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Executives

Daniel J. Oh - President and CEO

Chad Stone - CFO

Monte Bullock - Treasurer

Analysts

Mahavir Sanghavi - UBS

Michael Cox - Piper Jaffray

Jeff Osborne - Stifel Nicolaus

John Quealy - Canaccord Genuity

Robert Wagner - Seeking Alpha

Renewable Energy Group (REGI) Q4 2012 Results Earnings Call March 4, 2013 4:30 PM ET

Operator

Good day, ladies and gentlemen, and welcome to and welcome to the Renewable Energy Group Inc. Fourth Quarter 2012 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions]. Today's conference is being recorded.

I would now like to turn the call to Treasurer, Monte Bullock. Please go ahead sir.

Monte Bullock

Thank you. Good afternoon everyone, and welcome to our fourth quarter 2012 earnings conference call. With me today is our President and Chief Executive Officer, Dan Oh; and our Chief Financial Officer, Chad Stone. We are here to discuss our fourth quarter and full year 2012 financial results and recent developments.

Before we begin, 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 of this webcast will be available on our website for one year. The webcast includes an accompanying slide deck. The slides will appear automatically with the webcast, but you will need to advance them manually as we prompt you. For those of you dialing in, the slides can be downloaded, along with the earnings press release, in the Investor Relations section of our website.

Turning to slide 2, we would like to advise you that some of the information discussed in this conference call will contain forward-looking statements. These statements involve risks, uncertainties, and assumptions that are difficult to predict. 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 such differences. These factors are described in detail in the risk factors and other sections of our annual report on Form 10-K and quarterly reports on Form 10-Q, which are on file with the SEC. They are also described in our earnings release and other SEC filings.

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 may be important to investors as a metric to assess the operating performance of our business. Please see the press release for a reconciliation of GAAP and non-GAAP measures.

With that, let me now turn the call over to our Chief Executive Officer, Dan Oh.

Daniel J. Oh

Thank you, Monte, and thank you everyone for joining on the call. I want to start by reviewing all of 2012, our first year as a publicly traded company. After we review the year and recent developments, I will then turn the call over to Chad for additional financial details.

REG has operated independently since 2006, and we have a great track record of growth and success in our market. I know Wall Street is always interested in the new news of the quarter, yet it is important to step back and look at the year, and how it fits in the context of a multiyear story. We intend to be a thriving and much larger company 10 years from now, and 2012 was an important stage in that evolution.

In 2012, we surpassed $1 billion in revenue, a significant milestone for our company. When we spun out of West Central Cooperative in 2006, we owned a single 12 million gallon-per-year biorefinery in Ralston, Iowa. We are now 10 times larger in revenue, with nearly 20 times of production capacity ready to facilitate further growth. In 2012 we represented 17% of the market, that we believe will grow substantially in the future.

Although our adjusted EBITDA declined compared to a record 2011, we were still solidly profitable, and cash flow positive in 2012 and strengthened our balance sheet, increased cash and reduced debt. After managing through many ups and downs over the last several years, including a major recession and the temporary expiration of the blenders tax credit in 2010 and again in 2012, with our durable business model, we were confident in our ability to adapt, survive, and thrive, in the years ahead. REG and the biodiesel industry are in a strong position to serve our nation's RFS to advanced biofuels needs.

Here are some of our key accomplishments in 2012. These accomplishments are evidence of the ability and hard work demonstrated by every employee within REG. We started the year by pushing through a challenging IPO market, especially for so called clean tech or alternative energy companies to complete the initial public offering of our stock. We sold 6.9 million new shares, raising $59.9 million for the company net of expenses. The additional working capital, has allowed us to run a larger production fleet and capital expenditures related to improvements of production processes and logistics, and investments.

Today, we have 227 million gallons of production capacity that will be online by the end of second quarter. Capacity growth came from the acquisition of a 15 million gallon-per-year plant in New Boston, Texas. That biorefinery is scheduled to begin production during the second quarter of 2013.

During 2012, we finalized technology upgrades on the third train at Seneca, that increases the plant's operating capacity by 50% from 40 million to 60 million gallons per year. We also continue to make progress in converting REG Albert Lea from soybean oil-only to full feedstock flexibility, and expect to have that work done by the middle of this year. We also acquired a 15 million gallon plant outside of Atlanta during the fourth quarter. However, at this point, we have not decided upon a timeline to begin production.

