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BIOX CORPORATION THIRD QUARTER 2010
FINANCIAL RESULTS CONFERENCE CALL
09H00 ET
CNW GROUP
APPROXIMATELY 46 MINUTES
AUGUST 9, 2010
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OPERATOR: Good morning ladies and gentlemen; thank you for
standing by.
Welcome to the BIOX Corporation 2010 Third Quarter
Results Conference Call. At this time, all participants are in a listen-only
mode. Following the presentation, we will conduct a question and answer
session. Instructions will be provided at that time for you to queue up for
questions. If anyone has any difficulties hearing the conference, please
press star, zero, for operator assistance at any time.
Listeners are reminded that portions of today’s discussions including
responses to questions posed in today’s call could constitute forwardlooking statements that are subject to risks and uncertainties relating to
BIOX’s future financial or business performance and condition.
Actual
results could differ materially from those anticipated in these forwardlooking statements. Risk factors that may affect results are detailed in
BIOX’s filings with Canadian Securities Regulatory authorities which can
be accessed at www.sedar.com.
Please note that BIOX is under no
obligation to update any forward-looking statements discussed today
except as required by applicable law and investors are cautioned not to
place undue reliance on these statements.
I would like to remind everyone that this call is being recorded on
Monday, August 9th, 2010, at 9AM Eastern Time.
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I would now like to turn the conference over to Mr. Tim Haig,
President and Chief Executive Officer. Please go ahead, sir.
TIM
HAIG
Corporation):
(President
Thank you.
and
Chief
Executive
Officer,
BIOX
Good morning everyone and thank you for
joining our conference call today. This morning we issued our 2010 third
quarter results by press release and a copy of those results are available
on our website at www.BIOXcorp.com. With me today is Chris Clinning,
our CFO. I’ll summarize the key events of both the quarter internally to
BIOX and within the biodiesel sector then I will hand off to Chris to review
our financial results for Q3. Then I’ll close with a few comments and Q&A.
On July 26th, 2010, we issued preliminary results for the quarter. As
we highlighted at that time, Q3 was a positive period regarding our
biodiesel production and the progress towards our expansion plans via
Eco energy application process, but a challenging quarter from a financial
perspective. However, Q3 also led to a major milestone for the broader
biodiesel market with the initiation of the expansion of the renewable fuel
standard or RFS2 on July 1, 2010 which we believe will have significant
long-term benefits for the sector. The initiation of RFS2, the sector has
transformed from a voluntary market in the US to an obligated market.
Refiners and importers are now operating in a mandated environment in
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which they are obliged to blend requirements under… as set out in RFS2.
This is a significant development within the US biodiesel market and I will
address this in more detail momentarily.
But in short, we believe the
conditions are now in place for what we have referred to as repricing of
biodiesel which should provide an economic return for the industry and
place BIOX in a strong position relative to other producers because of our
cost advantages of our proprietary patented production process.
From a production standpoint, we continue to operate within our
target range. During Q3 we produced 14.4 million litres of methyl esters
which we achieved despite two weeks of a scheduled downtime in June for
semi-annual maintenance purposes.
On the year-to-date basis, we
produced 41.8 million litres.
From a results perspective, two major regulatory issues impacted
our sales during the quarter. The first was the US Federal Excise Tax
Incentive for biodiesel which I’ll refer to as the blender tax credit. This
measure was not reinstated by Congress prior to the House departing for
its summer recess.
The second was the initiation of RFS2 which I
mentioned took effect July 1, 2010.
The impact of these two events
occurring along the same timeline as they did is complex. In our view,
uncertainty surrounding the blender tax credit has in the short-term dulled
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the positive impact expected of RFS2. The blender tax credit was one of
several unrelated tax initiatives that was stripped out of a financial reform
package to ensure that the passage prior to the recess for the extension of
the unemployment insurance benefits.
While congressional leaders
continue to indicate their goal to pass the legislation including the tax
incentive, it is unlikely to pass before the fall and there is a chance that this
tax accession will not be passed at all. While I believe the blender tax
credit will eventually be reinstated, the more important thing is the
uncertainty surrounding the issue is actually more detrimental to the dayto-day pricing and the business environment than a firm decision to
reinstate or to not reinstate the program. As we indicated on Q2 call,
despite the fact that the US blender tax credit expired December 31st,
2009, from January 1st to March 31st, 2010, our US buyers paid us the
value of the blender tax credit.
