Renewable Energy Group's (REGI) CEO Daniel Oh on Q2 2016 Results - Earnings Call Transcript

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Renewable Energy Group, Inc. (NASDAQ:REGI) Q2 2016 Earnings Conference Call August 4, 2016 4:30 PM ET

Executives

Todd Robinson - Treasurer

Daniel Oh - President & CEO

Chad Stone - CFO

Brad Albin - VP, Global Manufacturing

Eric Bowen - VP, Corporate Business Development & Legal Affairs at Renewable Energy Group

Analysts

Craig Irwin - ROTH Capital Partners

John Quealy - Canaccord Genuity

Brian Lee - Private Management

Operator

Good day, ladies and gentlemen. And welcome to the Second Quarter 2016 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mr. Todd Robinson, Treasurer. Sir, you may begin.

Todd Robinson

Thank you. Good afternoon, everyone, and welcome to our second quarter 2016 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 results and recent developments.

Before I 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, but you will need to advance the slide manually as we prompt you. For those of you dialing in, the slide deck 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 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 Report 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 measures.

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

Daniel Oh

Thank you, Todd, and thank you, everyone, for joining the call. I will review the operating highlights in the quarter and then we'll turn the call over to Chad for financial details. Our performance in the second quarter was mixed, our 150 million gallon sold a quarterly record for REG, we're at the high-end of our guidance range and reflects strong demand for biomass-based diesel. Our fleet produced 114 million gallons in the second quarter which also is a record for us. Geismar resumed production after a longer than expected start up process and did experience some unexpected downtime in June for specific unresolved issue. However, it is now fully operational. The work at Life Sciences is progressing nicely.

Our adjusted EBITDA was below are going strange due primarily to risk management losses resulting from larger than expected price increases in the energy markets in the second quarter. The majority of this quarter's risk management charges are associated with improved margins so it will be recognized in the third and fourth quarter. EBITDA would have been above the high-end of our guidance range if you adjust for the risk management charges. Chad will address the quarter's financial details in his section.

Now let me discuss highlights in our core biomass-based diesel business. Demand for biomass-based diesel is strong in the quarter. We sold 150 million gallons which was up 56% from second quarter last year. Our sales and marketing teams again found more sales opportunities than we had capacity to fulfill from our own production. This allowed us to take advantage of third-party sales and hauling for the excess demand we were able to generate. Demand was broad-based with the healthy mix of customers. Our customer base is fairly balanced between travel centers, petroleum major who are obligated parties and distributors which include convenience stores and local distributors or jobbers. Keep in mind that we deliver more than simply fuel. We also generate and monetize environmental benefits for lower carbon intensity value for RIMS and LCFS credits which are supportive of U.S. federal and state environmental objectives.

Now, let me cover how it could fill demand. The increased demand relative to second quarter last year was around 54 million gallons. Our bodies of plants supplied over 4% of that increase, sort of a same-store concept. We feel the difference with production from Geismar, Grays Harbor and Madison. Geismar supplied 12 million gallons and the bio-refineries at Grays Harbor and Madison supplied 20 million gallons. The balance of incremental demand we've supplied through third party sources including a total rearrangement. Our overall run rate for our entire fleet in the second quarter was over 85% of nameplate capacity.

There are a few key points you should take away from this analysis. First, in this market we generally can sell as much as we can produce. In fact, we regularly sell more than we can produce. This is supportive of growing our production capacity. Second, because of our technical expertise in distribution footprint, bio-refineries can often be more valuable in our hands than as independent entities. Third, we are still growing organically. Through upgrades and investments to increase productivity, we were able to meet a portion of the increasing incremental demand through our existing fleet. Finally, our distribution reach enables us to resolve biodiesel produced by other producers when it makes sense economically.

Bio-refineries are our primary assets, so we regularly perform maintenance to ensure they're in good shape operating condition. Once up and running, any individual plant generally does not require a lot of maintenance CapEx, although we continue to invest in order to run as profitably as markets allow. This enables the fleet to grow ever more efficient production and help meet grow in demand. During the second quarter, we acquired nearly 13 million gallons of additional storage of REG Danville to complement the ongoing upgrade project to that location. It should be completed in the third quarter. At our recently acquired Madison bio-refinery, we announced $7 million of upgrades.

Now let me talk about Geismar. We announced that it was up and running in March after a restoration and improvement process was completed as well as previously announced upgrades. Geismar produced 12 million gallons of RHD, along with renewable and LPG this quarter, about 70% of its nameplate capacity. We will continue to invest in our logistics for structure there such as storage tanks and real access. We remain confident that Geismar will grow into a long-term financial and strategic success.

