Yahoo Finance Renewable Energy Group Inc (REGI) Q2 2019 Earnings Call Transcript
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Renewable Energy Group Inc (NASDAQ: REGI)
Q2 2019 Earnings Call
Aug 6, 2019, 4:30 p.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Greetings, and welcome to the Renewable Energy Group Second Quarter 2019 Earnings Conference Call. [Operator Instructions]
It is now my pleasure to introduce your host, Todd Robinson, Treasurer. Thank you, sir. You may begin.
Todd Robinson -- Director, Investor Relations, Treasurer
Thank you, operator. Good afternoon, everyone, and welcome to our second quarter 2019 earnings conference call.
With me today is our President and Chief Executive Officer, C.J. Warner; and our Chief Financial Officer, Chad Stone. Let me cover a few housekeeping items, before I turn the call over to C.J.
First, I would like to remind everyone that this call is being webcast and is available at the Investor Relations section of our website at regi.com. A replay will be available on our website beginning later this afternoon. The webcast includes an accompanying slide deck for your reference. This will appear automatically with the webcast, but you will need to advance the slides manually as we prompt you. For those of you dialing-in, the slide deck can be downloaded along with the earnings press release, in the Investor Relations section of our website.
Turning to Slide 3, we would like to advise you that some of the information discussed on this conference call will contain forward-looking statements. These statements involve risks, uncertainties and assumptions that are difficult to predict and such forward-looking statements are not a guarantee of performance. The Company's actual results could differ materially from those contained in such statements. Several factors could cause or contribute to those differences. These factors are described in detail in the Risk Factors and other sections of our annual report on Form 10-K and subsequent quarterly reports on Form 10-Q, which are on file with the SEC. These forward-looking statements speak only as of the date of this call. 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 measures.
With that, let me turn the call over to C.J. Warner. CJ?
Cynthia J. Warner -- President & Chief Executive Officer
Thank you, Todd, and good afternoon to those on the call. I will discuss our second quarter high level results, margin and regulatory environment and operating highlights and then Chad will provide more details on our financial results. Then I will come back to discuss our outlook.
Our second quarter reported financial results were disappointing as we and the entire industry navigated through a very low margin environment. These results do, however, reflect continuing strong underlying operating performance. As reflected on Slide 4, our second quarter adjusted EBITDA of negative $42.3 million was well below our expectations. Since we provided guidance at the last earnings call, customer sentiment around the Biodiesel Mixture Excise Tax Credit, otherwise known as BTC, has started to shift. The decision as to whether or not to reinstate the BTC has dragged on for 20 months. One of the resulting effects is that some customers are telling us that they are reaching their limit to take on BTC exposure. This has enabled us to capture a higher percent of the potential BTC upside and continue to produce at high run rates. In turn, however, we have accepted lower prompt pricing.
Slide 5 puts the adjusted EBITDA result in context with our previous guidance. We came in at the high end of guidance on volume, much lower on adjusted EBITDA before BTC, higher on capture of potential BTC benefits and within guidance at the low end of adjusted EBITDA inclusive of potential BTC.
Chad will give more details later to reconcile guidance to actual results. Standing back from the quarter, we continue to build a large potential net benefit from the reinstatement of the BTC. If reinstated, our net benefit would be approximately $370 million. That amount represents the potential net BTC benefit for all of 2018 plus the first half of 2019 and represents over $9.50 a share.
As I mentioned previously, we are now into the 20th month operating without a decision on the BTC. This is resulting in a market that is caught in the middle. With high confidence in the ultimate reinstatement of the BTC, the market continues to operate as though it is already there, creating a disconnect in pricing and volumes being produced and sold.
Simply said, in anticipation of the BTC reinstatement, marginal gallons are not naturally coming off the market, which is depressing realized margins. Once the decision is made about the BTC, one way or the other, we would expect that the market will rapidly adjust for these discrepancies.
Equivocation on the BTC has now been dragging on for far too long. We announced two weeks ago that we are closing our New Boston, Texas bio refineries due to poor economics, driven in large part by the indecision around the BTC and the resulting caught-in-the-middle economics I mentioned earlier.