However, as of April 1st, these same
buyers were no longer willing to accept the risk associated with the
extension of the blender tax credit and instead paid us net of the incentive.
Essentially the production we sold during Q3, we have accepted the risk of
the blender pass credit being passed retroactively.
Based on this change, for the first time since we initiated production,
we are storing increased level of production as inventory to optimize the
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price we receive. We believe managing the timing of sales is an important
and prudent strategy in the current environment and quite common in other
sectors. However, it did have significant impact on the financial results for
Q3 which Chris will address specifically in a moment.
In terms of the RFS2, we believe the initial indications are that with
the implementation of RFS2, the market dynamics that we have discussed
previously are bearing out. Refiners and importers in the US are now
obliged to blend 1.145 billion US gallons of biodiesel over 2010 through to
the end of 2011. The roll-out of these volumes are staggered to provide
the parties with a transition phase to adapt their infrastructure to blending
biodiesel.
Based on EPA estimates, approximately 350 million gallons of
biodiesel is allocated for blending prior to the end of 2010 and 800 million
US gallons are obligated to be blended in 2011.
In early July, we
registered through our subsidiaries with the EPA, as an approved foreign
producer of biodiesel and a renewable fuels importer and a biodiesel
renewable identification or RIN generator in the US. These registrations
provide us with access to the US renewable fuels market and give us the
ability to generate RINs which are required by obligated parties such as
refiners and importers to show compliance with RFS2. Obligated parties
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can purchase biodiesel to meet their blending requirements or,
alternatively, they can purchase RINs only on the open market.
We believe that this sets in motion a very compelling demand
opportunity for producers like BIOX to capitalize on. There is now clear
minimum volumes required that diesel refiners and importers must meet on
an ongoing basis. Demand from obligated parties and now mandated and
we believe that as these parties begin to comply, the value of biodiesel will
reprice away from petroleum replacement and to correlate with the input
price as demonstrated with the price of ethanol under obligated markets
such as Brazil. We believe that the shift in biodiesel based on input prices
will allow the industry to achieve returns in the long-term and will allow us
to leverage the cost advantage of our high-yield continuous process that
uses lower priced feedstocks such as tallow and yellow grease. As we
approach the 2010 deadline, we believe that there will be upward pressure
on the price of biodiesel and/or alternatively the price of RINs which we
can generate.
We have worked to optimize our technology and process over the
past 10 years to capitalize on the introduction of the mandated biodiesel
market and it now exists in the US. We are producing at or near our
capacity at the Hamilton facility and we have submitted two applications to
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ecoENERGY for Biofuels Program with Natural Resources Canada or
NRCan for 67 million litre facilities in Hamilton and Montreal. In June, we
received notice from NRCan that the Hamilton application would undergo a
full merit-based assessment against all program criteria.
NRCan has
indicated that it is aiming to make final program decision this summer
which is a slight delay from the original plan of announcing successful
projects in late spring. As yet, we have not received any notification of the
status of our Montreal application.
Based on the delay of the final decisions of ecoENERGY and the
current uncertainty surround the blender tax credit in the USA, we have
decided to defer any significant commitments on the construction of our
second plant. We believe this is a responsible decision until such time that
we have greater clarity on not only ecoENERGY announcement but also
on the blender tax credit and the price momentum provided by the
implementation of RFS2.
Energy providers and producers operate in highly regulated markets.
While many of these regulations, such as RFS2, serve to expand and grow
the market opportunities to us, it is imperative that we recognize the impact
of the regulations like the blender tax credit and allocate our resources in a
timely and responsible manner to maximize (inaudible).
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I’ll now turn over to Chris to review the financials.
CHRIS CLINNING (Chief Financial Officer, BIOX Corporation):
Thank you, Tim, and good morning everyone. As Tim mentioned, Q3 was
a difficult quarter for BIOX due to the continued uncertainty regarding the
extension of the blender tax credit.
While the quarter was negatively
impacted by the non-renewal of the blender credit in terms of both sales
and inventory valuation, we continue to believe that the longer term
economics for biodiesel will improve, supported by the implementation of
the RFS2 in the US and the Canadian and biodiesel mandates expected to
commence during 2011. As Tim mentioned, at 14.4 million litres for the
quarter, our production output continues to perform at or near target.
Sales volumes decreased in the quarter to 7.1 million litres of
biodiesel sold compared with 12.7 million litres in 2009, a 44 percent
decrease to 2009. The decrease in sales in 2010 was the result of the
delayed sale of product into the fourth quarter of fiscal 2010 related to the
expanded US RFS2 that commenced on July 1st, 2010. Year-to-date we
have sold 33 million litres of biodiesel compared with 37 million litres in
2009.
