Renewable Energy Group Inc (REGI) Q4 2020 Earnings Call Transcript

Image source: The Motley Fool.

Renewable Energy Group Inc (REGI)
Q4 2020 Earnings Call
Feb 25, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, ladies and gentlemen, and welcome to the Renewable Energy Group Fourth Quarter 2020 Earnings Conference Call. [Operator Instructions].

I will now turn the conference over to our host, Jacob Schwager [Phonetic], Senior Analyst, Investor Relations. Thank you, sir. You may begin.

Jakob Schwegler -- Senior Analyst, Investor Relations

Thank you, Diego. Good afternoon, everyone, and welcome to our fourth quarter and full year 2020 earnings conference call. With me today is REG's President and Chief Executive Officer, CJ Warner; and our Interim Chief Financial Officer, Todd Robinson. While Todd is serving as interim CFO, I am [Indecipherable] today to assist in the role normally reserved for the Head of Investor Relations. Let me cover a few housekeeping items before I turn the call over to CJ. First, I would like to remind everyone 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 evening. The webcast includes an accompanying slide deck, which will appear automatically with the webcast, but you will need to advance the slide manually as we prompt you. For those of you dialing in, the slide deck can be downloaded along with the earnings press release in the Investor Relations section of our website. Turning to slide 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 that 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 these differences -- excuse me, those differences. These factors are described in detail in the Risk factors and other sections of our amended annual report on Form 10-K for the year ended December 31, 2019, filed today with the SEC and in subsequent reports that we will file with the SEC. These forward-looking statements speak only as of the date of this call. The company undertakes no obligation to publicly update any forward-looking statements based on new information or revised expectations. Today's discussion also includes non-GAAP financial measures. We believe these metrics will help investors assess the operating performance of our core business. Please see the press release 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, CJ Warner. CJ?

Cynthia J. Warner -- President and Chief Executive Officer

Thank you, Jacob, and good afternoon, everyone. As we stand back and review our 2020 results, I am incredibly proud of the effort put in focus maintained and results achieved by the REG team this year. 2020 was a singularly difficult year and maybe one of the most disruptive, volatile and uncertain years any of us will experience in our careers. The REG team adapted to the challenging environment and kept us operating efficiently and profitably with an unwavering focus on safety and health. Our performance in 2020 demonstrated the commitment of our team, the strength of the demand trends, which continue to fuel our growth despite significant market disruption and the resiliency of our operating model, especially with respect to feedstock flexibility. We believe our 2020 performance was a product of our drive to act in operate in keeping with our core values. These values foster our results driven culture, embracing safety, integrity and humanity. Regularly naming them gave us confidence that even in the face of the fear and uncertainty of a pandemic, together, we would make decisions in keeping with our values. And because of that, we would make it through. Making it through 2020 as we did, strengthens our belief that these values will continue to underpin our future success. Our goal is to achieve a mission of accelerating the transition to a more sustainable energy system by maintaining leadership in the growing bio-based diesel market.

The planned Geismar expansion is an important element of achieving this goal as is our downstream strategy. Moving downstream is driving customer enthusiasm in premium markets and building value capture for both biodiesel and renewable diesel. More than ever, bio-based diesel is recognized as a means for our customers to decarbonize now, without having to make significant new and costly infrastructure or equipment investments. I've been saying for a while now that REG is in the right place at the right time. And looking back at our demand levels in 2020, it seems the public agrees. I believe our position will only grow stronger in the future. And so I look forward to the opportunities ahead. Before we go into our 2020 results, I want to address the restated financial results for 2018 and 2019 and the reasons behind the need for restatement. In preparation for the standard IRS audits of our 2018 and 2019 Biodiesel Mixture Excise Tax Credit, otherwise known as BTC filings, we discovered that our Seneca, Illinois biorefinery had fewer gallons of petroleum diesel blended than we had expected and that would be required for the volume of B99.9 that we have sold. Many of you know that the BTC credits are realized at the point of blending or when pure biodiesel B100, is blended with petroleum diesel to at least a 0.1% level, creating a product known as B99.9. We promptly self-reported the discovery to the IRS and launched an internal investigation.

What we learned was that the diesel additive system at our Seneca biorefinery and unique to that plant was periodically not including the 0.1% petroleum diesel in certain gallons sold as B99.9. As a result, some of the gallons we sold as B99.9 were actually B100 gallons. We are confident that in keeping with how the product is consumed, any B100 gallons that were incorrectly sold as B99.9, were eventually blended with petroleum diesel by our customers. And accordingly, the issue with these gallons is not whether the gallons qualify for the BTC, but what entity is the appropriate taxpayer to claim the BTC. Therefore, and pursuant to a consent that we signed with the IRS for its tax assessment, we are returning the incorrectly claimed BTC credits totaling $40.5 million for the period from 2017 to third quarter of 2020. And then working with customers and, in some cases, our own internal entities to refile and claim the credits properly. We are engaging with relevant customers to recover as much of the $40.5 million as possible. Shortly, Todd will provide the details of the restatement by year during his segment of the call. Now let's discuss what we have done to address the situation. First, it is important to note that all of our other U.S. plants have successfully completed their IRS audits. Our primary remediation efforts are, therefore, focused on Seneca although our overall enhanced assurance approach is being applied companywide.

Going forward, we have established the following additional policies and controls designed to ensure that the required blending takes place and that we properly file for the BTC. For the Seneca facility, we are limiting the loading to modes where the existing system is known to be functional until the system is redesigned to work in all operating modes. And we have implemented a control system calculation and readout tool that enables the loading operator to validate that the proper number of petroleum diesel gallons were added to each load. Then to further reinforce our systemwide controls and assurances, we are performing additional local reconciliations weekly to validate that the amount of petroleum diesel used matches the amount of petroleum diesel required to be blended. And the company is now reviewing monthly inventory reconciliations prior to filing for BTC to reconfirm that the required volume of petroleum diesel has been blended. We are disappointed in this situation and take full responsibility for it. Since learning of it, we acted decisively and have our hands around this matter. Our systemwide investigation, in addition to our stepped-up assurance processes give us confidence that this isolated incident won't be repeated. Let's now turn to the 2020 fourth quarter and full year results, as highlighted on slides four and five. Especially given the magnitude of the challenges of the year, we are very pleased to report fourth quarter net income of $27 million and adjusted EBITDA of $46 million, with 151 million gallons sold and full year net income of $120 million and adjusted EBITDA of $196 million, with 651 million gallons sold. As we look back on 2020, it taught us a lot about ourselves and our value creation capabilities.

