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Renewable Energy Group Inc. (NASDAQ:REGI)

Q1 2014 Earnings Conference Call

May 6, 2014 4:30 PM ET

Executives

Todd Robinson – Director-Investor Relations

Daniel J. Oh – President and Chief Executive Officer

Chad Stone – Chief Financial Officer

Analysts

Brett Wong – Piper Jaffray & Co.

John Quealy – Canaccord Genuity Inc.

Craig Irwin – Wedbush Securities, Inc.

Operator

Good day, ladies and gentlemen, and welcome to the Renewable Energy Group, Inc. First Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to turn the call over to Todd Robinson, Director-Investor Relations. Sir, you may begin.

Todd Robinson

Thank you. Good afternoon, everyone, and welcome to our first quarter 2014 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 first 2014 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 will be available on our website beginning later this afternoon. The webcast includes an accompanying slide deck, which will appear automatically with the webcast, you will need to advance the slides 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 earnings conference call will contain forward-looking statements. These statements involve risks, uncertainties and assumptions that are difficult to predict, and such forward-looking statements are not a guarantee of performance.

The company’s actual results could differ materially from those contained in such statements. Several factors could cause or contribute to those differences. These factors are described in detail in the Risk Factors; and other sections of our annual report on Form 10-K and quarterly reports on Form 10-Q, which are on file with the SEC.

These forward-looking statements speak only as of the date of this call. The company undertakes no obligation to publicly update any forward-looking statements based on new information or revised expectations.

Today’s discussion also includes non-GAAP financial measures. We believe these metrics will help investors assess the operating performance of our core business. Please see the press release 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, Todd, and thank you, everyone, for joining the call. As we have discussed and previously announced, we’re not happy that we missed our first quarter adjusted EBITDA guidance, yet we remain confident in our business and our business model. One contributing factor was the unexpected harsh weather that impacted results in many industries across the U.S. economy.

Despite the challenging environment in the first quarter, we were able to generate positive adjusted EBITDA, which is a testament to the durability of our business model and the hard work of our employees.

At the same time, we are focusing our efforts in the near-term to capitalize on opportunities when markets normalize. We continue to execute on our long-term growth strategies as we transition to become a more diversified industrial company, while continuously improving and building our core bodies of business.

Turning to operating highlights for the quarter, we made key advances in major functions of our bodies of business, and our business including product development, production, and distribution.

On Slide 3, regarding product development, as part of the launch of REG Life Sciences in January, we announced the acquisition of LS9. Our integration efforts are underway and people are working well together. We intend to build on the solid foundation of development work and produce renewable chemicals.

The technology acquired brings us an industrial biotechnology platform as the production process utilizing engineered bacteria that can metabolize renewable feedstocks into targeted products. REG brings commercialization capabilities, access to capital, distribution, and a brand name as a leading player in the advanced biofuel industry.

We’re not yet offering specific guidance on what chemicals we expect to commercialize first or when we will ship for competitive reasons. We can confirm, just four months after the acquisition, we are satisfied with product development efforts.

Looking at production, in February, we broke ground on a $13.2 million upgrade at our Newton, Iowa, biorefinery. The upgrade will improve our production capabilities such that we can produce biodiesel from a wider array of lower-cost raw materials. Despite these, we will exceed industry quality standards, while meeting our own more rigorous REG 9000 quality specifications.

This project is being funded by last year’s refinancing of existing debt held by REG Newton, which added $5 million of additional borrowing, and extended the maturity date, and by cash generated from REG.

We also continued to progress with upgrades at our Mason City, Iowa, biorefinery. Phase 1 is complete, bringing basic biorefinery operations online, and we continue to advance the conversion from low free fatty acid to lower cost feedstock technology.

We also added additional logistics and distribution capabilities including expanded storage capacity at REG Seneca and REG Newton. In April, we signed and renewed an exclusive two-year agreement with a 30 million gallon per year multi-feedstock biorefinery. REG was a general contractor and technology provider for the construction of that plant, so we understand how the plant operates. Gallons from their facility will augment our new and existing sales contracts.

