Renewable Energy Group, Inc.

Greetings, and welcome to the Renewable Energy Group third quarter 2020 earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we'll conduct a question-and-answer session. At that time, if you have a question, you may press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star 0. As a reminder, this conference is being recorded Thursday, November 5, 2020. I would now like to turn the conference over to Todd Robinson, Treasurer. Please go ahead.

Thank you, Eric. Good afternoon, everyone, and welcome to our third quarter 2020 earnings conference call. With me today is REG's President and Chief Executive Officer, C.J. Warner, and our Chief Financial Officer, Chad Stone. Let me cover a few housekeeping items before I turn the call over to C.J., First, 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 slides 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 three, 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 subsequent 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, and 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 or the appendix to the accompanying slide deck for a reconciliation of the non-GAAP measures to the most comparable GAAP measure. Let me also remind you that at the end of last year, the Biodiesel Mixture Excise Tax Credit, or BTC, was retroactively reinstated for 2018 and 2019. It was also put in place for 2020 through 2022. The net benefits of that retroactive reinstatement for both years was reflected in our GAAP financial statements in the fourth quarter of 2019. Because the credit related to our 2018 and 2019 operations, our adjusted EBITDA and other line items reflect an allocation of the net benefits of the credit to our 2018 and 2019 results by quarter to reflect the period in which the associated gallons were sold. Chad will provide more detail on this when he reviews our financial report. With that, let me turn the call over to our President and CEO, T.J. Warner. T.J.?