Most important is that the values that inform our daily efforts matter, none much more than safety, which importantly includes health. REG's Vision Zero drives us to a goal of no accidents or workplace related health issues, a goal that became even more important in the face of a pandemic. And our good safety record starts with planning and proactive approaches. In late January 2020, before the disease was evidenced in the U.S. and Europe, but when we could see the possibility of COVID-19 becoming a pandemic, we activated our emergency response team to begin planning for the worst. This included securing needed supplies and preparing for either remote work in the case of our offices or stepped-up hygiene practices for our plants. So when COVID-19 hit, we were ready and were able to continue operating our essential business without significant employee health issues or business disruption. Over the course of the year, we have kept our plants running safely and manage office occupancy with a phased approach following CDC guidelines. Even with the challenges of the pandemic, including the new requirement to monitor and record workplace-related COVID transmissions, we maintained a total recordable incident rate better than pre-COVID industry average, as shown on slide eight. In keeping with our safety culture, we are working hard to learn from the incidents we had and use those lessons learned to drive to Vision Zero. The other REG value that really shown through in 2020 was our results-oriented culture, which helped us to stay focused and even thrive despite the challenges. I am extremely proud of our notable organic growth as we achieved record production of 519 million gallons, 17 million gallons more than our previous high in 2018 and representing 2% additional organic growth at our Geismar renewable diesel plant. Along with this strong production, we kept the Geismar expansion plan on track and made substantive progress in the downstream strategy. All of this resulted in solid profitability despite the highly challenged external economic environment.

The stress of the year highlighted the strength of our business model, our gallons sold declined, but this was driven by a strategic decision to improve our product mix and sell more profitable gallons. We reduced the volume of petroleum diesel sales and the volume of third-party biodiesel sales, both lower margin activities. Meanwhile, we increased our volume of self-produced biodiesel, as shown on slide nine, and increased sales of blends of biodiesel into renewable diesel by 57%, as shown on slide 10. Our fourth quarter production and sales volume performance was solid, rounding out the year for a strong finish. Gallons sold were on plan and adjusted EBITDA came in slightly above the high-end of guidance. Gallons sold were down 1%, but REG produced gallons sold were up 6% compared to fourth quarter 2019, also shown on slide nine, with the continued shift of the sales mix away from petroleum to maximize profitability. Our quarterly production was up versus prior year, as shown on slide 11. Notably, biodiesel production was up 19% in the U.S. and up 20% in Germany, where production was strong all year. This was offset by a decline in [Indecipherable] production for the quarter, which was caused by a brief unplanned outage at Geismar in early December. Overall, REG produced gallons were up 13% compared to fourth quarter of last year, driven by biodiesel. And notably, sales of blends of biodiesel into renewable diesel continue to grow rapidly as more and more customers see the value of REG's proprietary Ultra Clean fuel. These sales were up 48% compared to the fourth quarter of last year, as shown on slide 10. A major contributor to our strong performance is a focus on and capability in system optimization and feedstock flexibility. At REG, we believe that our unique position of producing and selling both biodiesel and renewable diesel at scale is a competitive advantage.

With a large fleet of biodiesel plants, wide-ranging feedstock procurement and flexible feedstock capability, an international sales footprint and advanced tools like linear programming, we optimize our profitability by taking the right feedstock to the right plant to the right end market. Feedstock flexibility has been a critical element of optimization in 2020, especially given the volatility of the feedstock market. COVID shutdowns dramatically affected the availability of used cooking oil given broad reductions in restaurant operations, also in distillers corn oil as a result of significant reduction in gasoline consumption and commensurate reductions in ethanol volumes and in animal fats during various times of the pandemic when meat packing and rendering operations were severely cutback. Slide 12 shows the resulting broad swings in feedstock prices and notably, their costs relative to one another. Slide 13 shows how dramatically we modified our feedstock mix in response, which enabled us to continue to run to planned rates and with attractive margins. Our confidence in REG's future comes not only from our solid performance, but from the opportunities in our markets. 2020 was a year of change in acceleration, including the acceleration of demand for low carbon fuels. It has become clearer that the low carbon future is here now and bio-based diesel will play an important role. Notably, even as demand for gasoline and jet fuel collapsed last spring and summer, demand for bio-based diesel held steady and was up 8% in 2020, as shown on slide 14. As one might expect, during a pandemic year, margins were challenged. For both the quarter and the full year, the HOBO + 1.5 RIN spread has been about 40% lower than the equivalent prior year period.

Recall that the year began with a dramatic drop in crude oil price, followed by depressed fuel prices in keeping with the huge pandemic-driven drop in petroleum fuel consumption. Feedstock supplies were reduced at the same time, driving feed prices upward. For the first half of the year, RIN prices were increasing, as shown in slide 15, but not enough to stem the overall drop in realized margins. Slide 16 shows the HOBO spread and the HOBO + 1.5 RIN spreads, and you can see the two tracking closely in the first half of the year. Uncertainty regarding the small refinery exemptions contributed to this effect. By the fourth quarter, the market began to react positively to the view of a significantly lower potential for small refinery exemptions to be issued under a new EPA administration, and the RINs became more of a stabilizing force as designed. You can see on slide 16, the flattening out of the HOBO + 1.5 RINs during the fourth quarter, while HOBO continued to drop. Though we never predict RIN or feedstock price movements, we are encouraged by the ongoing RIN-related tailwinds we just reviewed. It's important to note how diversified the market-pulling mechanisms for our industry have become. RINs continue to be significant, but we also have the ongoing drive for decarbonization and renewable energy inherent in the California LCFS program as well as those in Oregon, British Columbia, Norway and the European Union. We continue to see momentum on the regulatory front and are encouraged by multiple other developing programs domestically and abroad. This includes LCFS and similar clean fuel programs under consideration in additional states as well as within the aviation and marine fuel markets, where there is a trend to follow the on-road fuel markets and moving toward greater use of cleaner, sustainable fuels. In both the U.S. and Europe, market signals and regulatory activities are indicating the growing probability that the use of sustainable aviation fuel will ramp aggressively over the next [Indecipherable]. Especially given the backdrop of this environment, we are encouraged to continue to drive our growth strategy over the next few years. Clearly, a step change in R&D volume growth will come from the Geismar expansion.

