Karen Power - SVP and Principal Financial Officer
Gary Roth - President and CEO
Ron Stinebaugh - SVP, Finance
Syntroleum Corporation (SYNM) 2013 Annual Meeting of Shareholders December 18, 2013 3:00 PM ET
Good afternoon and welcome to the Syntroleum Corporation 2013 Annual Meeting of Shareholders Our agenda for today is to begin with the general business of the Company directed by Karen Power, Senior Vice President, Principal Financial Officer and Corporate Secretary. Then we will move into a review of the transaction with Renewable Energy Group directed by Gary Roth, Chief Executive Officer and President; followed by a question-and-answer session directed by Ron Stinebaugh, Senior Vice President, Finance.
A link to the slides we are presenting today along with the recorded audio of this call will be available on our website within 24 hours after completion of this meeting. In addition, you will find the slides related to the transaction with Renewable Energy Group and the Syntroleum project report attached as exhibit 99.2 to the 8-K filed with the SEC yesterday, December 18, 2013. Only stockholders of record at the close of business on the Record Date, October 21, 2013 are entitled to vote at this meeting.
We have received an affidavit from Broadridge Financial Solutions Inc.; the Company’s stock distribution agent attesting to the fact that notice for the meeting and information regarding access to the company document was mailed on November 6, 2013. If you have your control number and yet not already voted your shares of stock, you may do so during this meeting by clicking on the vote here button on the site. If you have your control number and wish to revoke your proxy and vote during this meeting, you may do so by clicking on the vote here button on the site.
A quorum has been established and the meeting is now duly called to transact the business brought before it.
Proposal Number One; the election of directors. The Board of Directors have nominated the following two persons as named in the Company’s proxy statement for election as Class B members of the Board of Directors, to hold office for terms to expire at the Company’s annual meeting of stockholders to be held in 2016 or until their successors have been elected and qualified. Those two nominations are P. Anthony Jacobs and James R. Seward.
Proposal Number Two, ratification of Accounting Firm. Appointment of Hogan Taylor LLP as the Company’s independent public accountant for the year ending December 31, 2013. This appointment has been approved by the audit committee of your Board of Directors.
Proposal Number Three, advisory vote to approve executive compensation. Non-binding approval of the 2012 compensation awarded to named executive officers. The compensation has been approved by the Nominating and Compensation Committee of the Board of Directors.
The polls are now declared closed to voting. The preliminary Inspector of Election report reflects each of the two directors nominated by the Board were re-elected; Hogan Taylor LLP was ratified as the Company’s independent public accountant and the 2012 compensation awarded to named executives was ratified.
We will now move on to the next section to discuss the agreement to sell substantially all assets to Renewable Energy Group Inc. in exchange for shares. Here is our forward-looking statements about the transaction. Please note these forward-looking statements are based on current expectations, estimates, assumptions and projections that are subject to change and actual results may differ materially from the forward-looking statements.
We also have additional information about the proposed transaction and where to find it. REG plans to file with the SEC, a registration statement on Form S-4 in connection with the transactions discussed in this presentation, which will include Syntroleum’s preliminary proxy statement and REG’s preliminary prospectus for the transactions. The registration statement, the proxy statement, prospectus and other documents, when filed with the SEC by REG and Syntroleum can be obtained free of charge through the website maintained by the SEC at www.sec.gov, at REG’s website at www.regi.com, or at Syntroleum’s website at www.syntoleum.com.
Following is the normal disclaimers and the general informations about participants in the solicitation.
I will now turn the call over to Gary Roth.
Thank you, Karen. Good afternoon everyone and thank you for joining us today. Before we discuss the details of the transaction, I’d like to say that we’re extremely pleased to have found a great partner in REG and to provide our stockholders with the opportunity to participate in the significant upside potential of the combined company. We are confident that REG multi-feedstock business model and the combination of technologies will drive increased value and is the best path forward for Syntroleum.
On Slide 11, you can see an overview of the transaction. Under the terms of the agreement, REG will acquire substantially all of Syntroleum’s assets, including our 50% interest in dynamic fuels, global renewable fuels intellectual property and our gas to liquids intellectual property. In turn Syntroleum will receive 3,796,000 shares of REG Common Stock, which represents approximately 9.2% of the fully deluded shares of the combined company. This is subject to adjustment in the event that the aggregate market value of the REG Common Stock to be issued would exceed $49 million or if the cash transferred to REG is less than 3.2 million.
