Renewable Energy Group's CEO Discusses Q2 2013 Results - Earnings Call Transcript

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 |  About: Renewable Energy Group, Inc (REGI)
by: SA Transcripts

Operator

Good day, ladies and gentlemen, and welcome to the Renewable Energy Group Inc., Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will have a question-and-answer session and instructions will follow at that time. (Operator Instructions) And as a reminder today’s conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today Mr. Monte Bullock, Treasurer. Sir, you may begin.

Monte Bullock

Thank you. Good afternoon everyone, and welcome to our second quarter 2013 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 second quarter 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 beginning later this afternoon. 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 on 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. 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 to assess the operating performance of our core business. Please see the press release for a reconciliation of the non-GAAP measures to the most comparable GAAP measure.

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

Daniel J. Oh

Thank you Monte, and thank you everyone for joining the call. I want to start by reviewing our operations in the quarter including recent developments. After that I will turn the call over to Chad for additional financial details.

The quarter was very strong for us as you can see in our results in slide 3. Revenues grew 42% year-over-year, we sold more than 69 million gallons of biodiesel, our busiest quarter ever with an increase in average selling price of 3% when compared to year-over-year. The higher average selling price and capacity utilization enabled us to expand gross profit by $19 million or 62% year-over-year and led to an adjusted EBITDA of $41.6 million.

As we move throughout the quarter, we saw improved margin opportunities for third and fourth quarter sales. We generally book 90 days out and manage our portfolio of sales with limited sales booked and risks managed throughout the calendar year. So, we have an averaging up effect when you see improving commodity trends. This has allowed us to increase our third quarter guidance and is reflected in the fourth quarter guidance we’re providing today.

During second quarter we executed as planned on our technology upgrade and startup strategy. REG Albert Lea’s $21 million upgrades were completed this quarter allowing us to use a wider variety of raw materials including inedible corn oil and used cooking oil. The first shipment of biodiesel from the upgraded technology was available.

All right, I’m going to start over here because we have put some things in the wrong order. So, I am going to go back to as we move throughout the quarter.

So, as we move throughout the quarter, we saw improved margin opportunities for third and fourth quarter sales. We generally book 90 days out and manage our portfolio of sales with limited sales booked and risks managed throughout the calendar year. So, we have an averaging up effect when you see improving commodity trends. This has allowed us to increase our third quarter guidance and is reflected in the fourth quarter guidance we’re providing today.

We attribute second quarter results to our improved manufacturing results and the continued strong market demand for biodiesel and biomass based diesel RINs. If you will turn to slide 4, on the manufacturing front, we learned last night that the unit holders of Soy Energy, LLC in Mason City approved our asset purchase agreement to acquire Soy Energy’s 30 million gallon per year nameplate capacity.

Just this afternoon, we closed this transaction and expect to immediately start repairs and begin production using soybean oil and other low free fatty acid feed stocks. The plan was idle in mid 2012 by its former owners due to market conditions and manufacturing challenges. Going forward we expect REG Mason City to become a revenue and profit contributor in the fourth quarter of 2013. This transaction brings us up to 257 million gallons of nameplate production capacity across eight active plants. Several of our locations achieved record production milestones due to operational efficiency gains, including improve in yields, increased throughput and uptime.

During second quarter, we executed as planned on our technology upgrade and startup strategy. REG Albert Lea’s $21 million upgrades were completed this quarter allowing us to use a wider variety of raw materials including inedible corn oil and used cooking oil. The first shipment of biodiesel from the upgraded technology was available from the Southern Minnesota site in mid June.

Turning now to slide 5, during the second quarter we also completed repairs and upgrades and began production at our 15 million gallon nameplate facility in New Boston, Texas. The first shipment of biodiesel from New Boston was sold a Dallas area distributor in late June. Furthermore, we added to our production capabilities through a towing agreement and third party sales. All of these factors contributed to our total sales volume.

As part of our continued focus on improving and expanding our national infrastructure, last week we announced new terminal capacity in the New York Harbor. As you see in slide 6, the IMTT side in New Jersey is one of the world’s largest petroleum trading hubs and gives us 1.5 million gallons of additional storage capacity and distribution capabilities to make growing Northeast bio-heat blending demand.

As you may be aware, the New York State Legislature recently passed the B2 Bioheat Requirement for heating oil to be blended with 2% biodiesel. When signed into law by the Governor as expected, it will require 2% biodiesel in heating oil for use in any building in five counties in downstate New York, effective October 1, 2014.

