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Executives

Karen Power - SVP and PFO

Gary Roth - President and CEO

Ron Stinebaugh - SVP, Finance

Analysts

Luis Navarro

Daniel Lambert

Brian Hatch

Jack Bean

John Anderson

John Smith - Smith Investors

Luis Navarro

Scott Robert - Edward Roberts Corporation

Syntroleum Corporation (SYNM) Q1 2013 Earnings Call May 8, 2013 11:00 AM ET

Operator

Good morning, and welcome to the Syntroleum Corporation’s first quarter results Conference Call. All participants will be in a listen-only mode. (Operator Instructions) After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Ms. Karen Power, Senior Vice President. Ms. Power, please go ahead.

Karen Power

Thank you for joining us today. Remarks for today’s call will be presented by Karen Power, Senior Vice President, Principal Financial Officer, Syntroleum’s President and Chief Executive Officer, Gary Roth, and Ron Stinebaugh, Senior Vice President of Finance.

Before we begin our remarks, I would like to remind everyone that during this call we will make certain forward-looking statements, as well as use historical information. Words such as believe, estimate, expect, intend, plan, anticipate, could, should or suggest are intended to identify forward-looking statements. Although Syntroleum believes that expectations reflected in these forward-looking statements are reasonable, these statements involve risks and uncertainties. Future results may differ materially from those projected in these forward-looking statements. You are encouraged to refer to our SEC filings, including our most recent Annual Report on Form 10-K for a full disclosure of these risks and uncertainties.

We apologize for the technical difficulties experience during our last conference call which has been corrected. We appreciate the constructive feedback from many of our shareholders. Additionally, we have prepared responses to 22 share holder questions at the end of this call.

Syntroleum’s net income was $11 million and $1.15 per share for the three months ended March 31, 2013 compared to a net loss of $1.9 million or $0.20 per share million for the corresponding periods in 2012. The financial statements for all prior periods have been retroactively adjusted to reflect the April 11 2013 one per ten reverse stock splits of the company's stock.

For the quarter ended March 31st 2013, the company reported an operating loss of $2 million resulting from total revenues at 899,000 and operating expenses of 2.9 million. Equity in earnings have dynamic fuels for the quarter ended March 31 2013 was 6.7 million which includes 12.6 million is gains from the $1 tax credit that is 5.9 million from dynamic fields operating losses for the first quarter ended December 31, 2012. We have accounted further retroactive restatement of $1 tax credit in the current quarter.

Income from Discontinued Operations for the current quarter includes $5.8 million in proceeds from the sale of pilot plant and $603,000 from accrued asset retirement obligations.

As of March 31, 2013, Syntroleum’s available cash position was $14.9 million. On April 12, 2013, we received $9.0 million in funds from the IRS related to the $1 tax credit resulting in total cash of approximately $23.9 million.

During the quarter ended March 31, 2013, Syntroleum and Tyson each made additional equity contributions of $1.7 million and working capital loans of $4.0 million to Dynamic Fuels to fund operations.

Now, we’ll turn the call over to Gary Roth.

Gary Roth

Thanks, Karen. I am going to discuss the status of the Dynamic Fuels Geismar plant plus review of a few key highlights. We anticipate a restart of the Geismar plant in mid to late July. Our reasoning for the start date is as follows.

We ordered a new catalyst in February for which we have now confirmed delivery in late June. And we inspect an increase in our diesel yields from an average of 80% to 88%. We have been using our new catalyst and we have been using new our catalyst in 2012.

Dynamic Fuels would have had revenues per gallon of $4.55 versus $4.09 resulting in 13 million in increased revenue. Rather than interrupt the Feedstock supply chain, we believe the better alternative is to defer operations until installation of the new catalyst.

We believe the fundamentals of our renewable fuels industry to be attractive given the current process for refined products, winds and feedstock as well as our full year outlook for revalue. Since obligated parties are able to use D4 biomass-based diesel RINs for advanced biofuel and corned ethanol compliance, we now believe there will be sustain economics in the current regulatory environment.