More immediately, we believe our downstream strategy will drive growth and margin capture. REG Ultra Clean, our proprietary BD/RD blend, continues to gain market acceptance. Our expanding partnership with Hunt & Sons in California was an important contributing factor to this ultra clean growth, and we're pursuing other opportunities, including potential acquisitions to accelerate this strategy. In addition to the strong growth of BD/RD blends, we are seeing increased adoption of higher BD blend percentages among some key customers, up to and including B100. And accelerating our business optimization efforts, we restructured our leadership team in the latter part of 2020 to better enable us to boost profitability, announcing a newly formed optimization department that fosters strong collaboration and alignment among procurement, operations control and commercial optimization teams. We are confident that we have the right people in the right roles focusing on the right drivers and poised to deliver outstanding results. As a result of all of this, I am more confident than ever that REG is in the right place at the right time. Our products support society's desire for an environmentally friendly circular economy. We recycle waste products into clean burning fuels that enable our customers to significantly reduce their carbon emissions without incurring switching costs. Slide 18 highlights our considerable environmental net contribution of 4.2 million metric tons of carbon reduction for 2020, which we will highlight in more detail in the 2021 release of our ESG report. We are encouraged and energized by the potential contributions we can make in the years ahead.

Now I will turn the call over to Todd to review our financial performance for the fourth quarter and the full year 2020 as well as to provide some more detail behind the restatements. Todd?

Todd Robinson -- Treasurer

Thank you, CJ, and good afternoon, everyone. Before I get into my comments on our fourth quarter and full year 2020 results, I want to discuss the impacts from the restatement of our financial reports for 2018, 2019 and the first three quarters of 2020. Recall, the BTC was retroactively reinstated on February 9, 2018, for 2017 and then on December 20, 2019, for 2018 and 2019. Accordingly, for GAAP purposes, the 2017 BTC benefit was recognized in the first quarter of 2018 and the 2018 and 2019 BTC benefit was recognized in the fourth quarter of 2019. The impacts for the full year 2018 and 2019 have been reflected in the amended 10-K filed today, and the impacts for the first three quarters of 2020 will be reflected in the 10-K for 2020, we expect to file on Monday. They are scheduled in the earnings release, which reflect the impacts of the restatement of certain income statement items and adjusted EBITDA. Slide 19 in the presentation reflects the adjustments as well. As CJ mentioned, the tax assessment from the IRS is for $40.5 million, excluding approximately $3 million of interest. The restatement to our financials, however, is $38.2 million. The difference between the $40.5 million and the $38.2 million is made possible through our ability to claim the BTC for $2.3 million from intercompany sales. Now specifically, the impact on our financial statement is a reduction of biomass-based diesel government incentives revenue of $14.5 million related to the 2017 BTC in the first quarter of 2018, and $16.2 million related to 2018 and 2019 BTC in the fourth quarter of 2019. For 2020, the quarterly amounts are $1.7 million, $2.1 million and $3.7 million related to the 2020 BTC for first quarter, second quarter and third quarter, respectively, since the BTC was in effect for all of 2020.

The other impact to the income statement is an increase in interest expense resulting from the interest due on the tax assessment. The balance sheet impact is an increase in liabilities for the tax assessment and accrued interest and a reduction in retained earnings. The impact on adjusted EBITDA takes into account the allocation of the BTC benefit to the respective periods when the related B99 gallons were sold. While the amount of the restatement in each individual year is not material, the aggregate amount in 2019 is material, thus requiring the restatement of the 2018 and 2019 financial statements. Included in the amended 2019 10-K and the 10-K for 2020, you will notice the material weakness identified for the failure to detect the issue with the diesel additive system. This is specific to this issue and determined based on the status as of the end of 2020. Since then, we have established the additional policies and controls, as CJ mentioned, to address this weakness. I would like to reiterate what CJ mentioned. We are not pleased with the error that led to the restatement, but it does not have an impact on the financial health of our business. One more clarification before I get into the financial analysis for Q4 and full year 2020, I want to note that we have included in the presentation, information for GAAP results for the fourth quarter and full year on slides20 and 21 as well as adjusted results for the fourth quarter and full year on slides22 and 23. With the 2018 and 2019 net benefit -- net BTC benefit of $491 million, all recognized in the fourth quarter of 2019, we have adjusted the results for 2019 to reflect the allocation of the BTC benefit to the respective periods when the gallons were sold, which we believe allows for a helpful comparison. Now let's start by reviewing the fourth quarter results, and then I will step back and review the full year. First, revenue was down 4% on a GAAP adjusted basis, as shown on slide 22.

This decline was driven mostly by selling prices being down, reflective of the significant decline in ULSD prices, with much of the decline offset by strong growth in incentives, both RINs and LCFS credits. Total gallons sold also declined slightly versus last year, down 1%, in line with our guidance. Biodiesel volume in North America and Europe grew nicely. Petroleum gallons were down as a result of our strategic decision to shift to more profitable bio-based diesel gallon. Margins were pressured by lower ULSD prices and higher feedstock costs, as CJ noted. Specifically in the fourth quarter, HOBO + 1.5 RIN spread was down 40%. D4 RIN prices were up significantly, 57% on average, and we monetized more wins year-over-year, resulting in an increase in sales of separated RINs of $30 million. We also had $19 million of risk management loss, which compares to a $4 million risk management loss in Q4 of 2019. As ULSD prices rose during the fourth quarter of 2020, even though they were down significantly versus the fourth quarter of last year. Recall our usual reminder that some of the risk management gains or losses recognized in the period are offset by the final realized pricing when the gallons are delivered in a subsequent period. Roughly $11 million out of the $19 million risk management loss in the quarter is related to gallons not yet delivered. Chemical freight and operating costs were down $8 billion. SG&A expenses were down $9 million due primarily to higher employee-related compensation in 2019 caused by the retroactive reinstatement in 2019 of the BTC for 2018 and 2019. In addition, travel costs were lower due to the pandemic. All in, adjusted EBITDA of $46 million was down year-over-year, but still above our guidance. Now let's look at the full year results, as shown on slide 23. As CJ explained, we demonstrated our resiliency in a challenging environment. Considering these challenges, the revenue decline was modest, driven by lower selling prices as ULSD was down 36% and and significantly lower petroleum gallons sold as we intentionally focused on enhancing our sales mix.