On July 1, 2015, all heating oil sold for use in any building statewide would be required to meet the standard. New York City already has a B2 Bioheat Requirement in place. This would add to already growing demand for biodiesel blends.

New York City instituted a B2 Requirement last year and Rhode Island recently passed a statewide requirement. We foresee a growing demand for biodiesel in this market and are monitoring other states like New Jersey, for pursuing biodiesel blending legislation.

In addition to this capacity, we completed building an additional 1.5 million gallons of storage at REG Seneca that can be used for either biodiesel or feed stock to support our growing general terminal capabilities at that site.

Construction is underway there on new barge load-out capabilities for transport on the Illinois River that is tributary to the Mississippi River. We expect this project to be completed by the end of the first quarter of 2014. Barges will allow us to move larger volumes of fuel to our customers more efficiently and improve our overall distribution capabilities.

I will elaborate on our future outlook later, but I want to express our optimism regarding industry demand for the rest of the year. Demand remains strong as the 2013 RVO is 28% higher than that in 2012, and on-road transportation fuel demand continues to slowly rebound along with the slowly improving economy, it’s like the Northeast heating oil market but also in California. The state’s low-carbon fuel standard is offering biodiesel blending incentives, which Chad will further elaborate on when he discusses our financial results.

In the RIN market, biodiesel demand continues to benefit by being able to satisfy multiple RFS2 Renewable Volume Obligation categories, specifically Biomass-based Diesel RINs can satisfy the D6 Renewable Fuel RINs category, as well as the D5 Advanced Biofuel RINs category, resulting in demand in excess of 1.28 billion gallon RVO in the Biomass-based Diesel category.

Turning to Slide 7, during the quarter, the price of D4 Biodiesel, D5 advance and D6 up in RIN so once again the reason is petroleum major seek out alternative as heat and blend oil is approached. We except biodiesel RIN values to remain strong as an alternative buy for obligated parties, which will serve to improve our margins on future sales.

While, we only gave guidance for Q3 and Q4 today, we do expect continued strong demand in 2014, its renewable volume obligation 2014 and beyond. The EPA is expected to publish the volume requirements for 2014 before the end of the year. Well, there are no certainties until the agency releases its parts, we believe industry data, capacity and feed stock availability support strong growth of the RVO in 2014.

Further, I want to emphasize the importance of renewable energy policy to the U.S. economy. You are all aware of the environmental benefits of using cleaner burning biodiesel and the replacement of fossil fuel with sustainable fuels supplies to support the food chain.

Also important and as well in U.S. economy companies like REG are job creators. We grew REG's employment basis by 15% in 2012, have already added another 20% to our overall headcount in 2013. Those are high quality full time jobs with middle class pay. We are proud of this contribution being made by REG in the biodiesel industry.

I also want to highlight an important milestone. Ten years ago, we had a single 12 million gallon facility in Ralston Iowa, from that tiny beginning we have grown to be an industry leader with over $1 billion in annual sales, and with the addition of Mason City, 257 million gallons of nameplate capacity at eight active bio-refineries that growth has occurred through commodity market swings and regulatory uncertainty. I think this history and our results this today demonstrate that REG is durable, reliable, and profitable business.

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

Chad Stone

Thanks Dan and thanks to all of you who have joined us this afternoon. Let us start by turning to the financial highlight starting on slide 8. As Dan mentioned this was a very strong second quarter in many respects. We achieved record sales and production levels. We grew margins and then positive cash flow.

In the second quarter of 2013, we produced 56.5 million gallon including total manufacturing gallons and sold 69.2 millions of biodiesel. Gallons sold increased 28% year-over-year and sale included 8 million gallons from third-party producers. The balance of the gallons sold represent reductions of our terminal inventories. Year-to-date, we have earned $63 million in adjusted EBITDA compared to $97 million for the full year of 2012, after the pro rata volume allocation of the retroactive 2012 Blenders Tax Credit.

Increased demand for biodiesel RINs resulted in higher RIN pricing and this coupled with stable feedstock pricing enabled us to generate $41.6 million in adjusted EBITDA during the second quarter of 2013. This compares to second quarter of 2012, originally reported adjusted EBITDA of $26.5 million. When we add in the retrospective pro rata allocations of the 2012 Blenders Tax Credit of $16.6 million, the ending second quarter 2012 adjusted EBITDA would have been $43.1 million.

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 detailed reconciliation of the GAAP net income to adjusted EBITDA included in the press release in the presentation on our website on Slide 16 prepared for the call.