We continue to expand significant technical and managerial time on our natural gas to liquid technology pursuing an integrated field to small scale GTL plant concept and finally we’re advancing our research and development work on our phase change material taking this product from laboratory to commercial offering.

I am now going to turn the call over to Ron Stinebaugh who will review renewable fuels industry our GTL initiative and the current status of our PCM efforts in greater detail.

Ron Stinebaugh

Thanks Gary in our view the simplest way to gauge the overall health of the biomass based diesel industry is to look at the margins for a soy biodiesel plant. When soy biodiesel is profitable, our industry is doing well and when they are negative our industry is not. Ohio State University publishes monthly soy biodiesel economics and according their data published on April 5, 2013 soy biodiesel margins went negative in July of 2012 and remained negative through January of 2013 averaging a loss of $0.19 per gallon. Soy margins turned positive in February of 2013 at $0.07 per gallon and $0.23 per gallon in March. Given dynamic feasibility the utilized lower cost feedstock, we calculate current cash margins using the new catalyst, yellow grease prices and petroleum and product and RIN prices as of May 6, 2013 to be approximately $0.78 per gallon. However in 2012 after positive margins in the first half of the year margins turned negative for the full second half of 2012. Therefore the question remains will these market conditions repeat in 2013.

Our opinion is that demand for biomass based diesel D4 RINs for the balance of 2013 and 2014 will remain consistent with current market conditions given a total RFS2 mandate of 16.55 billion RINs for 2013 and 18.15 million RINs for 2014. Through March 2012 total RINs reported by the EPA for the entire RFS2 pool was 22% of the 2013 mandate compared to 25% of the 2012 mandate. If we project the March RIN generation rate for the balance of 2013, 94% of the 2013 mandate will be met. As I move into 2014, if EPA affirms the 2014 RIN mandate, the March 2013 run rate for a full year would be 84% of the 2014 mandate therefore we do not expect a return to the negative margins that the industry witnessed last year due to a sharp fall in RIN prices.

We are focusing significant management time on advancing a concept of a project integrating a 4,000 to 5,000 barrel per day GTL plant to a natural gas field in an integrated project the cost of the gas is the cost of drilling and operating the wells typically but depending on the play acreage and drilling costs for dry gas are about $1 per mcf and operating costs are another dollar per mcf. Therefore at an 11 mcf per barrel conversion ratio, synthetic hydrocarbons would be produced at about a $22 per barrel feedstock cost. We believe an integrated project is financeable for the following reasons.

It mitigates the collateral required for hedges locking the spread of natural gas to refined product. Natural gas production supports the project returns in the early years and it reduces working capital requirements. If gas prices remain at current levels, then the GTL plan provides the means to upgrade natural gas to oil equivalent values. If gas prices spike, then the integrated project has the option to sell natural gas instead of liquids. On April 9 2013, the potential gas committee released their report for year-end 2012, with an estimate of 2,384 trillion cubic feet of technically recoverable natural gas.

This combined with the total US proved gas reserves of 305 trillion cubic feet is the supply of a 105 years. Currently the Bakers use natural gas rig count is 354 rigs down from a pink of 1606 rigs in September of 2008, we believe the inventory of natural gas drilling locations is so large that as soon as gas price moves to $5 or above drilling rigs will return to natural gas increasing supply and thus moderating price. We completed the DOE supported phase of our PCM initiative in December 2012, during that phase we demonstrated all the steps in producing a low cost PCM product for the energy efficient buildings market.

The first step of the process is direct conversion of vegetable oils into PCM paraffin. We then use conventional plastic compounding equipment to make an ignition resistant coded pellet product. Field testing of our PCM pellet product was completed at Oakridge National Laboratory, economic modeling work was conducted by Fraunhofer CSE, and based on this analysis a payback period of 8-16 years is expected for retrofit projects involving addition of PCM pellets to attic insulation. With a typical payoff expected in the building industry. We have also produced prototypes of our PCM in sheet form. For example PCM sheets can be placed between wall board and as power components or as part of thermal energy storage modules.