Based on the share prices as of the close of market on December 16, 2013, the current value of the transaction is approximately $40.3 million or $4.04 per share of Syntroleum and represents a 37% premium to the Syntroleum 10-day average price. Syntroleum currently intends to distribute the REG shares as a liquidating dividend to stockholders, subject to satisfaction by Syntroleum of its retained liabilities. However, there can be no assurances regarding the timing of this dilution or the number of shares that will be available for distribution, if any.
Turing now to Slide 12, now becoming part of REG, Syntroleum’s renewable diesel intellectual property and assets will joined forces with one of the leading U.S. biodiesel producers providing asset diversification for Syntroleum stockholders. Importantly, REG has a platform and resources necessary to invest in Syntroleum’s next generation synthetic fuel and chemical growth opportunities, such as natural gas to liquids, biomass to liquids, phase change material and specialty renewable products such as drilling and frac fluids, some of which I’ll discuss in more detail later on.
The key takeaway is this is a compelling combination and the transaction enables Syntroleum stockholders to participate in a company that has a strong platform for growth, with significant upside potential. However, there are obviously risks and uncertainties associated with REG’s business and there is no assurance regarding the future value of REG’s shares to be received by Syntroleum.
Moving to Slide 13, it is important to keep in mind what the impact of changing regulatory environment will likely have on the industry. As outlined on Slide 13, the APA has published proposed reduced 2014 mandates, versus the guideline established under the Energy Policy Act of 2009. The EPA proposal is currently under public comment through January 28, 2014. For 2014, EPA has proposed a 60% reduction in total renewable fuel from 18.15 billion gallons to 15.21 billion gallons.
It has also proposed a 41% reduction in advanced bio-fuel from 3.75 billion to 2.2 billion gallons and no change in the current 1.28 billion gallons biomass based diesel mandate. This means it is likely that there will be significant excess biomass based diesel capacity, so it will be important for companies to have flexible feedstock capability, economies of scale and flexible fuels. With Syntroleum, REG will be better positioned in all of these areas.
On Slide 14 to underscore this point, the table on Slide 14 demonstrates how combining our companies would create the largest portfolio of flexible feedstock capable assets. For instance, the combined companies total nameplate capacity would be 294.5 million gallons per year and this will increase to 445.5 million gallons per year, if and when the four REG plants in development are completed.
Turning to Slide 15, this transaction marks the culmination of a comprehensive process to review Syntroleum’s strategic alternatives. Throughout the process the board was assisted by independent financial and legal advisors and Piper Jaffray provided a fairness opinion to the Syntroleum board, stating that the aggregate purchase price to be received by Syntroleum in consideration for the asset sale was fair to Syntroleum from a financial point of view.
Given the benefits of this transaction, together with a thorough evaluation of the company alternatives, the Syntroleum board firmly believes that this transaction is in the best interest of all Syntroleum stock holders and unanimously recommends that Syntroleum shareholders vote in favor of the transaction.
The next steps can be seen on Slide 16. The REG transaction is subject to customary closing conditions and regulatory approvals, as well as a Syntroleum stockholder approval. You can expect to receive related proxy materials in February of next year, with a special meeting of stock holders to follow in March, all of which is subject to the timing associated with SEC review of the joint proxy statement prospectus for the transaction.
For those of you not familiar with REG, Slide 17 through 21 provides some key facts and additional background information. Starting on 17 REG is headquartered in Ames, Iowa, and is listed on the NASDAQ with the ticker REGI. REG has 36.5 million shares outstanding, and a market cap of $387 million as of December 16, 2013.
The diagram on Slide 18 shows REG's fully integrated biodiesel platform, from production R&D to conversion of fuel, to customer service and administration and everything in between. This platform provides REG with the ability to process a wide variety of lower cost feedstock into high quality biodiesel, which it has levered to become one of the leading producers of biodiesel in the United States and a marketer of REG biodiesel and biodiesel produced by others.
Slide 19, you can see that shows that REG sold a 150 million gallons in 2011, which increased to 188 million gallons in 2012 and is expected to increase to 256 million gallons in 2013. That represents a growth from 2011 to 2013 of over 70%. On Slide 20, REG also generates significant EBITDA, generating adjusted EBITDA of a $107 million in 2011, $97 million in 2012, and an expected $145 million in 2013.
The table on Slide 21 shows that REG has a strong balance sheet and has increased its cash position to approximately a $135 million, reduced debt and substantially its net book value over the last four years. REG has the financial strength and business skills to drive forward the deployment of Syntroleum technologies.
To recap, the Syntroleum board conducted a comprehensive review of our strategic alternatives and we are extremely pleased to have found a great partner in REG. We are confident that REG's multi feedstock business model and strong management team would drive increased value for Syntroleum shareholders and that it is the best path forward for Syntroleum to deploy its various technologies in the production of synthetic fuels and chemicals. The transaction would create a combined company with strong diversified platform with the resources available to just pursue revenue growth opportunities from both the GTL and PCM businesses. This is a compelling transaction and one that the board unanimously recommends Syntroleum stockholders vote in favor for.