Thank you, Todd, and good afternoon, everyone. Following on from our Analyst and Investor Day from a few weeks ago, we are pleased to be building on that event today with our third quarter results. At Analyst Day, among other things, we described how we are building momentum through a planned major expansion at our Geismar Renewable Diesel Plant, as well as with our downstream strategies. Our current experience and information leads us to believe that demand for clean fuels continues, demand for great ESG investment continues, and demand for solutions available now continues. And all of this contributes to our feeling that this is the right place and the right time for REG. We had solid financial and operational performance in the third quarter. As shown on slide four, We sold 176 million gallons of fuel and produced 137 million gallons, generating $576 million in revenue and $58 million of adjusted EBITDA. Gallons sold were at the midpoint of guidance, while adjusted EBITDA exceeded previous guidance, mainly due to ongoing strong performance and incremental risk management gains realized during the period. Year-to-date adjusted EBITDA performance is $157 million, a result with which we are very pleased, especially considering the overall price volatility and energy demand reduction due to the pandemic. Primary drivers of change in year-over-year adjusted EBITDA for the quarter are shown on slide five. From an underlying performance standpoint, we continue to optimize profit by focusing on higher margin products, and directing sales to the most profitable markets. Volume sold was down versus last year, primarily due to reduced sales of lower-margin petroleum diesel and third-party gallons. REG-produced gallons sold increased 3% from last year to 141 million, as shown on slide 6. Sales of self-produced biodiesel increased by 6 million gallons, and sales of self-produced renewable diesel decreased by 2 million gallons due to timing of a vessel shipment. Our ongoing sales optimization efforts resulted in 4 million more gallons of RG being sold into Norway. Sales of biodiesel to premium markets, as reflected on slide 7, declined slightly as we optimized our product disposition based on current market conditions. Turning to production, we continued to operate safely, efficiently, and effectively. On slide 8, you can see our total recordable incident rate of 0.92 remains significantly lower than the industry average of 2.1 and much closer to the industry leader level of 0.7. As we continue our drive to our vision of zero safety incidents, We must always stay vigilant and mindful of how changes may affect workplace safety. We have had a recent uptick of incidents, as you can see in the slide, and are taking strong steps to address the challenges of pre-job safety communications introduced by our pandemic-related working conditions. We are resolute in our determination to focus on job safety while working during this challenging time. Along with already existing pressures from COVID-19, Q3 presented new challenges from weather-related disruption. A derecho in Iowa and hurricanes in the Gulf Coast provided challenges for several of our plants, but the team managed well through the disruptions and production for the quarter was essentially flat year over year. Notably, Geismar production in the quarter was up 3% year on year and over 128% of its nameplate capacity. Slide 9 shows our biodiesel and renewable diesel production by quarter. Compared to the highly volatile second quarter, we benefited from a more stable economic environment in 3Q. Although margins remained significantly compressed versus 2019, it is notable that year-on-year bio-based diesel demand was stable and pricing was far less volatile than 2Q. Equally important, feedstock availability started to return to normalcy after the COVID-driven disruptions of the second quarter. To get a sense of the dynamics of 2020 in the fuels market, slide 10 shows market demand for a variety of fuels in both 2019 and 2020. The pandemic has had a strong negative effect on petroleum fuels demand, with gasoline down by 14% year to date, distillate down 9%, and jet fuel down 38% versus last year. In contrast, bio-based diesel demand has been relatively stable, and on a year-to-date average, is down only 1% year-over-year. As I mentioned earlier, margins have been quite challenging. Following along with the drop in crude prices, the ULSB average price per gallon declined 37%. Accordingly, our average product selling price in North America was also down On the other hand, we did see a price increase for biodiesel in Europe, driven by increased local environmental mandates and increases in fuel consumption, as significant holiday traffic there moved from airplane to on-road vehicle. The U.S. hobo drop in the quarter was significant, with ULSD declining, as mentioned, and soybean oil prices increasing. D4 RIN prices have helped to offset some of the declines, supporting the market with a 46% year-over-year increase. Taking all of those factors together, the hobo plus 1.5 times RIN spread was down 41% year-over-year, although it has stabilized after the COVID-induced decline in the first half, as you can see on slide 11. Although relative feedstock pricing remained volatile, as reflected on slide 12, Options for feedstock supply selection did improve in the quarter relative to second quarter. Our flexible feedstock strategy enabled us to change our feedstock mix year-over-year significantly in response, as shown on slide 13. Soybean oil usage increased 26%, animal fat usage increased 20%, distillers corn oil usage decreased 14%, and canola oil usage decreased 26% year-over-year. With overall feedstock prices up, this change in mix enabled us to limit the increase in our weighted average feedstock costs to only 4 cents per gallon. In contrast to the significant swings in the economic environment, the regulatory environment provided a stable foundation for demand. Biodiesel tax credit, RFS2, and the LCFS programs in California and Oregon all provided welcome stability. Slide 14 shows the pricing for both the California LCFS market as well as the Oregon Clean Fuel Program. With this strong performance, despite a very challenging market environment, coupled with expanding demand and a supportive regulatory environment, we believe we are well positioned to execute on our growth strategy. One area of focus here is expansion of renewable diesel production. which will balance our product portfolio and enable us to accelerate our downstream strategy. Last month, we announced that we have a major expansion plan that guides our Louisiana. Summarized on slide 15, we intend to add 250 million gallons per year capacity to our existing facility there, increasing renewable diesel production capacity to 340 million gallons per year. The project is on track to be completed in late 2023, with projected costs of around $825 million. Geismar was selected successfully for the advantages that it offers us, including economies of scale, ready access to hydrogen, advantage logistics, and a strong community of support, including an excellent workforce. As we pursue this growth, we will also continue to closely watch our economics at all locations, and we're committed to making strategic decisions to optimize our portfolio, maximizing margin and impact, and shifting resources as opportunities arise. A second important focus for growth is our downstream strategy. Our aim is to generate near-term margin enhancement for the fuels we sell. Our partnership with Hunt & Sons continues to progress as planned, to increase sales of REG Ultra Clean in California, and it gives us a strong foothold in the largest renewable fuels market in the country. All 12 locations are up and running, and the initial customer reception has been quite positive. Speaking of REG Ultra Clean, volumes continue to grow as the market comes to appreciate its clean, low-carbon value proposition. As shown on slide 16, sales of blends of biodiesel and renewable diesel grew 70% year-over-year. Sales to end user are also a key element of our downstream strategy and they grew 26% in the quarter versus last year as noted on slide 17. As I look back on third quarter and ahead of the opportunities in front of us, I feel more than ever that we are in the right place at the right time. Demand is moving from regulatory push to societal pull and we believe should increase as people understand the tremendous environmental benefits our fuels are delivering today. While we applaud the efforts and recent momentum behind electric, semi, and large equipment vehicles, these ideas and prototypes may be several years or even decades away from being available at full commercial scale. In contrast, we offer a fuel today at scale and growing that enables our customers to substantially reduce carbon emissions with no capital cost and no performance compromise. We provide the best solution now for reducing transportation-related carbon emissions. In the third quarter alone, as shown on slide 18, REG's produced fuel resulted in a reduction of 1.1 million tons of carbon. That is the equivalent of 2.7 billion miles driven by a passenger vehicle. That is the right result at the right time, right now. REG is committed to making a difference for our planet, our customers, our stakeholders, and our shareholders in the years ahead. Now I will turn the call over to Chad to review our financial performance for the third quarter. Chad?

