guidance estimate of $63 million. If we add adjusted EBITDA and expected BTC benefit together in both the guidance and the result, we would have been within the lower end of our guidance range.

Using the guidance midpoint, we were off by $25 million due to assumptions that did not materialize or that changed. The largest item was the sales environment related to the BTC sharing, resulting in a lower biodiesel average selling price and higher estimated net BTC benefit for us. The drop in biodiesel average selling price impacted our results negatively versus guidance by $19 million.

Now let's turn to results, starting with Slide 12. The increase in total gallons sold was driven mainly by renewable diesel and petroleum diesel. Biodiesel gallons sold were basically flat. We did have substantial growth in the resale of petroleum-based diesel due to more blending as we expand our downstream distribution network. The solid volume growth was offset by a few items, resulting in revenue being down 3%.

U.S. biodiesel selling price was down sharply due to lower ULSD prices as well as lower RIN prices. As we discussed last quarter, due to a change in California's administrative process, we did not recognize California LCFS credits in the second quarter, which is a onetime impact, resulting in $29 million of revenue and adjusted EBITDA recognition pushed into the third quarter. California LCFS prices remained robust due to strong demand. Furthermore, the value for Oregon LCFS credits have increased dramatically and averaged over $150 per metric ton for the quarter. And last week, we were notified that Oregon approved our lower carbon intensity scores for Grays Harbor, which we expect will improve margins there.

To summarize the slight decline in revenue, renewable diesel revenue was up strong, while biodiesel, LCFS and RIN saw lower revenue.

Turning now to costs. The main driver of the increase in cost of goods sold was the overall increase in the feedstock complex as well as the compression of lower-cost feedstocks. Total cost of goods sold was up, while revenue declined, resulting in a gross loss. The spreads compressed between these feedstocks year-over-year. Since approximately 75% of our feedstocks are lower-cost feedstocks like distiller corn oil and choice white grease, our typical cost advantage was compressed. Our SG&A expenses were up slightly due mainly to legal costs associated with our potential joint venture with P66 and the Life Sciences divestiture.

On Slides 13 and 14, you can see our 12-month -- trailing 12-month adjusted EBITDA and return on invested capital. The light blue on the bar chart reflects the net benefit if the BTC is reinstated. Our business is seasonal, and we believe trailing 12-month results are a better reflection of our long-term earnings power.

Now please move to the balance sheet on Slide 15. Cash declined from the cash used in operations as well as cash used to settle our 2019 convertible bonds in June. We paid cash for the principal and issued stock for the premium. We brought down total debt even more in the quarter by reducing our revolver outstanding. We funded the revolver reduction with working capital changes and the main item being selling product out of inventory, which is normal for this seasonal period.

Looking at our liquidity. We had $61.6 million of cash at the end of the quarter, and we had $68 million available on our lines of credit at the end of June. In early July, we expanded our asset-backed line of credit at our option to increase the maximum borrowing amount through October from $150 million to $175 million, or to $200 million contingent upon the BTC reinstatement. We settled the 2019 convertible bond in June. We paid off $67.4 million of principal with cash and issued 1.9 million treasury shares to settle the premium. We did receive back 625,000 shares from the capped calls, so the net shares issued were 1.3 million shares. The treasury shares we issued were previously repurchased at an average price of $9.87 per share. We did not refinance the convertible bonds, which delevered our balance sheet.

As you can see on Slide 16, our debt-to-capital ratio is now 15.2%, down from 20.6% from last quarter and down from 19.5% at the end of 2018. The 15.2% debt-to-capital ratio is the lowest level since the first quarter of 2014.

Now let's touch on CapEx. We invested $9.8 million in the second quarter, mainly on growth and high-return projects. And year-to-date, we've invested $8 million of our original $65 million to $75 million budget. We have been consciously slowing our CapEx outlay to better manage cash flow in the absence of the BTC. Our effective tax rate for 2019 is expected to be less than 1%. And going forward, we expect our tax rate to continue to be less than 5% for the foreseeable future, and our blended average interest rate is less than 4%.

Now I'll turn the call back to CJ to discuss the outlook. CJ?

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Cynthia J. Warner, Renewable Energy Group, Inc. - President, CEO & Director [5]

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Thanks, Chad. And I'd like to just make a quick correction. The year-to-date investment of CapEx is $18 million versus that $65 million to $75 million budget. So just a quick misspeak.

Let's refer to Slide 20 now for our guidance. For the third quarter of 2019, we expect gallons sold in the range of 185 million to 205 million gallons. We do anticipate the margin environment to continue to be challenging in the third quarter as the uncertainty is prolonged around BTC and due to RIN price suppression that we believe is caused by RFS small refinery exemptions. On a positive note, we've seen modest increases in RIN prices recently with plant closure announcements from us as well as the Flint Hills Beatrice, Nebraska, plant. The third quarter will include $29 million of California LCFS credits.