Subsequent to the end of the quarter, we sold all the product
produced during the third quarter.
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Average revenue per litre of biodiesel sold for the quarter was $0.80
compared with $0.84 per litre in the third quarter of 2009. Year-to-date
average revenue per litre of biodiesel sold is $0.94 compared with $0.86
per litre in 2009.
Sales of bioheavies were 1.2 million litres for the quarter and 3.8
million year-to-date compared with 0.3 million litres and 2.9 million litres for
the corresponding periods in 2009. During the quarter we also sold the
majority of our March 31st inventory of glycerine for nominal net proceeds.
Our sales revenue for the quarter was $6.6 million compared with
10.8 million in 2009, a 39 percent decrease as a result of the expiry of the
blender tax credit and sales delayed into Q4. During the quarter we sold
biodiesel that included $1.6 million of contingent revenue that cannot be
recognized unless and until the US biodiesel tax incentive is reinstated on
a retroactive basis.
Despite the challenging quarter, our year-to-date sales revenue
remains steady at 33 million compared with 32.8 million in 2009.
Our direct expenses for the quarter were 9.4 million compared with
9.9 million in 2009. Direct expenses for the quarter included a $1.4 million
write-down of finished goods inventory to market value calculate to exclude
the US $1.00 per gallon related to the biodiesel tax incentive that has not
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been reinstated. Year-to-date direct expenses were 32.6 million compared
with 30.6 million in 2009.
Excluding the write-down of the finished goods inventory, feedstock
costs accounted for 74 percent of direct costs for the quarter and 73
percent of direct costs year-to-date compared with 67 percent and 72
percent for the corresponding periods in 2009.
Our operating loss for the quarter was 5.6 million compared with an
operating loss of 1.2 million in 2009. Operating loss for the quarter was
negatively impacted by the $1.6 million in contingent revenue not
recognized and the $1.4 million write-down of finished good inventory.
Year-to-date operating loss was 7.2 million compared with 4.8 million in
2009.
Operating loss prior to non-cash items for the quarter was 4.5
million compared with a loss of 0.2 million in 2009. Year-to-date operating
income prior to non-cash items was 4 million compared with an operating
loss prior to non-cash items of 1.6 million in 2009. Sorry, I should have
said year-to-date operating loss.
Operating loss prior to non-cash items for BIOX Canada Limited, our
wholly owned subsidiary that operates the Hamilton production facility, was
3.1 million for the quarter compared with operating income prior to noncash items of 0.9 million in 2009. Year-to-date operating loss prior to non-
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cash items for BIOX Canada Limited was 0.4 million compared with
operating income prior to non-cash items of 1.6 million in 2009.
The increase in operating losses and increase in operating losses
prior to non-cash items were primarily due to the impact of the sales of
biodiesel in Q3 that included 1.6 million of contingent revenue that cannot
be recognized unless and until the US biodiesel tax incentive is reinstated
retroactively and the 1.4 million write-down of finished goods inventory.
Net loss and comprehensive loss was 6 million or $0.13 per share
and 13 million or $0.40 per share respectively for the quarter and year-todate compared with 1.5 million or $0.07 per share and 6.3 million or $0.29
per share for the corresponding periods in 2009.
At June 30th, 2010, we had a cash balance of 31.6 million compared
with 0.2 million on September 30th, 2009 and our working capital balance
at June 30th, 2010, was 35 million compared with 0.2 million at September
30th, 2009.
In summary, we continue to produce at or near target volumes which
reflects our continued belief that the longer term economics for the sale of
biodiesel will improve. The uncertainty surrounding the US blender tax
credit has resulted in the poor Q3 for BIOX in terms of financial results.
Should the blender credit be reinstated for 2010 on a retroactive basis, our
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future results will reflect recognition of the $1.6 million in contingent
revenue not recognized in Q3 and also the revaluation of finished goods
inventory.
We look forward to providing you with additional updates as the year
progresses. With that, I’ll turn it back to Tim for closing comments. Thank
you again for your time and your continued support.
TIM HAIG: Thanks, Chris. We have come through a challenging
period in which the blender tax credit has lapsed and the introduction of
RFS2 had not yet occurred. As we enter the second half of 2010, we
begin to see—calendar 2010—we begin to see the impact of the RFS2
pricing and the rapid approaching of the 2010 year end deadline for which
obligated parties will have to fulfill their blending requirements as
mandated by law.
