Renewable Energy Group, Inc. (REGI)

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Renewable Energy Group (REGI)

Q3 2012 Earnings Call

November 6, 2012 4:30 p.m. ET


Monte Bullock - Treasurer

Dan Oh - President and Chief Executive Officer

Chad Stone - CFO


Mahavir Sanghavi - UBS

Michael Cox - Piper Jaffray

John Quealy - Canaccord Genuity

Shawn Severson - JMP Securities



Good day ladies and gentlemen, and welcome to the Renewable Energy Group Inc. third quarter 2012 earnings conference call. [Operator instructions.] I would now like to turn the conference over to your host for today, Mr. Monte Bullock, the treasurer. Sir, you may begin.

Monte Bullock

Thank you. Good afternoon everyone, and welcome to our third quarter 2012 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 third quarter 2012 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

A replay of this webcast will be available on our website for one year. The webcast includes an accompanying slide deck. The slides will appear automatically with the webcast, but you will need to advance them manually as we prompt you. For those of you dialing in, the slides can be downloaded, along with the earnings press release, in the investor relations section of our website.

Turning to slide two, we would like to advise you that some of the information discussed in this conference call will contain forward looking statements. These statements involve risks, uncertainties, and assumptions that are difficult to predict. Such forward looking statements are not a guarantee of performance. The company’s actual results could differ materially from those contained in such statements.

Several factors could cause or contribute to such differences. These factors are described in detail in the risk factors and other sections of our annual report on form 10-K and quarterly reports on form 10-Q, which are on file with the SEC. They are also described in the earnings release and other SEC filings.

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 may be important to investors as a metric to assess the operating performance of our business. Please see the press release for a reconciliation of GAAP and non-GAAP measures.

With that, let me now turn the call over to our chief executive officer, Dan Oh. Dan?

Dan Oh

Thank you Monte, and thank you everyone for joining the call. I will summarize our performance during the third quarter and discuss industry conditions. I will then turn the call over to Chad for additional financial details.

First, let me address our pre-announcement in early October. Obviously we are disappointed to report an EBITDA loss, yet the situation is complex. It in no way diminishes our confidence and commitment towards our business and industry.

Chad will go over the financial details, but first let me discuss a primary cause for the swing in our guidance from positive EBITDA to an actual loss. We incurred $18 million of losses in our risk management positions, which was primarily the result of large movements in heating oil and soybean oil price indices in late September, which are shown on slides four and five.

These movements were reflected in our financial statements by adjusting the carrying value of forward risk management contracts to fair value and recognizing the corresponding loss in current earnings. A natural reaction is to ask how could this happen, and whether our risk management system is broken.

The answer is that our system is not broken, and the loss is mostly a function of timing. Let me step you through an example that illustrates this. Suppose it is August and we contract with the customer to deliver X million gallons of biodiesel in November. We agree that the customer will pay Y dollars over the spot price of heating oil at the time of delivery, quoted on NYMEX.

When we sign this contract, we are now effectively short biodiesel at a floating index price, an exposure we do not want to assume uncovered. In order to mitigate that exposure, we now short heating oil via contracts traded on the NYMEX and by long soybean oil contracts on the CME, for example, to protect against fluctuations in heating oil prices and feedstock values between the time we enter in the contracts and the time we fulfill the sale.

At the same time we enter the contract to sell biodiesel, in this example, in August, we also need to mitigate exposure to potentially escalating feedstock prices by entering into long soybean oil contracts. Those contracts can also fluctuate in value, and must be mark-to-market at the end of the quarter.

Now, suppose heating oil rises in September. Our short position in heating oil is now showing a loss if priced at the last trade. According to generally accepted accounting principles, we are required to measure contracts at fair value and recognize corresponding gains or losses in current earnings. This is what you saw in Q3.

So, while a short position in heating oil is showing the loss, the other half of the trade you do not see reported is the long exposure via the biodiesel sales, whose price is indexed to heating oil. That “gain” is not recognized until the sale is fulfilled.

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