The critical learning is a (inaudible) do not impact production of conventional building materials allowing us to commercialized standalone products. Our patent pending PCM inventions have attracted interests to both commercial and non-profit organizations involved in energy efficient building design.

Now, I will turn the call over the Gary Roth for some concluding comments.

Gary Roth

Thanks, Ron. Let me review the key points of our prepared comments today. Syntroleum anticipates restart of the Geismar Plant in mid to late July with the new catalyst. The current economic environment for diesel production is favorable, but more importantly current production seems to be consistent with regulatory requirements.

We have regained listing compliance on the NASDAQ. We have approximately $24 million of cash. We are focusing significant management time on integrated GTL concept and have field level economics in multiple basins from which field development and business plans have been prepared. We continue to make advances on our phase change material development and commercialization efforts. Thank you for your attendance today. I will now turn the call back to Ron Stinebaugh for review of our prepared responses to questions we have received during the quarter. Ron?

Question-and-Answer Session

Ron Stinebaugh

Thanks again Gary. Question one; why has it taken so long to restart the plant? Give the negative margin, market conditions for the second half of 2012 and the early and the first quarter of this year, we felt it essential to be cautious. As these uncertainties have been resolved including receipt of our tax refund in sale of our FT pilot plant, we believe market conditions favor restarting the plant.

Question number two; how do you match renewable fuel and wind generation compared to historical values? The MTS reported 127 million gallons of biomass-based diesel in March 2013 which is the second highest reported. The maximum reported was 166 million gallons in December 2011. Corn ethanol reported 1 billion gallons from March which compares to the highest level of 1.2 billion gallons in March of 2011, and D5 RIN generation which has typically been imports of sugarcane ethanol was 46 million gallons compared to higher of 112 million gallons in November of 2012.

Question number three; if the highest values occur again, how does this impact the RIN market. We calculate that if the industry ran at the highest recorded rates for the balance of the year, the total RINs generated would be a 107% of the 2013 mandate. However if the 10%, ethanol blend wall occurs as expected, total RINS generated are estimated to be 94% of the mandate.

Question number 4; what is the cost of the new catalyst?

The net cost is approximately $3 million.

Question number 5; whose catalyst is it?

The catalyst is a proprietary formulation which has been tested in Syntroleum for renewable application.

Question number 6; has the full tax refund and received?

Syntroleum has received its $9 million. Dynamic Fuels has applied for its $7 million and is awaiting payment from the IRS.

Questions number 7; has receipt of the tax refund been a factor as to why the plant has not been restarted?

There have been a number of factors that have influenced the decision to operate the plan, only one of which relates to the tax refund.

Question number 8; what has been the monthly cost of keeping the plant in standby mode?

Approximately $2 million per month or $1 million to Syntroleum’s interest.

Question number 9; what is the current average feedstock price in the market today?

According to the Jacobson, as of May 7th, yellow grease was $0.40, edible tallow $0.43, inedible tallow $0.415, inedible corn oil $0.3625, and poultry fat was $0.38 per pound.

Questions number 10; can you explain why it requires up to $20 million in working capital to restart the plant?

This sounds like a lot of money for restart alone. This is the cost of feedstock with which to fill not only the plant but the logistics train. At design rates the plant uses approximately 1.6 million pound per day. Given current market pricing, building a 30 day supply chain results in a 20 million working capital requirement.

Question number 11; what is the status of the solid recycle pump?

The pump is on schedule for delivery in October.

Questions number 12; are there any plant process issues that could prevent restart?

Not that we are aware of.

Questions number 13; what do you expect plant up time to be going forward?

We believe we have implemented or are implementing solutions to address the major issues we have learned by running the plant, while we do not give guidance, we are optimistic about the future uptime of the plant.

Question number 14; has management examined the shifting of the quarterly reporting period such that there is no longer a three month lag?

We have reviewed this issue in detail and have not found a cost effective solution.

Questions number 15; what is the impact of Dynamic Fuels on the CME group beginning RIN’s futures contracts on May 13th?

