In late June, Renewable Energy Group (REGI) approached investors, hat in hand, to walk back previously announced guidance for the second quarter of 2020. Market conditions had deteriorated and, embarrassingly, the company discovered errors in its financial calculations. The business reduced expectations for adjusted EBITDA by $34.5 million at the midpoints.
But that prediction did not come true. The biomass-based diesel leader surprised everyone, including perhaps itself, by reporting relatively strong second-quarter 2020 operating results. It delivered positive adjusted EBITDA after all, pared GAAP losses, and reaped the benefits of several wise strategic decisions made during the quarter. The small-cap stock soared on the solid performance.
Here's what investors need to know about the latest results.
Image source: Getty Images.
By the numbers
Renewable Energy Group manufactures biodiesel and renewable diesel from biomass feedstocks such as distilled corn oil, animal fats, and used cooking oils. Although demand for transportation fuels has been reduced by the coronavirus pandemic, diesel fuels have generally seen healthier demand compared to gasoline and jet fuels. Combine that with the ability to collect generous incentives for renewable fuels, such as the California Low-Carbon Fuel Standard (LCFS) and recently reinstated federal blenders tax credit (BTC), and the business was likely to fare better than producers of petroleum-based fuels during the economic downturn.
That's pretty much how it played out in the most recent quarter. Shares of Renewable Energy Group jumped due to the surprise strength of adjusted EBITDA. The most recent second-quarter 2020 guidance called for adjusted EBITDA of negative $7 million at the midpoint, but the Renewable Energy Group managed to deliver $8 million in adjusted EBITDA.
A big helping hand from state and federal incentives drove a solid first-half performance, although the business made a handful of operational improvements on the fly to navigate volatile markets.
|
Metric |
First Half 2020 |
First Half 2019 |
Change |
|---|---|---|---|
|
Biomass-based diesel revenue |
$857.7 million |
$1.04 billion |
(17%) |
|
Government incentives revenue |
$162.3 million |
$1 million |
N/A |
|
Total revenue |
$1.02 billion |
$1.04 billion |
(2%) |
|
Gross profit |
$131.9 million |
($39.6 million) |
N/A |
|
Operating income |
$76.2 million |
($92.4 million) |
N/A |
|
Net income |
$77.7 million |
($105.5 million) |
N/A |
Data source: Press release.
What about those expert operational decisions made during the second quarter?
First, the company increased sales of renewable diesel 25% compared to the year-ago period. Compared to biodiesel, renewable diesel is chemically similar to petroleum-based diesel, earns higher selling prices, and has lower production costs. Renewable Energy Group also directed renewable diesel to the most profitable markets: 40% to the West Coast, 25% to Canada, and 35% to Norway.
Second, the company sidestepped volatile feedstock markets by increasing its use of soybean oil 126% in the year-over-year period. It represented about 60% of total feedstock consumed during the three-month period. That provided a significant boost to margins, especially with corn oil, animal fats, and cooking oils in shorter supply due to temporary closures of ethanol manufacturing facilities, meatpacking plants, and restaurants, respectively.
Third, the company grew gallons sold to fleet customers 62% year over year to a record 9 million gallons. It's a relatively small portion of overall gallons sold (less than 10%), but supply agreements help to stabilize revenue and insulate the business from broader market volatility. Investors should hope the growth in this trend continues for the foreseeable future.
A surprisingly solid quarter
By now, it's clear investors (and I) should be giving Renewable Energy Group the benefit of the doubt when times get tough. The management team has been hardened by navigating years of uncertainty related to federal tax credits -- and the experience is paying dividends. Now, with the largest and most efficient operating footprint in the company's history in place, the renewable fuels manufacturer is well positioned to invest in profitable growth and reduce its reliance on tax credits.
Where does the renewable fuels stock go from here? The stock is trading hands at book value, which has historically been the upper limit on shares. Can it break through that ceiling? Perhaps, but the uncertainty in markets might weigh on the stock's ascension. If Renewable Energy Group can provide more details by the end of 2020 on its ambitious plans to significantly boost renewable diesel production, that might help shares break free from the constraints of book value.