Thank you, CJ, and good afternoon, everyone. Before I get into my comments on the quarter, I want to align everyone on comparisons. As Todd mentioned, the biodiesel tax credit was retroactively reinstated last December for 2018 and 2019 and then extended through 2022. As such, we'll provide an analysis of the non-GAAP numbers adjusted with the allocation of the BTC to the third quarter of 2019. The apples-to-apples comparison will allow you to better understand the real change underlying the economic performance. Slide 19 shows third quarter results, and as CJ mentioned, margins were down year on year. Biodiesel sales were up. Renewable diesel sales were down due to the timing of a vessel shipment, but total renewable diesel production was up. Finally, we brought down sales volumes of petroleum diesel quite significantly as we shifted our blending strategy to higher margin opportunities. As CJ noted, our gallons sold were at the midpoint of guidance, and it reflected very encouraging relative stability of the bio-based diesel demand during the pandemic recovery. Prices were down across the board except for European biodiesel, which increased modestly. The price reduction reflects much lower diesel prices, partially offsetting this with an increase in wind values. Finally, as CJ noted, our actual full quarter risk management gains were $9 million larger than when we gave guidance. Recall that our risk management approach is designed to lock in cash margins as best we can when we make the sale. As ULSV prices declined during the quarter, risk management gains increased to balance out the decline, and our approach did the job as intended, resulting in these risk management gains. Moving from revenue to margin, let's look at feedstocks on slides 12 and 13. Because fuel production was essentially flat year over year, so was feedstock usage. Feedstock production costs were up around 1 percent, however, due to lingering higher prices in certain feedstocks as the world continued to adjust to the pandemic. Notably, used cooking oil was more expensive in the quarter, as supply remains constrained with restaurant closures still prevalent. In response, we used our feedstock flexibility and optimization efforts to shift among feedstocks. For example, soybean oil prices were down, so we increased our usage significantly. As we often emphasize, feedstock's flexibility is an incredibly important advantage for us. When you look at the actions we took in the quarter, you can see our margin optimization strategy in action. On the sales side, we directed product to the highest margin market, and on the production side, we shifted between feedstocks based on supply and price. This quarter, we did take an impairment charge for equipment we'd initially planned to use at Geismar, for a small renewable diesel production expansion project. Since that time, we've been able to increase our production capacity organically without major capital expenditures, and we're now planning a much larger 250 million gallon expansion to the plant. With this new design, that equipment is no longer needed and was written off. Now onto SG&A. SG&A is a percentage of revenue was 5% compared to 4% last year. The increase versus last year was driven primarily by bonus accruals. We did not have those accruals last year given the low profitability prior to the biodiesel tax credit reinstatement. Looking at the bottom line, adjusted EBITDA exceeded our guidance due to ongoing strong performance and incremental risk management gains. We're very pleased with this performance considering the challenging economic environment we are all still operating within. To smooth out quarterly volatility, we tracked trailing 12-month figures. Slide 21 shows trailing 12-month adjusted EBITDA, and slide 22 shows trailing 12-month return on invested capital, which was in excess of 17%. Now let's turn to the balance sheet. shown on slide 23, and discuss our capital allocation strategy. The balance sheet remains strong. We have $286 million in marketable securities, with $100 million of those classified as long-term. Our multi-quarter debt reduction program has resulted, as planned, in a low leverage ratio and a net cash position, as we consider the necessary financing for the planned Geismar expansion. Slide 24 reflects our strong liquidity and capital position, which provides us with many options as we finalize our financing strategy. On that subject, we have a combination of opportunities and operational needs that compete for capital. Obviously, renewable diesel is attractive, and the planned Geisler expansion is at the top of the list. Share and convertible bond repurchases have also been a high return option opportunistically over the years. Finally, our biodiesel fleet optimization opportunities are attractive and delivering returns. As a reminder, our target for growth in capital projects is a 20% internal rate of return for the project and an overall 15% return on invested capital for the company. In the third quarter, our capital expenditure investment was $16 million. We also used $18 million to repurchase convertible bonds early in the quarter. And we now have $91 million of repurchase authorization remaining following that repurchase. Now I'll turn the call back to CJ to discuss the output. CJ?