In biodiesel, Europe's performance was strong with more gallons sold and higher prices. Europe also saw growth in renewable diesel as we shifted our sales there from North America to capture better pricing. Petroleum diesel gallons sold were down $49 million. Third-party biodiesel gallons sold were down $16 million, with North American biodiesel gallons sold up $10 million and European biodiesel gallons up $5 million. Renewable diesel gallons sold were essentially flat year-over-year. Rising feedstock costs also impacted margins for the year. Average prices for used cooking oil and distillers corn oil increased dramatically as restaurant closures and lower ethanol production impacted availability. So we shifted our mix to more attractively priced soybean oil. We used 50% more soybean oil in 2020 and in 2019. Our increased feedstock cost was evenly balanced between more usage from higher production and higher prices. Our average feedstock prices for the year were up $0.14 a gallon. Full year adjusted EBITDA was $196 million, which is down from the $211 million generated in 2019. The main driver of this decrease was margin compression. The average HOBO + 1.5 RIN spread was lower by 40%. This margin compression was offset by a risk management or by a $66 million increase from risk management as well as $77 million increase from separated RINs and LCFS credits. We also experienced stronger European biodiesel margins driven by volume and price. Additionally, chemical, freight and operating costs were down $36 million. Finally, we benefited from our strategy to redirect sales to the most profitable markets as product mix versus 2019 provided an uplift. Slide 24 shows trailing 12-month adjusted EBITDA, and slide 25 shows our trailing 12-month return on invested capital. As you can see, we continue to exceed our internal ROIC threshold of 15%. For 2020, we did recognize a small tax expense. However, going forward, we expect our tax rate to continue to be less than 5% for the foreseeable future. Our blended average interest rate continues to be low and is less than 4%.

Now let's turn to the balance sheet, as shown on slide 26. Our balance sheet remains strong. At the end of the year, we had over $350 million in cash and marketable securities, inclusive of the long-term portion of marketable securities. In terms of capital allocation for the year, we did allocate some capital to convertible bond purchases. We used $76 million of cash to settle $30 million of principal, mostly in the first half of the year at a point in time when our stock price was much lower. We also paid down some term debt in the first quarter. Additionally, we invested $64 million in capex in keeping with our capital allocation framework. Our total debt-to-capital ratio was 5% at year-end, which positions us well as we consider options for financing Geismar expansion. As always, we will carefully consider the environment, market conditions and all options as we make our capital allocation decisions. We used a balanced approach for nonmajor capital projects, focused on both keeping our biorefineries safe and reliable while also providing an overall acceptable return through rapid payback projects. Included in our 2021 capex budget is approximately $20 million for safety, reliability and asset integrity and approximately $30 million for high return and strategic projects that combined should deliver less than a 2.5-year payback. Approximately $30 million has been budgeted for engineering on future growth projects. Major capital projects such as the Geismar expansion or any M&A are subject to separate Board approvals. Our internal threshold for growth projects remains at a 20% IRR. Overall, including safety and reliability investments in our ROIC target remains greater than 15%.

Now I will turn the call back to CJ to discuss the outlook. CJ?

Cynthia J. Warner -- President and Chief Executive Officer

Thanks, Todd. I will now discuss our first quarter 2021 guidance as well as a general outlook for the year ahead. For context, I'd like to touch on the external environment in a bit more depth. Because the pandemic's been part of our lives for so long, it's easy to forget that we're still in it and the markets we are seeing reflect this. In fact, California went back into lockdown at the end of 2020 and remained that way until recently, impacting economic activity in that significant market. The ongoing COVID-related shutdowns and supply chain disruptions are impacting feedstock availability and prices. We are all still projecting a recovery, but do not see it happening in the first quarter. Cold weather across the central continent has temporarily reduced demand for biodiesel and in Texas, particularly in Houston, where many RIN buyers and traders are located, there's been a significant drop in RIN trading activity, which should pick up once things return to normal there. Having said that, we are confident that REG has implemented a set of tools that let us manage within our environment as effectively as possible and operate profitably even under tough conditions. First of all, we're taking advantage of the relatively low margin period of the first quarter to undertake necessary annual maintenance at several of our biodiesel plants and at Geismar, where our annual turnaround is currently under way. This downtime will have an impact on first quarter renewable diesel production, but will strengthen the plant for the coming year. Secondly, I want to note that for a variety of reasons, we're building a significant inventory of RINs in the quarter that will be monetized in future quarters. We estimate the value at the end of the quarter to be approximately $25 million. With that context, let's get to numbers as shown on slide 28. For the full year, we are targeting gallons sold in the range of $660 million to $700 million. We expect to produce 490 million to 520 million gallons and will fulfill the excess demand through third-party gallons. For the first quarter, we expect gallons sold in the range of $120 million to $140 million and adjusted EBITDA in the range of $10 million to $30 million. Of course, any changes to the ULSD 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 first quarter guidance includes an $11 million risk management loss as of February 15, 2021. Our strong performance in the face of unprecedented economic conditions gives us confidence as things return to normal. We believe we're well positioned to capitalize on our strategy as we pursue long-term outsized growth in renewable diesel, combined with near-term tactical growth in the downstream. Finally, though there are near-term headwinds, I want to reiterate that we have the tailwinds of the consumer's interest in fuels that are renewable and clean. The grassroot societal movement demanding carbon reduction has led to increased support on the regulatory front, which provides a rising demand floor for our products and ever-increasing opportunities for growth. This demand only continues to grow, and we are already enabled to provide that fuel to meet these needs at scale. I am more convinced than ever that REG is in the right place at the right time.