We are pleased to see these new financial instruments but we will have to see how the markets trade on this information.

Question number 16, what is the status of the pattern disputes with (inaudible)?

Given the nature of the legal system. Our communications regarding these matters are directive by council. At this time we have no new information.

Question number 17, what is the GTL status? Are you still optimistic about economics and potential partners?

We are optimistic about GTL fundamental economics, access to natural gas and the financing of the small scale plan.

Question number 18, with your integrated GTL concept; do you envision accruing natural gas reserves?

There have been several recent announce sales of gas acres and sale place ranging from $550 per acre to $875 per acre which equates to penny for MCF for potential gas reserves. But natural gas acres of these levels most cost effective way to manage gas to oil spread risk is ownership of the reserves. There are number of ways to do this which could range from partnering with upstream companies, net back pricing mechanisms, joint ventures and purchases of acreage, to name a few.

Question number 19; are there any anticipated GTL engineering revenues which can be connived to shareholders?

We expect that we will generate engineering revenues related to our GTL activities consistent with the model utilized developed Geismar.

Question number 20, when do you expect to commercialize PCM?

Given that we’ve passed a certain ASTM fire test and have manufactured very stable forms and have our pattern applications in place we are on a path to commercialization

Question number 21, had you considered converting Geismar to PCM if there is a real concern about the long run economics for renewable diesel?

Geismar can make PCM as configured.

Question number 22, why does Syntroleum not engaged in more IR and PR?

We have chosen to manage our budget frugally. With financial success, we would consider allocating additional funds for IR and PR purposes.

That concludes our prepared responses to selected questions. We will now open the call up for additional questions. Please queue the questions. Thank you.

Operator

Thank you. We will now begin the question and answer session. (Operator Instructions). Our first question is from Luis Navarro, a private investor. Go ahead please.

Luis Navarro - Investor

I would like to thank you for this great thesis today. It gave us a lot of information, a lot more than I; I think most of the investor community for SYNM expected. My question is, do you have any additional information with the business relationships with Sinopec and Sasol?

Ron Stinebaugh

First taking Sinopec; Sinopec continues to run our facility and gather data, in China. We have annual conferences in which we exchange data; they continue to manufacture our catalyst and work on those and we get those learning's back and forth. So far, the catalyst performance has been as expected and we have seen only minor change as we would make typically to metallurgy in terms of the GTL facility. So it's up and running. It's on recycled same gas and result our consistent with what we saw it here. In terms of shortfall, we continue to supply labor support for them at the toss of pilot plant and assist for them in terms of engineering support and R&D effort.

Operator

Our next question comes is from Daniel; Daniel Lambert, an investor, go ahead please.

Daniel Lambert

Could you discuss a periodical, it would be technically, financially, to modify the dynamic fuel plant to also accept natural gas as a feed stock?

Ron Stinebaugh

A dynamic fuel; what we have is we have three basic thesis to gas to liquids. One is conversion of natural gas, with the creation of same gas. The second piece is the ST reactor in which we convert synthesis gas to FT wax; candle wax. And the third piece is the conversion of the FT wax to finished products. Geismar uses the same technology in the conversion of animal fats as we use in the conversion of Fischer-Tropsch wax. So, in our mind we have demonstrated technically one of the three pieces. Syngas generation is a commodity; if I were right, currently there is about 38 plants in the United States that convert natural gas to Syngas so you can buy that readily. So, we could covert gas 2GTL it would have the addition of the FT reactor and we would purchase synthesis gas as a commodity.

Operator

Our next question is from Brian Hatch. Go ahead please.

Brian Hatch

In the financial statement, you said, you took the retroactive payments from third quarter of this year as well as the first quarter from the joint venture. Doesn’t not distort the results for Syntroleum and what would it had been if you only take one quarter pass though from the joint venture?

