Renewable Energy Group, Inc.

Greetings and welcome to Renewable Energy Group Incorporated third quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Todd Robinson, Deputy CFO and VP of Investor Relations. Thank you. You may begin.

Thank you, LaToya. Good morning, everyone, and welcome to our third quarter 2021 earnings conference call. With me today is REG's president and chief executive officer, CJ Warner, and our chief financial officer, Craig Bellmer. Let me cover a few housekeeping items before I turn the call over to CJ. 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 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 along with the earnings press release can be downloaded from 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 and uncertainties that are difficult to predict and assumptions may or may not prove to be correct. Such forward-looking statements are not a guarantee of performance. The company's actual results could differ materially from those contained in such statements. Many factors could cause or contribute to those differences. These factors are described in detail in the risk factors and other sections of our 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 the date of this call. The company undertakes no obligation to publicly update any forward-looking statements based on new information or revised expectation. 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. With that, let me turn the call over to our President and CEO, C.J. Warner. C.J.? ?

Thank you, Todd, and welcome to all of our callers today. I'm pleased to present another quarter of strong performance. The overall margin environment and demand for our products remains healthy. The post-pandemic recovery continues to create volatile markets and the REG team continues to do an outstanding job navigating through this environment and delivering solid results. Before I go into more detail on the quarter, I want to take a couple minutes to acknowledge that as we speak, Global leaders are meeting in Glasgow at the 2021 UN Climate Conference to discuss how to meet emission cuts outlined in the Paris Agreement back in 2015. This conference has worldwide attention because of the growing determination that we must make our energy systems more sustainable and work harder to decarbonize. Commercial enterprises, municipalities, school districts, states, and nations are all setting goals and targets for decarbonization. Coming in combining into a pull of demand for low-carbon options versus the regulatory push of earlier years that we've been referring to as the inflection point. Many potential solutions are being developed now, some of which require massive infrastructure build-out in order to be realized, and many still have quite a few technical hurdles to be passed before being ready to have an appreciable effect on sustainability. REG is delivering real products that address this problem now. Bio-based diesel can be used today without any modifications to existing vehicles or delivery infrastructure. REG is delivering significant volumes of B20 blends today, and blending levels are increasing steadily. For example, REG is regularly delivering biodiesel blends of 30%, 50%, and even 100% to satisfied customers in targeted segments. Slide 4 shows the significant carbon reduction that our best-in-class biodiesel provides not only compared to petroleum diesel, but also versus an electrical vehicle charged both using the standard U.S. grid or California's. Bio-based diesel also provides the important benefit of a high energy density, as shown on slide 5, enabling heavy-duty and long-haul applications in ways that would be very difficult to deliver with lower density options. Our message to the leaders at COP26 is that REG and the bio-based diesel industry play a critical role in the energy transition. Every fossil diesel burning fleet, be it on-road, off-road, on-rail, or on the water, has the ability to significantly reduce their carbon footprint by over 80% today by switching to bio-based diesel. Again, they can do this with no major infrastructure modifications and with no meaningful capital expenditures. For the COP26 decision makers or anyone else looking to decarbonize, we believe a viable solution for the planet exists now. And time is of the essence. Carbon emissions accumulate in the atmosphere and consequently have a negative compounding effect on global warming. A report issued late last week by the Climate Action Tracker Consortium echoed this point, stating that decarbonization efforts must be accelerated at a far faster pace than recent trends in order to meet the Paris targets. Failing to take full advantage of the opportunity presented by bio-based diesel in anticipation of a more perfect climate solution in the future will have the negative consequence of accumulated carbon emissions in the interim, compounding the climate crisis. Before I finish, let me be clear. Many solutions will be needed for society to realize its transition goals. My purpose here is to emphasize the ready-now aspects of bio-based diesel. At REG, our mission is one of sustainability. We are driving for sustainability through growth in production, sales, and ultimately use of our low-carbon solutions, and we know that we must also drive for financial sustainability in order to make all of that happen. So let's turn back to our financial performance where we are delivering on our mission. We posted another strong quarter and are optimistic about our future. Let's go over our third quarter highlights. As shown on slide six, our net income was $42 million, and adjusted EBITDA was $68 million, with 176 million gallons sold. Recall that our guidance for adjusted EBITDA was $70 to $90 million, which included a $6 million risk management gain. With a late quarter spike in energy prices, we ended up recognizing a timing-related $12 million risk management loss in the third quarter, most of which is expected to be offset in the fourth quarter as the hedged gallons are delivered. As a reminder, the intent of our risk management strategy is to protect our cash margin at the time of sale. We believe these results and our consistent track record of quarter-by-quarter profit generation in extremely volatile markets demonstrates the strength of our business model, which is underpinned by the ongoing growth in demand for sustainable, clean fuels. Demand drivers associated with the inflection point in our industry continue to accelerate, and we remain confident that Renewable Energy Group is at the right place at the right time right now. Let's break down the performance for the quarter into essential elements now. Starting with safety and operational excellence, I'm proud to say the REG team continues to focus on safe and healthy operations as demonstrated by our performance metrics. Our rolling 12 month total recordable incident rate into which OSHA now requires inclusion of any workplace COVID transmissions is shown on slide seven. The year to date TRIR of 0.31 exceeds performance of industry best in class during pre-COVID times. I am incredibly pleased with the 2021 safety record and we will continue to push towards vision zero. Plant operations continue to be strong. Total production in the quarter was down 7% versus prior year, mainly due to the impact of Hurricane Ida, a strong Category 4 storm which nearly directly hit our Geismar plant. Ida was a major event in the Gulf with widespread impact to the region. We are most thankful that all of our employees and their families remained safe. I am extremely proud of our team's effort to plan ahead, effectively prepare the plant for a major weather event, and to work safely throughout the duration of the storm and its aftermath. All of this contributed to the team's safety and their ability to minimize the impact of the storm on our facility. The Geismar team brought the plant down safely in preparation for the storm and then safely returned it to normal operations once the local utilities were back up and running, resulting in only two weeks of unplanned downtime. Other than the lower production numbers resulting from these two weeks of storm-related downtime, there was no material damage to the plant and no material financial impact to third quarter, nor any delays to our improvement and expansion project. The impact of the third quarter production outage at Geismar will be realized in future periods. In addition to the storm-related impact at Geismar, North American biodiesel production dropped by 4% as we continue to optimize our production mix to maximize profitability. We also continue to work to optimize our production portfolio so that we participate from a position of strength. As announced earlier, we decided to shut down our Houston facility. REG has operated at Houston since 2008, and the plant has consistently run well and contributed to our financial results. We made the decision not to renew the long-term property lease there, as it would have imposed an uncompetitive fixed cost on the plant. Note that none of our other 11 plants are subject to a similar lease. Combined with a fixed cost burden of that lease, the lack of REG's hallmark multi-feedstock processing capability left the plant in a definitively non-competitive position relative to the other facilities in our portfolio. These factors together drove the difficult decision to shut the plant down. It's important to say here that we truly appreciate the efforts and contributions of the Houston team who delivered operational excellence and had no recordable safety incidents in over six years. They are a great team. Turning to financial results and drivers, net income increased $20 million and adjusted EBITDA increased $14 