During the year, we substantially expanded our distribution footprint across much of the United States. We opened a terminal at our partially completed Clovis, New Mexico biorefinery to serve the southwest. We better serve the Midwest via a new terminal in Lebanon, Ohio, near Cincinnati, and we better serve the west with a deal with Maxum Petroleum to sell biodiesel at their Long Beach, California terminal.

In the fourth quarter, we expanded to better serve the northeast signing deals to sell from our four terminal locations, in New York and New Jersey. In Q1 2013, we added a fifth location to serve the northeast heating oil market.

The New Boston, Texas plant that I just mentioned has also begun selling fuel as a terminal, and we are currently investing and bringing the plant online in second quarter. REG biodiesel is now available directly at 19 terminal locations all across the nation, at the same time, we focused on growing internally to keep pace with the ever expanding demands of our business, by adding to and upgrading our existing information technology infrastructure, that allows us to better manage our growing business.

One important development came at year-end, when the so-called fiscal cliff legislation resulted in a retroactive reinstatement of the blenders tax credit. While the development was not under our control, we did manage our business during the course of the year with the credit in mind. We ran the business conservatively, so that we would be profitable without it, but negotiated agreements, so that we would participate fairly, if it was reinstated. Roughly 75% of the gallons sold throughout 2012 were contracted under various sharing provisions, in the event that the credit was reinstated. This careful positioning resulted in our receiving a $58 million bottom line benefit associated with 2012 blended sales.

Keep in mind, that the blenders tax credit is one part of our nation's strategy to promote both energy, independence, and the use of cleaner burning fuels. The incentive encourages investment in production and infrastructure that enables more consumption of biodesel, best creating new markets for feedstock suppliers, and promoting food security. We believe that the incentive is working as intended by supplying capital that we and other industry participants are using to expand production and distribution.

Let me make one final comment on 2012. An integral element of managing the business has been a careful steward of shareholder capital. This responsibility is magnified considerably when a company becomes publicly traded. Our stated strategy is to grow our business in part through acquisitions, and throughout most of the year after the IPO, there was considerable pressure to get a deal done. You should not be surprised to learn that we have looked at a number of acquisitions, but apply discipline regarding the price we would pay for assets. For most of the year, potential targets did not meet our economic parameters, and we walked away rather than risk shareholder capital on unattractive deals.

As you saw late in the year, we were able to buy good assets at attractive prices and executed on those deals. Meanwhile, we executed on our strategy, as we first indicated in the prospectus for our offering. We invested in working capital, acquisitions and infrastructure investments and we strengthened our financial position, most importantly, with the retirement of the REG Seneca debt of $34 million. We enter 2013 with our strongest balance sheet ever. Nonetheless, you should expect us to continue to exercise discipline in our potential acquisitions as we did in 2012.

Now, I would like to turn the call over to Chad Stone, to review our financial results in more detail. Chad?

Chad Stone

Thanks Dan and greetings everyone. Please turn to the financial highlights, starting on slide 8. In the fourth quarter of 2012, we produced 36.4 million gallons of biodiesel, a 24% year-over-year decrease, and sold 38 million gallons, which was a 19% year-over-year decrease. Our sales in the quarter included 5.5 million gallons from third party producers. Sales were down for the whole industry, as many obligated parties met their RVO targets earlier in the year, as they had purchased a portion of their 2012 RVO requirement in the fourth quarter of 2011, to capture the benefit of expiring blenders tax credit.

I'd also point out that New York City's 2% Bioheat blend requirement did provide some countercyclical demand this year compared to most winter seasons. Revenue for the quarter was $232 million in fourth quarter 2012, a 13% year-over-year decrease. The 19% decrease in gallons sold, and a 17% year-over-year decrease in average selling price per gallon was partially offset by an increase in RIN revenues, as we essentially liquidated our inventory of 2012 RINs.

The average sales price was impacted mainly by lower demand as there was sufficient production through October, to meet the 2012 RVO and the expiration of the blenders tax credit by comparison, a year earlier.