We are disheartened by the associated loss of jobs. We continually monitor margins and unfortunately did not see a near-term path to profitability at New Boston. Its small capacity made it more difficult to operate as efficiently as the other plants in our fleet. This was an important part of our work to continuously strengthen our portfolio and ensure that our resources flow to the highest and best opportunities. We also see others in the industry responding to this low margin environment with reduced capacity and plant shutdowns.
We believe that it is likely that this trend would continue with a protracted period of indecision about the BTC. So what is the status of the BTC reinstatement? We were disappointed that yet another tax extenders were not included in the recent budget deal. We believe, though, that there are other legislative vehicles to get the incentive reinstated before the end of the year and possibly by the end of September. There remains strong bipartisan support for the incentive and we continue to be confident that the BTC will be reinstated.
Now back to our financial results. Other factors held us to the lower end of guidance inclusive of potential BTC. Margins were lower than expected in the quarter. As you can see on Slide 6, our key indicators, the spreads between heating oil or ULSD and three feedstocks, soybean oil, otherwise known as HOBO spread, distillers corn oil , HOCO, and Choice white grease, which is HOG, have all compressed across the quarter. Chad will cover this in more detail presently.
In terms of self-help actions, underlying performance continues to be strong. We grew gallons sold 15% over last year, a very solid result. This volume increase offsets much of the headwinds of a lower average selling price and the one quarter lag in LCFS income, which we discussed last quarter.
We work to continuously and safely improve our production efficiency and to maximize our feedstock flexibility. We believe that both of these are key competitive advantages for us and they both positively influence this quarter's results. Most notably, we produced 127 million gallons in the second quarter, which is 2.5 million more gallons than Q2 2018. Yet, our feedstock usage was identical. We consumed right at a billion pounds in both periods.
Some of that efficiency gain is due to operational improvements and some due to feedstock usage. Our feedstock flexibility allowed us to use more soybean oil this quarter compared to the prior year. At times this quarter, soybean oil was cheaper than animal fat on a yield adjusted basis. So we switched some production in soybean oil when and where appropriate. Across most of our fleet, we can switch back and forth as pricing dictates optimizing operational profitability.
We are starting to see real traction in our downstream strategy, which is key to boosting biodiesel demand and margins and we believe therefore we'll significantly expand our long term profitability.
So let's talk about the progress we're seeing in our downstream efforts. Turning now to Slide 7. In our first quarter earnings call, I mentioned we would be opening our first REG branded Carlock station to drive higher blends of biodiesel and enhance margins. We opened the Seneca Carlock fueling station on July 17th, and are pleased with the early progress there, as well as a future profit opportunity for REG in selling fuel directly to end users.
The other downstream effort I mentioned in the first quarter call was our fuel distribution business in Iowa, which is also driving higher blends of biodiesel and enhancing margins. This business has achieved many promising developments thus far. We have converted several customers from B5 to B20 blend. These customers range from a large metropolitan fleet to a mining company to a large utility company. In addition, we continue to convert our own fleet of delivery vehicles to B-100. Through these efforts, we're proving the B100 Biodiesel makes a great fuel and does not need to be blended with petroleum.
We believe this demonstrated success will increase overall biodiesel demand, open up new higher margin markets for us and accelerate environmental improvement in the locales where the fleets operate.
As an illustration of why distribution participation makes sense for us, over half the volume we sold in our Iowa fuel distribution business in June were blends of B11 and B20. These blending levels are 2 times to 3 times the industry's nationwide on-road biodiesel blending level of 7%.
Although it is early days, our direct to fleet sales are growing rapidly and in second quarter 2019, they are 250% higher than the second quarter of 2018. The average REG Ultra Clean gallon, our proprietary blend of biodiesel and renewable diesel contained 10% biodiesel for the first six months of 2019. We believe our ability to blend biodiesel with renewable diesel is a real differentiator for REG and uniquely positions us with scale in both products. We've filed for a patent to protect our proprietary blending knowhow.