Karen Power

According to this account and according to GAAP, when an event is known that is when you recognized it and that is why we recognized it in Syntroleum’s first quarter, yes, it was from the prior year of Dynamic Fuels. Dynamic Fuels is also recognizing those tax payments and its current year of 2013. As the payments are received so we both are accounting for the credits in accordance with GAAP.

Operator

Our next question is from Jack Bean, Investor.

Jack Bean

Yes good morning, I was wondering if you might be able to comment on any collaboration you have with the navy in regards to follow-on orders or their desire of the purchase more product as I did when I purchased 450,000 gallons from Syntroleum earlier or Dynamic Fuels?

Ron Stinebaugh

So, we supplied the research volume to navy both the marine diesel and the jet fuel and one of the purposes of that was to allow them then generate the documents of commerce how to make those products a commercial offering, so we’re waiting for the navy to finish publish those document once those documents are published the marine diesel and jet fuel renewable marine diesel and jet fuel should be items of commerce and we would expect to be able bid for those contracts as soon as those documents are published. We would anticipate them in the first half of this year.

Jack Bean

Okay is there any collaboration, my understanding as the navy is interested in helping incentivize private industry with some grants I was wondering if you have applied for any other grants at all?

Ron Stinebaugh

What we are waiting for is that again the publication of the document of commerce generally the grants are relatively small grants but in the end your product has to be commercially priced and it has to be drop in so we meet those criteria what we need to do is have those items from the Navy research to the procurement departments and then we will able to participate in that bidding process.

Jack Bean

Okay do you anticipate any change in the maybe ability for Congress to improve long term contracts or DOD purchases for out to 10 year contracts which would help to incentivize the private sector in production?

Ron Stinebaugh

Those are difficult questions and Navy has worked to combine USDA with the procurement what has always been missing is the RINs how does one lock the prices of the RINs so one could fix the supply contract enterprise one could fix feedstocks primarily soy at a price you could have an off take at a price but we were unable to fix the RINs so that is why we are very pleased to see RIN trading on the CME and we watch it keenly because once that commercial tool becomes available one would be able to entertain a long term contract so it is enabling financial institute.

Operator

The next question is from John Anderson, investor. Go ahead please.

John Anderson

I just have a two part question if you will indulge me. One; one thing that struck me when I think it was a comment Karen made that you have received your portion of the tax credit but Dynamic Fuels hasn’t and I guess some of us who filed this were under the impression that dynamic fuels would be applying for all the tax credit and then feed the money back to (inaudible) and you so could you explain the logistics of that?

Karen Power

This is Karen again. When the government, the IRS proposed the rules to receive the refunds Dynamic Fuels was not able to get all the money because some of our fuel is tax exempt and so Dynamic Fuels was only able to receive directly from the IRS the amount of excise tax that they had already paid. In addition because the form that you could file to get the money, had already transpired the closing time, it had to flow directly to the owners. They changed the rules from the way it was done in 2011 where Dynamic could get all the money directly.

John Anderson

So, and Dynamic is still expecting 6 million?

Karen Power

Yes, a little over 7 million in total.

John Anderson

Now, does that reduce to 20, for the restart?

Karen Power

It would be offsetting to the 20, correct.

John Anderson

And then the last question was just about your cash position, presumably even though you're very optimistic about GTL and PCM you don’t expect any significant revenue from them any time soon. How do you feel about your cash position going forward given you won't be receiving any, optimistically any revenue from Dynamic Fuels until September, I'm doing the math right?

Ron Stinebaugh

We're always (inaudible) our cash, we need to look at it very closely but we feel good to the end of the year given our current level of cash.

Operator

Your next question is from John Smith with Smith Investors.

John Smith - Smith Investors

Just a couple of questions, first it's great that the plant is reopening and you've given a solid timeline, I'm just wondering if you can give a bit more detail on, timeline of how that happened and I missed just the very beginning of the call, you might have gone over it, (inaudible) catalyst changes involved here. Was that decision just made recently and does that contribute to the fact that we have to wait another 10 weeks for the plant to reopen or will that only, could only move to a catalyst change after you decide to reopen, because it is a pretty large gap remaining here, until the plant reopens. Secondly, right now you have a swap up to (inaudible) pump, will that have another plant shutdown. And thirdly, just as a follow up to a previous question. Specifically in terms of our Navy and bio fuels there's a $510 million program that was announced. Is that the program you're referring to when you said you're waiting for commercial papers to be released and will that be the program you are applying to.