Revenues from RIN, co-products, feedstock sales, demurrage, and storage amounted to $65.8 million during the quarter, and this includes again, liquidating our 2012 RIN position, as we finished out the compliance year. Gross profit of $8 million was down 91% year-over-year resulting in a gross margin of 3.4%. Gross profit was severely impacted by the decline in demand during the fourth quarter, again as there was sufficient production through October to meet the 2012 RVO as we discussed in last quarter's earnings call.

Selling, general and administrative expense declined 10% compared to the fourth quarter 2011, due to our continued focus on containing costs, as well as a decrease in employee stock compensation. SG&A declined to a very manageable 3.4% of revenue compared to 4.1% in Q4 of 2011. The significantly lower gross profit combined with controlled SG&A resulted in operating income of $73,000.

Fourth quarter interest expenses of $1.4 million decreased by $1 million year-over-year. The decrease was attributable to continuing to reduce our debt levels, including the pay-off of the debt at Seneca and the refinancing of the Newton and Danville term debt. We also reduced the interest costs, due to the lower interest grades on our Wells Fargo line of credit, compared to our previous working capital financing instruments.

We had an income tax benefit of $2 million during the fourth quarter, as a result of using our remaining valuation allowance of $2 million. For 2012, our effective tax rate was 6% compared to 4% in 2011. For 2013, we are modeling an effective tax rate of 35%. GAAP net income was $704,000, or earnings per share of $0.02. In 2013, we expect our fully diluted share count to be 36.6 million shares for modeling purposes, assuming no new share issuances.

Adjusted EBITDA is a helpful measure of our economic performance because it adjusts for several non-cash and other items that we believe are less informative to the underlying economics of our business. Having said that, please review the reconciliation of GAAP net income to adjusted EBITDA included in the press release and the presentation on our website prepared for this call.

For the fourth quarter, adjusted EBITDA was $13.6 million, which was a 54% increase from fourth quarter of 2011. This does include an allocation of $11.7 million of the $58 million related to the retroactive 2012 portion of the blenders tax credit.

Now let's briefly review the full year results. Please turn to slide 9, where you see adjusted EBITDA for the year was $96.5 million. When you review the 10-K, as it is filed later this week, you will also see that over the course of the year, we would have absorbed $19.6 million (inaudible) loss. This was indicative of the tightening biodiesel margin during the year and situational illiquidity in the RIN market at the end of Q3, which continued into the beginning of Q4. We have learned from the RIN market over the past year, and then adjusted some internal practices, in an effort to better manage our exposure to RIN volatility. But please keep in mind, there are no futures contracts available to hedge our RIN, so we will always have some level of exposure to changing RIN prices.

Adjusted EBITDA was $0.51 per gallon sold, compared to $170 million or $0.71 per gallon sold in 2011. Full year revenues were $1.02 billion, a 23% annual increase. We sold 188.4 million gallons in 2012, compared to 150 million gallons in 2011, a 26% increase.

SG&A for the year was $42.4 million compared to $34.5 million in 2011. Interest expense for the full year was $4.7 million, compared to $8.1 million in 2011, again the decrease was a result of the reduced debt levels and lower cost of our Wells Fargo line of credit rates, compared to our previous working capital instruments. Income tax expense was $1.5 million versus $3 million in 2011. Basic earnings per share was $1.53, fully diluted earnings per share was $0.27, and adjusted EBITDA per share was $2.81.

Now let's turn to the balance sheet on slide 12. We strengthened our financial position by using cash flow to pay down long term debt and investing in Albert Lea upgrade. Accounts receivable decreased by $21 million sequentially to $18.8 million, due to the seasonal year-end ramp down at our [faster collection]. DSO is seven days, versus 11 days at the end of Q3.

Inventory increased $6 million sequentially from 11 days of sales to 18. The softening in the fourth quarter coupled with favorable feedstock prices created very attractive produce and store opportunities. We proactively took advantage of this opportunity by producing and storing some high quality material, intended normally for warmer weather sales. I expect we will have somewhere between 7 million and 8 million gallons stored by the end of the first quarter, that will likely be sold in the second quarter, may be into early third quarter.