million, or 25%, versus the third quarter of last year. In addition to a higher HOBO plus 1.5 RIN spread shown on slide eight, we were able to realize additional margin through optimization of our system, including the overall sales mix. Gallons sold for the quarter were flat versus last year, while our mix of gallons sold was more profitable. RD sales increased by 28%, offsetting the 6% decline in biodiesel and 5% decline in lower-margin petroleum gallons. This strong performance in renewable diesel reflects Geismar's improved production since the first quarter turnaround increased third-party RD sales, and strong demand for our REG ultraclean fuel, which rose by 73% year over year. Related to third quarter of last year, our bottom line was also improved due to higher commodity prices for crude glycerin generated at our biodiesel plants. We don't discuss glycerin often, but it's worth pointing out that it's an important component of the global supply chain used for food, pharmaceutical refining, de-icing, animal feed, and wastewater treatment. As mentioned earlier, sales of REG Ultra Clean, our proprietary BDRD blend, continued to increase rapidly as shown on slide 10. We set a record in third quarter with over 35 million gallons sold, a 36% increase versus second quarter 21, which was the previous quarterly high watermark. Overall, Ultra Clean has grown at an 84% CAGR since 2018. which demonstrates the clear customer enthusiasm for this high-performing, low-carbon fuel. Note that growing customer demand for clean fuels is also reflected in overall industry data shown on slide 11. Bio-based diesel demand continues to rise and is up 12% year-to-date versus pre-pandemic 2019. Over this same time period, petroleum, diesel, gasoline, and jet fuel demand are all down. As bio-based diesel demand continues to grow, it remains a small percentage of the total petroleum middle distillate market, giving our industry a clear avenue for market share growth as more customers switch from fossil to low carbon intensity fuels. As this push for clean fuels accelerates, feedstock capability becomes paramount. We believe our procurement capability combined with our flexible feedstock approach is a significant competitive advantage. Slide 12 shows our feedstock mix for the quarter, roughly 75% waste-based feedstock and 25% feedstock derived from virgin veg oils. During the quarter, we again processed 14 different types of feedstock and continued to procure both internationally and domestically. Our flexibility and global presence enable a diversity of sourcing and demonstrate ongoing feedstock assurance. Our commitment to feedstock assurance goes beyond global sourcing and flexibility as we seek to find and foster development of new sources of low-carbon feedstocks to convert to low-carbon clean fuel. Early last month, we celebrated the opening of our HydroTreater pilot plant, an R&D partnership with Iowa State University designed to accelerate the development of novel feedstocks and our proprietary pretreatment processes. Research at this new pilot plant will support Geismar and the other assets in our fleet. by enabling the evaluation of new low-carbon feedstocks and optimization of renewable diesel and sustainable aviation fuel production. We continue to look into investments to further enable global feedstock abundance and are committed to widening the available feedstock pool by building on our strong foundation of commercial and innovation capabilities. Moving back to the current market environment, as shown in the chart on slide 13, Feedstock prices remained elevated during the quarter, and spreads continued to be volatile. If you look closely at the chart, you'll notice waste-based feedstock prices dipped in unison around the beginning of September. This dip was influenced by Hurricane Ida, and the team took advantage of the opportunity to source discounted feedstock to be processed in future quarters. We continue to be both confident and optimistic about forward feedstock prospects. Moving from the market to the regulatory environment, we await word on the 2021 and 2022 renewable volume obligations from the EPA and look forward to the final proposal, which continues to be delayed. Leaks on the proposed levels of advanced biofuels appear to be bullish for our industry. We do not want to put too much emphasis on leaks and will remain cautious on any guidance until the EPA finalizes official figures. We urge the administration to release the proposed rule as soon as possible to give the needed direction to the industry that decarbonization is critical and bio-based diesel plays a critical role as a solution to the code red climate crisis that President Biden has described. With regard to the most recent proposal in the budget reconciliation bill, we applaud lawmakers for recognizing the benefits of long-term supportive policy for bio-based diesel. We are very pleased to see what, if enacted, would be the longest extension of the Federal Biodiesel Tax Credit, or BTC, since its inception. The latest version of the reconciliation bill would extend the full dollar per gallon tax credit through 2026 and then pivot to a domestic technology neutral incentive for the next five years based on the fuel's greenhouse gas reduction levels. This is encouraging for REG because it supports conversion of the lower carbon feedstocks that we utilize. As Congress works to finalize the package, we strongly encourage incentivization on a level playing field with respect to carbon reduction to maximize the overall effectiveness of policies designed to decarbonize transportation. On the European regulatory front, the Fit for 55 package currently being discussed in the EU government aims to reduce emissions by 55% by 2030. This builds upon the current RED2, which incentivizes the use the use of lower carbon feedstock in biofuel production. As the inflection point solidifies and societal demand for low carbon fuels accelerates, we are confidently proceeding with our growth plans. Our improvement and expansion project at Geismar remains on track, and we celebrated its groundbreaking in October. Craig will discuss this further, including a view on capital expenditures and an update on procurement of long lead time items. The additional 250 million gallons of production capacity from the Geismar expansion will build upon our existing portfolio and are expected to provide a significant step change in adjusted EBITDA upon project completion in late 2023. In addition, the expansion to 340 million gallons at Geismar will further diversify our product mix and it gives us optionality. We're often asked about the potential for sustainable aviation fuel or SAF production at Geismar. As a reminder, the Geismar facility produced the first commercial batches of sustainable aviation fuel in the United States in 2010. Since our acquisition of the facility in 2014, we have optimized Geismar to maximize profitability through renewable diesel production. As it stands today, we know the investments it would take to produce scalable SAF at Geismar both now and following the improvement and expansion project. However, given the current market conditions and customer demands, we continue to optimize for renewable diesel production. Should the economics change where SAF production would be the right optimization choice, we would reassess the situation and take action to capture the upside. Regardless of whether our future Geismar gallons are used for SAF, terrestrial transportation, or a mix of both, renewable diesel and biodiesel both are expected to remain a core part of our strategy moving forward. Biodiesel also has exciting use cases beyond on-road transportation, with emerging and growing opportunities in several very significant markets. We are currently selling biodiesel blends to strategic marine customers, which we believe marks the beginning of a journey to a clean energy transition in the maritime industry. And biodiesel has desirable attributes that we believe make it a better fit for this market than RD. We issued a press release last week noting our long-term supply and development agreement with good fuels for marine fuel. Yesterday, Canadian National Railway announced a partnership with us to advance sustainability goals using bio and renewable diesel blends for their locomotive fleet. This is an attractive opportunity to expand into a market with significant demand potential and to partner with an industry leader like Canadian National to develop the knowledge that will create a pathway for meaningful future carbon reduction. Both the marine and rail industries have large addressable fuel markets and are actively seeking ways to decarbonize. Biodiesel can have a massive positive impact, playing a key role in immediately reducing emissions in these sectors. With these emerging opportunities in biodiesel, the growing sales volumes of our proprietary REG Ultra Clean, our growth plan for renewable diesel expansion, and our option to produce sustainable aviation fuel in the future, I am confident in our strategy and proud of our considerable impact being made today. As shown on slide 15, with the 128 million gallons we produced this quarter, we saved 1.1 million metric tons of carbon, which is the equivalent of 2.8 billion miles driven by passenger vehicles and is nearly double the level of carbon credits earned by all on-road EVs combined in California during second quarter of 2021, which is the most recent quarter of available data. We're energized and encouraged by this positive impact and look forward to greater contributions in the years ahead. And with that, I will now turn the call over to Craig to review our financial performance for the third quarter. Craig?