Ron Stinebaugh

As Rotn pointed out there were a number of rich factors beginning in the first quarter of the year. Those included the margins were negative for six months of last year, whether or not the dollar was going to come in, if it did how the IRS handle the dollar, when would the payment made given the budget deficit issues, what would be new mandate for the RIN values, were ethanol RINs are going to be curtailed based on the blend wall, are sale of the Tulsa pilot plant. So, there were a number of risk factors associated with restarting. One of the ways to mitigate those risk factors was an improved process design and as Ron pointed out there is a significant improvement as we move to diesel, diesel was at D4 RIN, D4 RIN has been called kind of a type O blood of RINs because it can substitute for the D5 and D6s.

So, independent of the risk factors we all knew that internally that different catalyst, this improved catalyst would improve plant economics and we move forward on analyzing and testing that catalyst. Order has been placed, the product is produced in the United States and we now have confirmed our manufacturing slot.

So that were the decision process as it laid up to ordering the catalyst and then the other decision process as do we restart or interrupt the supply chain or wait to this catalyst to arrive and then come up with the clean and sustained and are hopefully sustained restarting that’s our recommendations, Syntroleum’s recommendation.

As per the sale of the recycle pump, we are still expecting October delivery. We would anticipate to make the, solvent recycle plant, the new one, would be installed during the normal course of an annual or biannual turning event.

Our current pump works, it just doesn’t have the stability and the reliability that we would like and that justifies the replacement with the new solvent recycle pump. As per the navy, what we are hoping for this year our commercial documents that allow marine diesel specifically to be in item of commerce meaning that we would able to bid our marine diesel Dynamic Fuel would just like any other diesel product, not R&D, not monies that would be subjects to annual reviews. So what we want to be as an item of commerce with the military and that’s our goal.

John Smith - Smith Investors

Just a follow up on that, you confirmed that you did not apply for the $510 million program that was (inaudible) with grants for new plant, is that something you are not interested in?

Ron Stinebaugh

The $510 million unless it’s changed recently, has not been funded. It was a three agency pool of funds. We looked at it quite in detail last year. And it never got funded. So the moneys were not available. Additionally there was an extensive amount of work to apply for basically you had to do fee engineering. We anticipated those cost were up to $10 million. So it didn’t make sense for us at that time to invest that kind of money on a program that was not fully funded.

John Smith - Smith Investors

Okay, and just on that subject, in terms of a second plan, obviously I mean we want to get the first plant up and running, but assuming that it goes well, what would it take for a decision to be made about a second plant at any point in the future?

Ron Stinebaugh

That’s a hard question; I think we will just run that one we have got, would be our recommendation for the time being.

John Smith - Smith Investors

Okay, so we won’t expect that in the mid-term I guess?

Ron Stinebaugh

I think we just need to focus on running what we have got and we will be of course one of the biggest problem is this regulatory environment. What’s going to happen next year is that, this is a year-to-year renewal. We really don’t have a planning today based on the current regulatory environment. We would expect some stabilization of that.

Operator

(Operator Instructions) Our next question is a follow up from Luis Navarro

Luis Navarro

I am very pleased with your answers, this week, I can’t thank you enough for your efforts there and also (Geismar). I think one of the terms that we speak to on this (inaudible) is the problem from the Navy with publishing of the commercial documents. Also I think that was the main facilitators, the pentagon through their title 3 program with the new Secretary of Defense, he continues to support that program. Are you confident that if that program doesn’t materialize, that the $10 million necessary for slow feedstock investment would be something that you would pursue?

Ron Stinebaugh

What the Navy, our understanding of what the Navy want, and will only purchase our commercial prices volumes and drop in fuels. But those are the two things and we cut through the legislative discussions and the press releases, those are the two things that we focus on based on what maybe procurement is telling us.