As far as the commodity markets, heating oil during the quarter traded between $2.90 to $3.20 per gallon during the fourth quarter, which was pretty much sideways and ended the quarter at [$3.03]. Soybean oil traded on a declining trend between $0.50 and $0.45 per pound, ending the quarter at $0.47. Spot biodiesel declined on weak demands between $4.35 per gallon and $3.85 per gallon, and then RINs recovered from a low of $0.42 at one point, trading into the 70s and then ending the quarter at $0.64. Actually today, we have seen strength in RIN trading, as RINs have been trading in for the $0.80 range again, with ethanol and advanced biofuel RINs providing positive support.

Most importantly, low cost feedstocks have been trading at (inaudible) to soybean oil, due to reduced biodiesel demand in last quarter, and an increase in supply of (inaudible) oils.

At this point, please turn to slide 13. We announced in late December that we have retired the 34.5 million of debt owed by RNG Seneca. The Seneca term debt was paid using cash flow generated from that point since we began producing in August of 2010, with cash that was otherwise restricted from being invested elsewhere in the company. At the end of Q4, the company had a total of $37 million of term debt, down from $76.3 million at the end of Q3. That is now an attractive 7.5% of total capitalization. Cash at $67 million is 21% of our equity, down from Q3, but reflective of the debt retirement. Our average interest rate is just under 5%.

We invested $12.7 million in CapEx during 2012, primarily for the third production line at Seneca, and the upgrade in process at Albert Lea. In 2013, we expect that CapEx will more than double, as we invest cash flows generated from operations in the funds associated with the blenders tax credit.

Finally, let me briefly touch on the shelf registration that we filed last week. As you may know, that S3 of the short form registration, that allows us to register securities to be issued at a later date. We plan to register up to an aggregate of $120 million of debt and equity securities, as well as registering 4.7 million shares held by current stockholders. The shelf was put in place as part of our overall capital structure cleaning strategy, and could be used, among other things to allow us to pursue growth opportunities, should they arise.

I will now turn the call over to Dan to discuss our outlook. Dan?

Daniel J. Oh

Thanks Chad. We would like to provide the following financial guidance for the first quarter, and the first three quarters of 2013, based upon our current outlook as shown on slide 14. Keep in mind, that our guidance assumes a number of factors. Foremost, the guidance assumes no change in the price of heating oil, soybean oil, choice white grease or biodiesel RINs. Of course, these values are highly likely to change during the quarter. However, we will not attempt to predict for you, the level of magnitude of change.

Also, with the reinstatement of the blenders tax credit, both RNG and our partners up and down the supply chain will receive additional economic benefits. That economic support is important for an industry really just in its early days. Gross feeds from a tax credit fund capacity expansion, research and development, logistics and distribution infrastructure to support increase blended (inaudible) biodiesel and other activities that will drive the industry's cost structure to [petrol in parity].

Renewable volume obligation for 2013 is now established at 1.28 billion gallons. 2013 demand will be enacted by the publication of 2014 RVO, but we do not expect that announcement until late in the year. With that backdrop in the first quarter, we expect to sell between 35 million and 40 million gallons. We expect that adjusted EBITDA will range between $5 million and $15 million for the quarter.

Due to the natural volatility of our industry, the full year outlook is expected to be revised and may not be useful at this time, so we are providing two quarters for guidance. For second quarter of 2013, we expect to sell between 55 million and 60 million gallons and that adjusted EBITDA will range between $15 million and $25 million. But just remember, that the normal seasonal patterns of our business, where demand strengthens in Q2, peaks in Q3, it is generally weaker in Q1 and Q4.

Depending on the need for biodiesel compliance, where it appears an anticipation of the tax credit to lapse, we could see a spike in demand during the fourth quarter. We also have begun to see counter seasonal demand coming from the northeast heating oil market more recently. With an RVO of 1.3 billion gallons and a tax credit in place, we are optimistic for the year ahead. We see many good opportunities to support and execute on our growth and diversification plans.

Now we would like to turn the call over to the operator for the question-and-answer segment of our call. Operator?

Question-and-Answer Session

[Operator Instructions]. First question comes from Mahavir Sanghavi from UBS.

Mahavir Sanghavi - UBS

Yes hi, thanks for taking my question. Hi Dan and Chad. First question on the first half '13 guide. Can you tell us what percentage of your first half '13 gallons have already been booked, and maybe can you give us some visibility in the second half '13 gallons, in terms of percentage that is booked?