We currently have eight operating biorefineries with nameplate capacity of 257 million gallons per year. As we begin to ramp up production for second and third quarter, we will begin to run a broader range of lower cost feedstocks, which is a result of our prior investments, and upgrades, and improvements.

Turning to distribution. Earlier this year, we launched REG Energy Services, a new division focused on selling petroleum-based heating oil and diesel fuel. The idea here is not to move away from our foundational base of advanced biofuels, but rather to better serve customers while simultaneously creating more opportunities to blend biodiesel into petroleum-based products.

We are currently offering product at seven terminals throughout the Northeast. We expect this division to contribute in a meaningful way in the next heating oil season.

Subsequent to the quarter end, we also announced the renewal of our contract with Pilot Travel Centers, the largest travel center operator in the United States. Pilot has been our largest customers for several years, accounting for between 16% and 36% of annual revenue in years past. They are a value customer, and we are pleased that we will be able to continue to serve Pilot in a significant way.

Regarding the Syntroleum transaction, the Syntroleum shareholders are scheduled to vote to approve the transaction at June 3, 2014 stockholders’ meeting and we hope to close the transaction shortly thereafter. In late March, we redeemed the remaining preferred shares, which simplifies the capital structure for $3.6 million of cash.

Before I conclude, I want to note an important milestone for REG. In late April, we announced that we had over 1 billion gallon of biodiesel. In 1996, we marketed 30,000 gallons of biodiesel, 17 years later in 2013, we sold 259 million gallons. This success is not simply the result of any one person or even a small group.

On behalf of the Board of Directors and employees of REG, I want to say thank you to all of our customers, vendors, investors, federal, state and local supporters, partners and team members over the years without whom we could have never met this milestone.

It’s the support of all of these people and entities that enables us to serve an important role in society by diversifying America’s sources of energy, helping promote more energy security, supporting agricultural and local economies, and improving the environment.

Let me now turn the call over to our CFO, Chad Stone to review our financial results in more detail. Chad?

Chad Stone

Thank you, Dan. First, I’m going to start by elaborating on the first quarter conditions that Dan mentioned earlier. Our adjusted EBITDA for the quarter was $1.9 million; and a significant driver in the quarter was weaker demand than expected as our gallons sold were 47 million at the low end of our guidance range, and the average price per gallon fell by 20% compared to the 2013 period.

Demand was weaker in the quarter due to high inventory levels coming into the quarter, regulatory uncertainty surrounding both the RVO and the BTC; and extremely cold winter. As demonstrated by the lack of growth in GDP in the first quarter, the harsh weather played a significant factor in the economic activity broadly, and we were not immune from the impact.

Recent data from the Energy Information Administration noted a 10.5% year-over-year decrease in refinery sales of distillates in January, and this decreased distillate demand was magnified further by correspondingly lower demand for biodiesel blends. Feedstock prices increased in the quarter, and ended higher than expected when we provided guidance.

You can see the increase in the prices during the quarter on Slide 9. We believe the increase is the result of strengthening price of palm oil and overall reduction in supply of waste fats from the rendering complex, and strong demand for fats, oil and greases for oleochemical, animal feed and exports.

We are seeing reduced slaughter rates due to the PED virus and lower herd population, following the 2012 drought as well. The colder weather also resulted in higher utility expenses as natural gas prices increased this winter in response to the severe cold weather.

Now, let’s review a few line items from our financial results on Slide 7. As I noted, adjusted EBITDA was $1.9 million for the quarter, a decrease of 91% from first quarter 2013.

And on Slide 8, to make the quarter-over-quarter analysis of results comparable, we’ve normalized adjusted EBITDA for Q1 2013 for the impact of the retroactive reinstatement of the 2012 biodiesel mixture excise tax credit.

There are a few other noteworthy items that impacted adjusted EBITDA during the quarters. Our investments in REG Life Sciences and REG Energy Services resulted in a reduction in adjusted EBITDA of $1.9 million and $300 respectively for the quarter.