To make those things happen, we need a commercial or an item commerce, a document has says, these are the commercial specifications they’re no longer renewable and those are things we’re waiting for. Another terms and conditions of those contracts can vary. And until such time as it becomes an item of commerce, we really just need to wait and see on how the contracts will revolve around those items of commerce.

Operator

Our next question is from (inaudible) investor. Go ahead.

Unidentified Analyst

My question is about PCM, what did you find in your studies would be the peak efficiency and cost savings for that we’re using PCM? And also you guys had (inaudible), what’s happening with that 50% win as if.

Ron Stinebaugh

PCM, some of our analysis looks like peek and you talked peek energy savings are about 42% that would be an expectation related to roofing installation where we use our pallet. Now, what we have found out is that the best things, the best product that we can manufacture is a product that stands alone from existing infrastructure and production therefore example in cooperating the pallets into wallboard requires the wallboard manufacturer to modify his production line.

We have developed PCM sheets and in doing that the wallboard manufacturer becomes independent from the sheet manufacturing and he put up his wallboard, we put up our sheet, he puts up his secondary wallboard and we stand alone. So a lot of (inaudible) from our grant to date has been what is the commercial product and which is just an important about how to manufacture commercial product.

We’ve also have also passed the fire test; our methods of production we believe; it will allow us to have a UL listed in ASTM listed offering. In terms of the costs savings of PCM, we've seen anywhere between 8 and 16% savings that doesn't include savings associated with peak, power costs, data empower versus off peak lifetime power costs. Net RINs are in the engineering process but that has been up to two year term to get those RINs.

Unidentified Analyst

What's the time frame you would feel that you could get PCN running with another manufacturer and is there anything and put the government and the government was very interested in building envelopes that safe energy. Is there anything; what's your time frame in getting this up and going?

Ron Stinebaugh

For PCN you're exactly right but the government has a number of programs related to building envelopes. And the sheet can be manufactured now by third parting totaling. So, I would anticipate, we are in the commercialization process now. We have the products, we UL tested them; we know what products manufactures dim the light. So now it’s a question of finding the right application and there are a number of government applications for this. We think that is exactly the right place to go for energy saving.

Unidentified Analyst

And really outcome is then; the bottom line is profits; what's your profitability on PCM versus continuing the (vehicle) profits?

Ron Stinebaugh

They will be have to be equal to or better than diesel profits; right or Dynamic fuels when they (inaudible) PCM so we would think they are consistent or better with now. we generally think it’s better than diesel products because of the energy savings in the long run energy savings, associating with PCM, you install it once and it saves it forever. So, the economics are comparable or better than diesel.

Unidentified Analyst

And one final question; this PCM is from an (HDL) product not necessarily a final diesel product. If you still continuing to have problems with the plane running at a 100% with the better profit or the weight to make this HDL legal product that return into PCM; would that save energy in time and make it easier on the plane if you want that with PCM?

Ron Stinebaugh

In the plan, the more problematic area is HDO production once HDO is produced it is a very clean hydrocarbon. We have renewed all the contaminants at that point so the HI unit is actually the easiest unit to run in the plant because it’s processing extremely pure hydrocarbon at that point, so there is not a lot of savings associated with that.

Operator

Our next question is from Scott Robert with Edward Roberts Corporation. Go ahead.

Scott Robert - Edward Roberts Corporation

I’d like to show my appreciation and probably a lots of investor appreciation that this maybe the most informative conference call that we’ve had from you guys in years. My question is maybe an opinionated question, but the government has been talking about taking away some of the oil companies subsidies and you had talked about some of the grants and not been funded. Now, if they take some of these subsidies away from the oil companies, you know, have you heard or do you have an opinion on maybe they will be allowed to say give you this $1 subsidy for two years or if three years or maybe even fund somebody’s grants that you say when funded, do you have an opinion on that or have you heard anything about that?

