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FF: Third quarter earnings above expectations. Biodiesel profitable even without blenders credit or RIN sales.

By Ian Gilson, CFA

Futurefuel Corp. (FF)
reported its third quarter 2012 results on November 8, 2012 followed by a conference call on November 09, 2012, 2012. Both Chemical sales and biodiesel sales were below our estimates but gross profits were much better than anticipated. Biodiesel profits included about $3 million in RIN sales in the third quarter. We had included a significant amount of petrodiesel sales in the quarter that did not occur and which accounted for our estimate being too high. The improved margins for chemicals and reduced margins for biodiesel Y/Y are, in part, due to the allocation of certain expenses based on that groups proportion of revenue versus the prior year's allocation. Pretax income increased slightly from year ago levels but an higher tax rate dropped EPS from $0.31a share to $0.30 a share. Income in 2012 was boosted by a change in LIFO accounting for inventory.

Chemical sales, excluding those to P&G and Arysta, increased.. This mainly was due to sales of  one product to a customer that did not buy any a year ago. This customer buys product periodically and there may not be any more sales this year.

Domestic (US) sales were flat Y/Y at $85.8 million but non US sales declined from$4.5 million to $2.5 million.

Renewable identification numbers (RIN) prices declined significantly in the third quarter. Prices were $1.17 at the start of the quarter, dropped to $0.76 at the end of the quarter and were $0.53 on November 08, 2012. Prices for RINs that can be used in 2013 are above the current levels. This may be due to the increase in the mandated production levels of biodiesel, which increases from 1 billion gallons in 2012 to 1.28 billion gallons in 2013. Except for the fully integrated producers and sellers of soy bean products the users of soy beans to produce biodiesel are not profitable and the 1.28 billion gallon level may not be reached. This should increase the prices of RINs in late 2013.

There are no current sales of the carbon anode. The take-or-pay contract revenue is part of the deferred revenue account on the balance sheet.

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