As Chris mentioned, we have now successfully sold our inventory of
Q3 production period. We will continue to utilize storage as necessary in
the near-term while we monitor the impact of the RFS2 on pricing. This
strategy enables us to be opportunistic in our sales approach and to
maximize the benefits of the cost advantage of our proprietary patented
production process in the new environment under RFS2.
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At this time we’d like to reiterate our belief in the long-term
fundamentals of the biodiesel market in general and our business model in
specific are strong and while the snapshot of the market of Q3 is
frustrating, we believe that this is not indicative of the underlying market
drivers of increased demand and our cost advantage related to other
producers. We will continue to monitor the market and wait final decision
on ecoENERGY and update the market at that time on our timings of our
planned expansion.
That concludes the formal remarks for this morning and I thank you
for participating in the call today. At this point I’d like to open up the call to
questions.
OPERATOR: At this time, I’d like to remind everyone, in order to
ask a question, press star then the number one, on your telephone
keypad. We’ll pause for just a moment to compile the Q&A roster.
Your first question comes from the line of Carolina Vargas from
Clarus Securities (phon). Your line is now open.
CAROLINE VARGAS: Good morning everyone. How much of your
cash right now is tied up in inventory and how it has been (inaudible) to
Q4? I guess the question is, is the inventory… the leftover inventory from
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Q3 sold into Q4, the pricing for that is a fixed price or are you still trying to
fin… or the customers will pay accordingly to the market rate?
CHRIS CLINNING: Hi, Carolina. It’s Chris. The… our inventory at
the end of Q3 was about 7 million litres of biodiesel and that full 7 million
litres has been sold along with additional… about another half a million
litres and that has been sold under a structure similar to what we did in Q3
in terms of the contingent dollar on those sales, so it sold at a price that
was set in June with the dollars’ contingency and that’s about $2.1 million
worth of contingency on that product.
CAROLINA VARGAS: So if the tax credit doesn’t get reinstated we’ll
see another market value write-down of about 2.1 million in Q4.
CHRIS CLINNING: No, because the write-down is already down
because that’s what the write-down is on, is on that inventory at the end of
Q3.
CAROLINA VARGAS: Okay.
CHRIS CLINNING: So there would… in that case, if we didn’t get
the dollar, there wouldn’t be any margin on that product but there would be
no write-down.
CAROLINA VARGAS: Okay, okay. And the next question is can
you comment a little bit more about the process for either the Hamilton or
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the Montreal facility? I know you haven’t had any details from Natural
Resources Canada but can you comment on the steps that are in planning
to getting done?
TIM HAIG: Yes. This is Tim. Yes, the ecoENERGY for Biofuels
project, the companies applied for contracts, much like we already have on
the Hamilton One (phon) proj… facility, and if you… if they have no
questions, there were three phases. They’ve accepted your application on
March 31st and both of them were accepted as being complete and figure
out which… so they went through to the next stage to see if they were in
the advanced state of readiness which was the next criteria so that they
passed the advanced state of readiness.
We got an indication that
Hamilton was through to the advanced state of readiness.
We had a
couple of questions on Montreal which we answered. We don’t know if it’s
through to the advanced state of readiness or not but we know that
Hamilton is being looked at under the full criteria of the program of which
we should find out presently. They say by the… in the summer which we
are clearly nearing the end of the summer. So we expect to hear from
them any time now.
CAROLINA VARGAS: And you’re waiting for ordering these longlead items to hear from them so if you hear from them and it’s positive, will
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you go ahead with const… well, ordering the items for facility number two
right away?
TIM HAIG: Well, that’s a good question. The answer… the quick
answer is probably but we also have to look at the rest of the market on
how everything has been doing with the pricing mechanism and making
sure that we’re in a position to be able to… that we picked the right
location, the right jurisdiction which we believe we have. So, we’re going
to have to cross that bridge when we come to it, Carolina, but everything is
looking positive so let’s head in that direction.
CAROLINA VARGAS:
Okay, great.
And my last question is in
terms of the demand, now that we’re into your Q4, in terms of volumes are
you getting strong demand? What are the markets signalling you in terms
of demand of the product?
CHRIS CLINNING:
I think… it’s Chris again.