Thank you, CJ, and good day, everyone. Slide 16 shows our third quarter results. As CJ reported, it was another quarter of solid financial performance. Overall revenue was slightly over $1 billion, a 76% increase compared to the third quarter of 2020. This increase was mostly driven by higher average selling prices, including RINs and ULSD, up 139% and 78% respectively. With year-to-date revenue of $2.4 billion, we are on pace for over a $3 billion year. Moving down the profit and loss statement, our gross profit rose by $15 million, or 20% versus third quarter 2020. We benefited from a stronger margin environment and ongoing commercial optimization delivery across our system in the quarter. As demonstrated on slide eight, since 2020, the hobo plus RIN spread has remained relatively stable. Relative to third quarter 2020, the market saw a 10 cent per gallon increase as higher RIN prices more than offset a significantly lower hobo spread. As feedstock price increases exceeded diesel price increases, the RIN adjusted accordingly. This increase in the whole BOPUS RIN spread was partially offset by a $19 million year-over-year negative impact in risk management, driven primarily by a late in-quarter spike in diesel prices that I will discuss in a moment. Gallons sold slightly beat guidance and were flat compared to third quarter 2020. Total renewable diesel sales were up 28% in the quarter. North American biodiesel volumes sold were down 3%, a result of our optimization efforts focusing on our most profitable biodiesel gallons. As CJ mentioned earlier, third quarter EBITDA was $68 million, 25% higher than third quarter of 2020 and just below guidance. As shown on slide 17, ULSD price increases pressured our hedging book. especially in the latter part of the quarter. This resulted in a $12 million loss to our risk management book, which was $18 million worse than the $6 million gain included in our guidance. This $18 million negative difference was the largest driver in our delivery relative to our adjusted EBITDA guidance of $70 to $90 million. Roughly $10 million out of the $12 million risk management loss is expected to be offset in the fourth quarter when the hedged gallons are scheduled for delivery. In addition to a stronger Hobo Plus RIN, we also benefited from ongoing commercial optimization activities in the quarter. This includes the value from the record REG Ultra Clean sales, higher biodiesel blends, and ongoing feedstock optimization. SG&A expenses were up $3 million, so down significantly as a percentage of revenues. The absolute dollar increase was driven by higher legal and professional fees. Note that there were no material increases in expense associated with Hurricane Ida. Slide 19 shows trailing 12-month adjusted EBITDA, and slide 20 shows trailing 12-month return on invested capital. We continue to generate consistently strong EBITDA results and deliver attractive return on our invested capital. As a reminder, our internal threshold for growth projects remains above a 20% IRR, and our target return on invested capital, or ROIC, is above 15%. We recognize a small tax expense in the third quarter. Going forward, we expect our tax rate to continue to be less than 5%. Our blended average interest rate for the third quarter was 5.87%, essentially the rate on our green bond. Turning now to the balance sheet, I would like to start with a high-level update on overall capital spend at Geismar. As a reminder, our total capital budget for the project is estimated at $950 million. We anticipate rough capital spending for the project of approximately 15% in 2021, 45% in 2022, with the remainder of the spend slated for 2023. At the end of October, we had ordered over 80% of long-lead equipment for the project. For capital spend beyond Geismar, we remain on track with our board-approved plan, which included roughly $20 million for safety, reliability, and asset integrity, and approximately $30 million for high-return, rapid payback projects. As the project at Geismar accelerates and other opportunities come into play, it is important to have a strong balance sheet with financial flexibility. We have a sizable cash position with over $1 billion in cash and marketable securities, including long-term marketable securities, as of September 30th. In addition to our high levels of liquidity, we recently announced an extension and an increase of our asset-backed line of credit, or ABL, with Wells Fargo, Fifth Third Bank, and Bank of America to a maximum of $250 million, with an option to increase the line to $350 million if agreed upon by all parties. The ABL gives us optionality and flexibility to quickly act should an opportunity for expansion or acquisition arise in the future. We are grateful for the relationship with Wells Fargo and Fifth Third and the commitment they have shown over the past five years and are excited to expand our banking relationship with Bank of America. Now I will turn the call back to CJ to discuss the fourth quarter outlook. CJ?