You can find a reconciliation of adjusted EBITDA to GAAP net income on Slide 17 of the presentation, and in the earnings release. Gallons sold increased 22% year-over-year, to $47.1 million. The average B100 sales price per gallon decreased 20% to $3.54 for the first quarter from the year-ago quarter. This decline contributed to $34.9 million revenue decrease when applied to the number of gallons sold during the same period in 2013. The increase in gallons sold for the first quarter accounted for a revenue increase of $36.9 million.

During the quarter, we generated revenues of $219 million, a 17% year-over-year decrease. The decrease in revenue is also largely due to the net benefit of $57.4 million from the retroactive reinstatement of the BTC in first quarter 2013. Sales of separated RIN inventory were $30 million, up from $15 million in the first quarter of last year. And revenues from the sale of co-products, feedstock sales demurrage and storage were $21.6 million for the first quarter.

On Slide 9, margins were compressed compared to prior year, as biodiesel sales price declined more than feedstock prices. As you can see in the charts, the average sales price per gallon decreased $0.90 while feedstocks only decreased to around $0.56 per gallon on average. We incurred risk management expenses of $700,000 in the quarter, which is in line with the long-term trend highlighted on Slide 10.

Now turning to the balance sheet on Slide 11. Liquid assets which includes cash, cash equivalents and marketable securities declined to $136 million at quarter-end from $153 million at the start of the quarter as we have made investments and also paid off debt.

During the quarter, we used cash to build inventory and to reduce payables and debt; and more specifically, we paid $15.3 million in cash as part of the acquisition of LS9. We invested $12.8 million in capacity upgrades and improvements, and we reduced our line of credit by $8.5 million, and paid $3.6 million to redeem the remaining preferred stock outstanding as Dan mentioned earlier. That is now 5% of capital. And notably, our liquid assets now include $59.9 million of marketable securities that we purchased during the quarter.

Accounts receivable decreased by $51.9 million from the fourth quarter, causing DSO to drop 13 days from 19 days. The reduction in receivables was due to high year-end receivable balances from strong sales volume in the fourth quarter, as well as quick receivable terms.

Inventory increased $8.3 million during the quarter with 41 days of sales from 22, and the majority of the inventory build was in finished goods as we frequently build the inventory during the winter for later sales during the summer demand. Of our total term debt at the quarter-end of $33.2 million, $29.2 million was held at the biorefinery level.

Finally, let’s review some of the financial details related to the LS9 acquisition. We closed the transaction on January 22 and financial results are consolidated into our first quarter.

Recall that the transaction was structured as an asset acquisition and you can see on slide 13, we paid $15.3 million in cash and 2.2 million common shares valued at $26.3 million. If REG Life Sciences achieved certain milestones in the coming years, there can be up to an additional $21.5 million of contingent payoff.

For the year, we modeled R&D expenses of approximately $1 million per month into REG Life Sciences. And for modeling purposes at a consolidated level, we estimate a 2% to 5% effective tax rate. Before I turn the call back to Dan, we continue to make progress on improving and upgrading our fleet and invested $13 million in capital expenditures in the first quarter. Dan?

Daniel J. Oh

Thanks, Chad. We would like to provide the following financial guidance for the second quarter and third quarter of 2014 as shown on slide 14. Our guidance incorporates several assumptions. First, we assume current market margins. Of course, these values will change during the period, but we will not attempt to predict the level of magnitude of change for you. Second, we are providing guidance as if the BTC will not be reinstate in 2014. Finally, keep in mind that our business model now includes REG Life Sciences.

In the second quarter, we expect to sell between 65 million and 75 million gallons of biodiesel and an adjusted EBITDA range of a negative $2.5 million to a positive $7.5 million. For third quarter we are forecasting 70 million to 80 million gallons of sales. Assuming current market margins, the adjusted EBITDA range is a negative $10 million to positive $10 million.