Thanks, Chad. Turning now to fourth quarter guidance. With the COVID pandemic continuing and looking to our neighbors in Europe, as well as the current statistics in the United States, we must be mindful that a second wave is possible in the winter months. Keeping that in mind without dwelling on it, we are once again taking into account both potential positive and negative market forces as we formulate our outlook. As you can see on slide 25, on the positive side, potential factors include that the diesel inventory situation will continue to improve, Renewable diesel and biodiesel demand will remain relatively robust. Choice white grease availability and pricing will remain attractive, and public support for cleaner fuel solutions with low carbon intensity will continue to broaden. On the downside, potential developments and factors include that low crude prices appear to be with us for a while, depressing diesel prices. Both distillers' corn oil and vegetable oil prices are rising. And both of those are putting our margins under ongoing pressure. So as mentioned above, there is also a potential resurgence of COVID-19. Note that we have not factored a major market disruption into our guidance. With all that in mind, as shown on slide 26, for fourth quarter, we expect gallons sold to be in the range of 150 to 170 million. We expect adjusted EBITDA in the range of 30 to $45 million. For the full year, we expect gallons sold to be in the range of $650 to $670 million, gallons produced in the range of $505 to $525 million, and adjusted EBITDA in the range of $187 to $202 million. Of course, any change to ULSB prices, margins, RINs, or LCFS credit values, or a level of market volatility through the end of the quarter could affect actual results. Shipment timing could also affect timing of revenue recognition. Note that this fourth quarter guidance includes $1.5 million of risk management gain. We remain optimistic in closing out 2020, and we will continue to focus on underlying performance, optimization, shareholder value, and implementation of our strategy. And now I'd like to turn the call over to the operator for the Q&A segment of our call. Eric?

Thank you. So everyone, if you'd like to register a question, please press the 1 followed by the 4 on your telephone. You'll hear a three-tone prompt acknowledging your request. If your question has been answered and you'd like to withdraw your registration, please press the 1 followed by the 3. In an effort to address as many callers as possible, we will ask that you please ask just one question at a time and re-enter the queue for any other questions you may have. So once again, for any questions, please press 1-4 on your telephone. It'll be just a moment for the first question, please. And our first question comes from the line of Manav Gupta with Credit Suisse. Please go ahead.

Hey, CJ, Todd, and team. Just quickly referring back to slide 13. In 2Q, obviously, the restaurants were closed. A lot of ethanol facilities were closed. So you were running a much heavier soya beans rate. Now, it looks like distilled corn oil has made its way back into your feed slate. UCO is looking a little better, and soya bean has shrunk a little. As you look towards 4Q, what's the supply situation looking? And also what we are seeing is there's a little bit of a compression in spread between soya bean and some of these lower CI feedstocks. So would it still make sense to more run soya bean? Like which way would, how should we think about 4Q as it relates to your feedstock mix.

Yeah, thanks, Manav. It was good to hear from you. What we are seeing is the need to optimize not just price differential, but of course the types of yield and as well as the CI potential of each of the different feeds. So we have a pretty sophisticated optimization system that we utilize. We are seeing, as I mentioned, We're getting a return of supply back, but you do see some pretty big pricing differentials as there's various market dynamics going on. So we are actually continuing to look at things like choice white grease as well as soybean oil a little bit more heavily than some of the others. But our procurement team is active and out in the market all the time, so it's a little bit difficult to say how the whole thing's going to work out as you look out in the further months away. Chad, anything you want to add to that?