Let me also touch on Petrotec, a base platform for growth in Europe. Petrotec continues to operate well, producing at 10 million to 11 million gallons per quarter and is spread between used cooking oil methyl ester and used cooking oil improved in the second quarter. We continue to increase our ownership which is just now over 90%.

Now, let me turn the market conditions for biomass-based diesel. As we noted at the start of the year, we are at a period of welcome and relative stability from a regulatory perspective. The federal Biodiesel Mixture Excise Tax Credit or BTC is in place. The RFS2 RVOs for 2016 and 2017 have been established and made the EPA announced its proposal for 2017 overall advanced and 2018 biomass-based diesel volumes. We believe the industry will supply more than the 2.1 billion gallons per post for 2018, which represents modest growth over 2016. Nonetheless, we are happy to see growth and are happy to have visibility this early. The visibility helps all of us from the industry plan for the long-term success of our companies.

In addition to increasing RFS2 uncertainty, state incentives remain strong. As examples, during the quarter the State of Iowa extended its producer tax credit – important to us since we produce a lot of fuel here. Iowa also extended and raised its retail blender credit which helps to spur demand. Illinois, longest supporter, effectively waives state excise tax on blends exceeding 11% biomass-based diesel. California GHT reduction goals went from 1% to 2% this year and given the 3.5% next year. Minnesota has a 10% plenty requirement in warmer months that increases to 20% in 2018. Beginning on July 1, 2016, New York City's municipal fleet is required to use a B20 from April to November and B5 the rest of the year.

Let me now turn to one of our growth initiatives. We're making meaningful progress at Life Sciences, our biotech-based fermentation platform; we are using to enter the renewable chemicals and bio-based products markets. Slide 4 shows our progress since we first publicly introduced the Life Sciences product pipeline at our New York analyst day in January. We're making steady progress on our two primary efforts, Fragrance 2 and Plastics 1. We anticipate our first sale of Fragrance 2 in the fourth quarter for the purpose of market development by our fragrance commercialization partner. Plastics 1 is on track and we continue to anticipate commercialization in 2018. We have also been developing additional markets for this product beyond plastics to further extend its potential.

For those of you who have followed us for a while, you know that a key element of Life Sciences investment thesis is that as the technology platform progresses, we will be able to more rapidly develop all our products. We are seeing our first example of this with Fragrance 3. As you can see in the pipeline chart, Fragrance 3 is a new product development effort and progress has been rapid.

In essence, we are able to take a more developed Fragrance 2 strain and add a slight genetic modification and very rapidly achieve commercially attractive metrics on this new product. We anticipate the commercial launch of Fragrance 3 sometime next year. As discussed in January, we've been increasing our efforts on using crude glycerin as a fermentation feedstock. This effort is developing nicely and we anticipate our first large scale glycerin fermentation run in our Okeechobee Florida fermentation facility in the third quarter. The ability to utilize crude glycerin from our used fleet of biodiesel plants as a fermentation feed stock for our Life Sciences products continues to show great promise as a low-cost feed stock value added activity.

I would also like to note that Life Sciences had low [ph] quarterly revenue. We generated over $1 million in collaborative R&D and other service revenue in the second quarter, allowing us to more cost-effectively build out the technology platform. Let me conclude my overview of some comments on capital allocation.

For the core business that generates cash, we place a high priority on being effective capital allocators. The existing core biodiesel business does not mean a lot of maintenance CapEx for plants in order to remain efficient and competitive. This gives us flexibility in how we allocate capital between funding growth and other uses. We are committed to our shareholders so we continued our share repurchase program this year. We believe this is an effective way to return money to shareholders when we feel the price of our stock is a good investment. Since March 31, we repurchased 5.1 million shares of our common stock from the open market and as part of the convertible debt issuance through yesterday.

In addition, when the opportunity is present, we may act in order to optimize the capital structure. We took advantage of market conditions in June by completing a new convertible bond issue. Chad will provide the details in a moment. This deal made a lot of sense by enabling us to extend the maturity of our debt, retire significant portion over existing data to discount and efficiently buy back common stock while also strengthening our balance sheet.

Let me now turn the call over the Chad for financial update and then I will return to discuss our guidance and outlook. Chad?

Chad Stone

Thank you, Dan. Let's turn to Slide 5 for a review of our financial results. Please note that the tax credit was retroactively reinstated for 2015 and extended through 2016. In our adjusted EBITDA calculations for 2015, we allocate the net benefit of the credit throughout the year to the quarters in which the gallons were sold. We believe this provides a more accurate picture of our performance since the adjusted EBITDA reflects when the gallons were sold. You can find the reconciliation of our adjusted EBITDA to GAAP net income on Slide 15 of the presentation and also in the earnings release.