I think as we’ve
always said, the demand is there, it’s really just a question of what the
price is and unfortunately with all the confusion around the blender tax
credit, it has caused a bit of a hiccup but in terms of the actual demand for
the product, there isn’t an issue; just what we can sell it at is really what it
comes down to.
CAROLINA VARGAS: Okay. Thank you.
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CHRIS CLINNING: You’re welcome.
OPERATOR: Your next question comes from the line of Sameed
Mahesh (phon) from Dundee Securities. Your line is now open.
SAMEED MAHESH: Thank you. Good morning everyone. A quick
question on the expected revenue for Q4.
In your Q3 results you
mentioned that the company has secured sales contracts for all the
outstanding inventory on the balance sheet which is around 7 million so
should we think 7 million as the base case for revenue in Q4?
CHRIS CLINNING: Yes, it’s Chris. Sure. Yes, that would be the
situation where we sold no additional product other than the inventory and
as I mentioned earlier under Carolina’s question that that sale is for that full
7 million litres plus about another 500,000 on top of it.
SAMEED MAHESH:
Okay.
And just to understand the cost
structure, is the fixed production cost around 2 million a quarter?
CHRIS CLINNING: This fixed production cost?
SAMEED MAHESH: Yes, like you mentioned the variable cost is
like 74 percent, the cost of the feedstock.
CHRIS CLINNING: Yes. That’s 74 percent of our total cost of sale
so the fixed portion, the true fixed portion if you’re talking about things like
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the cost of the facility, the plant facility, the staffing, et cetera, et cetera, it’s
much lower than that.
SAMEED MAHESH: Okay. So would it be like around a million?
CHRIS CLINNING: Less than that.
SAMEED MAHESH: Less than that?
CHRIS CLINNING: Yes. Half of that.
SAMEED MAHESH: Oh, okay.
CHRIS CLINNING:
That’s not a very large number.
The vast
majority of the costs are all variable based on production because it’s…
the vast majority of our costs are a combination of feedstock, chemistry
and energy.
SAMEED MAHESH: Okay. Got it. And one last question on… in
terms of capital, my understanding is for the expansion, the capital
requirement would be like anywhere between 38 million or north of 38
million and you have just around 32 million in cash. So do you have
sufficient capital or is it like inventory is going to be cash out? So will you
have sufficient capital for expansion or you might need to raise more
money?
CHRIS CLINNING: I think we look at it in terms of what our working
capital number is, which as I mentioned is 35 million, and clearly that’s
20
been impacted by the non-renewal of the blender credit. If you think of it in
terms of the $1.4 million write-down and the $1.6 million of contingent
revenue, there’s 3 million on top of that 35 million, then there’s also margin
on that sale that we’ve talked about above and beyond that write-down
number. So, you know, to some degree it depends on what happens with
the blender tax credit but I think most importantly it depends on what
happens with pricing in general as we move forward over the next several
months. Clearly if the base business is not break-even to positive then,
right now, you know, you can just look at the balance sheet. We don’t
have 38 million. That’s not where we think we’re headed. We think we’re
headed to a combination of recouping that money, hopefully, if the blender
credit… we would if the blender credit comes back in, but even if that
doesn’t happen, improved economics in the underlying business that will
start to generate positive cash flow so we would have enough cash onhand without even having to raise any additional financing to execute on
plant two.
SAMEED MAHESH: Okay. Yes, that answered the question. Then
one last question on the… on Canadian mandate in terms of the 2 percent
use of biodiesel starting in 2011. So how do you see the Canadian market
shifting out in the near future, like starting next year, basically?
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TIM HAIG: Well the mand… this is Tim, Sameed. The ethanol
mandate or the gasoline portion of the mandate comes in this year,
scheduled for September 1, of which the 2 percent biodiesel mandate is
allowed to be part of so we are part of that volume. The full mandate
comes into effect next year. The date has not been fixed but it comes in
next year and as you… as we have said—I’m sure I said it to you in the
past and on some occasions—but people need to understand there’s
about 120 to 135 million litres of production in Canada. The 2 percent
mandate requires a 600 million litre scale-up. BIOX produces half of the
current production and with another plant we’ll produce about 120, 130
million litres of production, so we’re well-placed when this mandate comes
into place which is in, by law, by Bill C-33, to come into place next year.
SAMEED MAHESH: Okay.
TIM HAIG: This is very positive. I think we need to focus on the
pressure that these mandates will have on pricing and I think it’s really
important that it just came into effect in the States July 1, 2010 and it will
be early next year that the Canadian one comes into place.