Now I'd like to turn the call over to our operator for the question-and-answer segment of our call. Diego?

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Craig Irwin with Roth Capital Partners.

Craig Irwin -- Roth Capital Partners -- Analyst

CJ, first thing I wanted to ask is if we could maybe walk through guidance a little bit. I'm guessing that Geismar is going to have a 14-day turnaround. That means we'll probably have about a $7 million EBITDA hit. And the $25 million in inventory build points to something more like $42 million to $62 million in EBITDA, if we didn't have these timing issues, debt in line with consensus thinking for the year. Does this jive with sort of the way you're looking at things? Are there any other major pieces we need to look at that are causing some of the volatility or short-term timing adjustments we need to make?

Cynthia J. Warner -- President and Chief Executive Officer

Craig, nice to hear from you. So the first thing I would say, just keep in mind is this turnaround for Geismar is a 31-day shutdown. It's a significant turnaround, and we're doing some capital work in addition to our normal catalyst change out, which will help to strengthen the unit in a number of different ways. So we're excited about the work that we're going to do. And you might remember, last year, we did defer some work because we brought that turnaround down right at the peak of the early part of the pandemic. So we've been able to stretch things out for an extra year, and then this is going to be an important turnaround. So what we have in the first quarter is a little bit longer downtime and then the additional cost of the turnaround. So you need to keep that in mind for first quarter. But given the more narrow margins the first quarter, it's a good trade off. And we look forward to recovering fully and then some in the subsequent quarters.

Craig Irwin -- Roth Capital Partners -- Analyst

So new subject, right? There's actually been some pretty encouraging chatter out there about potential for a long-term BTC reinstatement so that we don't have to worry beyond the end of '22. We can look out for several years, given that there's now growing bipartisan support across the board. Everybody likes clean air, everybody likes clean fuels because it's so important to get and -- clean air and a lower carbon footprint. Can you maybe update us on your conversations with our regulators, our congressional representatives? What are their questions and concerns about BTC and the long-term support for the clean fuels industry?

Cynthia J. Warner -- President and Chief Executive Officer

So Craig, it's early days for any one specific thing to get focused in on. But what I can tell you, in terms of the mood, you're exactly right. There's tremendous bipartisan support for this space. And BTC is very much a vibrant part of that conversation, but it certainly isn't the only one. And as I indicated in my earlier comments, you're getting the desire to decarbonize and establish targets and incentives in order to meet those targets, not just from the U.S. federal government anymore, but from multiple different jurisdictions. So we have quite a groundswell of increased demand showing up in many different corners.

Craig Irwin -- Roth Capital Partners -- Analyst

Great. And then last question, if I may. I've been watching Seneca and Grays Harbor for many years. Been to Seneca, not Grays Harbor yet, but I see these as potentially ideal locations for additional green diesel plants. You have the land at one of these. You have an option on the land at the other. You have air permits that are both in place for both facilities that would allow for large expansions there. What are the things that we would need to look for from the investor side to see regi commit to an expansion? Are we maybe looking for third-party government supports and tax packages or something like this? How would you go through a decision process to move forward with two or three plants potentially versus the very nice expansion at Geismar that you already announced?

Cynthia J. Warner -- President and Chief Executive Officer

For starters, we definitely share your enthusiasm for continuing to work on the next project and the next frontier. And there are multiple factors that we take into account while we're doing that. We've actually put together something that we like to call the location linear program that has multiple factors that we take into account. And we are definitely taking an approach that -- for our next project, we want it to be strategically advantaged. That's a winning way, particularly when there's multiple announcements out there. And some of the things that do provide strategic advantage for an RD plant are definitely geographical location because you want to have advantaged logistics both for access to a wide variety of feedstocks and access to multiple different markets to enable optimization and enable operation in a wide variety of economic environment.

The location is very important. As you said, government incentives can be a real game changer. And actually, permitting challenges can also be a game changer for the other reason. So a positively disposed environment as well as one that understands what it takes to get permitting done on a timely basis is quite critical. And there are multiple other factors, including available utilities and other types of savings that might be realized in order to accommodate whatever the plant's needs are, including advantaged logistics. So we're looking at all of those things, and we do have some very exciting options that we are continuing to work. So watch this space, and we will keep you posted.

Craig Irwin -- Roth Capital Partners -- Analyst

Great. Congrats on the strong results this past quarter.

Cynthia J. Warner -- President and Chief Executive Officer

Thank you, Craig.

Operator

Our next question comes from Manav Gupta with Credit Suisse.

Manav Gupta -- Credit Suisse -- Analyst

My first question is more on the renewable fuel standard as we see it, it's working its way through. Its causing development of lower carbon fuels, yet every now and then you see somebody go out on an RFS rant and say it's completely broken. And I'm just trying to understand from your perspective that you are developing these lower carbon fuels, how do you feel about the renewable fuel standard? I mean, no system is perfect, but do you think it supports the development of the right kind of fuels in a lower carbon world? So just your views on the RFS first?

Cynthia J. Warner -- President and Chief Executive Officer

Thanks, Manav. The RFS is a program that's definitely been pulling through significant volumes of our low carbon fuels. So it's a very important program. It has had its challenges, particularly in the last four years because of all the uncertainties around the actual demand that it was pulling. So there is a renewable volume obligation, which sometimes is announced on a timely basis. But if there are small refinery exemptions that go with that or the uncertainty around whether they would be granted or not, the actual total need is very uncertain. And we've been coming out of a period where we had to live with that for quite a long time. The great thing we're seeing now, as we just mentioned earlier, is there's kind of a groundswell of support from both legislators as well as the public for getting on with the energy transition. And you're seeing that in the RINs market right now as the greater certainty is helping to drive RIN prices into a place where it is helping to balance that HOBO spread. Does that answer your question?

Manav Gupta -- Credit Suisse -- Analyst

Yes, it does. Definitely. My second question is, one of the reasons we are seeing some pressure on this sector, and you kind of highlighted is there are a lot of people who have never actually -- run renewable diesel facilities, never actually got involved biodiesel, who are coming out and suddenly claiming that because they have this one shut hydro cracker somewhere sitting, and they can restart it overnight, they can become renewable diesel producers. And you have been in the business for a long time, and I'm trying to understand from you, why is it not that simple? Why is it that if we don't have like a a simple hydrocracker, which is -- can be restarted, is not about producing a new bel diesel. There's a lot more science and math goes into that. So if you could comment on that.