Daniel J. Oh

Well we are well into first quarter, and we have got good visibility on the first quarter in terms of revenues, we feel very comfortable about that. In terms of second quarter, this is a time of the year that you'd normally be starting to put those gallons on, and traditionally, when you think about this quarter, next quarter and quarter out on a rolling sort of basis, by the time we give guidance, we should have good insight in the current quarter, the next quarter often would have, that quarter, (inaudible) and in the third quarter that would be something less. We historically have not booked more than 10% or 20% of our business out through the calendar year, and while we are not sharing that number, there is nothing that's inconsistent with that right now.

Mahavir Sanghavi - UBS

Thanks for that color Dan. Then also, if you could give us some -- maybe assumptions behind, how should we think about your 2013 position in terms of market share, and also do you expect to grow in line with the market, or do you expect to outgrow the market?

Daniel J. Oh

Well, the market is growing and we feel comfortable in this 15% to 25% range. To continue in that general position, we will need to grow, either through the remarketing of gallons out of other facilities through partnerships that we might put in place, for example, [tolling] or manufacturing agreements or direct acquisitions. We are looking at all of those, as is our history, and we are going to stay focused on maintaining our market share.

Mahavir Sanghavi - UBS

Thank you. Then one last question for you Dan, just an overall industry related question. Dan, can you give us some color on the state of the biodiesel industry, in terms of how does the supply-demand look? I understand that RIN is a good indicator of the supply and demand, and you talked about RIN prices kind of strengthening, even the tax credit being reinstated. I am trying to figure out if the new RIN price that we have fully reflects some of the tier-II, tier-III manufacturers that perhaps have come back into the market. (Inaudible) select a potential oversupply into the second half of the year, if this is strengthening overall in the pricing? Thank you.

Daniel J. Oh

Well, if we all take advantage of the opportunities (inaudible) balance sheet and we are pleased with the position we are in right now. We think that will support our ability to help this growing market. One of the interesting things that may come out, is that last year, I think it's likely that a lot of companies were not able to receive blenders credit benefit, because they either didn't position themselves in the right blending, or they could not have working capital operate directly. So we continue to be in this world where, if you are an efficient platform multi-feedstock business, you should be able to run and operate, and if you are a marginal producer, where really you can only run the highest cost feedstock, you really do need to see not only RINs appreciate, but the inherent spread between energy and feedstocks grow as well.

We do think that we will see an opportunity to grow, and it's hard to say right now, because we are seeing all the numbers come in, but our production this year will match the RVO or exceed it. We are still waiting to see what carryover is from last year. But there are opportunities around the general advanced biofuel category; because the general advanced biofuel category still works like it's pretty firm, and will be there, and there are not all the options from a production perspective, you get that product in place, or those RINs in place, other than biomass based diesel and sugarcane ethanol. We will all be watching to see what's happening with imports and with heating oil prices and with the ability of less efficient single-feedstock plants to run. But I think there is good opportunity to run this year, trying to make money with our kind of business model.

Operator

The next question comes from Michael Cox from Piper Jaffray.

Michael Cox - Piper Jaffray

Good afternoon guys. My first question is on feedstock. I was hoping you could provide an estimate as to how much of your production in 2012 was made with conventional soybean oil, and as you look at 2013, how do you see that percentage changing?

Chad Stone

Hi Mike, this is Chad. Soybean oil was again less than 20%, I think it was about 16% in 2012, and as you know, our plants at Albert Lea [are dependent] on soybean oil now that we are upgrading and once that has more flexible capabilities, you would expect that percentage to continue to go down over time.

Daniel J. Oh

This is Dan, I think you will continue to see us using vegetable oil, especially as we bring on or strive to bring on assets that do not have full capability like our plants. Then if it makes economic sense, we will run them, they will tend to run on veg oil, until they are improved to have better capabilities. So it wouldn't surprise me to see this general percentage, 80%, 85% crude fats and oils and refined oils, in that 15% to 20% over time. But if we were to do no other production, we are going to end up at a place where Ralston is the primary place over time, that would be veg oil.

Michael Cox - Piper Jaffray

Okay. That makes sense. The M&As that you guys have been able to pull off, really inexpensive multiples, and based on a per gallon basis. We are done at a period of obviously great uncertainty and around the tax credit and profitability in the industry. Do these M&A opportunities go away, now that the tax credit has been reinstated, or how do you think about the potential for M&A on a go forward basis here, in this current environment?