With all of that in mind, we are projecting adjusted EBITDA to be in the range of $3 million to $18 million. In keeping with the trend we have experienced on BTC sharing, we estimate that third quarter adjusted EBITDA would be approximately $80 million higher if the BTC were reinstated on terms similar to past years. This estimate for the third quarter is based on actual performance through last week and takes into account existing forward contracts expected to be fulfilled and existing spot margins through the end of the quarter. Any changes to the ULSD prices, margins, RINs or LCFS credit values or a level of market volatility through the end of the quarter could affect actual results. We have included $1 million of risk management gains in our guidance, which reflects our estimate for the quarter as of July 23 based on the ULSD forward curve.

Our full year guidance reflects a continued challenging market environment. We now estimate that gallons sold will be in the range of 715 million to 740 million and gallons produced to be in the range of 510 million to 540 million. These have been reduced from prior guidance due primarily to the New Boston closure and reduced third-party trading.

To wrap up, we remain focused on improving financial results in this very challenging margin environment. With the expected BTC reinstatement, our results will be strong and will provide the intended capital to fuel value creation. In the meantime, we continue to deliver on the controllable elements of our plan and have put in place several programs that we believe will accelerate growth in the future. We remain confident in our long-term earnings power and the value we continue to create.

Now before we close, Todd is going to mention upcoming investor events for REG. Todd?

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Todd Robinson, Renewable Energy Group, Inc. - Treasurer [6]

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Thanks, CJ. Please turn to Slide 21. We will present at the Canaccord 39th Annual Growth Conference on August 7 in Boston. Attendance at this conference is invitation only, so please contact your Canaccord sales representative if you want to attend or schedule one-on-one meetings with us. We will also be attending the BWS Financial Growth and Value Summer Investor Conference on August 13 and the Seaport Global Securities Annual Energy and Industrials Conference on August 28 in Chicago. Attendance at these conferences is invitation only, so please contact your sales representative if you want to attend or schedule one-on-one meetings with us.

We prerecorded our comments this quarter as CJ had an unavoidable and unexpected personal matter to tend to. She will not be available for the remainder of this call. Chad will lead the Q&A session, and we will have other members of the senior leadership team on the call to answer questions as needed.

Operator, we will now open it up to Q&A. Please proceed.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Patrick Flam with Simmons Energy.

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Patrick Jacob Flam, Simmons Energy | A Division of Piper Jaffray - Research Analyst [2]

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I really wanted to ask you about the changes in pricing across the market that we've seen and specifically what have historically been lower-cost feedstocks. Essentially, you mentioned that soybean oil prices were actually cheaper than some of those historically advantaged feedstocks throughout the quarter, and it doesn't seem like that market is going to change anytime in the near future. Can you frame up your expectations for this going forward?

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Chad Stone, Renewable Energy Group, Inc. - CFO [3]

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Yes, Patrick, it's Chad. Thanks for your question. And if you look on Slide 6, it really kind of shows you that compression and the evolution of the feedstock. And then again, on Slide 7 of this deck shows exactly what you just described. So we have -- as CJ was saying, have seen changes in pricing of lower-cost feedstocks for a couple of reasons. There's a lot of factors moving in the feedstock markets. One of them is highly incentivized markets for low-carbon-intensity feedstocks like used cooking oil and distiller oil -- distiller corn oil that are going into West Coast markets like California and Oregon, for example. And so that's supporting this compression of lower-cost feedstocks into the soybean oil pricing.

Soybean oil has been kept relatively low for a few reasons: one, due to the continued trade war with China, keeping the entire soybean complex low; the reduced demand for protein in China as well. So we've seen that price lower than normal. We've also seen an abundant supply of palm oil, which trades in the world market and keeps soybean oil in check. So on the one hand, you see incentives for the traditionally lower-cost feedstocks because of premium markets. On the other hand, soybean oil has been relatively flat.

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Patrick Jacob Flam, Simmons Energy | A Division of Piper Jaffray - Research Analyst [4]

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Okay. That's very helpful. My follow-up question is that on the off chance that this BTC keeps getting pushed back or worst-case scenario gets shelved completely, I was wondering if you could talk about how that affects your willingness or ability to fund some of your slate of growth projects going forward.

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Chad Stone, Renewable Energy Group, Inc. - CFO [5]

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Sure. So on the one hand, as CJ mentioned, in the beginning of the third quarter we've started to see that this is -- the 20 months of lapsed BTC has been wearing on the industry from our announcement to shut New Boston and the Flint Hills closure of the plant in Nebraska, you can see that. You can also see it in our reduced run rate of the capital expenditure allocation. So we originally started the year with about a $75 million budget, and we've pared that back to only spending $18 million through the first half of the year.