Cynthia J. Warner -- President and Chief Executive Officer

There absolutely is a lot of challenge. There are some good analogies and similarities to hydro processing. However, these feedstocks in our space are more challenging to convert and some of them are much more challenging than others. Refined vegetable oil is relatively simple the process in the hydroprocessing systems for renewable diesel. Even they have different quality specifications. And so an operator does need to be cautious, and we do see problems with some of the new units starting even on refined vegetable oil. But as you get to the lower carbon intensity, lower cost feeds, they are harder and harder to process. So it does take some experience with feed pretreatment as well as a really good understanding of even the construction requirements of the plant in order to have the type of feedstock flexibility that we've built up over time in our fleet. Those are probably the biggest challenges. And you do see other ones. I don't think, over time, any of those are absolutely insurmountable, but I do believe that they are going to create some issues. there will definitely be differences in the types of netbacks that operators will be able to realize from the different RD plants that they contemplate building.

Manav Gupta -- Credit Suisse -- Analyst

Okay. And one last one is we are seeing Canada move ahead with green fuel standards. Again, there aren't that many biodiesel facilities being built over there or renewable diesel, is this a market which could be yours for a foreseeable time just because they want to produce lower carbon fuels, but the investments over there are not even starting up. So is this a new market you could look at, the Canada market?

Cynthia J. Warner -- President and Chief Executive Officer

Well, we actually already work in Canada quite a bit. We have some very good customers in British Columbia, where they have an LTFS-like program. And Canada overall does have a carbon [Indecipherable], which they're contemplating ramping up quite significantly over the next couple of years. I do believe it's an expanding market of tremendous interest, and they are very actively talking about a countrywide LCFS program, which as currently envisioned, would start-up in 2023. And this would give us additional opportunity in other parts of the country besides just the western portion.

Operator

Our next question comes from Ryan Todd with Simmons Energy.

Ryan Todd -- Simmons Energy -- Analyst

Great. Maybe on the Geismar expansion, I mean, can you talk about how we should think about steps along the time line for the Geismar expansion? And what permits are required? When should we expect them? What's the timing of ordering of long lead time items? When do you anticipate construction commencing? Just trying to get a handle on what things we should be keeping our eyes open for -- assuming the project is progressing on schedule.

Cynthia J. Warner -- President and Chief Executive Officer

Ryan, very good questions. Actually, for some of our longest lead capital items, we've actually started the order process. So things are well under way, and we expect to have final investment decision sometime within the next couple of months. So watch this space. And once we have that, we'll be able to lay out a very specific project plan that will give you a little bit better sense of milestones that we'll be watching as well. From a permitting standpoint, there is kind of a normal schedule where you apply at specific periods of your construction plan and everything there is well on schedule. So we're very pleased with the location and with our partners in Louisiana.

Ryan Todd -- Simmons Energy -- Analyst

Great. Maybe on the -- you always have the slide in there and the presentation on the sales of blends of biodiesel with renewable diesel. You were effectively flat versus the third quarter. I was under the impression that the previously announced Hunt deal wasn't fully reflected in 3Q results, so I was a little surprised to see a flat versus third quarter. Any thoughts on the driver there? And any commentary on how we should think about the pace of growth in those blended volumes over the course of 2021? How are your discussions going with additional partners to kind of increase penetration there?

Todd Robinson -- Treasurer

Yes. Thanks, Ryan. This is Todd. Good question. So yes, obviously, we're very focused on our Ultra clean branded product, and we are excited about the opportunity there. California, is -- has been impacted by the recent ramped up kind of stay at home orders. So demand is a little bit slower than what we would have expected. But we have seen great uptake from the Hunt & Sons agreement and that relationship. And as CJ mentioned, we're looking for further and further opportunities to either do further branding agreements similar to the Hunt & Sons or even potentially doing acquisitions. So stay tuned and be looking for something to happen in that space.

Ryan Todd -- Simmons Energy -- Analyst

Okay. Maybe if I could just squeeze in one more because we get this -- we get questions on this a lot, then I'm sure you do as well. There's always a lot of concern about biodiesel economics going forward. But I mean, as you think about increasing competition for feedstocks, I mean, across your whole system, you run quite a high percentage of low CI feedstocks as additional plants start-up in the coming years, and you see increasing competition for those. I mean, can you talk a little bit on the biodiesel side about how you view you might be -- your relative positioning relative to kind of a typical biodiesel producer in terms of your access to your competitiveness in attracting the right kinds of feedstocks?

Cynthia J. Warner -- President and Chief Executive Officer

Yes. This is part of the reason why I'm emphasizing optimization for you so much. It's really -- there's there's quite an optimization game to play here. And the name of the game is different depending on the plant and its processing capabilities as well as its geographical location. An advantage that many of our biodiesel plants have is their geographic location and the advantaged logistics they have with access to some of the more localized feeds that really don't have a good outlet to some of the big international markets. So that's an important thing to keep in mind, particularly when it comes to biodiesel because the biodiesel plants have a reasonable net back at smaller scale than an RD plant, which has to really be built larger in order to have economies of scale, and therefore, tends to rely more on access to a wide variety of internationally sourced feeds. So keep that in mind, there's an optimization game to be played there. Some of our long-standing relationships as well as just our local access, does give us some feedstock reliability and assurance that you wouldn't have otherwise. Then a whole variety of other things that we're working on from both near term, medium-term and long-term feedstock access, which actually gives us a lot of encouragement and excitement about the future and our ability to grow and the whole industry's ability to grow because it really isn't about just cutting up the existing slice of pie. It's about baking more pies when it comes to feedstock availability.

And then one of the things I like to point to folks when they're looking at me puzzled when I say that is, this industry has grown up quite a bit over the last 20 years. And in its inception, it started on soybean oil. And as it grew, different types of feedstocks, which are now considered to be staples, were really novel in their concept when they were introduced. So we added used cooking oil and we added distillers corn oil, tallows and fats. And now we use a wide variety of things, including trap grease, and we are experimenting with other types of plant oils. So there's a really exciting world out there, and there's a lot of growth opportunity in sort of both near, medium and long-term for feedstock.