Revenues for the quarter were $387.1 million, which compares to the revenues in the second quarter of 2012 of $271.9 million, equating to a 42% growth year-over-year. Revenues from the sales of RINs in inventory, by co-products such as Glycerin and FFA, feedstock sales demerge and storage were $61 million.

Strong demand for biodiesel in D6 Renewable Fuel RIN has caused Biomass-based Diesel RIN prices to increase from $0.77 at the beginning of the quarter, to $1.07 per RIN at June 30, 2013. The average closing RIN price during the second quarter was $0.94.

Another revenue contributor I wanted to touch on is California’s Low-Carbon Fuel Standard or LCFS. The California Air Resource Board put in place a program to reduce carbon emissions from fuel used in California vehicles, using a credit system. Much like the RFS2, biodiesel producers must register with CARB and feedstock pathways must be approved.

REG currently has four plans approved for the program and has been using our Long Beach, California area terminal and direct sales to customers to move product into the state. California Petroleum Distributors and Refiners are willing to pay a price which offsets the freight cost to get the fuel to the West Coast. This helps us to geographically diversify our sales.

During the quarter, we had risk management gains of $6.7 million or $0.906/gallon which compares to gains of $18.1 million for the second quarter of 2012. As you can see in slide 10, our experience over the last three years has been that risk management transactions have averaged $0.01 per gallon quarterly expense. As part of our risk management strategy, we continue to manage RIN price fluctuation and protect biodiesel margins by selling RINs in the forward months when available.

Feedstock prices have generally been stable or slightly increasing and our lower cost feedstock capabilities provided flexibility and better margins this quarter. Tech tallow has recently increased back to levels above soybean oil market pricing after being a significant discounts to soybean oil for months.

Recently and more recently we have see weakness in soybean oil compared to other fats and oils causing us to consider switching certain plants over in the second half of the year and running soybean oil campaigns until the spread relationship realigns.

GAAP gross profit was $50.2 million or 13% of revenues, the improvement in year-over-year was primarily due to an increase in gallon sold and lower feedstock prices. You may recall that we built inventory of higher plug point biodiesel in first quarter for sale in the warmer summer months when we expected better economics. With the late spring, we began moving that product during late April and plan to sell the remaining gallons of this inventory during the third quarter. As of June 30th, we had 4 million gallons of its product remaining in storage.

Our SG&A costs were $11.2 million or 2.9% of gross revenues for the quarter which represents continued improvement over the prior year quarter. Interest expense was $634,000 and lower than second quarter last year reflecting the continued reduction and outstanding term debt.

Income tax expense was $15.3 million which reflects a 39.8% rate. And we’re using that same rate to model out future periods. Net income attributable to the company's common stockholders for the quarter was $19.6 million compared to $11.3 million during the same period last year. Diluted earnings per share were $0.62 reflecting 59% growth compared to the year ago quarter.

Turning to the balance sheet on slide 11, you can see we continue to strengthen our financial position and we ended the quarter with cash and equivalence of $95.5 million. Our inventory days decreased from 31 days at the start of the quarter to 21 days at the end reflecting the continued growth in the gallon sold and reduction of the high cloud biodiesels stored in terminals from first quarter that I mentioned a minute ago.

Accounts receivable declined substantially to $77.1 million from $172.5 million at March 31st, 2012. The majority of this decrease reflects the collection of the 2012 Federal Blenders Tax Credit benefit. As of today, we have fully collected the benefit of the reinstatement.

As you see in Slide 12, we’ve paid down $2 million dollars in Term Debt during the quarter, bringing Total Term Debt down to $34 million at an average interest rate below 5% that remains at a conservative 7.5% of total capitalization. Between this low-level of debt, which gives us the capacity to further leverage as needed in our cash balance, we believe our financial strength enables us to continue to pursue strategic growth opportunity.

I also wanted to mention a favorable change in our capital structure which is going to reduce our future cash obligation. It does not affect our current earnings or a change of fully diluted earnings per share calculation. When we went public through December 31, 2012, our capital structure included 3 million shares of Series B preferred stock with a value of $83 million. The holders are entitled to convert each Series B share in the common stock at a rate of two shares of common for each share of preferred plus accrued and unpaid dividends.

Preferred holders have been proactively converting their preferred stock in the common as a preferred is in the money when our common stock price per share exceeds $12.50. SO, recently a substantial amount of Series B has been converting to common. As of June 30, a little less than one million Series B shares had converted, leaving us with 2.1 million preferred shares outstanding with a carrying value of $59.4 million. As the Series B converts, we reduce the potential liability to redeem the Series B for cash, which would have occurred in the second half of 2015.