Thanks, Craig. I will now discuss our fourth quarter guidance. The margin environment continues to look relatively robust. Our feedstock procurement continues to be successful, and commercial optimization, including feedstock flexibility and downstream optionality, give us confidence as we close out 2021. As a reminder, fourth quarter typically has seasonally weaker demand for biodiesel, and costs and closeout activities related to our Houston exit add uncertainty to the quarter projection. In addition, remember that Geismar volume reduction from the two-week hurricane-related shutdown will impact our fourth quarter results. One additional reminder that I'd like to draw your attention to, unrelated to fourth quarter guidance, is that Geismar is preparing for its annual turnaround in the mid-first half of 2022. With all that as a backdrop, let's turn to the numbers as shown on slide 23. For the fourth quarter, we're targeting gallons sold in the range of 135 to 155 million with adjusted EBITDA of $50 to $75 million. This guidance includes $7 million of estimated risk management loss for the quarter as of October 25th. Despite a year of significant external challenges such as ongoing COVID, market volatility, hurricanes, and other extreme weather, we are confident in our delivery of another strong year. For the full year, our projection is 609 to 629 million gallons sold and adjusted EBITDA of $278 to $303 million. Of course, any changes to ULSD prices, margins, RINs, or LCFS credits, values, or level of market volatility through the end of the quarter could affect actual results. Shipment timing could also affect timing of revenue recognition. As I close, I want to reiterate the message I shared earlier. The inflection point is visibly upon us and the societal pull to reduce carbon emissions is stronger than ever. With a robust portfolio and a clear strategy, we stand ready to meet this growing demand. Our clean fuels are ready for use today, providing immediate, scalable decarbonization with no switching costs. We believe our strong year-to-date performance is further evidence for the current energy transition and proves that Renewable Energy Group is at the right place at the right time. Now I'd like to turn the call over to the operator for the question and answer segment of our call. Latonya?

Thank you. At this time, we will conduct a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we pose for our first question. Our first question comes from Manav Gupta with Credit Suisse. Please proceed.