No, I would just reinforce that for the most part, I think in the second quarter we saw the extreme movement towards soybean oil away from what we traditionally emphasize and kind of a return into normalcy like CJ said in the third quarter, but not quite all there yet. You know, certainly saw the ethanol plants come back online in fourths versus second quarter for sure. And then we did see both some restaurant openings making UCO a little bit more available and then some closures after that causing it to be a bit tight. So we still watch that every day as we're in the feedstock markets for sure.

Thank you for taking my question.

Thank you, Manal.

Thank you. Our next question comes from the line of Craig Irvin with Roth Capital Partners. Please go ahead.

Good evening, and thanks for taking my question. So congrats on the EBITDA, both the top end of your guidance range. You know, it's nice to see our performance there. Can you maybe talk a little bit about the $9 million delta you mentioned during the call, delta on risk management? How much of the strength really came from that versus RINs and other factors in the quarter? And then as we look at the fourth quarter guidance, $30 million to $45 million in EBITDA, you know, how much of that has actually been pulled out from risk management from us having a stronger third quarter than you expected? And are there any other factors other than typical seasonality or maybe feedstock price compression that might be causing this guidance slightly lower than that? than where you executed to in the third quarter?

Yeah, Craig, thanks for your question. It's Chad. To the question on risk management, I would say for the third quarter, we were coming in with improved rent prices and good operational performance right at the top end of our $50 million of guidance, and then that risk management put us over the top, and that was really a reflection of the you know, reducing ULSD price throughout the quarter. In the point of the $9 million was to just reflect that based on what we gave you guidance on, it was $9 million higher risk management gain than when we gave you the forecast. And that was, you know, we were operating at the top of guidance, and that pushed us over the top. So still strong performance, but, you know, That was the differential there. And then CJ's in the guidance section for risk management in the forecast that we've given, we've included $1.5 million of known risk management as of basically last week or October 26th, I think, was that measurement date when we levelized all the commodity prices. So your other point, though, was RINs did improve During the quarter, we've seen those strengthening in response to the tightening of the hobo spread, and you can see that a little bit on slide 11.

Craig, this is CJ. I'll just add that for fourth quarter, we are watching margins pretty closely, and it is seasonal, but it's getting tight, so that's behind our guidance. And in terms of the beat for third quarter, Yes, there was a factor for risk management, but we're also seeing some of our margin expansion in the approach we're taking in the downstream coming through, which we're pleased to see.

Great. And then my second question is kind of a big-picture question. So, you know, there's a lot of companies out there making announcements that they're going to be involved in renewable diesel. Most of them are oil companies that have never bought feedstock before or have no idea about or no budget, actually, in their announcements for pretreatment. You know, they think they can actually buy feedstock pretreated somewhere. You know, there's an appetite on the part of investors to see Reggie maybe do more than one plant, see if you can pick up, you know, a couple more. Can you maybe update us on the potential for debt financing at Dysmar and what you expect as far as – financial flexibility as you move through the CAPEX schedule there before it comes online, and how that could potentially free you up for additional plans, if that makes sense for you.

So, Craig, I'll start, and we'll let our CFO opine as well, especially on financing strategy. Keep in mind that our downstream strategy is enabling us to start expanding our EBITDA. And we're very much focusing on that because that's nearer term. And we will be continuing to do that between now and when Geismar actually comes up. And that's going to help us continue to fuel our growth. So if you think about our strategic approach from a big picture standpoint, I think that's your answer. And rest assured that Chad's working some great options for financing.

Yeah, we are considering all options for financing, of course, Craig. And, you know, you can see on the balance sheet, really strong balance sheet with nearly $100 million in cash, $285 million, $286 million invested. And, you know, so you already have a pretty nice down payment for the existing project with financing alternatives available, as well as – you know, a historical track record of really strong cash flow generation, as well as retention of that cash flow generation in terms of, you know, we don't generally, you know, we don't generally have a really high otherwise capital expenditure portfolio. Of course, this is a really big project, but there's not a huge pull from that perspective, and We've got a really attractive tax profile that helps us retain a lot more of the cash.