This could improve with a positive revision to the RVO and reinstatement of the BTC. If either both of these factors are favorable, there should be upside for this. We’re currently operating in a dysfunctional pricing environment, and when federal guidance is clarified, business will be simply to accomplish and margins should return to a more normal situation.

As I previously mentioned, a proxy has been sent to the Syntroleum shareholders detailing the proposed transaction and the June 3, 2014 date has been set for the shareholder vote. So, please, do not ask any more specific questions related to this transaction.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And the first question is from Brett Wong of Piper Jaffray. Your line is open.

Brett Wong – Piper Jaffray & Co.

Good morning, gentlemen. Thank you for taking my questions. I’ve got to ask about the RVO, so I guess we’ll just start off with that one, but just wondering, your expectations for the RVO on timing, volume, especially given Gina McCarthy’s comments today at the Washington Watch Conference. And then in addition to that, can you comment on expectations of Brazil sugarcane imports and how that might impact the RVO?

Daniel J. Oh

Well, I should ask you. You may have better intelligence than we do. It’s a really serious matter because the uncertainty does create kind of a dysfunctional pricing world, and it’s a double whammy because I think people expect that blenders’ tax credit at some point will come back. There’s favorable activity in the Senate. However, it’s not clear when that will come through as it’s an election year.

So if it comes through, it could be as we saw a couple of years ago at the beginning of the next year, and that then compounds or complicates a little bit with the RVO. The rhetoric I hear is that it should be more a supportive RVO than what came out. But there’s a negotiation occurring between the executive branch in and amongst agencies and people looking at all the data.

So I’m inclined to think it’s going to be up. It’s hard to know how much. We kind of think conservatively about it all and when we look at our business model and we look at the way that our interaction with market and the way the market’s interacting with us, we think we’re well positioned no matter what happens from a long-term growth and strategy perspective.

But despite our guidance being, assuming it’s not there, I think the industry is leaning into winter’s tax credit, and I think the industries are assuming that the RVO goes up, but I don’t think anybody’s assuming it goes up a whole lot.

Brett Wong – Piper Jaffray & Co.

Okay. Good. Any ideas on timing for the RVO especially given now that you’ve given three quarter or Q3 guidance?

Daniel J. Oh

Well the signals implied some time in July that we would hear back from OMB. It’s rational to think that the executive branch understands that it would be dysfunctional if the EPA came out with a number and the OMB didn’t agree.

So one hopes that in the background, they’ve been coordinating all of these. It would be a minimum of 30 days from the time EPA transmits OMB and then it would come out. And that becomes just a matter of regulatory function. So, if five EPA gets over there sometime in June, I would guess we’ll get it sometime in July.

Brett Wong – Piper Jaffray & Co.

Great. Thanks. And just kind of digging into the sugar cane imports side of things, just wondering given your expectations there, and is the increase in the RVO really necessary and obviously that’s going to be dependent on what you think imports are going to look like.

Daniel J. Oh

There’s healthy competition for D4 RINs from imported products. And we see our renewable diesel and certain product coming from Canada and other areas that continues to move. You can see the EPA and EMTS type numbers and see that.

And of course sugarcane, in its own alcohol distribution battles its having with corn ethanol in its own economic issues; seem to make it less likely that that product participates this year. So, yes it matter to see the advance category go up at the same time in general, D4 category, it goes up.

But the U.S. is proving a healthy and growing market and a lot of products focused our way, even if it’s not sugarcane ethanol. I think we’ll be seeing a healthy amount of D4 and I believe the EPA and the LNB are aware of that and I certainly hope that they’re considering that, when they’re thinking about the rate of raise of RVO over time. But sugarcane ethanol does not appear to be a factor right now in any significant way.

Brett Wong – Piper Jaffray & Co.

Okay, great. And one last one for me is looking at kind of your margins and expectations for guidance. Just wondering if you can walk through, kind of the assumptions there and why you’re including current margins in the third quarter guidance, when really you don’t basically talk to, why you don’t really see an improvement in input costs or just biodiesel costs, given increased demand?