Ron Stinebaugh

We don’t hear any linkage between the two obviously we’re little small company we don’t get into the political rhetoric. What we do look at is when we invest our engineering technical time, do our programs funded, are they sustainable and are they commercial, we’ve generally been through R&D phase although we learned every day in the plant but what we search for our commercial and longer term commercial opportunity which is once again we make a great marine diesel, it’s a product the nave loves it’s dropped then, it can be supported by financial instruments on soy and RINs that’s an area of focus.

First is you know a 510 million unfunded grant which has three body collusion between three government agencies requiring a $10 million investment and 20 other bidders so it is risk management of what do we think we can reasonably close that would support Dynamic Fuels.

Operator

Our next question is a follow up from Jack Bean, investor go ahead.

Jack Bean - Investor

Gary as a follow up and thanks for taking this call it seems like Syntroleum meets the drop in and the ability for the Navy contract as far as there is the efficacy of the product so I guess the remaining question is the price point when the commercial back (inaudible) comes out could that price point that the Navy puts on their document because obviously the renewable product is going to be more expensive than the standard diesel that the Navy is currently purchasing will they be able to put out say a higher cost for per gallon to where the Dynamic Fuels product because we know it will be a proportion higher than the general cost out there for general industry fuel will it have a price variance that will enable the Dynamic Fuels product to be eligible for purchase by the Navy in the DOD?

Ron Stinebaugh

So in all diesel sales for us at Dynamic Fuels we basically have a commercial component that is the price for diesel every day and we have a regulatory component where that is the dollar or the RIN so what we would anticipate in government contracts that they would be consistent with commercial contracts that those contracts you would bid a market price for the product and then the regulatory component the dollar and the RIN would remain so we can be quite competitive we can be actually very competitive on a marine diesel spec a very tight marine diesel spec F76 NATO spec those kind of specifications in competing with petroleum products but the government portion of the revenue side would need to remain in place the dollar and the RIN so we can compete head to head on petroleum and specially on specification as long as the existing regulatory framework remains around military sales as related to…

Frame work remained around military sales as related to domestic and commercial sales.

Operator

The next question is a follow up from Brian Hatch, go ahead.

Brian Hatch

Earlier you mentioned in answer to a question that you see the recycle pump, in October I think you said, and you would not install it until the regular shutdown, roughly when would that maintenance shutdown occur.

Ron Stinebaugh

I wish I could predict exactly when it would occur but there is no requirement to shut down or the (inaudible) recycle (inaudible) in addition to a turnaround. We would run them and we anticipate we can have that pump installed and add minimal if any additional time to the turnaround.

Brian Hatch

But that you're going to delay until the regular maintenance, is that what I heard earlier.

Ron Stinebaugh

We would anticipate installation of a new solvent recycle pumps one concurrent with a normal turnaround, exactly when that's going to occur I can't tell you.

Brian Hatch

(inaudible) based on need.

Ron Stinebaugh

That's correct.

Operator

The next question is from Luis Navarro, go ahead please.

Luis Navarro

I have one last comment in the formula forward looking statement from investor, and following the rhetoric somewhat of (inaudible), I believe in the retraction of the petroleum subsidy that they've been receiving for a number of decades, to create the revenue necessary to provide our emerging industry with the sustainability of the (inaudible) and the dollar credit for ten years, some 2015 or so, because I believe a lot of the banks are ready for the next big industry that's sustainable, (inaudible) that has great economics in the long term which I believe Syntroleum carries in its patented technology. So I hope you (inaudible) in the form of forward looking statement I believe that will happen, I hope you guys get that, for ten years out instead of this one year by one year and maybe next year maybe not and have government pass the bill and give you guys 10 years at least, that's my forward looking statement. Thank you.

Ron Stinebaugh

Thank you. We would agree stability would work a long way.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Ms. Karen Power for any closing remarks.

Karen Power

On behalf of the management and the board of directors, we would like to thank you for your interest in Syntroleum today and your attendance. Thanks very much.

Operator

The conference is now concluded. Thank you for attending today’s presentation. Please disconnect your lines.

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