REG Ultra Clean diesel gives us a significant uplift in the value of our biodiesel. These examples of downstream progress indicate why we are focused on this element of our growth strategy. Speaking of growth, we are highly confident in the outlook for renewable diesel. Pricing is good, demand is very strong and new potential demand draws such as aviation and other incentivized geographies are on the horizon. Produced volumes at Geismar continue to grow organically and we continue to advance our work with Phillips 66 on our potential joint venture.
As we look at our major investment opportunities, our focus is on renewable diesel. We are progressing with our planned joint venture with P66, which is an important example of how we can grow our renewable diesel business through strategic partnerships. We expect to make final investment decisions toward the end of this year following completion of scoping design engineering.
Our current plan has the projects coming online in late 2022. We are carefully managing our capital investments in response to the market environment and are continuing to invest in the key projects that look to provide high returns and long-term growth. Chad will elaborate on capital investments shortly.
Finally, let me provide updates on a few non-operating items. First, we announced the sale of our Life Sciences business to Genomatica. We believe Genomatica is an outstanding home for this business and our former Life Sciences team members who have joined them. We wish them great success as they carry forward our efforts.
Secondly, I want to highlight our contribution on the environmental and social fronts. We are very proud of the carbon reduction we achieved in the second quarter. On Slide 10, you can see that 127 million gallons of low carbon renewable fuel we produced displaced approximately 850,000 metric tons of CO2. This tremendous environmental benefit is integral to our fuel forward strategy.
In addition, we maintain a stellar safety track record again achieving zero reportable incidents in the quarter. Our 12-month rolling average injury rate through June is at record low levels. The goal to achieve the industry leadership is -- this is our goal to achieve industry leadership in this very important KPI.
Let me now turn the call over to Chad for the financial update and then I will return to discuss our guidance and outlook. Chad?
Chad Stone -- Chief Financial Officer
Thank you, C.J. and good afternoon, everyone. Before we review the key line items, I want to summarize our results relative to our guidance. As a reminder, our Q2 adjusted EBITDA guidance, excluding BTC and LCFS effects was a range of negative $10 million to negative $25 million. This was based on a historical ratio of shared BTC benefit with our customers. Our actual result was negative $42 million. As C.J. mentioned this before BTC result is lower than expected because we took on a greater than historical portion of the expected BTC value this quarter.
Our estimated BTC benefit was $81 million compared to our guidance estimate of $63 million. If we add adjusted EBITDA and expected BTC benefits together in both the guidance and the result, we would have been within the lower end of our guidance range.
Using the guidance midpoint, we were off by $25 million due to assumptions that did not materialize or that changed. The largest item was the sales environment related to the BTC sharing, resulting in a lower biodiesel average selling price and higher estimated net BTC benefit for us. The drop in biodiesel average selling price impacted our results negatively versus guidance by $19 million.
Now let's turn to results, starting with Slide 12. The increase in total gallons sold was driven mainly by renewable diesel and petroleum diesel. Biodiesel gallons sold were basically flat. We did have substantial growth in the resale of petroleum-based diesel due to more blending as we expand our downstream distribution network. The solid volume growth was offset by a few items, resulting in revenue being down 3%. US biodiesel selling price was down sharply due to lower ULSD prices as well as lower RIN prices.
As we discussed last quarter, due to a change in California's administrative process, we did not recognize California LCFS credits in the second quarter which is a one-time impact, resulting in $29 million of revenue and adjusted EBITDA recognition pushed into the third quarter.
California LCFS prices remain robust due to strong demand. Furthermore, the value for Oregon LCFS credits have increased dramatically and averaged over $150 per metric ton for the quarter. And last week, we were notified that Oregon approved our lower carbon intensity scores for Grays Harbor, which we expect will improve margins there.
To summarize, the slight decline in revenue, renewable diesel REG revenue was up strong while biodiesel LCFS and RIN saw lower revenue.