SAMEED MAHESH: Okay. And just last question on that, is… all
the fuel that is required to fulfill the mandate, does it have to manufacture
in Canada or it can be imported?
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TIM HAIG: No, it can be imported.
SAMEED MAHESH: Okay. Okay. Thank you.
TIM HAIG: Thank you.
OPERATOR:
Your next question comes from the line of Lisa
Wilkinson from Scotia Capital. Your line is now open.
LISA WILKINSON: Good morning. Could you provide some colour
around RIN values? Where do you see the RIN values stabilizing in the
future, either with or without the US tax incentive, and how does that
change your pricing strategy going forward?
TIM HAIG: Well, the thing is if the RFS2… sorry, if the blender tax
credit does not come in place, the RIN value will clearly have to go up
because it will have to make up the difference and provide part of the
margin that we expect to be there for the industry. As you can see, from
the way RINs have been trading, before the RFS2 came in it was about
$0.30 a gallon RIN and it went up to as high as… I believe it was $0.60,
$0.61. It’s kind of settled down to—I looked this morning and it was about
$0.52 a gallon. Some of that coming off has been because people have
some confidence that the blender tax credit is going to come back in so it
has softened somewhat. So, if the blender tax credit doesn’t come in, the
market will be made up by a combination of biodiesel price and RINs and if
23
the blender tax credit does come back into place then the RIN is likely to
settle down a little bit and the combination of that dollar, the RIN and the
biodiesel price will make for the market… I know it’s complex but this is the
problem that we’re struggling with, that the industry is struggling with in this
interim period when the blender tax credit is either in or it’s not. We’d be a
lot better shape as an industry if it was decided it was going to come or it
wasn’t going to come in so we just get this pricing thing settled down.
LISA WILKINSON:
Okay, thanks.
And what is your biodiesel
storage capacity, both on your site and off-site? And what’s your optimal
storage capacity for taking advantage of the opportunistic biodiesel pricing
strategy?
CHRIS CLINNING: Lisa, it’s Chris. On-site we don’t have a lot of
storage at the actual site location. We have two tanks that have capacity
of about a million litres of finished product and we’ve been utilizing storage
in Hamilton in the near-term but what we’ve done is acquired storage for
about three months’ worth of production in New Jersey on a short-term
lease, on a three-month lease with the ability to renew. So that’s really
the period we’re looking at in terms of potential production and storage. It
may not… we in fact may not use that storage because again it all comes
24
back to where values are at and what type of pricing structures we can
execute on but that’s what we have in place right now.
LISA WILKINSON: Okay, and regarding your second plant, having
received notification from NRCan on the Hamilton application but no word
on the Montreal application yet, pending any further delays, is there a
higher likelihood that the second plant will in fact be located in Hamilton
and is the timing of the second plant further delayed beyond calendar Q4
2011?
TIM HAIG: Good question. It’s hard to say. I think with regards to
the notification of Hamilton and not the notification of Montreal, other
facilities that have good applications didn’t get their notification on the
second plant either so I’m not… we’re not actually indicating that that
necessarily means that Montreal is not on the list. We’re just saying that…
we’re just being open with the process. And so… that’s the first question.
We don’t know what the delay will be with regards to completion of the
plant and going forward. We expect ecoENERGY to come through with
their decision very quickly. We also expect, you know, over the next short
period that we’re going to have some clarity on the blender tax credit which
will lend to understanding where the pricing is going to be. We’re going to
have to… I’m going to have to come back to that question over the next
25
few weeks if you don’t mind, Lisa, because it’s just too difficult to say as
we’re looking at it right now. We’re trying to be as clear as we can but we
just can’t see our way to that timing at this stage.
LISA WILKINSON: Okay.
CHRIS CLINNING:
But I do think, just to get back to the specific
timeframe, Lisa, that you mentioned that I think as we’ve put in the press
release we sent out a couple of weeks ago that, you know, there will be a
delay based on the late timeframe on ecoENERGY and we were expecting
I think to get word on ecoENERGY through the whole process in May and
now we’re in August, obviously the middle of August, so, you know, it
certainly is dependent upon when we get that clarification and clarification
on pricing as well.
LISA WILKINSON: Okay, great. And my final question, in the case
of the Canadian biodiesel mandate, do you think there will be a similar
mechanism to the US RINs that would be implemented?
TIM HAIG: Yes, there will be. Right now in the regulation I think it’s
called a compliance unit and it will have the similar sort of trading… we
expect to have a similar sort of trading ability as a RIN.