With that said, total adjusted EBITDA for the second quarter was $8 million. Because our adjusted EBITDA was below our guidance for the quarter, I want to address that point upfront. Adjusted EBITDA was impacted mainly by an unusually large risk management expense, which was $30.5 million. Remember that when we give guidance, we emphasized that the forecast range is based on stable energy, RIM and feedstock prices. Clearly in the second quarter, this wasn't the case.

Ultra-Low Sulfur or ULSD jumped from $1.18 per gallon on March 31 to $1.48 per gallon on June 30. This 25% percent increase in ULSD during the quarter was a primary driver of the $30 million risk management loss. Had energy markets been stable throughout the quarter, we would have been above the high end of our guidance. In addition, the majority of these risk management losses booked in the second quarter are associated with physical sales for third and fourth quarters. Over $20 million of the losses are associated with future sales and not matched with the period where the offsetting margin improvement would be realized.

Now let's move onto sales. We sold 150 million gallons during the quarter which includes 60 million gallons from third parties, 10 million gallons of petroleum-based diesel as well as 12 million gallons sold in Europe by Petrotec. Energy services gallons sold increased from 6.4 million to 12.5 million gallons year-over-year. During the quarter, we produced 114 million gallons. Our average price per gallon for biomass-based diesel increased 3% year-over-year from $3.19 per gallon to $3.27 per gallon this quarter. We sold over 56% more gallons of fuel in the second quarter of this year compared to last year, supported by a higher average price per gallon and a higher volume and better pricing, resulted in revenue of $558 million, or an increase of 49% year-over-year.

SG&A expenses were $20.9 million, or 4% of revenue in the second quarter of 2016. This compares to $15.4 million or 4.1% of revenue in the same period last year. The year-over-year increase of $5 million in SG&A expenses was attributable to higher cost associated with international expansion, an increase in headcount in supported growth and an increase in professional services fees. R&D expenses were $4.4 million in the second quarter, compared to $4.4 million last year. Life Sciences generated $1 million in revenue from collaborative R&D and service efforts as mentioned by Dan earlier.

In our Form 10-Q, you'll notice a line item in our income statement below income from operations that's labeled 'Change in the fair value of convertible debt conversion liability in the amount of $13.4 million.' This amount relates to the fair value conversion feature from the new convertible bonds issued in the quarter, valued at June 30 by external valuation experts. We excluded this non-cash gain from adjusted EBITDA. Now let's turn to Slide 6, let's turn to the balance sheet of Slide 6.

Accounts receivable of $97 million represents 16 days of sales outstanding. Inventory was $130 million, a decrease of $4 million during the quarter. This represents 22 days down from 43 days where we started the quarter. Cash and cash equivalent decreased to $74 million from $154 million last quarter. The decrease in our cash balance was primarily due to settling with customers on the collection of the tax credit. Accounts payable were $83 million in the quarter, down significantly from the $247 million in the prior quarter. This also reflects mostly the tax credit payments due to customers and the suppliers.

We closed our private offering of $152 million principal amount of 4% convertible senior notes with the state of 20-year maturity. The net proceeds from the offering were approximately $147 million after deducting the initial purchases discount and operating expenses. We used $62 million of the net proceeds of the offering to repurchase $64 million principal amounts of REG's convertible senior notes due 2019. The weighted average purchase price per note was 95% or the principal amount of 2,090 [ph] notes purchased.

In addition, we use net proceeds from the offering to repurchase approximately 4 million shares of common stock, or 9% of the shares outstanding for $35 million, or $8.52 per share. We intend to use the remainder of the net proceeds from the offering for working capital and other general corporate purposes including additional share repurchases of common stock. In February of 2015, our board gave authorization to repurchase $30 million of common stock over an 18-month window. We completed that campaign six months early. In March of 2016, our board authorized another $50 million repurchase campaign and over the last year and-a-half, we have repurchased 8.2 million shares of common stock for $73.4 million between the two programs at an average price of $8.93 per share.

The carrying value of our term debt at the end of the second quarter 2016, net of our fully collateralized GO Zone bonds is $220 million. Of that amount, $112 million is the carrying value of the $152 million of convertible notes issued in the quarter that I just mention, $71 million of the carrying value of the convertible bonds issued in 2014 with $80 million faced value outstanding after the repurchase, and the remainder is $37 million of term debt that's at the project level.

Term debt is 28% of capital, net of the cash collateralized GO Zone bonds and we will be redeeming the GO Zone bonds in September using proceeds from the existing certificate of deposit that collateralizes the letter of credit supporting the bonds. The CDs is included in restricted cash on the balance sheet, so using this cash to redeem the bond will not impact the balance sheet of our cash and marketable securities. We believe it makes sense to pay off that goes on bonds to eliminate cost associated with remarketing the bonds and bank these related to the letter of credit.