I will now spend a few moments talking about a couple of Syntroleum's promising technologies, which can meaningfully contribute to the upside potential of the combined company. I'll start with gas to liquids on Slide 24. We believe there are tremendous market opportunities for Syntroleum leading GTL technology, both licensing and project participation, and while this represents a long term strategy, we believe this has a significant potential payoff.
The abundance of natural gas, driven by shale gas development, means gas prices are low, compared to oil prices creating favorable GTL economics. We believe there is a significant market opportunity for smaller scale 4000-5000 barrel a day GTL plants with flexible feedstock and manageable natural gas volumes and where the product is developed at the field and sold locally. We are seeing the convergence of the right technology and the right commercial environment and as mentioned REG, has the resources necessary to develop this technology and capitalize on this opportunity.
There are three steps to the GTL strategy as outlined on Slide 25. Step one synthesis gas; step two is the Fischer-Tropsch process where synthesis gas is converted to liquids and step three, refining. Synthesis gas production technology is commercially available with hundreds of units around the world today.
Syntroleum demonstrated our FT technology at the Katusa Demonstration Facility which operated near Tulsa from 2004 to 2006. This unit is now being operated in China by Sinopec, one of the largest refiners in the world. And lastly we have commercialized our refining technology at the dynamic fuels Geismar plant. We believe this combination of technologies is now ready for commercial deployment.
Turning to Slide 26, Syntroleum has a unique approach to GTL business. Our approach in integrates building small plants to the gas field. By combining gas reserve and mid-stream GTL assets in the same project, there will be the opportunity to enhance initial plant financing ability. Most importantly these smaller projects are more manageable with pre-fabricated sections. This single project structure also acts as a physical hedge to an integrated pre-project. Gas feed stock cost is limited to the cost of drilling and production, results in less volatile organs and better supports project financing.
Slide 27 provides detail on the GTL project we currently have under development. On July 9, 2013, Syntroleum signed a memorandum of understanding with an upstream U.S. based oil and gas exploration and production company to investigate the joint development of more, 4,000 to 5,000 barrel per day natural gas to liquid plants integrated into natural gas fields. Today a detailed feasibility study is well underway and multiple sites are under consideration. We have validated a number of our major technical and cost assumption over the past five months and believe the fundamental assumptions under which this MOU was undertaken remain valid.
Moving to Phase Change Material on Slide 28, a Phase Change Material or PCM is a substance that's capable of storing and releasing energy. Just as ice cubes can regulate the temperature of a glass of water, our patented renewable PCM does the same things like building materials and textiles, just at a different temperature.
The reason PCM is important and why we see such a strong future in it, is because when encapsulated within pallets or sheets it can reduce energy consumption in building and structures by 10% to 15%. Syntroleum’s PCS technology is protected by a strong PCM composition patent, issued by the USPTO on July 31, 2012. We have also filed patent application to predict the low cost manufacturing process we have developed for making PCM pellets and other PCM articles.
As you will see on Slide 29, PCM is more than just pellets or sheets. It can be incorporated into building materials, heating, ventilation, air-conditioning, textiles and even outerwear. We believe PCM thermal energy storage technologies represent the next step in lowering the energy consumption in buildings and certain military applications. It can also be incorporated into textiles and clothing.
According to a report by markets-and-markets, the global PCM market is currently 460 million and is expected to reach 1.5 billion by 2018 as can be seen in the chart on Slide 30. With Syntroleum's PCM technology and REG resources, the combined Company is well positioned to capitalize on this market opportunity.
On Slide 31, we have outlined the four phases of PCM commercialization strategy. Phase 1 is continued market development, work for related for renewable PCM. Phase 2 is become a renewable PCM supplier using contract manufacturing. Phase 3 is to construct a renewable PCM plant, either standalone or as an add on to gas to liquids plant. Phase 4 is to evaluate forward vertical integration into branded PCM products, and overall PCM is an attractive business with rapidly growing target markets.
As can be seen in the table on Slide 32, Syntroleum has a robust and growing intellectual property portfolio. At the end of this year we will have a total 72 patents and 29 patents pending. We believe that with REG’s platform and resources, the integration of our patent into REG’s portfolio will drive additional value for all stock holders.
This ends our formal presentation and I will now turn the meeting over to Mr. Ron Stinebaugh, who will conduct the FAQ portion of our meeting. Thank you.