And so we're managing what we control. The margin and the markets are what they are. They're acting with the expectation that the tax credit will be reinstated. But we need to position ourselves to protect our balance sheet and weather the storm, which is why you've seen those actions. But we have prioritized high-priority, fast-payback projects, safety projects and those types of things. So that's kind of where we stand. The other thing that we've done, as Todd has talked about before, is expanding our working capital line of credit.

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Operator [6]

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The next question comes from the line of Craig Irwin with Roth Capital Partners.

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Craig Edward Irwin, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [7]

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So Chad, the changes in BTC expectations over the quarter, 63 to 81, it seems like there was a fairly significant change in sentiment among the buyers of your biofuel. My back-of-the-envelope math is somewhere between 55 million and 60 million gallons was moved to where you're the beneficiary directly of the reinstatement and, as you said, to a greater degree. Can you maybe characterize for us what type of clients are -- or what type of customers for your biodiesel are asking for this altered arrangement? And is there potential for more of the product that's sold to move into this more favorable longer-term BTC arrangement but something that obviously pinches the EBITDA in the short term?

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Chad Stone, Renewable Energy Group, Inc. - CFO [8]

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Yes. Thanks for the question, Craig. And what we saw during the quarter was $18 million more of BTC upside to us than we would have expected based on our traditional relationship. And I think it was an evolution of customer risk appetite. You think of the 20 months of -- some of our customers have very large exposures to the BTC, and their offers on the table may be more leaning towards us retaining the net benefit upside. Again, if -- and I think in terms of types of customers, it's difficult to say. I mean it's more anecdotal around the industry, and we don't want to get too much into what our specific customer appetites are. But the underlying theme really shows through in these numbers is that they have enough exposure in some cases and they don't want to extend that.

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Craig Edward Irwin, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [9]

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Okay. Excellent. And then this quarter, you didn't have as much as -- much of a detailed discussion about Geismar and Geismar's contribution in the quarter. Can you maybe update us how Geismar is performing? Is that still a nicely profitable plant even in this difficult environment? Should we expect Geismar to continue to outperform versus the traditional biodiesel plants?

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Chad Stone, Renewable Energy Group, Inc. - CFO [10]

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Yes, Geismar is performing well. It's running very well. It had a successful turnaround, and it continues to be profitable. We're very happy with the plant. As you know, we don't give specific details on plant economics. We do have some industry markers out there where you can get a sense of likely the way renewable diesel is selling, but we continue to be very happy with the performance.

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Craig Edward Irwin, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [11]

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Okay. And then just looking at potential opportunities out there. You mentioned on the call 20 months waiting for our good friends in Congress to actually do their job and implement legislation properly and reinstate this blenders credit. Is there an opportunity now in the fat side given that some people obviously on the petroleum side are kind of giving up? Is there a potential that we can see you guys actually take fat off the market for significantly lower prices than what you're forced to pay at the moment?

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Chad Stone, Renewable Energy Group, Inc. - CFO [12]

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I'm sorry, take what off the market? I didn't hear that.

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Craig Edward Irwin, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [13]

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Feedstocks, soybean oil and high-grade fatty acid feedstock.

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Chad Stone, Renewable Energy Group, Inc. - CFO [14]

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Yes. So what you saw us doing throughout the quarter is increasing our mix of soybean oil and canola inclusion because of that yield -- the yield advantage of using the easier-to-process feedstocks. And we probably -- I think it was 25% mix of soybean oil and canola last year compared to roughly 38% in the second quarter. So you've seen us adjust as it made -- as we optimized our plants and our feedstock mix based on the evolution of the feedstock markets. And from that perspective, what we're seeing is some opportunities in -- as we said, the Nebraska plant came offline. That we think has been helpful to keep distiller corn oil a little bit lower. And so that is an opportunity for us.

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Craig Edward Irwin, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [15]

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Okay. And then last question if I may. California low-carbon fuel standard, I think you mentioned was a $20 million positive delta going from the second quarter into the third quarter. Should we continue to expect that into the fourth calendar quarter as an uplift to overall profitability?

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Chad Stone, Renewable Energy Group, Inc. - CFO [16]

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Yes. So the second quarter did not have the benefit of any California LCFS credit. So the -- that was transferred into the third quarter. And then the fourth quarter we expect to be as strong and arguably strengthening. What we've seen year-over-year is California LCFS average price go from about $133 a year ago during the second quarter to $194. And so the LCFS price has been firming up. The Oregon credit prices have been firming up as well. A year ago, they averaged $60 a metric ton. And this last quarter, they were up to $156 per metric ton on average. So we've seen strength in those markets, in the incentivized markets, and we expect that trend is continuing.