Through the second quarter of 2016, we used $7 million in cash for cash flows from operations, net cash used in investing activities totaled $39 million for the six months ended through the end of June; this includes previously mentioned projects at Geismar. For modeling purposes, we have board-approved CapEx of around $25 million to $30 million for the remainder of the year. Our blended interest rate on debt is slightly less than 2% and our effective tax rate is expected to be 3% to 5%.

Now I'll turn the call back to Dan to discuss the outlook. Dan?

Daniel Oh

Thanks, Chad. Guidance for the third quarter of 2016 as shown on Slide 12; on the context and operating environment didn't give you the numbers.

First of all, we do have a relatively certain demand environment. The biomass-based diesel RVO for 2016 and 2017 have been established in the BTCs in place for 2016. The foreign prices have been trending up for the past few months. Oil and associated fuels notably ULSD are above the low digits [ph] in Q1 although they are off their highs. Feed stock prices are modestly lower and we expect some softness as USDA is predicting record corn and soybean crops this year. As usual, we expect third quarter to be the seasonally strongest for biomass-based diesel sales volume.

So demand in Q3 should be solid. Keep in mind that the BTC is in effect for 2016, but then will last unless Congress and the President extended. In terms of fulfillment, all of our fleet including Geismar are expected to be operational. We do not plan to run Geismar at full capacity as I noted earlier since we are ramping carefully. We expect to again utilize towing and third party sales to fulfill overflow demand. So for the third quarter we expect to sell between 155-175 million gallons of fuel. We expect adjusted EBITDA to range between $30 million and $45 million. This range does not include any amounts of insurance proceeds related to Geismar.

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

[Operator Instructions] And our first question comes from the line of Craig Irwin from ROTH Capital Partners. Your line is open.

Craig Irwin

Good evening, and thank you for taking my questions. So Dan, I guess I'll start with the big item, the $30 million plus headwind from hedging activities in the second quarter. Can you remind us the mechanics -- what commodities you trade to put your hedges on and the rationale for your hedging program?

Daniel Oh

Generally we have a non-speculative orientation as we manage our book and we are a business that generally trades for -- not much more than about 90 days because as we're matching our sale of rooms and fuel and coke products and purchase of raw materials; that is something that often does not come together much more than 90 days into the future. And practically, no one trades beyond the end of the calendar year because regulatory situations may change, most of them are based on a calendar year. So as we go to market, we are in a situation where hedging kind is not possible from an accounting GAAP perspective based on the thing -- the way things match up is there are not correlations in instruments on the board of trade that make that a simple thing to do.

So we follow our limits that are in place, we -- through the course of a day and a week and a review period true-up to be in a risk managed situation and that includes hedging techniques that generally protect our forward sales. And as we're selling forward, and as the market moves up and down because that cash is not yet realized, we're marketing to lower costs or market and the instruments values at zero on the buck. So that ends up having a situation where we have volatility overtime, risk management for gallons been anywhere from $0.05 to $0.10 a gallon but it can be volatile in terms of how it's hits our P&L quarterly. Chad, would you like to add anything?

Chad Stone

I think that covers it well, I mean we're using what you would expect like NYMEX ultra-low sulfur diesel contract in cases where we're making sales index to ultra-low sulfur diesel for and on the feedstock side, at times if we we're short relative to our forward sales commitment, we may enter into a CME or [ph] well contractor or something of that nature. So as we roll into a quarter, some of what will give recognized at quarter end will have been realized either in a cash gain or cash loss situation. And the core business that is still in movement until the cash in the sale is completed and the products delivered and revenue collected. The full cash benefit typically is on a delayed basis, it tends to match up overtime; in this case we made a point of sane which is -- really acknowledging that this is a fairly large number that the majority of the movement is on forward sales.

Craig Irwin

Okay, thank you for that. So my next question is about the feedstock complex. I know that one of your strengths historically has been that you can process many different feedstocks and often there is an opportunity to trade feedstocks for something cheaper, to be a little bit nimble in the way you serve your facilities. This past few months we've seen a very unusual divergence between soybean oil and some of the more complex fats with the implied crush on soya oil actually -- for a period -- among the three highest levels ever over the last several years. Can you comment about the ability to push additional production through your plants using soybean oil as a feedstock? If this is something that is consistent with sort of the longer term plan your multi-feedstock approach. And is this something that could potentially impact profitability in the second half?

Daniel Oh

When feedstock pricing were spreads narrow because there is an average of some particular product, now that is an opportunity to move into something or process, higher volume situations; and if you like the market, it tends to happen. Companies of all kinds participate in the complex that uses oils and fats which will be on biofuels will substitute up or down, that happens inside our business too and as volume opportunities exist, we analyzed the mixture of raw materials, each plant has a local tailoring to its normal market which would be truck or rail delivered; and if higher volume which often comes from refined or crude vegetable oil usage enables better cash collected in the pocket, we'll often ship that way. We are because of our volume in the business tending to buy forward.