Great. Understood. Congrats on the really strong quarter, and I'll hop back in the queue. Thanks, Greg.

Our next question comes from the line of Greg Wasikowski with Weber Research. Please go ahead.

Hey, good afternoon, everyone. How are you?

Great. Good. How are you? Good.

Doing well. Thanks for taking our questions. I'm going to start with Geismar. Just on construction set to begin, I guess, like mid to late next year, I'm just curious, what's left to do there? And then considering the benefit and progress that you guys had from the P66 venture, how much is that benefiting that timeline?

Yeah, so we were able to take our ISBL engineering and just continue to progress it without really missing a beat from that project. So that has probably accelerated by a year where we might have been otherwise. Engineering is largely complete on ISBL. We have some OSBL engineering we're still doing only because we were working on all our easements and servitudes so that we knew exactly what we were engineering. But everything's progressing to schedule to enable us to get to that mid-late 2023 completion time.

Okay, great. And then along those lines, in terms of milestones, I know you guys have been asked this in the past, but are there any, like, tangible milestones that you could give us either in the near term or, you know, over the course of the next three to four years, either on the regulatory side or construction side? I mean, the logical next step is to kind of look at comparable facilities and kind of extrapolate that for ourselves. But, you know, it would be nice to see if you anticipate that, if your process being materially different than others or, you know, any specific milestones that you guys might have.

Yeah, so I think the two you can think of in the very near term, one would be long lead order items, and we've actually placed those already. So that gives you a sense of the momentum of the heavy capital items. And actual final investment decision, which is more of a reflection of engineering completion than anything, we would consider to be in the early part of next year. So we'll be sharing that milestone with everyone as we pass it.

Okay, very helpful. Thanks again for your time, everyone.

Yep, thanks, Greg. Thank you, Greg.

Thank you. Our next question comes from the line of Jordan Levy with Truist. Please go ahead.

Just wanted to get a sense on, you know, I know you've got a lot of questions on feedstock. Just as it relates to kind of the aggregator side of that market for low carbon feedstocks, are you seeing that sort of market and knowing there's a lot of different moving pieces within that? Are you seeing any development in that market as, you know, a lot of renewable diesel capacity gets announced from yourselves and your peers?

Well, we certainly see activity starting to show up. I do think that for the newer entrants, the more challenging lower CI feeds are simply just either not getting touched just yet or it's harder either to get into the market or to understand what the quality differentials are by the different suppliers, et cetera. So you're seeing a little bit of activity there as well as lots and lots of questions. So I think it will be developing as we go, but I do think the new entrants are starting to realize that it is more challenging than it might appear at face value, and there are a tremendous number of nuances.

Great. Thank you. And then my second question is this. I was just hoping to get a sense of if there were any changes to kind of end market for renewable diesel or biodiesel versus last quarter, I know, There's kind of three main buckets for renewable diesel last quarter.

Yeah, but actually what we're seeing, what's interesting is we're seeing pretty flat demand even when the overall fuel pool demand has come down, which means that the blend level and inclusion blend of biodiesel and renewable diesel has been going up. So I think that's probably the biggest trend that we're seeing. And that's happening in multiple regions. Obviously, it's happening a lot in California as driven by the LCFS in Oregon as well. We're seeing it in several other markets, though, as that blend level continues to rise.

Great. Thanks so much.

Thanks, Jordan.

Okay, thank you. Our next question comes from the line of Ryan Todd with Simmons Energy. Please go ahead.

Thanks. On slide 16, you saw a nice jump in third quarter and blends of bioteas into renewable diesel. Can you maybe talk about what the driver of the sequential increase was there? How we should think about the pace of that growth going forward? Is already availability a limiting factor? And maybe thoughts on where that number could go over the next 12 to 24 months in terms a percentage of the broader sales.