Daniel J. Oh

Yes, so I’ll speak a little bit and then I’ll hand it over to Chad Stone here, and he can elaborate further. So, our prices have stayed fairly firm. On a long-term trend, they’re lower. But the real question is the spread between the selling price of fuel and RINs against the cost of goods coming in. So in the recent months, feedstock has generally firmed up and probably doesn’t have a lot of room to improve from a cost-of-goods perspective.

So then you end up thinking hard about what happens with demand and demand which is selling price as a combination of blenders’ tax credit, local incentives, what’s happening with RINs, what happens with the RVO, what happens with the RVO for 2014 and 2015. And the uncertainty of the market just causes people not to buy any more than they think they might barely have to have because they just want to wait and see what happens. And overall, energy prices have gone down a little bit lately.

So when you think about RVO, if it comes out in July, the entire industry won’t know until the first half of the year started moving how pricing will be signaled. So it’s going to be a very interesting and sensitive piece of information the market will respond quickly. Chad?

Chad Stone

Sure. Yeah, Brett, to add to that, if you look at the feedstock chart on that slide 9 and you see the strong increase in feedstock prices. As we look forward we’re currently seeing and projecting that forward basically, strong demand for fat oils and greases. And like I said earlier, we’re seeing good export demand for feedstock. We’re seeing good demand in the animal feed market for this even though we do have relatively lower price of corn. We’re seeing good demand for oleo chemical. One of the things that we hear is animal fats are still finding their way into animal feed because of the desire to kind of bring...

Daniel J. Oh

They kind of juice the calories.

Chad Stone

Yeah. Juice the calories in the diet. So, because of that demand, we’re projecting that forward so we’re seeing strong demand for feedstocks and supportive pricing along those lines.

Daniel J. Oh

And that’s true, a little longer, the only one we’d expect because the longer winter actually called for more calories which is longer than you might have guessed. So, as we get into the summer months and we see regulatory clarity, the markets will actually know how to behave much better.

We always need to remember that biofuels are not the largest coal on any of these materials that have their own markets. So, we’re a significant factor but we’re not driving it. So, one really wants to see price movement and price movement upward at a higher rate than feedstock.

Brett Wong – Piper Jaffray & Co.

Got you. Thank you very much. That’s great color.

Daniel J. Oh

Thank you.

Operator

Thank you. The next question is from John Quealy of Canaccord Genuity. Your line is open.

John Quealy – Canaccord Genuity Inc.

Hi. Good afternoon, guys. So, Dan made a statement about the Q3 projected guide to this point, 70 million to 80 million in gallons and depending on some favorable outcomes and perhaps that number could get better from an adjusted EBITDA perspective from minus 10 to plus 10, can you talk about the different variables and would that tighten up the lower end of the range so we get to breakeven plus 10, or do you think if things fall positively, we could be raising that positive end to the range.

Daniel J. Oh

Yeah, it’s clearly wide range and the reason we did that is there are many permutations that one could see happens. So let’s be optimistic if we hear early and fast that the EPA is putting out a higher number and a higher trending number. We don’t know that we’ll see 2015, but let’s say we see 2014 and 2015, and we continue to see positive signals on blenders tax credit, we continue to see positive crop indicators then there is room to operate – one would expect there’ll be room to operate and capture margin.

However, on the other end, it takes a long time. All the businesses in the industry will just continue to operate assuming they’re making positive contribution margin the better. And as they book business and move farther into the quarter, they just get locked in. So timing matters a lot in terms of how quickly the industry hears and whether or not there is time to react within the quarter. In general, the trends expected are positive in the long run. So it’s just a question of the quarter.

John Quealy – Canaccord Genuity

Okay. And then in terms of feedstock whether it’s vegetable or animal, in terms of volumes and accessibility to volumes, is that still not a problem generally speaking for you folks?