So sometimes the spot pricing that you might see in the market today will not flow through our business until a couple months or a few months into the future as that raw material is coming through. We do have on the call today, Brad Albin, who is Vice President, Global Manufacturing. Brad, do you have other comments to add?

Brad Albin

No, I think that's correct, we changed the mix and our plants have the ability to change the mix in soybean oil, the yield adjusted is the better thing to do. We make that change as necessary.

Daniel Oh

And I'd say in particular, at our Grays Harbor Facility, it is highly performing right now and I won't speak to specific utilization but it is running at record levels.

Craig Irwin

Okay, excellent. So then as I look at the P&L and I adjust for your hedge losses. The high-end of your guidance range in the third quarter seems to imply essentially flat profitability on an EBITDA per gallon basis versus the hedge adjusted second quarter profit. Would you expect some of the probable reset in prices and the fats complex given that most rendered fats and secondary fats are oversupplied right now to potentially provide upside in the back end of the third quarter and into the fourth quarter or is that something that's not in your thinking, not in your guidance at this point?

Daniel Oh

So we're trying to guide based on what we know right now. What I will share is forward luck that isn't necessarily in the guidance but will probably affect the end of the quarter and fourth quarter depending on how things go. And those of us -- I think everybody on the phone have been around the industry for several years as we watched the cycle are aware that if -- lapses at the end of the year and that is a certainty or the market thinks it is some point that will encourage the delivery of imported product and perhaps the production of fuel inside the U.S. if there is carrier implied. If we get towards the end of the quarter or the beginning of fourth quarter, it seems like it might change or even change to a producer credit which I think is a good idea; then we would see more normal production going towards the end of the year for U.S. production and maybe little more enhanced import.

There is a factor around import of product that is not so clear right now in terms of whether something gets loaded or above. I think that has a little bit of effect right now as people are thinking about what maybe not happen in the fourth quarter. Practically speaking, it wouldn't surprise me if we have over 500 million of imported product in the U.S. this year which might be further influenced if winter lapses which for companies like us who had scale and can generate cash flow and work and we've proven that we can generate cash flow in many different environments including last year, it probably has opportunities in the near-term while other folks might experience little stress. It also shows to the EPA that there is ratable flow from overseas and they really ought to start counting that when they think about our views that ethanol has no problems line supplying. So it's much simpler to move up to statutory levels, and that they can count on the stuff working. So they might as well raise the numbers.

And I do think that the greater the imported biofuel, the less rational it is that policymakers paid for their transportation to get to the U.S. through the winners credit; and I think the pressure for some of the producers increases and a logic for that occurring increases.

Craig Irwin

Great, thanks again for taking my questions.

Operator

Thank you. Our next question comes from the line of Tyler [ph] from Piper Jaffrey. You know line is open.

Unidentified Analyst

Thanks for taking my questions. I was wondering if you could talk about the timing of the reversals for the hedge products; the hedge losses. You said that it depends on when the gallons are sold and revenues received; do you have any insight if most of them would be done on a third quarter or beyond that? Anything there would be helpful.

Chad Stone

When we talked about over $20 million of risk management loss associated with future periods. So first of all, we're not able to mark up our inventory to market, to offset that that risk management lost in the current period but if energy prices stay the same, effectively three-fourths of that would be in the third quarter and a fourth of that would be in fourth quarter. Assuming that the commodity markets are stable and don't change. Now if they do change what you'll see is the reversal back through a risk management gain, for example, as energy markets come down if they were to stay elevated you will just see us selling at a better cash price index to that commodity. And like I said, Dan has talked about the forward typically 90 to 120 days sold out, you'd imagine the third quarter is going to be heavily weighted with that activity versus fourth.

Unidentified Analyst

Okay. And that's related to the $31 million not $21 million -- I think you said?

Chad Stone

Well, you can also remember that some of the current activity in second quarter was matched with the timing of the risk management loss, and we did deliver fuel against that. So that's why it was kind of bifurcating the $30 million to talk about what was more related to future committed sales.

Unidentified Analyst

Okay, Got it. All right, so then moving on to what do -- I guess could you give us idea of what you have had listed going forward, obviously we have some volatility in the energy markets. Just any idea of what we would be looking at?