I mean, we often hear that the Biden administration is very focused only on electrification. He himself only talks mostly about electrification, but then you look at some of the things in this proposal, whether it's extending BTC, whether it's giving $1.75 for SAF, and even the leaked EPA document, which is almost giving $2 billion increase in the D4 volume obligations, it seems that people underneath him are actually supportive of the biofuels industry. And I just wanted to get your take as to when you talk to these people, EPA and other stuff, do you feel there is support for your industry and biofuels as a whole?

Good morning, Manav, and thanks for that. Yeah, what a great point. I think... There clearly is an ongoing focus on the all of the above strategy from the prior administrations, and there's also a greater and greater sense of urgency. And even, you know, what I'm picking up is a sense of a realization that flexibility is important if we're going to capture carbon reduction as soon as everyone wants. You hear from COP26 the discussion of how While a lot of things have happened since Paris, a lot of things have not happened, and there's a concern about the speed with which things are taking place. And the great thing is there's a recognition that things like bio-based diesel provide that answer of making a change faster. And you are seeing that, as you pointed out, Manav, in the current proposals.

Okay, and CJ, a quick follow-up here is, I mean, you're making this expansion at Geismar, and you indicated, I think you're making some SAF over there already, but if there's more policy support, especially if you can get 1.75 in BTC in SAF, I'm just trying to understand from configuration-wise, what kind of changes will you have to make to the Geismar facility? How much more lead time would there be? Would that push the project out? And how much SAF, you know, any... Anything you can give us on those directions as to what changes, will there be additional capex which will be required to make more SAF at the Geismar facility? Thank you.

Sure. It all really depends on how you want to optimize because the kerosene that comprises what you would make for SAF actually is produced along with the renewable diesel in an HDO plant such as ours. So it's really about two different things, either staying at nominal RD operations and simply separating the kerosene and having the segregation capability on the back end, which is a fairly minor change. Currently, we just blend the kerosene back into the longer chain diesel and sell it all as RD. But, you know, if the market signals are right, and as you point out, there's some pretty big incentives that are being discussed, you can actually change the catalyst in order to optimize the yield of kerosene and go into max jet mode, in which case some of the modifications would simply be to provide larger offtake capabilities for a different size of a yield production stream. None of those things are really significant capital items. They're really just about optimizing the configuration of an existing plant.

Thank you so much.

Our next question comes from Prashant Rayo with Citigroup. Please proceed.

Hi. Good morning, team. Thanks for taking the question. The first one I wanted to ask, just on the Houston Point closure, CJ, completely understand, and I think you outlined very clearly as to the rationale behind that. I kind of wanted to take a step back and ask a bigger macro picture. You know, we all see the announced projects and We come out with this math that shows like an oversupply incrementally for the next couple of years on BBD, both sides of the Atlantic. But I wanted to ask on the rationalization side, what are you seeing right now and what are you expecting near term in terms of some of these quiet, maybe more quiet rationalizations on not necessarily your plant, but first-generation biodiesel plants and other producers who may find themselves more challenged economically going forward? How should we be thinking about that? How much do you dial in sort of when you think about supply-demand dynamics incrementally in the market in the next year or two?

Yeah, thanks, Prashant. Well, you know, it's always anybody's guess in terms of exactly how the balance is going to come out, but the name of the game in portfolio optimization is making sure that the portfolio that you have has advantaged gallons. So understanding what makes the difference between an advantage gallon and an incremental gallon is critical in this industry, just like it is in refining and other commodity industries. So lower carbon intensity feedstock slates are obviously very, very helpful because the margin is expanded by the low carbon reward systems that we have in several different markets now. So that's really important to be able to have that upgrading capability. But advantage logistics, whether a plant is highly integrated with its feedstock, for example, could give it a lift. Those plants that are running straight-run veg oil and are not integrated are probably the most vulnerable in a situation like this.

Okay. This is a quick follow-up there and another question after that. Do you have a sense of when you think about how big or how much production is in sort of the base right now that is at risk? Is there sort of a size or some color that you can give us on that, at least the way that you see it? Not in your asset base, I think, in the market as a whole. That's more of a question just to be clear.

Yeah. You know, Prashant, it's always a matter of degree, and so something that we will all be monitoring. So I wouldn't say there's huge tranches as much as there are clearly some plants that are going to be more vulnerable than others. Okay. You know, so far the pull has just continued to be high enough that that has not been an issue. And when you look at some of these addressable markets that we're starting to enter, it's actually signaling more strongly and robustly that the demand is going to continue to outpace the supply for quite a while.

Okay. Makes sense. And last question from me. I was just wondering if you could maybe highlight, CJ, a bit some of the areas of strength in the quarter where you were able to offset some The headwinds from the downtime, do you destroy them, Ida? You know, your volumes were flat year over year, and if we back out the hedging or the risk management impacts, you know, the core implied ASP is still pretty strong. So just curious if you could talk about maybe a little bit of the strength of what you saw maybe outside of the U.S. or in particular parts of North America, and how much of that do you see continuing into fourth quarter?

Yeah, we tend to encapsulate all this as optimization, and much of it is proprietary, but think of it as our ability to procure a wide variety of feeds, sometimes being quite flexible even of the moment, and then route those to the most optimal locations. We did have very robust margins in Europe, so that was quite helpful and bullish for the quarter. we're also making a lot of excellent headway in the downstream, which gives us upside margin flexibility. Craig, do you want to add anything to that?