Daniel J. Oh

Yeah, I think it’s – as is the case with most commodity, it is more a function of price and price moves the commodities. There are many commodities. It can be substituted. They go many directions. So the more willing you are to pay a higher price, the easier it is to get access. There’s a lot of raw material out there.

John Quealy – Canaccord Genuity

On the animal side and veg side.

Daniel J. Oh

On the (indiscernible) chemical side.

John Quealy – Canaccord Genuity

Yeah. Yeah. Okay. And then, Chad, I’m sorry, you said something on the inventory balance and I missed it. It’s up a little bit given the pullback in revenues. Is that just timing or just some pricing disparities or just walk me – I’m sorry – through the inventory change for the quarter.

Chad Stone

Sure. What we talked about is $8 million increased in the quarter, $8.3 million, so we’ve got additional production. We had, first of all, we started the quarter with some product that we would normally produce and sell in the summer that we continue to have and we had a decent production levels.

And when you go back to the sales side, the lower demand than originally expected is the result of the higher inventory that we basically build as a result of some opportunities for the warmer parts of the year. So, it’s a little bit of a carryover of the slower winter demand than expected in the winter storage that we had to begin with.

John Quealy – Canaccord Genuity

Okay. And then last question, in terms of your separated RIN realization, can you comment year-on-year Q1 to Q1, was that a positive or negative impact?

Chad Stone

I think it’s a positive impact. We highlighted now just given the relative size for SEC reporting purposes, but it’s more of a measure of following our risk management, our governance practice and our limits and making sure we’re not overly exposed to potential adverse price movements.

John Quealy – Canaccord Genuity

Okay. Thanks, guys.

Daniel J. Oh

John. John, it’s Dan. Just following up on your question, there definitely have been supply constraints in some of the fats, you’ve had poor sign, epidemic disease. You’ve had lower herd from drought a couple of years ago and other things. My point is, there’s still a large volume. It’s price sensitive but there is still a large volume out there to access if one can pay for it.

And the delay in winter, consumption in distillate which Chad was talking to a little bit here. In general, diesel and biodiesel across the board was used less because of cold weather. So you have an overhang that’s stuck out there a little farther. So that has put pressure on the ability to increase price, as we’re waiting on the RVO.

John Quealy – Canaccord Genuity

Got it. Thanks, Dan.

Daniel J. Oh

Yeah.

Operator

Thank you. (Operator Instructions) And the next question is from Craig Irwin of Wedbush. Your line is open.

Craig Irwin – Wedbush Securities, Inc.

Dan, I was hoping you could discuss a hypothetical scenario with us. So, if we look at the RVO for biodiesel for 2014 and we say that EPA realizes that maybe they made a mistake, not counting the carry forward compliance credits from last year and the import of biodiesel. Maybe we can handle each of these separately, but if we look at the current environment, it looks like you have just demand for just over 1 billion gallons of production in 2014.

If EPA was to make an adjustment upwards to offset the impact of the carry forward credits from last year, where do you think the RVO should be? And if we were to maybe parse the impact of imports, I don’t know if you want to say where it would land us on an RVO for 2014 but can you share with us what your number is for 2013 and where you think things are tracking at this moment and how we should be looking at that?

Daniel J. Oh

So, Craig, the answer of course is it depends and it’s a combined sort of answer. You certainly have four things that we should all be looking at. One is the 2014 RVO for D4. One is the 2015 RVO for D4 along with the general category. And then when you look at import last year, import this year, and the carry forward, carry forward matters not only in what’s happening with this year’s RVO, what the implied carry forward should be for next year.

So if we’re doing this in the more predictable even way, federal government would be putting out a good number for this year and a better number for next year. Then I have to be 500 million, 700 type million gallon numbers but something that just shows a predictable increase. And the industry of biodiesel sides has been navigating something anywhere from 1.7 billion to 2.2 billion gallons that easily could be supported this year.

And if we saw anything in those ranges plus an increase moving ahead, there could be no trouble supporting it knowing that we have import and a tremendous amount of production in the U.S. and the EPA and the federal government can rely that supply would be delivered.