Daniel Oh

So it's a complicated question. I'll give you two answers, its Dan here. The first one is, we know where we are today based on what we saw it and risk management movement for second quarter and how it's already changed in this quarter. So when you look at the market, we've seen another 20% in crude oil pricing but it went the other way. So we know where we are today, and then we don't know what's going to happen in the next few months. So when it comes to September 30, the forward look on the market there is kind of hard to predict. One other thing that's always happened as we have a rolling forward look on that book -- the gap does not allow for hedge accounting; so based on where we are today based on the conditions Chad has, we're projecting that number of EBITDA. And that number could be more, from purely risk management perspective that number could be better if energy is down and if it goes up, it could be worse; we're telling you where it is today.

Chad Stone

And Dan, I will add to that, we're accounting for the fact in our forecast that energy markets have not been stable since June 30 through today, we have seen heating oil or ultra-low sulfur diesel has dropped recently. So we've taken that into account when we give you the forecast.

Daniel Oh

For the cash realizations, ultimately happens there can be a little leakage here and there in inventory price movement on fuels or feedstock, it's something like that but it's a non-speculative policy.

Unidentified Analyst

Got it, fair enough. Maybe they will look at it a little bit different; could you maybe just talk about how the margin profile has changed over the first half of the year? And kind of as where we've gone into the third quarter -- what you're looking at there?

Chad Stone

Tyler, I'll start and then I'll let Dan correct anything or fill in anything I missed. I think if you look at our results, we started this year in a very tight margin environment. You saw that margin environment improve in the second quarter. Because of the improving margin environment, you saw our risk management results -- when margins improved generally, you'll see increasing risk management losses but better opportunities on the next gallon sold or what you have not yet committed to -- so we saw that improve during the second quarter. Since the end of the second quarter we have seen some downward pressure on energy prices slightly offset by a little bit of improvement in prices. We have seen some weaknesses -- questions asked earlier by Craig in the feedstock complex.

Daniel Oh

So I think we are inside the band of what people might call historically normal margins, lower end but inside the band of historically normal margins. What I'm trying to tell folks is whether or not that as a kind of mid-period change or not has a lot to do with whether or not the federal government motivates a lot of imported product. So their actions can display or motivate important product. And as we look towards the fourth quarter -- we're planning, if you hear a little hesitancy in telling you exactly what the number is, it's because sometime in September or October people start making decision on whether they're going to led fuels and send it to the U.S. And they need a couple months to make production decision, get it on the book, move it, realize the sales so they can collect tax credit.

We have a window now where as Craig was saying, feedstock prices may be helpful and energy prices might be stable and rim prices are a little bit uncertain but trending in a reasonably good direction. And it's going to be affected by November RVOs and is going to be affected by perception of how long a lapse may take last or whether or not it goes to PTC, producer tax credit. If everything were otherwise equal, we have generally improving conditions right now.

Unidentified Analyst

Got it, all right, thanks.

Operator

Our next question comes from the line of John Quealy from Canaccord Genuity. Your line is open.

John Quealy

Good afternoon, thanks for the details. A couple of questions, different topics. Staying with biodiesel, Dan I think you talked about the ability of the platform when you absorbed a new acquisition in assets purchase that benefits you more than perhaps as a standalone and it sounds like Grays Harbor is really home. So can you just break out for us what exactly in terms of benefits you get -- obviously certain geographies that you're not already beneficial in help but just break it down for us a little bit about how the strategy of buying some distressed and/or available for sale assets helps you a little bit more than it would not as a standalone?

Daniel Oh

I think there are many benefits all the way up and down the value chain when our REG grows. And of course we're focused on profitable growth, growth as I say growth is not what we're interested in. As we have been adding assets; first of all, we've been very big about price, even more picky about logistics and how things fit in; and we care a lot about how that improves our buying power and our selling capability. So as an example; when we went out to Grays Harbor, that improved the reach of our sales; we had historically sold intermittently to Western Canada, the PNW in California; mostly by rail. By having a base layer production out there, now we can take advantage of constant production and then supplementing that makes sense.

For customers in the West Coast, I believe they like having the REG balance sheet stability or reputation for quality, both on the fuel side and on the delivery of rims, all the around rims and LCFS. And it makes their life simpler because they're working with the same buyers and the same folks they normally work with and the trading relationships are more normal and understood. From a counter-party perspective, we're really strong counter-party and our vendors are very comfortable working with us and selling to us. And as an example, the bank out there with the asset -- Uncool Bank [ph], great bank for us has extended additional capital which we have been deploying to improve and strengthen that facility.

Even the additional rail activity optimizes our real fleet at one and less utilization than I wanted to have and now has a very strong utilization in terms serving -- what's going on out there in the LCFS market. So that facility -- also has had the benefit of our engineering teams, our upgrade activities, the reach and access we have to the vendor and engineering world that serves upgrades and that sort of activity, when we call and we interact with these folks they we're serious, and they spend the time and spend the effort to get it done right. And then insider business, as we integrate it, it was a very efficient integration and the addition of overhead was not comparable to what it would have otherwise benefit, stood up an independent site. And the existing infrastructure of a public accounting registered company, ready system easily absorbed it.