As I mentioned earlier, the conversion does not impact our fully diluted per share numbers since the diluted calculations already assume the full conversion of the Series B.

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

Daniel J. Oh

Thanks Chad. We would like to provide the following financial guidance for the third and fourth quarters of 2013, based upon our current outlook as shown on Slide 13.

As we regularly note, due to the cyclical nature of our industry we are only providing six months of guidance at a time. Also, keep in mind that our guidance assumes a number of factors. Foremost, the guidance assumes no change in the price of heating oil, feedstock prices or biodiesel RINs as of today. Of course, these values will change during the remainder of 2013. However, we will not attempt to predict for you the level or magnitude of change.

We expect industry demand to be impacted by a number of factors some of which I mentioned earlier, dynamics in the ethanol RIN market are currently benefiting by biodiesel producers, these are biodiesel flexible compliance fuel. We further believe and assume for the purpose of our guidance that the 2014 biomass based diesel RVO will be higher than in 2013 setting up expectations for increased biodiesel demand.

With this context in mind, we’re revising our third quarter guidance upward to reflect improved margins. In the third quarter we expect to sell between 65 million gallons and 75 million gallons biodiesel and we expect adjusted EBITDA to range between $34 million and $44 million.

For the fourth quarter of 2013, we expect to sell between 45 million gallons and 60 million gallons and to generate adjusted EBITDA of between $25 million and $40 million. With that fourth quarter guidance you can calculate that we expect full year 2013 gallon sold to be in the range between 220 million gallons and 24 million gallons with adjusted EBITDA ranging from $125 million to $150 million.

Please remember the normal seasonal patterns of our business, demand normally strengthens in the summer and is generally weaker in Q4 and Q1. The 2013 Blenders Tax Credit is scheduled to expire on December 31st, unless Congress acts to extend. At this point it is uncertain if it will be reinstated for 2014. Similar to the situation at the end of 2011, if there is no extension of the credit before year end, we believe we could see some first quarter 2014 demand pulled forward into the fourth quarter of 2013.

Under that scenario there could be 5 million gallons to 15 million gallons sold in the fourth quarter that would not be recognized until 2014 due GAAP revenue recognition rules.

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

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from Brett Wong from Piper Jaffray. Your line is open.

Brett Wong – Piper Jaffray

Hi, gentlemen thanks for taking my questions. I want to know if you can give us some more color on timing and pricing of the Mason City plant improvement?

Daniel J. Oh

Yeah, we’re already going to have it under our full control tomorrow, closing that’s been occurring and we were informed just currently of this meeting that it was closed, what we will be doing right away because that facility is intellectual property that we’re very familiar with and also have license and ownership around, we will bring the core part of the refinery up right away that is capable of running soybean oil, vegetable oil, low free fatty acid raw materials.

We have a plan for bringing it up later on the higher free fatty acid material, but we need to get and confirm that plan under our control before we give any other guidance on that. But, we think is a great plan and expect it to be attributing very quickly to our business.

Brett Wong – Piper Jaffray

And on pricing per improvement, is that going to be kind of in a range that you typically seem?

Daniel J. Oh

While, we have to confirm we have at least three scenarios that we will be going through, we’ve done lots of diligence that on and already, so we just need to get through some bid and estimation. But, the startup is a low dollar activity and then we have to make choices on upgrades and in a certain way it could be in the $10 million or $20 million range to put it on choices that we would make for major upgrades, but nothing at all like that to get it up and running.

Brett Wong – Piper Jaffray

Okay, thanks. And can you give any update on other projects maybe more longer term that you guys have been looking at?

Daniel J. Oh

We have not announced any other projects that we’re bringing online, we have been carefully monitoring four indications of future demand related to RVO and just a general fungible of our biomass based diesel RINs and what that will do overall at the same time, would you see a favorable market. So, as you know, we can acquire and bring into service facilities, we can upgrade existing facilities and we can complete projects that we have already. We have active activity in each one of those areas and as we finish that analysis we will be letting you know, but we’re focused on growth right now.

Brett Wong – Piper Jaffray

And can you give us a breakdown of feedstock now that you have Albert Lea up and running and where expectations that composition might be as Mason City come from?

Daniel J. Oh

Yeah, generally we are following the plan that we talked about Albert Lea was on a low FFA soybean oil, feedstock plan. And now that it's running on high free fatty acid feedstock like inedible corn oil and fats, we expect it to just run at that level.