Daniel J. Oh

We think the potential is still quite good in the relative value, when we are talking about companies that are in the same systemic risk, still continues to matter to us. The prices will depend very much in terms of total invested capital, and whether or not, we are acquiring an asset that needs a lot of work, or maybe you can run right away, and gets optimized over time, then the next dimension would be, where is it geographically located and fits right in our system.

So I think you are going to continue to see good values, and that we will have the opportunity and bring in other assets that makes sense, we will still be very disciplined in the way we do it.

Michael Cox - Piper Jaffray

Okay. Very good. Thanks a lot guys.

Operator

[Operator Instructions]. The next question comes from Jeff Osborne from Stifel.

Jeff Osborne - Stifel Nicolaus

Good afternoon guys. I understand the rationale for not giving guidance for the full year, but I was wondering if you could just try and may be update us on some of the things you can control, interest expense and in particular, CapEx plans, what shall we be thinking about from a modeling perspective for the full year on that basis?

Chad Stone

Sure. I guess, in terms of interest expense, I think you can look that our reduced term debt came down to less than half of what it was a year ago and consider maybe the most recent quarter as a good guide going forward, in 2013 throughout the year; and as you look at the funds also that we are generating and receiving and collecting being redeployed, as well as the continued work that we plan to -- already do at Albert Lea and New Boston that we have already talked about. You can expect that our CapEx maybe more double than what you saw for the full year of 2012, which came in at about $12.7 million of CapEx.

Jeff Osborne - Stifel Nicolaus

Got you. That's helpful. Then I just wanted to understand what the dynamics are on the tax credit, in terms of -- as you enter the year, you are in negotiating contracts for (inaudible) 2Q and 3Q. What's the dynamics as to how much you will be keeping the tax credit versus passing that on to your customer; because obviously it has an impact on the ASP assumptions that we have in our model?

Daniel J. Oh

I think the way to think about it is, blenders credit is known by everyone, and it gets generally negotiated up and down the value chain, it's just another component of value that's shared. So, if it were a year where blenders was going to continue and go on year after year, you might [look at] a couple of years ago to see the sense of sharing, but we don't know what will happen at the end of '13, so you might actually end up with another one of these fights, like we saw at the end of '11, which is something that you'd go into at any way. So, it's really more of a relative ability to process the lower, cheaper feedstocks, sell it locally, but it locally and very efficiently distribute it. But we think we are in a very good position for that. The inclusion of a growing RVO, makes it more likely that we will have pricing power this year.

Jeff Osborne - Stifel Nicolaus

Got you. My last question -- thanks for the detail there, Dan, if you have any assumption that there will be a surge of demand in the fourth quarter out of that expiration, I am assuming that RVO for the following years out. How do we think about the appetite for RINs, and the potential for a similar sized loss that you had in 2012, reoccurring in 2013?

Daniel J. Oh

We certainly learned and have put in place this improved risk management practices and some other controls and limits that we think will help us better manage volatility around that practice, as you recall. Late third and continuing into the fourth quarter, the market kind of ceased on and became illiquid and I think just about everybody saw a decline in RIN values, when the market wouldn't clear.

This year, we think that the growing RVO, the expectation of a growing RVO in '14, but the general belief that we are not going to hear what the RVO is until late summer. We think there will still be healthy consumptive activities moving ahead, and we started out this year and not -- and what's probably not an industry-wide over production mode. So we think that will be healthy moving ahead.

Jeff Osborne - Stifel Nicolaus

Great. Thanks so much guys.

Operator

The next question comes from John Quealy from Canaccord Genuity.

John Quealy - Canaccord Genuity

Hey good afternoon guys. First, just some housekeeping on the restatement of the '12 adjusted EBITDA numbers. I assume that the blenders tax credit, from the retroactive perspective in 2012, that number gets added up into the gross profit line, in addition to EBITDA, just to make apples to apples in the models. Is that right, Chad?

Chad Stone

That's right. So that will basically be a revenue that will flow through the margin, and down to the bottom line. On a GAAP basis, from an accounting perspective, it will be recognized in the first quarter of 2013, but as you know, this is associated with the sales in gallons produced and contracts (inaudible) throughout 2012. So what we tried to do is, show you how to think of it over the course of the year, how it would have been allocated to each quarter.