We look at Madison which just occurred. And really, I think in both cases within one or two days closing, we were selling on REG invoices with REG BOLs. And at Madison, it was a seamless transition, an example of efficiency. As you know we acquired the Nova Biosource [ph] platform years ago at REG Sonica [ph] and made that facility what it is today, which is just a great battleship that makes money and its debt-free and it's -- so I mean it's a very high utilization asset. Well that team which has learned how to improve that facility is now helping the really great team we acquired at Madison, invest $7 million and exactly the way we already know how to do to get that place up 220 million gallons a year utilization with better yield.

And as an example, as we were working through hiring the right people and fill in the slots, folks at Sonica [ph] we're working at Madison. And now there is a general manager over both facilities, the plant managers are there, they are on internal company with teleconference; they are working through issues and challenges. And the feedstock buying power of that added plant allowed us to reallocate more efficiently delivered cost of raw material. So now we've got a place in Madison, we've got a place in Danville and we've realigned our logistics and supply chain activity.

So it's all very powerful, and I'll just make a point; one -- and this is not simple to do, we work hard at it all day long in terms of continuous improvement but one $0.01 improvement in money earned or saved across 500 million gallons is $5 million. And it is increasingly powerful, the technology and the suite of capabilities we have as we acquire this.

John Quealy

That's helpful. Thank you, Dan. A couple more quantitative questions on Life Sciences, it sounds like you're happy with the progress in the movement and acceleration of commercialization efforts. Can you talk about how the tracking from a cash burn perspective and how are those milestones being hit?

Daniel Oh

Yes, as we're investing cash to improve our capability and develop products there, it has continued to be efficient. One of the things that I highlight is that Eric Bowen, and Eric's on the phone today -- Eric Bowen is Vice President who leads that Life Sciences along with Steve DelCarteret [ph], the Head of R&D; Steve's not on the line. So we entered into a development project with Exxon and co-investing. That is one of the sources of that revenue that came in and we're starting to monetize the knowledge in the information that team has. So that's a significant amount of money, a little bit over $1 million; when you look at the R&D investment for the quarter which was a bit over $4 million. It's a system that's now starting to really benefit like we talked about in biodiesel side with the integration into our technology science registration EHNS and other commercialization platform inside of the business.

When I see Brad Albin, Eric's team and a bunch of others working inside the business growing, we're starting to see some acceleration around the normal commercialization activity. So no material enhancement in cash being spent, we're working in an efficient ways as we move ahead, at Okeechobee, Florida which is our small volume in batch production facility; that facility has been running nearly continuously for over a year and has also done projects for a small number of other companies, proving the fermentation of the science platform. So no big surprises there.

Eric, anything to add?

Eric Bowen

Thank you, Dan. No, I think you did a good summary there and in investment levels I believe will continue where they currently are, and will continue to bring in revenue from a combination of collaborations, third-party work and increasingly sales of our products.

Daniel Oh

Brad, any other additions?

Brad Albin

No.

Daniel Oh

Okay.

John Quealy

Alright, thank you for that. Just two more; one, the leftover cash from the convert and buy back in the things you did in June gives you a little bit more margin of safety in the balance sheet. You guys have been pretty nimble always with working capital and capitalization. How do you feel about the point some of that on a bigger M&A opportunity? You have been good picking off assets but what about more of a transformational type thing and Dan I think you've been open about different ancillary applications in markets etcetera, what do you think about that thought?

Daniel Oh

Well we like a full range of opportunities and have done so for years and you know I think the practical answer is we're return focus and into our system as we've been talking about strengthening that core bio-mass business and helping us either in adjacent diversification or moving up and down the value chain. There are many opportunities that exist on the marketplace and you know I would tell you that we're not winning them to the extent that we're participating because we are very price disciplined.

So to the extent that something like that were to happen it would be a very good thing and that's not why we raised the money. You know it be a good thing because it would be good for the system, it would be it accretive, it would be that we get some kind of return that we think strengthens and improves the business. At the same time that's not why we raise money John so. We have a platform now that is very cool and when you think about it we can grow organically.

We can improve through the addition of assets. They could be few hundred thousand dollars or several million dollars to our plans. Those assets can improve the technical capability of the Logistics. Often, either is powerful, sometimes equally powerful in terms of how they grow profit and then we're moving up and down stream so, you know one of the things that is just starting to get to the point where it's able to generate cash is REG energy services activities so about every year now for a few years we've been starting a business in the background.