Yeah, Prashant. And I think I've had this conversation with several folks just giving my newness with the company. I think one thing that just makes us distinctive is the depth of our commercial teams. We are in the market every day on the procurement side. We are in the market every day on the sales and marketing side. And so just constantly having that finger on the pulse of what's going on in the market means that we see and are very nimble at accessing those commercial opportunities. And it's not like a big macro thing. I think it's just how we are commercially oriented and run the business on a day-in, day-out basis.

Yeah, and some of the things that we pointed out in the script give you breadcrumb hints, too. So particularly things like the expansion of REG Ultra Clean has been very helpful for us and continues to be so. And we had some great success in feedstock optimization, particularly with the opportunity that Hurricane Ida provided to us.

Perfect. Thank you so much for the time, guys. Appreciate it.

Thank you. Ladies and gentlemen, we ask that you limit your questions to one so that others may have opportunity to ask questions. Our next question comes from Ryan Taub with Piper Sandler. Please proceed.

Okay. Thanks. Maybe a follow-up question on the marketing or the partnerships agreements that you announced on the rail and marine oil. I know you probably can't say a lot, but can you maybe talk about how you view those announcements? Are they more just announcements to kind of work together to figure things out? Are there any sort of... volumes or timelines associated with these? And maybe you mentioned in particular on things like rail and marine, is there anything unique about blending into rail or marine that make those markets that are different from blending into transport diesel in other areas? Or is it just a matter of setting up kind of logistics to get the volumes to the right places.

Thanks for the questions, Ryan. This is a really exciting area for us. And while the announcements are poignant right now, we have been making progress in the background in other ways. And we've actually been selling into the marine market for a while now, particularly in Europe, where there's some really interesting incentives, especially for Yuko-based materials, such as what we produce over there. But the Good Fuels announcement is a specific one, which is an 18-month agreement. And we're not disclosing volumes, but it is meaningful for us. The Canadian National, which is in rail, is multi-year, and it's really about discovering together, you know, what the optimal blends might be for rail. So if you go to, if you stand back and think about it, both rail and marine have different types of engine technology, obviously, than what the big on-road trucks have. And what's optimal for them in terms of burning, cetane levels, et cetera, are different. And we have quite a bit of indication that biodiesel is actually superior for many reasons over renewable diesel. And that's something that we're working on together. But standing back from all of that, we're making some really good volume headway in those markets, early days yet, but the addressable volumes in these markets are phenomenal, which means we have a phenomenal opportunity to make a really big difference with decarbonization. So, you know, in marine, just in North America, we're talking about 7 billion gallons and about 6 billion gallons per year in North America for rail. And the global marine market is 90 billion gallons So it gives you a sense of a very substantial opportunity that we're just getting started with.

Thanks, CJ. I'll leave it at one.

Our next question comes from Jordan Leary with Truist. Please proceed.

Morning, all. CJ, you've talked before about potential for additional renewable diesel projects outside of Geismar. And I'm just curious both How you're thinking about that now as well as if there's anything from a regulatory or a market development perspective you'd like to see to give you some added comfort in underwriting any future progress?

Yeah, thanks, Jordan. We are always looking for what the next really advantaged opportunity is for growth, and We are looking for that in the area of manufacturing and production, but we couple that with feed and downstream. So we're sort of looking at it on an across-the-board value chain standpoint. So keep that in mind as you're monitoring some of our activities. We see several really interesting opportunities to expand, especially in renewable diesel when it comes to production. and we'll continue to evaluate those. We're very focused on ensuring that the choices that we make are highly strategic, so we're being quite careful, but definitely very active in the space. From a regulatory standpoint, further to your question, you know, the signals just continue to be bullish, and they do so from a... standpoint of multiplicity. In other words, we're not just looking at what's happening U.S. federally, although obviously that has a big spotlight and a focus right now. But there are so many different regulatory pulls happening that that gives us a lot of upside and things to think about as we're considering strategic location.

That's great. I'll take the rest of my questions offline. Thank you all.

Okay. Thanks, Jordan.

Our next question comes from Chip Moore with EF Hutton. Please proceed.

Morning, everyone. Thanks for taking the question.

Hey, Chip.

Hey. So I just wanted to follow up on that last question and your response. Just in terms of regulatory momentum and implications for growth projects here, can you talk about if you're moving things a bit further along in terms of maybe some of those preliminary engineering efforts? maybe versus six months ago, just given what seems to be a pretty supportive environment?

Yeah, I would say just a couple additional things. Definitely focusing on taking advantage of Europe's emphasis on these Gen 3 feedstocks. There's some really interesting upside there, and I think that it particularly plays to some of REG's strengths, so we're focusing on that. We're also obviously looking at what it's going to take for us to be flexible to make more SAF because not only are you seeing the regulatory push and the discussion that we've already had together on some of the proposed legislation, but there's actually a growing pull from a customer standpoint too. And that's very encouraging for us and causing us to continue to look at things that we can do to be flexible.

That's helpful, and maybe if I could follow up on that on sustainable aviation fuel. We all know it's not justified versus some of the other markets here, but maybe you could talk a little bit about how you're preparing for that opportunity from a customer perspective to your point when that time does come.