Turning now to costs. The main driver of the increase in cost of goods sold was the overall increase in the feedstock complex as well as the compression of lower cost feedstocks. Total cost of goods sold was up while revenue declined, resulting in a gross loss. The spreads compressed between these feedstocks year-over-year, since approximately 75% of our feedstocks are lower cost feedstocks like distiller corn oil and choice white grease, our typical cost advantage was compressed. Our SG&A expenses were up slightly due mainly to legal costs associated with our potential joint venture with P66 and the Life Sciences divestiture.
On Slide 13 and 14, you can see our trailing 12-month adjusted EBITDA and return on invested capital. The light blue on the bar chart reflects the net benefit if the BTC is reinstated. Our business is seasonal and we believe trailing 12-month results are a better reflection of our long-term earnings power.
Now, please move to the balance sheet on Slide 15. Cash declined from the cash used in operations as well as cash used to settle our 2019 convertible bonds in June. We paid cash for the principal and issued stock for the premium. We brought down total debt even more in the quarter by reducing our revolver outstanding.
We funded the revolver reduction with working capital changes and the main item being selling product out of inventory, which is normal for this seasonal period. Looking at our liquidity, we had $61.6 million of cash at the end of the quarter and we had $68 million available on our lines of credit at the end of June.
In early July, we expanded our asset-backed line of credit at our option to increase the maximum borrowing amount through October from $150 million to $175 million or to $200 million contingent upon the BTC reinstatement. We settled the 2019 convertible bond in June. We paid off $67.4 million of principal with cash and issued $1.9 million Treasury shares to settle the premium. We did receive back 625,000 shares from the capped calls, so the net shares issued were 1.3 million shares. The Treasury shares we issued were previously repurchased at an average price of $9.87 per share. We did not refinance the convertible bonds which delevered our balance sheet.
As you can see on Slide 16, our debt to capital ratio is now 15.2%, down from 20.6% from last quarter and down from 19.5% at the end of 2018. The 15.2% debt to capital ratio is the lowest level since the first quarter of 2014.
Now let's touch on CapEx. We invested $9.8 million in the second quarter, mainly on growth and high return projects and year-to-date, we've invested $8 million over our original $65 million to $75 million budget. We have been consciously slowing our CapEx outlay to better manage cash flow in the absence of the BTC.
Our effective tax rate for 2019 is expected to be less than 1% and going forward we expect our tax rate to continue to be less than 5% for the foreseeable future and our blended average interest rate is less than 4%.
Now I'll turn the call back to C.J. to discuss the outlook. CJ?
Cynthia J. Warner -- President & Chief Executive Officer
Thanks, Chad. And I'd like to just make a quick correction. The year-to-date investment of CapEx is $18 million versus that $65 to $75 (ph) budgets. It was just a quick mix here.
Let me refer to Slide 20 for our guidance. For the third quarter of 2019, we expect gallons sold in the range of 185 million to 205 million gallons. We do anticipate the margin environment to continue to be challenging in the third quarter as the uncertainty is prolonged around BTC and due to RIN price suppression that we believe is caused by our efforts smaller refinery exemptions. On a positive note, we've seen modest increases in RIN prices recently with plant closure announcements from us as well as the Flint Hills Beatrice, Nebraska plant.
The third quarter will include $29 million of California LCFS credits.
With all that in mind, we are projecting adjusted EBITDA to be in the range of $3 million to $18 million. In keeping with the trend, we have experienced on BTC sharing, we estimate that third quarter adjusted EBITDA would be approximately $80 million higher if the BTC were reinstated on terms similar to past years. This estimate for the third quarter is based on actual performance through last week and takes into account existing forward contracts expected to be fulfilled and existing spot margins through the end of the quarter. 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.
We have included $1 million of risk management gains in our guidance, which reflects our estimate for the quarter as of July 23rd based on the ULSD forward curve.
Our full-year guidance reflects a continued challenging market environment. We now estimate that gallons sold will be in the range of 715 million to 740 million and gallons produced to be in the range of 510 million to 540 million. These have been reduced from prior guidance due primarily to the New Boston closure and reduced third-party trading.