Thanks Gary. Question number one; when will the Geismar plant restart?
After closing of the asset sale, the management team of REG in conjunction with Tyson will determine the appropriate time to resume operations at the Geismar plant.
Question number two; just back in August, Syntroleum was trading at around $7. Do you think this transaction is at the right price?
We believe industry dynamics, especially the regulatory environment play a very important role and can determine economic potential and drive value in the renewable fuel segment. As mentioned in the presentation, the EPA has indicated measurably lower mandates for 2014 and we believe this has had an adverse impact on companies operating in this space. We track a basket of alternative energy and biodiesel stocks, which is down nearly 30% since August 1st. Of these, the biggest decline is 68%.
If you look at Syntroleum’s current implied acquisition price by REG at $4.04 as of the price of December the 16th, Syntroleum is down 45%. So we are in the middle of that group. Additionally Piper Jaffray provided a fairness opinion to the Syntroleum Board stating that the aggregate purchase price to be received by Syntroleum in consideration for the asset sale was fair to Syntroleum from a financial point of view.
Question number three; the Geismar plant has not been operating since the end of last year. How did this impact determining the appropriate value of Syntroleum? Did this negatively impact the price?
As we stated in question two, we believe it is primarily industry dynamics and the regulatory environment that determine potential and drive value. However, the valuation may have been impacted by the cost to restart the plant, as well as the timing as the timing of when the new buyer would be able to restart the plant.
Question number four; why was the transaction structured as an asset sale?
Our Board and management team, with the assistance of outside advisors ran a thorough process and considered a wide range of alternatives. With respect to the agreement with REG, the Board and management team carefully evaluated this transaction and determined that this structure maximizes value for Syntroleum stockholders and provides operational flexibility for the assets going forward.
Question five; what is the value of the transaction?
This transaction is valued at approximately $40 million based on the value of the REG shares at the market close on December 16th. This is subject to certain terms and conditions in the asset purchase agreement that has been filed with the SEC. The transaction value is a function of the value of REG stock but the total transaction value is capped at $49 million and maybe reduced if the cash transfer to REG is less than $3.2 million.
Question six; why did the process take so long? Were there other bidders?
Our Board conducted a robust and comprehensive process. There were over 50 parties contacted as part of our strategic alternatives process. Full details will be available in the background section of the joint proxy statement prospectus, which will be filed with the SEC as soon as practicable.
Question seven; why is this a good deal for stockholders?
We believe the REG’s multi-feedstock business model and the combination of REG’s business and our assets and Syntroleum Technology will drive increased value for Syntroleum stockholders and is the best path forward for Syntroleum. We believe that this transaction will help REG grow its advanced biofuel business, enhance its intellectual property portfolio, and expand its geographic footprint. And this transaction enables Syntroleum stockholders to participate in a combined company with significant upside potential.
Question eight; how does the price paid by REG compare with other deals in your industry?
A summary of Piper Jaffray’s fairness opinion provided to the Board will be included in the joint proxy statement prospectus filed with the SEC as soon as practicable. These materials will detail the valuation analysis performed by Piper Jaffray in connection with its fairness opinion.
Question nine; why is this not a cash transaction?
Our Board and management team, with the assistance of our outside advisors carefully evaluated this transaction and determined that this structure maximizes value for Syntroleum stockholders. The equity consideration provides Syntroleum stockholders with the opportunity to participate in the significant upside potential of the combined Company.
Question 10, when will Syntroleum stockholders receive REG shares?
Following the closing of the asset sale and subject to the approval of Syntroleum stockholders, Syntroleum intends to dissolve in compliance with the applicable provisions of the Delaware General Corporation Law. In order to satisfy Syntroleum’s existing obligations to fund its operations through the dissolution process and to preserve the value of the consideration received at closing Syntroleum, will retain a cash reserve equal to lesser 5.3 million or cash on hand at closing. If all of the REG common stock received in the asset sale is ultimately distributed and there is no adjustment to the number of REG shares, Syntroleum stockholders would receive approximately 0.3809 shares per share of Syntroleum common stock. However it is difficult to predict the exact amount, nature and timing of any distributions to Syntroleum stockholders.
Following the closing of the asset sale, Syntroleum’s assets will primarily consist of the shares of REG common stock received as consideration for the asset sale and the cash reserve. Syntroleum will use the cash reserve to pay or provide for the payment of all of Syntroleum’s known liabilities and obligations but it is possible that in course of the dissolution process, unanticipated expenses and/or liabilities will arise. If such liabilities exceed the cash reserve, Syntroleum will be required to sell a portion or all of the REG common stock received in the asset sale to satisfy its obligations before its dissolution, thereby reducing and perhaps eliminating the assets available for distribution to Syntroleum stockholders.