LISA WILKINSON: Okay, great. Thanks.
26
OPERATOR: Your next question comes from the line of Allen Root
from Altima Partners. Your line is now open.
ALLEN ROOT: Hi guys. Thanks for taking my question. There’s a
couple of questions. First one on the RINs; I don’t know if we know the
answer to this. I mean, how many RINs are available to meet the 800
million gallons that need to be blended because obviously… and what’s
the penalty if you don’t find the RINs or blending the biodiesel?
TIM HAIG:
Well on the 800 million gallons, Allen, there’s zero
because is has to be produced in that year. They have to be created in
that year. So if you look on most of the websites on the trading, the 2011,
the 800 million gallon volume, it’s just not applicable because there’s no
RINs to trade into that year. Go ahead.
ALLEN ROOT: So what has to be blended this year? I mean I’m
basically trying to get at how short are RINs going to be and is there any
way to know that sort of thing? Like, do we have a list of all the RINs that
have been registered so far for 2010?
CHRIS CLINNING: Allen, it’s Chris. The EPA estimate for 2010 is
345 million gallons for biodiesel and that’s based on the 1.15 billion
requirement for the combined 2000 and 2010 and their estimate of what
had actually been applied in 2008 and 2009. So that’s… when we talk
27
about 1,145,000,000 gallons, it’s a combination of that 345 million for 2010
and 800 million for 2011. We do not know for 2010 how many RINs have
been issued and how much compliance has occurred in 2010 yet. We
don’t have that number.
ALLEN ROOT: The market has to be short RINs though, right? Or
am I barking up the wrong tree?
CHRIS CLINNING: Well I think it’s reflected in the value of the RINs
which right now as Tim mentioned are trading in the… at about the $0.50
level as opposed to $0.30 a few weeks ago. And one thing I wanted to
make sure that is clarified is that each gallon of biodiesel produced,
biomass-based biodiesel, generates 1.5 RINs so on a per gallon basis that
$0.50 is actually $0.75. So the compliance units are all based on the
number of gallons but it does actually generate 1.5 RINs per gallon.
ALLEN ROOT: Right. The… last question on these RINs; do we…
are trading volumes published on that website? Do we know the volume
that have traded?
TIM HAIG: No. I haven’t seen that anywhere.
ALLEN ROOT: All right. That would…
TIM HAIG: That would be helpful, you’re right, but I don’t know
where to get that.
28
ALLEN ROOT: Okay, my final question, or questions; can we just
go through operating expenses now? They’ve picked up year-over-year,
can you just run through the delta in op ex?
CHRIS CLINNING: It’s really all related to cost of becoming a public
company. You mean in the G&A costs basically?
ALLEN ROOT: Yes.
CHRIS CLINNING: Yes. You know we have additional costs in
terms of filing fees with the TSX, et cetera. We’ve got additional costs on
the audit side and the review side and additional tax costs, investor
relations costs, all the filings we have to do, et cetera. It’s all related to
that, Allen.
ALLEN ROOT: Okay. And then final question on costs; was there
any change or material change in the input prices, waste oil prices or
anything like that? Were they sort of flat year-over-year? Up? Down?
CHRIS CLINNING: They’re up year-over-year. They were relatively
flat from a feedstock cost perspective through the quarter and we actually
are seeing—a piece of good news is that our feedstock costs are actually
going down right now over the last several weeks.
ALLEN ROOT: Can you talk about the delta year-over-year?
29
CHRIS CLINNING: I can. Just let me pull something out here and I
will. If I can find it here. Just bear with me one second.
Yes, so it’s about… the feedstocks costs, feedstock is about 20
percent higher this quarter, this year than last year.
ALLEN ROOT: Is that… actually, that’s higher than I would have
thought. What… is anything driving that of note? Just… I don’t know what
would be driving it. What’s driving it?
CHRIS CLINNING: I think it’s just relative value in the commodity
markets. Soy prices are high. Palm (phon) is high right now, et cetera, so
they do trade… they do track fairly closely together.
ALLEN ROOT: What do you find that tracks most closely? Soy is
up but soy’s not up… everything has been bottled (phon) but year-overyear prices aren’t that different I don’t think.
TIM HAIG: No, I think you’ll find that soy is up year-on-year higher
than that. We’ll have to… I’ll send you an email afterwards but it’s pretty…
I think it’s pretty clear that year-on-year the soy price is quite a bit higher
than that 20 percent.