It's very capable and running very well. At our Huston, in our Ralston facilities, Ralston, as you may recall is connected to a crush that continues to run primarily on soybean oil at Huston, it's also well FFA plant and Mason City will be low FFA plant until we complete other our repairs and upgrades would enable that. Otherwise, it's a multi feedstock fleet operate in that way.

Brett Wong – Piper Jaffray

Thank. You commented that feedstock cuts have been stable maybe improving. Any impact from startup of the Diamond Green facility and expectations moving forward there?

Daniel J. Oh

Well, I guess, what we have specifically seen recently is soybean oil dropping pretty significantly. Normally that trades at a premium to other feedstock right now, as I kind of referred to Brett, soybean oil is actually cheaper than choice white grease because it's, I think it's been 14 or 15 days in a row that it's traded down. We have rarely seen it traded the discount to choice white grease and that generally tends to set the direction for the market.

So, we are watching that closely. In terms of Diamond Green, we do hear that they are in the market and it will take some time to see how they – what levels they run at and how they will impact the overall feedstock market, but expect that they will increase demand for feedstock.

Chad Stone

Yeah, I mean, you know, over time it will increase competition for raw material. We are not at least as far as I know, seeing any material change right now from that business and in the relatively low cost operating structure we have, we think we are at very good position to compete for feedstock.

Brett Wong – Piper Jaffray

Okay. One last quick one from me, what RIN value is incorporated in your guidance?

Daniel J. Oh

We are essentially reflecting stable RIN prices. They have been daunting between a $1 to $1.10 recently, so in July we did see them run up and increase close to $1.50 per RIN they are back, kind of, where they ended the quarter at right around the $1 or a little bit more.

Brett Wong – Piper Jaffray

Okay. That's better embedded in RIN?

Daniel J. Oh

Yeah.

Brett Wong – Piper Jaffray

Great. Thanks a lot guys.

Daniel J. Oh

Thanks Brett.

Operator

Thank you. Our next question comes from Mahavir Sanghavi from UBS and your line is open.

Mahavir Sanghavi – UBS

Yeah, hi, Dan and Chad. Good job on execution on the quarter. There is the first question about just to follow to the RIN prices that you talked about in the guidance. I was wondering if I look at your guidance for Q3 and Q4 and if I take those RIN prices, those RIN prices are higher than 2Q, so maybe just wondering if you could walk us through what your expectations are in terms of, are you expecting RIN prices to turn in the 3Q or puts and takes of what's leading to the guidance?

Chad Stone

Thanks Mahavir. This is Chad. I think what we are doing is using, it looks like a $1.05 for the rest of the third quarter and throughout the fourth quarter. Dan touched on this little bit in his comments that we are seeing strong demand for biodiesel and RINs. We are not predicting that they are going to change significantly but that's more of a conservative view that we think that there is strong demand, but we are not going to try to predict where it's going to go. So, we are leaving it at level for purposes of forecasting.

Mahavir Sanghavi – UBS

Got it. So just Chad, I mean I don't mean belabor the point, but your guidance for Q3 had a flat shipment level, it's down in terms of adjusted EBIDTA. So I just wanted to make sure I got my facts in terms of you said the average RIN prices for the second quarter was $0.94 and you are using a buckle 5 for the third quarter. So I am just, are you just being conservative in terms of your guidance for third quarter or is there anything else going on?

Chad Stone

Well, I will elaborate a little bit on it. This is a big granular, but if you look what energy and agricultural commodities prices have done, they effectively increased our margin opportunity going forward by heating oil rising and soybean oil decreasing. Remember when we have risk management contracts to protect our booked business, when our margin spread or when they improve, we have current risk-management losses that we book. So, because of the big move in heating oil and soybean oil recently, we are starting the quarter needing to overcome that risk-management loss, but we do see good margins on the business.

So, I would say, the guidance that we’re providing is not necessarily conservative. That’s what we believe third quarter will come in at.

Mahavir Sanghavi – UBS

Okay, got it. Thanks. And then Dan, maybe one question for you. Can you remind us what your total capacity is now with the addition of Mason City, and also if you could include your towing capacity in there? And just to follow up to that, what’s your expectations of what the market looks like in 2014, and then maybe if you could give us what kind of market share we should expect in 2014? Thank you.

Daniel J. Oh

The number with Mason City is 357 million gallons and we have an additional capacity available to us at our plant that we are towing of another 30 million gallons. So it’s 287 million gallons of excess right now on a fully utilized year-round basis and that’s an excellent piece of production that we can do a lot with and it’s located in many different locations with different feedstock rules to access.