Yeah, so thanks for noticing that. We're pretty excited about it, and the year-on-year increases are substantial, and we plan to continue that sort of rate of pace. It's really tremendous. We're getting a lot of good customer enthusiasm about it, and the big uptick is largely what you're seeing is our hunting suns taking place. So we're very excited about that deal and very encouraged by the initial volume uptake. We've got other plans in the mix, so I encourage you to watch this space, and we'll plan to continue talking about it as they develop.

Thanks. And maybe turning to the feedstock for one follow-up question on some of the earlier ones. As we think about the Geismar expansion, You guys obviously know that market down there very well. As you think about feedstock availability, and I'm sure you've obviously done tons of work on this as you thought about approving the expansion, but in terms of the availability of the low-CI feedstocks down there in the market, do you anticipate that coming primarily from increased aggregation of feedstock feed here in the U.S.? Is it increasingly going to come from international sources or from different types of feeds from what you've historically run? Any thoughts around the confidence of your ability to continue to source most CI feedstocks for the expansion there?

Sure. Well, I think one of the advantages of expanding an existing site is that we've got some pretty good familiarity of the sourcing options available to us. And you're right, especially because we have water access with attractive logistics, we can source from pretty much anywhere, and we already do. And that gives us a wonderful line of sight to the expansion options that we're already starting to work to enable us to see where we're going to go to for that 2023 startup.

How much of the feed right now comes from waterborne versus domestic? Or non-waterborne, I guess.

Well, and just thinking from an international standpoint, at any given time, I'd have to get back to you to give you an exact percentage. And I know that it moves around quite a bit from quarter to quarter. But there are times in particular where we put a pretty substantial weight on procuring international sources. It really, you know, it's a very... We do optimize really flexibly. That's one of the things we like to emphasize for you is that as the market moves around, we're capable of moving pretty quickly, and there have been some really good opportunities that we can chase because of that. So the arbitrage between domestic and international is very much part of that, as well as the arbitrage between the low CIPs and some of the higher CIPs because the margins between them move around quite substantially.

Thanks, CJ. All right, thank you. Our next question comes from the line of Samir Joshi with HC Wainwright. Please go ahead.

Thanks. Thanks for taking my question. Most of the questions have been answered, though, but on a macro level, CJ, I think you commented that you saw increased demand in Europe during third quarter as people use road more than air travel. Do you expect or are you seeing something like that for this holiday season in the U.S.?

Well, Europe's a little different. Well, it's quite different than the U.S. just from a regulatory regime. So that's a little bit of what you're seeing, especially one of the things we pointed out was the pricing, which is very interesting. So their regulations are changing dynamically, and there's a really good pull for biodiesel that comes from waste feedstocks, which is the type of biodiesel that we produce over there. And they have a pretty strong tariff structure as well, so the internally produced material is definitely incentivized versus anything that can be imported. It's quite difficult and costly to import there. So it's kind of a special and unique market. In terms of U.S.-based demand, we are seeing... as I mentioned, sort of a differential demand between the bio-based diesel and the petroleum, and that's where this lending level is coming up. But overall in the U.S., the total fuel demand is definitely down year on year. It has come up a lot between second quarter and third quarter, so it's starting to finish off the year in a lot better shape. So the numbers that I quoted you earlier on year to date are probably only half of the demand destruction that we would have been talking about in second quarter. So it's getting better, but it hasn't bounced back like you saw in Europe for the bio-ICU.

Understood. And just one more, I think it was addressed partially to a previous questioner's answer, but in terms of the downstream strategy, you are seeing that nice slide 16, I think, demand. But so are you planning more stations, more push out of that strategy quicker than planned?

We absolutely are. And so not necessarily at liberty to explain exactly what, but we'll continue to work at it. It's very much part of our downstream strategy. And we're extremely encouraged by what we're seeing. Okay. Thanks for taking the question.

Thank you.

Thank you. As a reminder, everyone, if you do wish to queue up for a question, please press the 1 followed by the 4 on your telephone keypad. Our next question comes from the line of Hamed Korsand with PWS Financial. Please go ahead.

Hi. Could you just talk about the sales in the premium markets, the decline sequentially, and what is seasonally a pretty good time frame? And is it really competitive reasons that you're diverting away from the premium markets this past quarter?