We started talking about them a couple years afterwards with their substantial and we start seeing growth. We're actually reporting. You need statistics now in the Services business. And that is an example of something interesting. So it's in the same value chain and help us blend biomass face diesel. It helps us realize more of the margin that's in the value chain. It helps us do the D-99 sales which have no advantage with the incentive systems and it turns working capital quickly which on a leverage basis and you know we got a $30 million line of credit from bankers to support this.

The return on the equity fortune of that trade during every couple of weeks can be pretty nice as it grows. That now started in New England, now we're up and down the Magellan, now we're starting to work in some other locations or abstraction and I think over the next couple of years will become very important so transformational deals might be interesting, at the same time they better be really good for us.

John Quealy

And if I can just do one more maybe for Chad. The goals on payoff in September, does that trigger anything on the project level? I don't know if this thing's eligible for dividends or does anything change from an accounting point of view besides just wiping off that asset liability? Thanks guys.

Chad Stone

No not really John, thanks for the question. Just to clarify we've issued notice to redeem the GO Zone bonds. Keep in mind this is just going to clean up the balance sheet from a reclassification perspective. We've got $100 million in that Bank of America that are fully offsetting the long term debt. So that's not part of our cash and marketable securities. Those funds would be used in the redemption of the GO Zone bonds and so effectively you're going to see you know total assets sorry long term asset will decline by $100 million and our term debt will decline by $100 million as well. It's really kind of a netting out of the balance sheet and they offset one another.

Daniel Oh

John we had already, Dan we had already had in place a scenario around RG where it could be managed or financed or funded around that GO Zone Bond. What I would highlight there which may be or indirectly asking is as Geismar deserves additional investment. So we've been through a couple trouble periods, there's no question about that. We have been through and worked hard on that system before and lately upgrades are online or coming online. We have additional tanks there coming online or pretreatment that was there that has come online and simply logistics, improving logistics footprint of the place will improve core profitability.

But it's also a great location on the Mississippi. It's set around a bunch of industrial gas, petrochemical companies. It has the ability with the footprint that's in that area to grow and to grow in more than one product so that place over time. I think will be something you think about the same or better as you probably do Seneca right now. Seneca is the story where you went through about four years from start up through the first train of three trains starting to work in the second and the third.

By the time we've been through two and half, three years it had already paid off its entire debt and preferred investment that went against it, around $40 million and its debt free and a great cash generator and as we look at the Mississippi the Mississippi is a pretty interesting place. So we're up river. We're down river and the Geismar, New Orleans, R.Ginola down river and customers are on that river so strengthening our footprint there will be a good thing to deal with overtime. John can't hear you.

Chad Stone

I think he hung up after the last question.

Operator

Our next question comes from the line of Brian Lee from Private Management. Your line is open.

Brian Lee

Hey guys thanks for taking the question. I just want to quickly circle back on the life sciences business and really appreciate the color there and the progress on the pipeline and as you stated the R&D spend continues to be pretty steady. As we get closer to that business starting to impact top line in a meaningful way in 2017-2018, you know how do we start to think about the value of that business and what kind of returns are you are you targeting on that R&D spend.

Daniel Oh

So when we when we look at that it is a product development company that is creating products in those products and it stacking on themselves as we grow revenue overtime so it will have to grow revenue overtime to get to a cash positive situation and practically there will be a point in the future with as a sufficient high flying place that will call for the creation of the production facility and the creation of production facility will depend on the specific products of course we have those in mind and we're thinking about exactly placement and all of the things and there will be a capital investment to build a plant which in a perfect world will prove and you get two or three other plants as you move ahead. So this is a medium to long term investment and it ought to be garnering the same kinds of return on investment that you would see in industrial biotech and oil and chemical activities for us to continue and keep pushing on it. So we see those returns right now when we look ahead especially when we look at the productivity, it has been growing in the business. Do you have anything else you would like to say?

Eric Bowen

No, Dan I think you summarized it well. We are targeting returns that one would see define in a chemical type operation which is the, you know type of product we are targeting.

Brian Lee

Great, thanks guys.

Daniel Oh

Thank you.

Operator

At this time, I'm showing no further questions. I would now like to turn the call back over Mr. Dan Oh for closing remarks.

Daniel Oh

Thank you, operator. And thank you all for participating in 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 will mention several upcoming Investor events. Todd?

Todd Robinson

Thanks Dan, we have a couple of conference appearances coming up and wanted to alert you to these opportunities. Each of these conferences is open to clients of their respective for the please get in touch with your contact to schedule meeting with us. We will be at Canaccord Genuity growth Conference in Boston on August 10. Then on August 11 we will present the Jeffries industrial conference in New York. Thank you all, again. This concludes the call. And you may now disconnect.

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