Operator

Our next question comes from Jordan Levy with Truist Securities. You may have yourself muted, please unmute yourself.

Jordan Levy -- Truist Securities -- Analyst

Wanted to start out by getting your thoughts on potential M&A. Todd, you kind of touched on this in your prepared remarks. You guys have previously discussed desire to both grow the midstream or the downstream marketing segment. Through a couple of different means. And so I wanted to first kind of see if there's been any progression in your thinking on that front. And then kind of as a follow-up on the same question. I wanted to get your thoughts on how you think about a more vertically integrated model, at least for some of your facilities, whether it be in kind of established markets or some of the more emerging feedstock markets like cover crops and things like that. So I just wanted to get kind of your thoughts on either of those sort of potential options?

Cynthia J. Warner -- President and Chief Executive Officer

Jordan. Well, definitely within our downstream strategy. We're very focused on opportunities to continue to grow both organically and inorganically. So I would say that's a good -- watch this space area, and we definitely have some very interesting prospects within our near-term focus. When it comes to feedstock, we're also looking at different ways to expand our portfolio of types of feeds. And we have some exciting potential with new sources of feed that we hope to be able to announce substantial use of actually by the end of this year. There's a lot going on there. Much of it is somewhat commercially sensitive, as you can imagine. So we don't talk about the specifics, but we will keep you posted, and I can assure you strategically, both of those areas are in high focus for us.

Jordan Levy -- Truist Securities -- Analyst

Great. That's great color. And then just to follow-up on Manav's question earlier about Canada. I just wanted to kind of get your thoughts on any progress you're seeing in other potential emerging incentivized markets, whether it be states or different international markets you're seeing progress toward an LCFS-type program. I think that probably the nearest term one to keep your eye on is Washington State who have been talking about an LCFS-like program now for a long time, and it's progressively getting closer and closer to coming across the finish line. And we're hearing some very positive feedback about the progress taking place in that jurisdiction this year. So I would watch that very closely. Actually, New Mexico is starting to talk about the potential of an LCFS program, which I think is very interesting.

And as you pointed out, Canada is the EU continues to be a space to watch closely because they have RED II, but they're also trying very hard to determine what they're going to do with sustainable aviation fuel and how to incentivize that in a way that actually draws the most decarbonization across the whole system. And while I'm talking about sustainable aviation fuel, I think it's really important not just to think about these programs, but think about the types of spaces where the existing types of products that we make are finding applications. So aviation is a very important space and marine is as well. We're having some extremely encouraging views into the marine world and their desire to continue to decarbonize. And I think there are some very exciting opportunities there in the near term.

Operator

Our next question comes from Amit Dayal with H.C. Wainwright.

Amit Dayal -- H.C. Wainwright -- Analyst

With respect to the outlook, CJ, gallons produced for 2021, roughly flat in that range. And then a small increase in gallons sold, could there be some upside to these numbers if the economy opens up, etc?

Cynthia J. Warner -- President and Chief Executive Officer

Definitely in the world where the economy is growing faster, an easy place for us to grow gallons sold rapidly is in third-party gallons. And of course, we continue to focus on organic growth with the existing portfolio. So I think what you saw this year was a bit of a mix improvement that we were undertaking. So Todd described this in a little more detail than I did. But we were trying to focus on selling the same number of gallons, but selling more premium gallons. And what you're seeing is, if you look at total volume, underneath that hood is as we increase our blending of biodiesel and petroleum diesel and our blending and biodiesel into renewable diesel we may be selling the same number of gallons, but the margin to those are much different than the margin with petroleum gallons. So in particular, as we get closer to the customer and we're selling more of the higher level of biodiesel blend. So I think we've given you an example before with our distribution business, where customers that haven't even been blending biodiesel at all, relatively, rapidly started purchasing diesel with a 20% blend. And we have other customers that are actually interested in higher level blends. Every time we make a sale like that, we're selling more biodiesel and less petroleum diesel, but the same number of gallons. So underneath the hood of the total number of gallons, you have quite a bit of change going on, which is adding value to our portfolio.

Amit Dayal -- H.C. Wainwright -- Analyst

That was really helpful. And then feedstock price trends in Q4 versus so far in Q1, do you -- are you seeing any stability or feedstock prices continuing to rise for you? Any color on that would be helpful.

Cynthia J. Warner -- President and Chief Executive Officer

I don't think we can say that the crystal ball is very clear right now in the world of feedstock -- actually, in any market as long as the pandemic continues to [Indecipherable]. So I would say what we're hearing in the news just as very minute is that for soybean oil, this soybean oil inventories are actually very, very low. And that's creating quite a bit of volatility in pricing. We actually, this week, have a pretty significant spike in soybean oil prices. We probably need to get through this year's growing season to give everyone a different level of confidence as to what the inventory situation might be. So we're probably entering into a fairly interesting and volatile period. As the market starts to open up, remember, there will be more used coking oil and more distillers corn oil coming on to the market. Right now, both of those are constrained in terms of supply versus what would normally be experienced. But at the same time, we have some new feeds that are coming on the market, and that's going to create some interesting supply and pricing dynamics. So it will be an interesting space for us to all watch.

Amit Dayal -- H.C. Wainwright -- Analyst

Okay. And then just in your inventory right now, Todd, is it mostly finished product? Or is it feedstock? Or the mix? If you could share what is in the inventory right now.

Todd Robinson -- Treasurer

Yes. So it's kind of a combination of both, Amit. And generally speaking, in the first quarter, seasonally, we're building inventory because it's a slow period. So yes, we've got finished more finished inventory in the first quarter build than we would throughout the rest of the year when it's warmer and we're running hard.

Amit Dayal -- H.C. Wainwright -- Analyst

Okay. Just one last question with respect to the restatement. The $38.2 million that you potentially could claim back. Is there a time line within which this could take place? Or will it...