To wrap up, we remain focused on the improving financial results in this very challenging margin environment. With the expected BTC reinstatement, our results will be strong and we'll provide the intended capital to fuel value creation. In the meantime, we continue to deliver on the controllable elements of our plan and have put in place several programs that we believe will accelerate growth in the future. We remain confident in our long-term earnings power and the value we continue to create.
Now, before we close, Todd's going to mention upcoming investor events for REG. Todd?
Todd Robinson -- Director, Investor Relations, Treasurer
Thanks, C.J. Please turn to Slide 21. We will present at the Canaccord 39th Annual Growth Conference on August 7th in Boston. Attendance at this conference is an invitation-only. So please contact your Canaccord sales representative if you want to attend or schedule one-on-one meetings with us.
We will also be attending the BWS Financial Growth and Value Summer Investor Conference on August 13th and the Seaport Global Securities Annual Energy and Industrials Conference on August 28 in Chicago. Attendance at these conferences is invitation-only. So please contact your sales representative if you want to attend or schedule one-on-one meetings with us.
We pre-recorded our comments this quarter as C.J. had an unavoidable and unexpected personal matter to attend to. She will not be available for the remainder of this call. Chad will lead the Q&A session and we will have other members of the senior leadership team on the call to answer questions as needed. Operator? We will now open it up to Q&A. Please proceed.
Questions and Answers:
Operator
Thank you, ladies and gentlemen. We will now be conducting the question-and-answer session. [Operator Instructions] Our first question comes from Patrick Flam with Simmons Energy. Please proceed with your question.
Patrick Flam -- Simmons Energy -- Analyst
Hey, guys, thanks for taking my question. I really wanted to ask you about the changes in pricing across the market that we've seen in specifically what have historically been lower cost feedstocks. Essentially, you mentioned that soybean oil prices were actually cheaper than some of those historically advantaged feedstocks throughout the quarter. And it doesn't seem like that market is going to change anytime in the near future. Can you frame up your expectations for this going forward?
Chad Stone -- Chief Financial Officer
Yeah, Patrick, it's Chad. Thanks for your question. And if you look on Slide 6, it really kind of shows you that compression and the evolution of the feedstock, and then again, on Slide 7 of this deck shows exactly what you just described. So we have C.J. was saying have seen changes in pricing of lower cost feedstocks for a couple of reasons. There's a lot of factors moving in the feedstock markets. One of them is highly incentivized -- highly incentivized markets for low carbon intensity feedstocks like used cooking oil and distiller oil -- distiller corn oil that are going into West Coast markets like California and Oregon, for example. And so that's supporting this compression of lower cost feedstocks into soybean oil pricing. Soybean oil has been kept relatively low for a few reasons, one, due to the continued trade war with China, keeping the entire soybean complex low, the reduced demand for protein in China as well. So we've seen that price lower than normal. We've also seen an abundant supply of palm oil, which trades in the world market and keep soybean oil in check. So on the one hand, you see an incentive for the traditionally lower cost feedstocks because of premium markets. On the other hand, soybean oil has been relatively flat.
Patrick Flam -- Simmons Energy -- Analyst
Okay. That's very helpful. My follow-up question is that on the off chance this BTC keeps getting pushed back or worst case scenario gets shelved completely. I was wondering if you could talk about how that affects your willingness or ability to fund some of your slate of growth projects going forward?
Chad Stone -- Chief Financial Officer
Sure. So on the one hand, as C.J. mentioned in the beginning of the third quarter, we've started to see that this is -- this 20 months of lapsed BTC has been wearing on the industry from our announcement to shut New Boston and the Flint Hills closure of the plant in Nebraska, you can see that. You can also see it in our reduced run rate of the capital expenditure allocation. So we originally started the year with about a $75 million budget and we've paired that back to only spending $18 million through the first half of the year.
And so we're managing what we control, the margin, and the markets are what they are. They're acting with the expectation that the tax credit will be reinstated. But we need to position ourselves to protect our balance sheet and weather the storm, which is why you've seen those actions. But we have prioritized high priority fast payback projects, safety projects and those types of things. So that's kind of where we stand. The other thing that we've done, and as Todd has talked about before, is extending our working capital line of credit.