John Quealy - Canaccord Genuity

We had a decent reconciling item in the Q1 group debt gross profit, right, because it will smooth it out from an adjusted perspective, and you (inaudible) in Q1, right?

Chad Stone

Exactly. The benefit will be created in Q1 because it didn't get time until January 3. But I would emphasize to everyone, those dollars weren't earned; because if you hadn't (inaudible) in a way throughout the year, royalty contracts and gave you business in the right way, you were to receive zero. Then when we allocated these gallons across the four quarters, we got it simply based on pro rata per gallons. It's hard to otherwise view, because, you don't know what would have been the negotiated outcome across here, with all the participants in the value chain if it had been there the whole time. So we thought the simplest way would be to just allocate it pro rata against the gallons sales.

John Quealy - Canaccord Genuity

From an operational perspective Dan, can you talk about -- referred a lot about corn oil hitting the market and depressing facts through most of calendar '12, at least the back half of the year? Can you talk about your ability to capture that and the raw pricing and obviously now Seneca has high acid capability and processing, but can you just talk about the damage and what you folks think will happen, as you sit now in terms of the facts, pricing vis-à-vis corn oil?

Daniel J. Oh

We as a business of course like that corn oil is there and slowly growing, and in many ways, some would say is the reason that corn ethanol is running. They are running in the ability to cut out the inedible oil and sell it (inaudible) margin, that's how you get things done. Our facility at Seneca could run very high concentrations of corn oil. Our facility at Albert Lea when it comes online, run very high concentrations of it, both in great locations with respect to eastern and western corn belts, and operationally, will continue to be focused on improving and reinforcing our business, so the assets will continue to use that raw material.

I do think it will grow, and if you look out there at corn ethanol RIN prices which are quite high compared to any history that most of us can remember, that and corn oil should help bring things back online.

John Quealy - Canaccord Genuity

Then lastly, can you talk a bit, the though process on New York, sort of bolt-on, couple of sales guys and some distribution capacity. Can you talk about expectations, perhaps, or volume growth in New York, maybe New England as Bioheat and heating oil gets a little bit more penetrated, maybe it was amended like the Massachusetts, but we have to wait. Thanks guys.

Daniel J. Oh

I think we will be giving more specific guidance when the first quarter comes. We are pleased with the addition of terminal positions, we don't own the terminals, but we have contracts that we wrote and brought on, a new sales team, and have been actively selling and getting good throughput through those positions, since it really came online in December, and of course, folks (inaudible) when the cold hits out there, it brings on heating oil and energy sales. So we are pleased with it, that general market, I think is a large and growing market.

You have the New York City area that has the B2 mandate now for heating oil. We believe that the New York state area will go to a heating oil mandate, and typically, when New York does that, the rest of New England will do that over the next few years. So the market size is many, many, many millions of gallons of biodiesel that can go in, and we really like these terminal locations, and you should expect us to continue to put more terminal locations in, because it lets us not only serve large customers, but serve that middle distributor and smaller distributor who need an efficient way to show up and buy biodiesel and take it directly to their retail outlet, and those position let us do that, and let us do it right of way.

One also often trades harbor and barge loads, we have participated with others historically to do that. That is not as steady a business, although we will be focused on that too.

Operator

[Operator Instructions]. The next question comes from Robert Wagner from Seeking Alpha.

Robert Wagner - Seeking Alpha

Thanks for taking my phone call. I was wondering, can you act as the blender for any of the gallons that you produce, or do you have plans to become a blender to capture more of the dollar tax credit?

Daniel J. Oh

As the incentive is designed, it's really structured so that the IRS has the most efficient paper processing system possible. So, blender is almost a misnomer in that it's that entity that first puts in a splash of diesel fuel, that becomes the administrator of the blenders credit, and then, you pass it on, however you pass it on in your negotiated outcome. So we have always had the ability to be a blender, and we choose ourselves B99 or B100 based on customer preferences and our particular preferences, based on the market that we are in. All of our plants have the ability to blend. So that when fuel originates from its production site, you can view it as a B99 or a B100. One does not need to be able to sell a B11 or a B20 or something like that to be considered a blender.