Yeah, you know, it's like anything else with a commercial agreement. It's completely dependent on location, volume, preference for multiple things. But there's just a lot of optionality there. It's extremely encouraging. And it's great because SAF is a way for many commercial entities who have made carbon neutral pledges to get started in a really good direction in reducing their carbon intensity because so many organizations have a carbon consumption waiting in the aviation area. So it's a good win-win for us to work with customers that are looking to decarbonize in that way.

I think the other thing that makes us unique is we have got both an RD product and offer and a BD product and offer, which means that we can have differential conversations with our customers about what both of our products can do to their aviation needs or their ground fuel needs.

Right. Great. Okay. Thanks, everyone.

Thanks, Chip.

Our next question comes from Amit Dayal with HC Ringwright. Please proceed.

Thank you. Good morning, everyone. Just a quick question on the buyback program, CJ. Have you utilized any of that facility over the last quarter, and what your plans are for bringing that into play to support the stock?

This is Craig. No, we have not, and really we're, as I kind of was talking about our balance sheet, it's well-positioned, but it's well-positioned for both completing the Geismar expansion, but for the other growth opportunities we see.

Okay, thank you. That's all I have.

Thank you.

Our next question comes from Craig Irwin with Roth Capital Partners. Please proceed.

Good morning, and thanks for taking my question. So it's a big picture question, right? The roughly 12 to 15 green diesel plants that are out there, some unannounced, some announced, we know that only a portion of those will be successfully commissioned and producing over the next few years. But it seems that many of those are plants where the owners are highly motivated more by something we can call politely compliance versus Reggie as a standalone entity that is really the pioneer or an important pioneer of this compliance value, but has a fiduciary to its investors on profits. Can you maybe... Talk a little bit about the strengths Reggie has or maybe possibly some weaknesses as you look to navigate this environment with these other plants coming online over the next couple of years.

Yeah, hey Craig, thanks for the question. It's really good to stand back and think about the big picture strategy and certainly there are different motivations on the parts of insurance and also, you know, different levels of margins that are going to be acceptable. And so the name of the game that we've talked about quite a bit is ensuring that what we build is strategically advantaged. And that way, even if there are some that are willing to take a lower margin, that's the choice that they make, and they create sort of a floor for incremental gallons. I think our advantages continue to be that We can process a very wide variety of feedstocks. We know how to procure a wide variety of feedstocks. We have this flexibility. We have quite a bit of portfolio optimization capability. So once you have multiple plants, that gives you an ability to pivot as well as manage margin in a way that you really can't do when you only have one or two plants.

Just as a follow-up here, the pivots that Reggie's made in the last year include curtailing production and shutting plants. You know, what are the positive pivots that you see with your current footprint?

Yeah, well, we've been pushing into new areas, both in terms of expanding into RD in a clear way, as well as expanding into downstream, which has been a substantial change for us and provides us quite a bit of insight as to what's driving our customers' preferences as well as where the margins are.

Excellent. We look forward to following this story over the next few years. Thank you.

Thanks, Craig.

Thank you. Our next question comes from Craig Wazowski with Weber. Please proceed.

Hey, good morning, everyone. How are you doing?

Hey, Craig. Good morning.

So it wouldn't be a Q3 earnings call if nobody asked about supply chain issues. So I guess I'll be that guy. And just curious how it's affecting your business overall. Are you seeing any issues with feedstock logistics or sourcing those long lead items for Geismar? Or are you even noticing anything on the demand side when it comes to auto OEMs kind of struggling with production? Just any comments there would be helpful. Thanks.

Yeah, you're so right, and we are so blessed because supply chain has been a challenge, but it hasn't been, you know, debilitating like it has been in so many different industries and for different companies. There's been issues, you know, where we've had to scramble to get truck drivers, but it hasn't inhibited us so far. And we've been able to pivot in terms of the way that we have our feedstock shipped, all of which has been successful for us. So we feel really blessed about that. I think one of the things that everybody's, you know, concerned about is the supply chain for big projects. And as Craig pointed out, we've been really lucky getting our long lead orders out there. solidified um and with the price lockdown for over 80 percent of of what we've needed to buy so far so that gives us a lot more assurance cj i'd add that you know when it came to geismar and the fid you know it wasn't just making sure we were engineering ready it was making sure that we were commercially ready to before we sanctioned the project yeah exactly and when it comes to feed stocks for example this is again where our multi-fleet um strategy i think has come into play but uh Instead of purchasing by individual containers, and you know, but just by the pictures, the container problem has been huge. When we can source an entire vessel, that's been helping us get around those problems.

Okay, got it. Thanks very much.

Thank you, Greg. Our next question comes from Hamid Khorasan with BWS Financial. Please proceed.

Hi, good morning. This is Vahid, actually, for Hamid. Just one quick follow-up and then another question. And I may have missed this, and I apologize, but in terms of the Geismar shutdown, have you disclosed what those numbers are going to look like, the impacts of the numbers of the shutdown, whether it's in Q4 or Q1?

Well, basically what we've said is, which you can kind of back calculate, is it's a couple weeks of production outage, and we're doing our best to mitigate that by, you know, continuing to push for record rates following. But, you know, the two weeks is pretty much you can sort of back of the envelope that.