You know, thanks, Tom. And good observation on your part. And it's very much part of overall optimization. So if you think about premium markets are partly premium because they reward differentially for the carbon intensity differential. And availability of seeds and the margins between them went absolutely haywire. And so as we optimized in many cases with the feeds that we did procure, we were actually able to get a better net back by not going to those premium markets and spending the additional logistics money and instead going to other incentivized markets. So it really is just purely on optimization. And I would say in normal times, premium always wins out. But in volatile times, you have to be flexible in your thinking.

Okay. What is the traction that you're seeing as far as selling direct? How will that work out as far as the mix is concerned? Will you just divert more to direct versus other markets?

Well, I think it's probably a combination of the two. So there is a little bit of trading that we're doing by identifying the channels we prefer and preferentially directing our volume that way. And as we grow, we'll be taking advantage of a variety of channels. So to answer your question directly, it's going to be a little bit of a mix of the two.

OK. Thank you.

Thank you. Our next question is a follow-up from the line of Craig Irvin with Roth Capital Partners. Please go ahead.

Thanks for taking the follow-up question. So, CJ, these days there's a lot of people, particularly European investors, that are asking about renewable jet. You know, one of your competitors out there that makes a different flavor of RHD talks about renewable jet a lot. Can you maybe discuss the general dynamics here in the United States, why this hasn't been a focus over the last few years? With your successful sales volumes increasing into Norway, is this something where you would consider this? And what kind of investment would it take for Geismar to divert increasing volumes to the renewable jet opportunity that's emerging?

Yeah, it's a wonderful opportunity emerging if you're in the RD market because there is not a substantial investment required to produce renewable jet from your RD process, or at least our proprietary process we can, with some minor finishing. So we're watching it closely. We've used our equipment to prove that we can make it. It hasn't been... It hasn't come into solution, let's say, for us from an optimization standpoint yet, but we're watching it closely and the great thing about it is as you see that market developing, it's just another element of the increased demand that we're seeing in the pull for these products that we're making. So we're really pleased to see it. We're monitoring it closely and when the market signals get to the point where those price signals are more attractive than the ones we're able to meet now, we'll definitely be players in that market.

Great. Thanks for the update.

All right. Thank you. And, CJ, we have no further questions from the phones at this time. I'll turn the call back to you.

All right. Thank you, Eric, and thanks for all the great questions. I'll make some closing remarks now, and then we'll have Todd announce the next investor event. So to conclude, we believe that REG is making a difference for our planet, our customers, our stakeholders, and our shareholders, and we will continue to do so in the years ahead. We believe that demand for clean fuels continues, demand for great ESG investment continues, and demand for solutions now continues. We offer our fuel today at scale that enables our customers to substantially reduce carbon emissions with no capital costs and no performance compromise. We provide the best solution today for reducing transportation carbon emissions. With this quarter's strong performance, With expanding demand and a supportive regulatory environment, we are well positioned to execute on our growth strategy. We optimize margins by focusing on higher margin products and selling into the most profitable markets. With our planned expansion at Geismar, we will grow renewable diesel production and thus balancing our product portfolio and accelerating our downstream strategy. That approach is designed to enhance margins and is gaining traction. Our partnership with Hunt & Sons is progressing, and both REG Ultra Clean volumes and sales to end users are growing. Looking at our strong performance now, even in the face of an extremely challenging year, and the opportunities in front of us, we think you can agree that this is the right place and the right time for REG. And now, before we close, Todd will announce our upcoming investor event for REG. Todd?

Thanks, DJ. Please turn to slide 27. First, I want to say thanks to those who have participated in our Virtual Analyst and Investor Day earlier in October. For anyone who missed it, a replay is available on our IR section of our website under Past Events. We have one upcoming virtual investor conference scheduled in November, the Baird 2020 Virtual Global Industrial Conference on November 12th. Attendance at the conference is by invitation only for clients of Baird, so contact your Baird sales representative to secure a meeting. Thank you all again. This concludes the call. You may now disconnect.

Thank you, and that does conclude the call for today. We thank you for your participation and ask that you please disconnect your lines.