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Renewable Energy Group Inc (NASDAQ:REGI)
Q2 2019 Earnings Call
Aug 6, 2019, 4:30 p.m. ET
- Prepared Remarks
- Questions and Answers
- Call Participants
Greetings, and welcome to the Renewable Energy Group Second Quarter 2019 Earnings Conference Call. [Operator Instructions]
It is now my pleasure to introduce your host, Todd Robinson, Treasurer. Thank you, sir. You may begin.
Todd Robinson — Director, Investor Relations, Treasurer
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, C.J. Warner; and our Chief Financial Officer, Chad Stone. Let me cover a few housekeeping items, before I turn the call over to C.J.
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 measures.
With that, let me turn the call over to C.J. Warner. CJ?
Cynthia J. Warner — President & Chief Executive Officer
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 sentiment 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 result 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 two weeks ago that we are closing our New Boston, Texas bio refineries 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 yet another 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 spreads between heating oil or ULSD and three feedstocks, soybean oil, otherwise known as 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 offsets much of the headwinds of a lower average selling price and the one 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 influence 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 a billion pounds in both periods.
Some of that 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 in 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 we’ll significantly expand our long term profitability.
So let’s talk about the progress we’re seeing in our downstream efforts. Turning now to Slide 7. In our first quarter earnings call, I mentioned we would be opening our first REG branded Carlock station to drive higher blends of biodiesel and enhance margins. We opened the Seneca Carlock fueling station on July 17th, and are pleased with the early progress there, as well as a 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 B5 to 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 B-100. Through these efforts, we’re proving the 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 times to 3 times 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 six 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’ve filed for a patent to protect our proprietary blending knowhow.
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 toward the end of this year following completion of scoping design engineering.
Our current plan has the projects 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 non-operating 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 fronts. We are very proud of the carbon reduction we achieved in the second quarter. On Slide 10, you can see that 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 maintain a stellar safety track record again achieving zero reportable incidents in the quarter. Our 12-month rolling average injury rate through June is at record low levels. The goal to achieve the 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?
Chad Stone — Chief Financial Officer
Thank you, C.J. 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 effects 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 C.J. 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 benefits 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%. US biodiesel selling price was down sharply due to lower ULSD prices as well as lowe