In terms of next year, our industry is really performing. So, if you look at the ability to acquire raw material, the prices and the market indicate that we can grow. The demand for RINs is strong on a fungible and direct basis, and the production throughout the year I would predict will be well in excess of the 1.28 required under the current RVO.

So, all that points to a scenario where the folks determining the RVO could easily go for a strong growth scenario next year, certainly one wouldn’t expect it to be anything other than good growth. So, we think we’ll be seeing, mostly based on logic, we think we’ll be seeing RVO growth next year that’s supportive of additional biodiesel production coming online.

In terms of our capacity, and we’re still focused on this 15% to 25% range and the regulatory uncertainty causes us to be more steady at the rate of growth as opposed to something really fast to March, and we evaluated a recorder in every six months and have always several activities and engineering studies underway. So, we are well prepared to pull the trigger at least in my opinion if the demand is there that justifies the capital investment with returns that are appropriate. And I think we will able to continue to stand this 15% to 25% space as we grow, and part of the acquisition of Mason City was to do just that.

Mahavir Sanghavi – UBS

All right, thanks. And then, just one clarification question for Chad, Chad what was the cash flow from operations and the CapEx in the quarter?

Chad Stone

I am going to have to get back to you on that Mahavir, I didn't bring that with me, I think, I will follow up little later.

Mahavir Sanghavi – UBS

Okay. That will be fine. Thanks.

Operator

Thank you. Our next question comes from Craig Irwin from Wedbush Securities, your line is open.

Craig Irwin – Wedbush Securities

Good evening gentleman. Congratulations on this sound quarter.

Daniel J. Oh

Thanks Craig.

Craig Irwin – Wedbush Securities

Dan, as we look out at 2014, some of the numbers we understand NBB might be talking about, it could be as high as maybe 1.8 or 1.9 billion gallons. If you are going to stay in the range of 15% to 25%, sort of suggest that there is a lot of the potential for being at the lower end of the range with big numbers like that being tossed around, how would you prioritize your opportunity for investments to meet a large RVO like that?

Daniel J. Oh

It's a dynamic process. We are long term returning profit focus first not volume. So, we are always making this determination simply on the production side. And we invest in distribution and access the feedstock in varying ways, but most of the money goes to capital in terms of production base.

We have continuous improvement programs inside the business that focus on slack and efficiency or yield and throughput basis those are frequently occurring. With respect to our projects, we have engineering going underway and are to be completed projects and those generally are 12 to 15 months from the time we pull the trigger to get them up and running and we have continuing dialog with other companies that they have interest in joining us.

So, I think, things are going to move quick way to respond to upper demand but we care about profit and return far more than we care about volume-oriented market share. It would be natural for us to acquire a veg oil, low FFA facility at a fair value, run that and that would have a market share effect, but generally the reason we would be doing that would be to get into a position to improve its flexibility with further investment.

So, we look at it every 90 days, Craig and we’ll end up going down many of those paths I think.

Craig Irwin – Wedbush Securities

Great, thank you for that. My next question again was about capital investments and investment for diversification. Can you scope out for us the breadth of potential diversification opportunities in front of you right now and the process that you go through in evaluating each of those, and whether or not, the company might be likely to make an acquisition or announce a new technology, or announce a specific capital investment related to diversification over the course of the next couple of quarters?

Daniel J. Oh

We try to exercise the same disk plan and diversification as we do and looking at them versus build, viruses build on the biodiesel side. I will share that we have actively looked at a few different industries that have a direct linkage into our value chain or are a natural bolt-on to our bio-refinery system where you can bring a new technology on at one of our facilities, or it would be an acquisition of a business that would be a platform on a smaller or regional basis on which we could do a similar pattern of consolidation as we have been endeavoring to do on the biodiesel side.

And we have yet to find something that is a good fit and an appropriate price that yield a return in the timeframe we’ve been working. But, I do see growing opportunities, partly because our business is more mature and has more capability and synergy to connect other companies in and because our cash flow is growing and our ability to do creative deals with or without public stock, is also growing thereby in terms of capital efficiency, capital allocation and risk and risk of absorption and in integration.

So we’re ready to do it. We don’t feel like we have a imperative it says we have to do it tomorrow because of such tremendous opportunity in biomass-based diesel, but we’re dedicated to it and you shouldn’t be surprised, if you hear something but that’s a forecast for next quarter Craig.

Craig Irwin – Wedbush Securities

Thanks again for taking my question.