I think they actually understand this. I believe there’s just a question of all the other fuels and the interrelatedness of the [fundability] (ph) of RINs and whether or not there is an explicit desire to be supporting them for it or not and supporting agriculture in different ways. But if we saw 300 million to 500 million gallons a year for several years, it would be easy to do.

Craig Irwin – Wedbush Securities, Inc.

Great. Thank you for that. Then the next question I wanted to ask was just a general question about feedstock dynamics. So, prices moved quite significantly during the first quarter but soybeans seem to have had among the most material moves – soybean oil, I should say.

At what point should we look at the spread between the more favorable feedstocks, the more attractive feedstocks and the price of soybean oil and say that the market is less attractive for the integrated, it’s less attractive for the independents assuming that they all produce on soybean oil which I think is pretty accurate, and really it favors the production on low cost feedstocks by producers like yourself.

Daniel J. Oh

Yeah. I appreciate the question. We generally avoid giving that specific number out there, Craig, because it gets to a real competitive differentiation. What I think is fair to look at is if look at the feedstock slides that we put out historically, whenever you get to a pinch point where the spreads are really narrow, what ends up happening is veg oil prices adjust and everything else adjusts, and you see the natural spread come back. So when the spreads get narrow, differentiation causes people to get over higher volume and throughput. It consumes easy-to-process feedstock in many different industries and they get to spread back.

So I tend to watch that spread pretty heavily and we did too internally because that allows us based on our technology to take advantage of throughput versus maximum profit. So as we sit here and calculate based on each facility what they can run in different levels, fatty acids, and the different impurities, we make those trade-offs every day.

And it’s pretty quick and efficient, pretty quick and efficient meaning a quarter – one to three quarters. So when you see something that is very narrow spread, people start taking advantage of that. The feed industry will adjust within three months on a formulation. The fuel and all the chemical industry can adjust within probably 30 days depending on the technology capability and on the other side, suppliers tend to only be able to store vegetable oil for one to two-and-a-half years or so and fats and greases do not have great shelf life. So they’re not long-lived when it gets set there.

Craig Irwin – Wedbush Securities, Inc.

Great. And then my third question is really a housekeeping question.

Daniel J. Oh

Yeah.

Craig Irwin – Wedbush Securities, Inc.

REG Newton, the $30 million upgrade, do you have an approximate timeline for when this should be essentially complete, when we should be seeing the benefit of this upgrade in their production?

Daniel J. Oh

Yeah, I believe we put up no later than the end of first quarter in 2015. Based on when we upgraded it, began the groundbreaking it, from that point about a 12 month project.

Craig Irwin – Wedbush Securities, Inc.

Great. Thanks for taking my questions.

Daniel J. Oh

Yeah, thank you.

Chad Stone

Thanks.

Operator

Thank you. (Operator Instructions) I show no further questions at this time. I’ll turn the call back over for closing remarks.

Daniel J. Oh

Thank you, operator. Thank you all for participating on today’s call and for your continued support. We appreciate your interest and look forward to reporting to you again next quarter on our progress. Before we conclude, Todd is going to mention some upcoming conference appearances for REG. Todd?

Todd Robinson

Thanks, Dan. On Friday May 9, Chad and I will present and host meetings at the Sidoti Conference in New York. The following Tuesday the 13th, Dan and Chad will present and host meetings at the Wedbush Transformational Technology Conference also in New York. Finally, on Wednesday, May 28, Dan and Chad will host meetings at the FBR Energy Technology Summit in New York. Attendance at all of these conferences is by invitation only, so please contact the sponsors if you’re interested. The Wedbush Conference will be webcast however, and you can access it via link from the IR section of our website.

Thank you all again. This concludes our call. You may now disconnect.

Operator

Thank you. Ladies and gentlemen, you may now disconnect at this time. Good day.

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Source: Renewable Energy Group's (REGI) CEO Daniel Oh on Q1 2014 Results - Earnings Call Transcript
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