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Todd Robinson, Renewable Energy Group, Inc. - Treasurer [17]

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Yes, Craig, Todd here. One thing to note, sorry, is we haven't really talked about IMO 2020. But we do think that in the second half we think there will be a little bit of uplift from that. We haven't put anything in our guidance around that at this point. But I think if you look at what's been out there, there is -- others are talking about what that uplift could look like.

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Chad Stone, Renewable Energy Group, Inc. - CFO [18]

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Yes. So just to put some numbers to that. In Marathon's call, they talked about the IMO 2020 uplift for diesel crack spreads to be $2 to $5 per barrel, which for us on a diesel gallon that translates to $0.05 to $0.12 per gallon. So that's the market outlook Marathon gave as far as IMO 2020 is concerned.

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Operator [19]

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(Operator Instructions) Our next question comes from the line of Hamed Khorsand with BWS Financial.

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Hamed Khorsand, BWS Financial Inc. - Principal & Research Analyst [20]

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So I'm just trying to understand if your customers are -- have enough as far as BTC credit exposure is concerned, wouldn't that also cause some adjustment in pricing as far as what you're selling into the market for? Or is there just too much pressure from competitors just producing as much as they can even though it's not feasible?

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Chad Stone, Renewable Energy Group, Inc. - CFO [21]

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I think it's -- Hamed, thanks for the question. I think that's certainly a signal that the market needs to adjust. So you didn't see that happening in the second quarter. In July, you saw 2 plant closures, our New Boston plant and the Beatrice plant. There's also some industry talk about reduced run rates. Those are the types of signals that you do need to see, customers talking about maybe having enough exposure to the BTC. They're either wanting to let us retain more of the net benefit upside or potentially forcing the markets to adjust to continue to clear the market. But I think that's the right way to think about it.

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Hamed Khorsand, BWS Financial Inc. - Principal & Research Analyst [22]

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Okay. And do you consider yourselves as the lowest-cost producer in the industry? And as far as your competitors go, do you think there's anyone that's prone to be actually closing down anytime soon?

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Chad Stone, Renewable Energy Group, Inc. - CFO [23]

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Yes. Well, we're very competitively positioned. And our ability to switch between feedstocks is an advantage for us for sure so that we were able to use the lowest-cost feedstocks that our optimized model suggest that we need to run. So it is an advantage for us. The other advantage that we have is our scale and our network approach and then our, basically, national footprint of feedstock supply and customer base. So that is an advantage for us. We're very competitively positioned.

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Hamed Khorsand, BWS Financial Inc. - Principal & Research Analyst [24]

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Okay. My last question is just given that the -- on the basis that BTC is not extended out or renewed, what's your operational plan? I mean obviously you can't be producing business at a negative gross margin. So what are you guys operationally looking to do?

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Chad Stone, Renewable Energy Group, Inc. - CFO [25]

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Yes. So it gets back to an earlier comment I made. It's the -- monitoring plant by plant. You have the New Boston shutdown. You have positioning our balance sheet to weather the storm. We've slowed down capital expenditures to -- from our original operating plan and just watching margins at plant all the time. I mean we've been through this several times before. We know the operating plan for what to do when the BTC is not in place. And what we can control are those types of things and expanding our working capital line of credit, looking at what we did with debt, paying down debt. We're at our lowest debt-to-capital ratio of 15% in the last 5 years. And then the other things we can control are things like getting downstream, moving downstream, selling blended, the entire blend, blend fuels, the cardlock at Seneca and those types of things.

So that's what we can do to control our destiny, and we know how to operate through times when the BTC has lapsed and when we're given signals to change production plans. But as CJ says, we're very confident in the strong bipartisan support. It's not for a lack of support for the biodiesel industry and the need to renew the tax credit, it's more a matter of when versus if. And so it's -- I think we got the attention of folks when the largest producer of biomass-based diesel in North America shut a plant. I think that -- I think that's telling for the market participants and policymakers that something needs to change to move forward. So we need to get the tax credit decision behind us and get that back in place.

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Todd Robinson, Renewable Energy Group, Inc. - Treasurer [26]

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Yes. Hamed, it's Todd. Let me just echo a little bit. I think as CJ mentioned in her comments, right, we're kind of in the caught-in-the-middle kind of dynamic right now where we're not really seeing natural margins in the marketplace because of the uncertainty around the tax credit. So once that certainty is determined and we get that out of the way, we will see things adjust. Markets will correct, feedstock prices, RIN prices, et cetera. And there will be a new normal once we get to some type of certainty. So right now, yes, our current financial reported GAAP numbers do not reflect true economic value that we are able to deliver. So we need certainty, and hopefully, we'll get that soon.

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Operator [27]

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We have no further questions at this time. So I'd like to turn the floor back over to Mr. Robinson for additional concluding comments.

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Todd Robinson, Renewable Energy Group, Inc. - Treasurer [28]

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Thank you, Jessie. Thanks, everybody. Thank you for participating, and this concludes our call. You may now disconnect.