Daniel J. Oh

Thank you. I wanted to go back and respond to Mahavir’s question on cash flow from operations and capital expenditures, maybe to look, look that up a real quick and I have it at my fingertips. For the first six months of 2013 cash flow from ops was $44.1 million and CapEx in the first six was $20.1 million.

Operator

Thank you. (Operator Instructions) Our next question comes from John Quealy from Canaccord, your line is open.

John Quealy – Canaccord

Hey, good afternoon folks. First question on the M&A side, depending what the RVO comes out and other strategic issues going on, I mean, how much are you going to look at sort of the distressed assets as you have been buying, seems like you had good success on asset purchases and some of the bolt-on towing, but what should we think about in terms of this type of capacity expansion moving forward?

Daniel J. Oh

I think, unique is a fair term and our ability to evaluate merger and acquisition opportunities versus doing our own construction. And we have right before us four great projects that deserve to be finished, we have discussions with other companies that occur from time to time and then we’ve our own internal optimization. What that allows us to do is be very disciplined in a price we might pay to somebody on the outside and with our business and the synergies that we can continue ranges and continue some improvement, it’s okay waiting a year while we build something versus overpaying and not even getting the benefit of the opportunity cost of maybe years worth of extra profit if you’re running something same. We if we find something that’s in the right location that fits our system and it seems like a good price we’re going to do it on a expected market growth oriented scenario.

But, these assets that are quality assets would fit into our system well are also good companies that also have choices. So, I can’t predict that we’re going hear them when they’re done, but what we have the ability to do is grow through organic construction, organic continuous improvement. But, if we can find the right asset I suspect will continue this effort on consolidation.

John Quealy – Canaccord

Okay, great. And then, secondly, I think, I don’t if it is in response to another question about competing with Diamond Green diesel on feedstock some like they’re starting that process up, can you just anecdotally talk about whether it’s corn oil or animal fats, have you seen any discernable change in the supply chain for you folks or?

Daniel J. Oh

There is lots of room for a high quality company like we expect Diamond Green to be joining the market, because raw materials in response to the demand signal from biomass based diesel are growing. So, we’re seeing more corn oil extracted, we’re seeing more waste oil, used cooking oil is being collected and I only get Diamond Green as what we expect to be a quality business that will just be part of the natural growth of RVO overtime.

If we’re something growing 3 to 500 million gallons a year and I think we can be more than that there is just to response to the market spread and the collection of energy and RINs and other incentives and co-product sales I think will make room for feedstock purchases as long as you’re a very competitive efficient business which I believe we are.

So, today in the market I don’t think they’re disruptive, I see them trained by varying types of raw material and you would expect that as they bring on their plan to learn how to do it. So, but I don’t find it disruptive to us, right now.

John Quealy – Canaccord

Okay. And then, lastly, if I can ask you to editorialize a little bit, obviously there is a lot of reform chatter in Washington on the broader RFS mandate, can you just sort of target us in and what we should be looking for in terms of the biodiesel of it, I am really not concerned right now about the broader the FNR, but which we watch for when congress gets back from recess here?

Daniel J. Oh

So, there is enhancement throughout the last several years’ of bio-fuel history a lot of vigorous discussion occurring, but these vigorous discussions doesn’t necessarily mean that there will be change. But, in particular on the biomass based diesel side, it was just a couple of weeks ago that a member of congress representative Shimkus from Illinois pointed out in recent hearings that biodiesel has been a tremendous success story and is doing very well in driving volume and meeting the goals our FS2. We find that both sides of the isle are very supportive of biodiesel and biomass based diesel, I am not a spokesman for the other fields, but in general it doesn’t feel like we’re going to end up with any change or any significant change, it seems like things are moving ahead and there is vigorous review, but our world is delivering and that's exactly what they want it. So, why they would change our world I don't know.

John Quealy – Canaccord

Okay. Thanks Dan.

Operator

Thank you. Our next question comes from Jeff Osborne from Stifel, your line is open.

Jeff Osborne – Stifel Nicolaus

Thanks. Good evening. Most of my questions have been answered. I just had two on Chad, can you just talk about what the attach rate of RINs are, say, how much RINs are on the balance sheet with the volatility here, did you see a bit of a surge in people wanting those during the quarter?

Chad Stone

Yes. So, we have talked in the past about how we have been managing within some strict RIN position limits just like we do with all the commodities and risk management contracts. We are sensitive to this specific position in providing competitive intelligence around that other than to say that we have been managing relatively low balance and to the extent we are separating RINs, we are trying to sell them as close to the detach as possible, but we don't have a specific number of RINs to share.