Todd Robinson -- Treasurer

Yes, Amit, a good question. So it's really hard to tell. We've -- every dollar that we will pay to the IRS, it's a recoverable dollar, but we need to work with our customers to get the dollars back. And so it's kind of an individual customer-by-customer analysis, so I don't really want to go out on a limb and give you a time line, but we're certainly working aggressively to recapture every dollar, if we can.

Operator

Next question comes from Greg Wasikowski with Weber Research.

Greg Wasikowski -- Weber Research -- Analyst

Most of the good ones have been taken. So I'm just -- so a couple of quick ones here. I think you've given enough color on Q1 adjusted EBITDA as to why that might be a little bit lower than expectations. But if we zoom out a little bit, just thinking about the outlook for 2021. And I know that there's a ton of unknowns with everything right now. But at least right now, how do you see 2021 EBITDA comparing to 2020?

Cynthia J. Warner -- President and Chief Executive Officer

Greg, well, as you know, we don't tend to [Indecipherable] specifically past the first quarter -- or the quarter in front of us with respect to EBITDA. But generally speaking, we are bullish on the year, assuming that the economic recovery that we all expect continues to march forward.

Greg Wasikowski -- Weber Research -- Analyst

Okay. Fair enough. And then maybe just digging a little deeper on the downstream expansion and potential M&A there. Can you give any color on specific technologies or products or especially geographies that you guys would be focusing on?

Todd Robinson -- Treasurer

Yes, Greg, good question. So it's kind of in keeping with the Hunt & Sons kind of playbook, if you will. California is a very strategic market for us. We want to move a lot of blends of biodiesel and renewable diesel into that market. So it's really strategic. That's kind of the area of focus for us. And then, of course, we're also looking at other opportunities but for the most part, it's in those LCFS-type of markets where we can blend our biodiesel into renewable diesel and then get that margin uplift.

Operator

Our next question comes from Hamed Khorsand with BWS Financial.

Hamed Khorsand -- BWS Financial -- Analyst

So first question I had was given what happened middle of last year now given the restatement process, what is -- what are you doing as management to keep investor confidence that these kinds of things aren't going to happen again? And what kind of ongoing costs, is that going to do to the operating structure?

Cynthia J. Warner -- President and Chief Executive Officer

Thanks for your question, Hamed. It's a very important one. I think it's important for us to get across to everyone how seriously we take this and how strong our actions have been actually, in both cases, to follow-up on the identified issues. And it really is about putting in place stronger systems of assurance. And the company actually has some really excellent ones already. It's been actually, history of the company to be very strong on compliance when it comes to the types of things that we engage in, which can be very complicated like LCFS and RFS credits. The situation at Seneca was a one-off. It was a design issue, and it was intermittent. So putting in place the extra assurance processes give us confidence that if there were something like that, we would become aware of it. Although, I think it's also very important for you to understand, the investigation that we did was comprehensive and not just isolated to Seneca, but rather being systemwide. And with us passing our IRS audits as well as including now everywhere, these extra assurance measures, we have high [Indecipherable] going forward.

Hamed Khorsand -- BWS Financial -- Analyst

Okay. And my other question was just on your supply chain disruptions that you're highlighting in the outlook. Is this anything beyond just being able to source feedstock? Is it just being able to ship more to Canada and Norway?

Cynthia J. Warner -- President and Chief Executive Officer

I think when it comes to thinking about logistics and supply chain, the flexibility is one of the most important things to keep in mind because there is an optimization game to preplay because margins do move around. So if you are a plant that has a single market and access to a single market, whatever that margin is at the time is the margin you're going to be able to realize. If you have a multi plant structure and portfolio that can take multiple feedstocks from multiple locations and ship to multiple markets, it gives you a tremendous amount of flexibility to react and work within the dynamic of a market, and there is going to be a lot of dynamic going forward.

Operator

And that's all the questions for today. I'll turn it back to CJ Warner for closing remarks. Thank you.

Cynthia J. Warner -- President and Chief Executive Officer

Thank you, Diego. And actually, I'm going to pass the baton to Todd, who's going to talk about the upcoming investor events.

Todd Robinson -- Treasurer

Thanks, CJ. We have card a few investor conferences scheduled for March, which are shown on slide 29. Before I walk through the conferences, please note that all conferences upcoming will be virtual due to COVID-19. Attendance at these conferences is by invitation-only for clients of each respective firm. So interested investors should please contact your respective sales representative to register for one-on-one meetings to secure a time. The first one is next Monday, March one when we'll participate in the Credit Suisse 26th Annual Energy Summit. We will host virtual one-on-one meetings with institutional investors throughout the day. The next day, Tuesday, March two at 5:00 p.m. Eastern, we will present in a virtual fireside chat at Morgan Stanley's Energy and Power Conference. On March 15, we will present in a fireside chat at the 33rd Annual ROTH Conference. We will also host virtual one-on-one meetings with institutional investors.

In the second half of March, we have four more conferences. On March 18, the company will present at the UBS Virtual conference. We will host one-on-one meetings with institutional investors throughout that day. On the same day, March 18, we will also make a presentation at the Gabelli Environmental Services Symposium later that day. On March 22, at four p.m. Eastern, the management team will present in a fireside chat at the Piper Sandler 21st Annual Energy Conference. We will also host institutional investors during the day. Lastly, on March 25, we will participate in the fourth annual Truist Securities Utilities Midstream and Alternative Energy Summit. We will host virtual one-on-one meetings with institutional investors throughout the day. All above conference information has been included in our latest press release on our website in the Investor Relations section. Thank you again. This concludes the call, and you may now disconnect.

Operator

[Operator Closing Remarks]

Duration: 71 minutes

Call participants:

Jakob Schwegler -- Senior Analyst, Investor Relations

Cynthia J. Warner -- President and Chief Executive Officer

Todd Robinson -- Treasurer

Craig Irwin -- Roth Capital Partners -- Analyst

Manav Gupta -- Credit Suisse -- Analyst

Ryan Todd -- Simmons Energy -- Analyst

Jordan Levy -- Truist Securities -- Analyst

Amit Dayal -- H.C. Wainwright -- Analyst

Greg Wasikowski -- Weber Research -- Analyst

Hamed Khorsand -- BWS Financial -- Analyst

More REGI analysis

All earnings call transcripts