You know, some people wonder why wasn't it a third quarter impact? We did go into the hurricane in a good position in terms of finished product inventory. So hence why it's having more of an impact in fourth quarter relative to third.

And then I appreciate that. Thank you. And then my question is for California. What did you experience with the drop in LCFS and were you able to divert to other markets? And how are you adjusting given the lower LCFS pricing?

Yeah, you know, it's part of the overall picture, and the volatility has been pretty substantial in all of the different market markers, whether it's feed or product or RINs or whatever. So it was part of that picture, and again, optimization plays a very strong part. And so our RD routing has many different options, and you know, as the market signals move around, we can route to other markets if the LCFS comes out of solution. But overall, as you can see, you know, we still experienced a good, robust margin market environment for the quarter. Great.

Thank you very much.

Our next question comes from Matthew Blair with Tudor Pickering-Holk. Please proceed.

Hey, good morning CJ, Craig, and Todd. You know, there's a lot of volatility in feed prices in Q3, and I think you said that your vegetable oil share was at 25% versus, I think it's 20% in Q2. So could you talk about, was that a purposeful shift to running more soybean oil based on margins, or was that just like normal volatility, or perhaps maybe there was an Ida impact, you know, taking out Geismar?

Well, so the first sort of thing to keep in mind is we have Ralston, which is our plant, which is integrated with a soybean crush plant. So we'll always have that. And Grays Harbor runs canola, which is actually a low CI feed in Canada. And so those are both pure veg oil. So you'll always have that in the background of our throughput. And then soybean oil just kind of comes in and out opportunistically depending on what's happening with margin differentials as well as what our procurement team can do because sometimes there's some opportunistic loads that they can take advantage of.

Great, thank you.

Our last question comes from Jason Gabelman with Cowan. Please proceed.

Hey, thanks for taking my questions. I wanted to first ask on Q4 guidance, if I'm looking at, the margin per gallon backing out the hedging impacts. It actually looks like the margin per gallon is moving higher from 3Q to 4Q. Is that right? It's a bit surprising just given it sounds like you're going to have less renewable diesel supply in 4Q and that's a higher margin gallon. So wondering why the move higher and also if there's any embedded costs in there for the Houston facility shutdown. And then my second question on these opportunities, on these new market opportunities that you've mentioned in rail and marine, appreciate it's a lot of volume you could go after, but just wondering on the price side of it, are you able to capture the same regulatory credits and pricing in these new markets as you do when you sell biodiesel into the diesel on-road fuel pool. I'll leave it there. Thanks.

Sure. Yeah, I'll start with the latter part, and then I'll hand it over to Craig for guidance and some of the specifics there. But the really interesting thing about what's happening with this inflection point that I referred to a few times is that our customers are evaluating all of their different choices to decarbonize. And as it happens... Bringing in bio-based diesel, even at the advantaged price that it tends to realize in certain markets where it's rewarded for its carbon intensity, is a much more economic and sensible and rapid way for them to decarbonize than it is to make some of the other significant choices that they need to face. So keep that in mind as pricing decisions take place. And of course, we don't discuss price beyond that. But from a philosophical standpoint, we're really rather economic versus other choices.

And Jason, it's Craig. And going to the fourth quarter, we are seeing the tailwind of improved margins. I think we were looking yesterday and the average hobo plus rent for the fourth quarter has been about $1.20. But we do have a couple of headwinds. One of those is just the fact that seasonally our biodiesel sales are normally lower in the fourth quarter, just where overall market demand is for that product. In addition, part of what's driving that hobo plus rent up is ongoing increases in ULSD. So even though we've kind of got the reversal of third quarter hedge impact, we've got more potential hedge impact in the fourth quarter. And as CJ mentioned in the guide, we didn't see the impact of Hurricane Ida in the third quarter, but we do go into fourth quarter with lower produced volumes due to the hurricane, and that'll be a headwind as well.

Thanks. So just to confirm, I don't know if you've looked at it, but the per gallon number, excluding the hedging impacts, have you looked at the numbers that way? Because I'm seeing that moving higher quarter over quarter. I don't know if that's not right, but...

I would say it would be kind of in the rough same zone because if you look at what our third quarter result was and if you kind of look at the midpoint of the guide, I think you're going to be roughly, roughly in the same zone on a dollars per gallon basis. It may go up a little bit just if we've got lower biodiesel gallons to sell in the quarter. Okay, thanks.

Ladies and gentlemen, we have reached the end of the question and answer session, and I would like to turn the call back to Todd Robson for closing comments.

Thank you. We have two investor conferences scheduled for December, both of which are shown on slide 24. Before I walk through the conferences, please note attendance at these conferences is by invitation only for clients of each respective firm. So interested parties, please contact your respective sales representative to register for and for one-on-one meetings to secure a time. The first conference is Wednesday, December 1st, when we will participate in the virtual B of A Securities Leverage Finance Conference. Please note we will participate in a fireside chat at 3.30 Central, and we will host one-on-one meetings throughout the day with institutional investors. In addition, on Monday, December 6th, we will participate in the Credits with Climate Tech and Startup Forum. We will host virtual one-on-one meetings with institutional investors throughout the day. Thank you all, and this concludes our call, and you may disconnect.

Thank you for your participation. This concludes today's teleconference. You may disconnect your lines at this time, and have a great day.