Daniel J. Oh

It's Dan. Generally, we see good liquidity in the RIN market today.

Jeff Osborne – Stifel Nicolaus

No, I don't think so. But, if they scroll the way on the balance sheet, A. where would they be and are they marked to market?

Chad Stone

Other assets in lower of cost to market.

Jeff Osborne – Stifel Nicolaus

Okay. And then last question is, can you talk about the plants that you have that are still idle or waiting to be upgraded? What the cumulative CapEx requirements for those would be first of all and then B. now that you have moved beyond Minnesota, what kind of the planning is of what's next? Are you looking at New Mexico or where are you going to deploy capital to retrofit facilities?

Daniel J. Oh

In terms of CapEx, what we have previously disclosed in our filing is still on the zone and the New Orleans project is largest CapEx project followed by Emporia and then New Mexico and in Atlanta, they are still very healthy because we would finish those as highly capable standalone multi-feedstock facilities where there are all buying local and selling local.

Every one of those markets is a good market right now. So, I think what we will end up happening is it will be trade off of “buy” versus “build” and which ones have supportive local incentives and project finance available. And the smaller projects are pretty simple to do in terms of decision to invest money. Those can just be done out of cash flow. We have to make a decision to do them and we’re waiting to see some additional market signals, but we’re actively doing design work on at least three out of the four projects, to give you a sense of it.

Jeff Osborne – Stifel Nicolaus

Okay, so that’s probably more for a 2014 event? Is that fair?

Daniel J. Oh

It’s possible that we would announce something this year on a project, but they are all 12 to 15 month projects once you begin construction. So, I wouldn’t expect any contribution from any of them any sooner than fourth quarter 2014.

Jeff Osborne – Stifel Nicolaus

Okay, I may have missed this, last question for you Dan is just with the insider sales that you’ve had recently, is that any thought of change in the board complexion, now that some people are dropped below 10% ownership?

Daniel J. Oh

I don’t foresee any change. I haven’t heard any discussion, but I am not the spokesman for that.

Jeff Osborne – Stifel Nicolaus

I understand. Thanks so much.

Operator

Thank you. Our next question comes from Katja Jancic from Sidoti. Your line is open.

Katja Jancic – Sidoti & Company

Hi Dan and Chad.

Daniel J. Oh

Hello.

Chad Stone

Hello.

Katja Jancic – Sidoti & Company

Most of my questions have been answered, but could you provide a little bit an insight on what do you expect the capital expenditures to be by the end of the year?

Chad Stone

So what we’ve guided in the past that they would be based on projects announced probably range $25 million at least. We’ve talked about what’s been approved and that number could go up if incremental projects were added on throughout the year, based on some of the projects that Dan described earlier, such as we’re working on barge load-out capabilities. There’s some dollars associated with that.

We’ve completed the CapEx on both Albert Lea and New Boston. So those large projects are behind us normally. I think the plant on average is going to need somewhere from $500,000 to a million total of CapEx per plant, just on the basic annual run rate. But aside from that, we haven’t announced any other projects. The main changes would come from new and announced projects from earlier expectations.

Katja Jancic – Sidoti & Company

You mentioned you’re focusing on growth right now, is there any chance you’re looking at international expansion or you’re still just looking at solidify your position in the U.S.?

Daniel J. Oh

We’re doing exploratory work that I would describe as business development only and if the right partner came, we would have interest in doing it, our primary focus remains North America, but we’re beginning to do what I would describe as a 2 to 3 year oriented level of research and diligence to perhaps in 2 or 3 years have an activity like that thriving. But, we don’t have anything right now that I would point to that will allow us to do that sort of business.

Katja Jancic – Sidoti & Company

Okay. Those were all of my questions, thank you for taking my questions.

Daniel J. Oh

Thank you.

Operator

(Operator Instructions) I show no further questions and would like to turn the conference back to Mr. Dan Oh for closing remarks.

Daniel J. Oh

Thank you, operator. Before we conclude I want to mention some upcoming investor conference at which REGI will be presenting. On August 1st, we will present at the CFA Society Investment Conference in Minneapolis. On August 12th, we will present at the Jeffries Industrial Conference in New York, on August 15th, we will present at the Canaccord Genuity Global Growth Conference in Boston. Finally, on September 17th, we will present at the Credit Suisse Small and Mid Cap Conference in New York.

Thank you for participating on today’s call and for your continued support, we appreciate your investment and look forward to reporting to you again next quarter on our progress.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference, this does conclude the program and you may all disconnect at this time.

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