Robert Wagner - Seeking Alpha

Okay. Could you tell me what percentage of your output is high cloud versus low cloud, and what percentage of corn oil versus yellow grease do you use?

Daniel J. Oh

One second please. Yeah we were just discussing whether or not we can talk about stuff that will be out in the K, sorry. So generally speaking, we have tracked last year, like we tracked in 2011, and our desire is to maximize, what you call high cloud point raw materials throughout the year, and we have typically done at least 80% high cloud or non-virgin vegetable oil based feedstocks. So when you look at '11, I recall it being approximately 15% virgin veg oil, 85% not. Then out of that 85%, while we produce from a really wide array of feedstocks that are all EPA compliant, the principal components would be choice white grease, beef tallow, used cooking oil and inedible corn oil.

Those cuts often are about even. But what we do is run feedstocks based on the region of the plant that are nearby the feedstock pool. So in a place like Illinois, where we have got plants that can run a lot of corn oil, and we are near a huge city like Chicago, where we can get a good amount of used cooking oil you may have plants more focused that way. And in Iowa where you have a huge pork production system you may be focused that way on choice white grease. And then our customers, or our terminals, maybe locations where we blend these together to get two different cloud point outcomes. But, just for kind of planning the 10% to 20%, any time of the year across those different categories would be pretty reasonable, do you agree Chad?

Chad Stone

Yeah, I agree.

Robert Wagner - Seeking Alpha

Are you allowed to give an estimate on what your delivery costs are for the feedstock per pound?

Daniel J. Oh

Well, we probably are allowed, but we don't do that, except in historical, because of competitive reasons.

Robert Wagner - Seeking Alpha

Could you give me historical estimate per pound?

Chad Stone

I would guide you to, there are some good sources like [Jacobson] [ph] for example would give prices on feedstocks, but more recently, what we have seen, for example -- I will just give you a little bit of a range, say $0.39 to $0.43 or $0.44.

Robert Wagner - Seeking Alpha

I’m sorry, I’m talking about the delivery costs, the delivery cost for the -- for instance, do you use rail or so you truck? There is a big – because that’s per pound, that’s a big - there is a huge difference.

Daniel J. Oh

We apologize. We thought you said delivered costs as opposed to delivery costs. Delivery cost would be a trade term often used here. About 70% of our business is historically done by trucks and 30% by rail. It will vary on the inbound and the outbound, but that's a reasonable planning factor, and we like doing business all local to the extent we can for the reason you identified, because trucking business is a lot cheaper, as long as it's kind of out and back within the same day.

Robert Wagner - Seeking Alpha

Last question. You said you had a profit of 13.6 and the tax credit was 11.7. If you remove out the liquidated RINs and any hedging issues, what would the earnings have been?

Chad Stone

What did you remove out of that, Robert?

Robert Wagner - Seeking Alpha

If you remove out the liquidated RINs and any of the hedging issues - the prior quarter, you had a hedging issue that was going to turn a - or may have carried over profits. If you were to remove those, for the actual production for the quarter, how would you have done?

Chad Stone

So, we -- in the absence of (inaudible) the tax credit, when we gave guidance, we originally had said it would be breakeven to positive, $10 million I think for the quarter. We ended up at about $1.8 million of EBITDA pre-tax credit, and $11.7 million related to the fourth quarter for the tax credit. Our risk management for the fourth quarter was pretty much flat. We saw heating oil not -- basically moving kind of sideways until we had a very minimal risk management loss for the quarter. It's actually a slight positive gain.

Robert Wagner - Seeking Alpha

Thank you very much.

Chad Stone

As far as the RINs, I wouldn't have isolated anything out of that, because that's just normal course of business for us to be selling those.

Operator

[Operator Instructions]. I am showing no further questions. I would now like to turn the call back over to Daniel Oh.

Daniel J. Oh

Thank you, operator. Before we close, I want to mention that Chad and I will be presenting later this week at the Wedbush Securities' Transformational Technologies Conference in New York on March 7. The presentation will be webcast and available in the investors section of our website. Thank you for participating in today's call and for your continued support. We look forward to reporting to you again next quarter on our progress.

Operator

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation, you may all disconnect. Have a good day.

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