Patrick Flam -- Simmons Energy -- Analyst
Okay, thanks very much.
Chad Stone -- Chief Financial Officer
Thanks, Patrick.
Operator
Thank you. The next question comes from the line of Craig Irwin with Roth Capital Partners. Please proceed with your questions.
Craig Irwin -- Roth Capital Partners -- Analyst
Good evening and thanks for taking my questions. So Chad, the changes in BTC expectations over the quarter, 63 to 81, seems like there was a fairly significant change in sentiment among the buyers of your biofuel. My back-of-the-envelope math is somewhere between 55 million and 60 million gallons, was moved to where you are the beneficiary directly of the reinstatement, and as you said, to a greater degree. Can you maybe characterize for us what type of clients or what type of customers for your biodiesel are asking for this altered arrangement? And is there potential for more of the product that's sold to move into this more favorable, longer term BTC arrangement but something that obviously pinches the EBITDA in short term?
Chad Stone -- Chief Financial Officer
Yeah. Thanks for the question, Craig. Yeah, what we saw during the quarter was $18 million more of BTC upside to us than we would have expected based on our traditional relationship and I think it was an evolution of customer risk appetite. You think of the 20 months of some of our customers have very large exposures to the BTC and their offers on the table may be more leaning toward us retaining the net benefit upside. Again, if -- and I think in terms of types of customers, it's difficult to say, I mean, it's more anecdotal around the industry and we don't want to get too much into what our specific customer appetites are. But the underlying theme really shows through in these numbers is that they have enough exposure in some cases and they don't want to extend that.
Craig Irwin -- Roth Capital Partners -- Analyst
Okay, excellent. And then, this quarter you didn't have as much as much of a detailed discussion about Geismar and Geismar's contribution to the quarter. Can you maybe update us on how Geismar is performing, is that still a nicely profitable plant, even in this difficult environment? Should we expect Geismar to continue to outperform versus the traditional biodiesel plants?
Chad Stone -- Chief Financial Officer
Yes, Geismar is performing well, it's running very well. It had a successful turnaround and it continued to be profitable, we're very happy with the plant, as you know, we don't give specific details on plant economics. We do have some industry markers out there where you can get a sense of likely the way renewable diesel is selling. But we continue to be very happy with the performance.
Craig Irwin -- Roth Capital Partners -- Analyst
Okay and then just looking at potential opportunities out there, you mentioned on the call, 20 months waiting for our good friends in Congress to actually do their job and implement legislation properly and reinstate this blenders credit. Is there an opportunity now on the fats side, given that some people are obviously on the petroleum side or kind of giving up? Is there a potential that, we can see you guys actually take that off the market for significantly lower prices than what you're forced to pay at the moment?
Chad Stone -- Chief Financial Officer
I'm sorry, Craig, what off the market -- I didn't hear that --
Craig Irwin -- Roth Capital Partners -- Analyst
Feedstocks, soybean oil and high fatty acid feedstock.
Chad Stone -- Chief Financial Officer
Yeah. So what you saw us doing throughout the quarter is increasing our mix of soybean oil and canola inclusion because of that yield advantage of using the easier to process feedstocks and we probably -- I think it was 25% mix of soybean oil and canola last year compared to roughly 38% in the second quarter. So you've seen us adjust as it made as we optimized our plants and our feedstock mix based on the evolution of the feedstock markets, and from that perspective, what we're seeing is some opportunities and as we said the Nebraska plant came offline that we think has been helpful to keep distiller corn oil a little bit lower and so that is that is an opportunity for us.
Craig Irwin -- Roth Capital Partners -- Analyst
Okay. And then last question if I may. California low carbon fuel standard. I think you mentioned was a $20 million positive delta going from the second quarter into the third quarter. Should we continue to expect that into the fourth calendar quarter as an uplift to overall profitability?