ALLEN ROOT: And basically soy is sort of the benchmark for the
US?
TIM HAIG: Tends to be.
30
ALLEN ROOT: For your benchmark.
TIM HAIG: RBD (phon) soy is what…
CHRIS CLINNING: (Unintelligible) priced soy because that’s…
TIM HAIG: The most usable…
CHRIS CLINNING: A more expensive product than crude soy but
that’s what’s used in biodiesel production.
ALLEN ROOT: Okay. All right. Thanks guys.
CHRIS CLINNING: No problem.
OPERATOR:
Again, ladies and gentlemen, in order to ask a
question, star, then the number one, on your telephone keypad.
Your next question comes from the line of John McIlveen (phon).
Your line is now open.
JOHN MCILVEEN: Yes, good morning. Just to put some numbers
on it, can you give us what selling prices were in March versus April and
now August?
CHRIS CLINNING: March versus April?
JOHN MCILVEEN: Yes, it’s not including the incentive in April so I
want to see the actual difference?
31
CHRIS CLINNING:
Okay, so our selling price in March… our
average selling price for… average revenue per unit for the quarter ended
March 31st was $0.983.
JOHN MCILVEEN: Okay.
CHRIS CLINNING: And for Q3, as we published, it was $0.80 but of
course that $0.80 reflects the fact that there’s no revenue in there for the
blender credit.
JOHN MCILVEEN:
Right.
And what pricing are we seeing in
August?
CHRIS CLINNING: We haven’t sold anything in August yet other
than the inventory that we had at the end of Q3.
JOHN MCILVEEN: So that was sold in July?
CHRIS CLINNING: Yes. It was actually contracted in June but it’s
carry forward to Q4, yes.
JOHN MCILVEEN: So that doesn’t reflect current pricing?
CHRIS CLINNING: The price is set in June.
JOHN MCILVEEN: Oh, okay. What does current pricing look like?
CHRIS CLINNING: Rack (phon) rates have gone up. The average
NYMEX (phon) rate in June, for example, was $2.00. We’re now sitting at
$2.16.
32
TIM HAIG: That’s a gallon.
CHRIS CLINNING: That’s a gallon, sorry, US per gallon. And RIN
values are up as well obviously but overall if you look at it in terms of the
blender tax credit, the overall value is still down although it’s actually
getting close to historic rates in terms of premium over NYMEX.
JOHN MCILVEEN: Okay. How do they… actually allocate either
the RINs or how much blending you have to do? Is it done on sort of like a
post basis on everybody’s share of production? Or blending, I should say.
TIM HAIG: Yes, it’s… the obligated parties, the importers or the
refiners, have to… they have to blend a certain volume and they know
what that volume is. I mean, just so you know, the… going towards 2012,
it goes to a billion gallons a year which is approximately 2 percent of the
market. So a blended refiner knows how much volume they need to blend.
They are either going to have to buy the biodiesel or they’re going to have
to buy RINs that have been split off from the biodiesel. So it’s pretty clear
what they have to do.
JOHN MCILVEEN: Okay. Lastly, if neither Montreal nor Hamilton is
a win for you, are there opportunities to deploy that cash in terms of a…
say a joint-venture with someone else in either Canada or the US?
33
TIM HAIG: What I want to make real clear, I mean, one, we do
believe that these… one or both will come through. That’s point one. But
two, the technology… we’ve always said that these are the first of a couple
of sites that we were looking at and if there’s other jurisdictions that we
would go to then we would take a look at that so… we believe in our
technology.
We believe in our margin that this technology gives us
compared to our competitors. We… it’s a good question. We don’t believe
that that outcome is likely so that’s why we’re staying the course that we’re
at.
If we didn’t believe in this industry, then the other thing is we’d have
to stop producing, but we believe very much in the direction that this is
going and production is the way forward. We need to produce and get the
prices that we can get because it’s going in the right direction.
JOHN MCILVEEN: Okay, thanks very much.
OPERATOR: And there are no further questions at this time. Mr.
Haig, I turn the conference back over to you.
TIM HAIG: Okay, well, thank you very much. I guess that wraps up
the Q&A session. I just want to thank everybody for joining us on the call
and reiterate our vision of this market, the RFS2 is putting the kind of… we
34
believe it’s putting the kind of pressures we need to see in this market. We
look forward to updating you over the coming months and have a great
day. Thank you very much.
OPERATOR: This concludes today’s conference call.
*****

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