Question 11, what happens if there are other bidders?
Under the terms of the asset purchase agreement, Syntroleum is prohibited from soliciting additional bids. That said, in the event that an unsolicited bid emerges, the Syntroleum Board of Directors will carefully evaluate it. If the Syntroleum Board of Directors believes that such bid is or is likely to lead to and offer that is superior to the REG offer, Syntroleum will so advice its stockholders. However, even if a competing proposal arises, Syntroleum is required by the asset purchase agreement to hold a meeting of Syntroleum stockholders to vote on the REG transaction proposal.
If the Syntroleum stockholders vote against the REG transaction, Syntroleum will be free to accept another offer. The termination fee in the transaction is $5 million, which is payable in certain circumstances as described in the asset purchase agreement.
Question 12, what are the liabilities that are not being acquired by REG?
In asset transactions there are often assets and liabilities that are not acquired by the purchaser. There will be a description of the assets and liabilities that remain with Syntroleum in the joint proxy statement prospectus which will be filed with the SEC as soon as practicable.
Question 13, how many shares does REG have outstanding and how many shares does Syntroleum have outstanding?
As of October 30, 2013, REG had approximately 37 million fully diluted shares outstanding. As of November 1, 2013, Syntroleum had approximately 10 million fully diluted shares outstanding.
Question 14, what is the production capacity of the combined Company?
Upon completion of the transaction and assuming that production is restarted at the Geismar facility, REG will have a nameplate capacity of approximately 294.5 million gallons a year, including one half of the Geismar capacity.
Question 15, will the Syntroleum trade name be going away?
Once the transaction closes, REG will own the trade name Syntroleum and Syntroleum will change its name. The new name has not been determined yet.
Question 16, what is the plan of development for GTL?
As outlined, REG has acquired substantially all of the assets of Syntroleum including GTL and it is our understanding that REG will continue to invest in this area to progress and develop the technology.
Question 17, what happens to the Neste litigation?
The status of the Neste litigation is unchanged. As part of our asset purchase agreement, REG is acquiring our IP which is the subject of the Neste litigation. Since REG is acquiring our IP, they are also acquiring any liabilities associated with the IP.
Question 18, what happens to the Syntroleum NOLs?
As part of the agreement, REG will acquire Syntroleum’s NOLs, subject to section 382 limitations in the tax code, if the intended tax treatment for the transaction is achieved, of which there can be no assurance for the reasons that will be set forth in the joint proxy statement prospectus.
Question 19, what are tax implications to your stockholders from this transaction?
We intend for the transactions to constitute a tax free reorganization, but there is no assurance that this tax treatment will be obtained for the reasons that will be set forth in the joint proxy statement prospectus.
That concludes our prepared responses. We will now open up the meeting to additional questions that have not already been addressed.
So, what other alternatives were evaluated during the strategic alternatives process? Are you confident that the decision to pursue this asset sale is the best alternative?
The Board conducted a robust and comprehensive process. They considered a wide range or alternatives. We are confident that this is the best outcome and path forward for the company and the one that maximizes value for Syntroleum stockholders.
Did you discuss the future of Syntroleum with REG? How did their plans differ from your original strategy?
We have only just announced this transaction and any specifics will need to be answered by REG at the appropriate time. That said, given the benefits and significant potential payout at assets like GTL, we believe that REG will continue to support and invest in the Syntroleum assets.
What happens to Syntroleum management? Has there been discussion regarding the management of the company post transaction close?
There are still many discussion to be made at this time. That said, we expect that a significant percentage of current Syntroleum employees will be offered positions with REG. During the period between now and the closing the transaction a transition planning team, comprising of leaders from both companies is expect to develop an integration plan and determine staffing needs going forward.
Do you expect any layoffs as a result of this transaction?
There are still many decisions to be made at this time. As we said before, a significant percentage of current Syntroleum employees will be offered positions with REG and there will be a transition and planning team comprising of leaders from both companies.
Are there any state regulatory approvals required for this transaction?
The transaction is subject to customary closing conditions and regulatory approvals.
Do you expect any regulatory difficulties or opposition associated with this transaction?
We expect to complete the transaction in March of 2014.
When do you expect to hold this Shareholder Meeting to vote on this transaction?
The Syntroleum stockholder meeting to vote on the deal is expected to take place in March 2014, subject to the SEC review.
What is the current Syntroleum cash balance?
The cash balance is $14.2 million.
And that concludes our question-and-answer session. Thank you for your attendance, our Board and employees. Thank you.
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