Chad Stone -- Chief Financial Officer
Yes. So the second quarter did not have the benefit of any California LCFS credits. So that was transferred into the third quarter and then the fourth quarter, we expect to be as strong and arguably strengthening. What we've seen year-over-year is a California LCFS average price go from about $133 a year ago during the second quarter to $194 and so the LCFS price has been firming up. The Oregon credit prices have been firming up as well, a year ago they averaged $60 a metric ton and this last quarter they were up to $156 per metric ton on average. So we've seen strength in those markets, in the incentivized markets, and we expect that trend is continuing.
Todd Robinson -- Director, Investor Relations, Treasurer
Yes. All right. Todd here. One thing to note, sorry, is we haven't really talked about IMO 2020, but we do think that in the second half we think there will be a little bit of uplift from that, we haven't put anything in our guidance around that at this point. But I think if you look at what's been out there and others are talking about what that uplift could look like.
Chad Stone -- Chief Financial Officer
Yes. So just to put some numbers to that, in Marathon's call, they talked about the IMO 2020 uplift for diesel crack spreads to be $2 to $5 per barrel, which for us on a diesel gallon that translates to $0.05 to $0.12 per gallon. So that's the market outlook Marathon gave as far as IMO 2020 is concerned.
Unidentified Participant
Great. Thanks for taking my questions.
Todd Robinson -- Director, Investor Relations, Treasurer
Thanks, Craig.
Chad Stone -- Chief Financial Officer
Thank you.
Operator
Thank you. (Operator Instructions) Our next question comes from the line of Hamed Khorsand with EWS Financial. Please proceed with your question.
Hamed Khorsand -- EWS Financial -- Analyst
Hi, I'm just trying understand that if your customers are, you know, have enough as far as BTC credit exposure is concerned. Wouldn't that also cause some adjustment pricing as far as what you're selling into the market for? Or is there just too much pressure from competitors just producing as much as they can even though it's not feasible?
Chad Stone -- Chief Financial Officer
I think it's -- Hamed, thanks for the question. I think that's certainly a signal that the market needs to adjust. So, you know, you didn't see that happening in the second quarter. In July, you saw two plant closures, our New Boston plant and the Beatrice plant. There's also some industry talk about reduced run rates. Those are the types of signals that you do need to see customers talking about, you know, maybe having enough exposure to the BTC. They're either wanting to let us retain more of the net benefit upside or potentially, you know, forcing the markets to adjust to continue to clear the market. I think that's the right way to think about it.
Hamed Khorsand -- EWS Financial -- Analyst
And do you consider yourselves as the lowest cost producer in the industry? And as far as your competitors go, do you think there's anyone that's prone to be actually closing down anytime soon?
Chad Stone -- Chief Financial Officer
Yeah. Well, we're very competitively positioned and our ability to switch between feedstocks is an advantage for us, for sure. You know, so that we were able to use the lowest cost feedstocks that our optimized model suggests that we need to run. So it is an advantage for us. The other advantage that we have is our scale and our network approach and then our basically national footprint of feedstock supply and customer base. So that is an advantage for us. We're very competitively positioned.
Hamed Khorsand -- EWS Financial -- Analyst
Okay. My last question is just, given that on the basis that BTC is not extended or renewed, what's your operational plan? I mean, obviously you can't be producing business at a negative gross margin. So what are you guys operationally looking to do?
Chad Stone -- Chief Financial Officer
Yeah. So it gets back to an earlier comment I made. You know, it's the -- monitoring plant by plant. You have the New Boston shut down. You have, you know, positioning our balance sheet to weather this storm. We've slowed down capital expenditures too from our original operating plan and just watching margins at plants all the time. I mean, we've been through this several times before, we know the operating plan for what to do when the BTC is not in place and what we can control are those types of things and expanding our working capital line of credit, looking at what we did with debt, paying down debt, we're at our lowest debt to capital ratio of 15% in the last five years. And then the other things we can control are, things like getting downstream, moving downstream, selling blended, the entire blend, blend fuels, the Carlock at Seneca and those types of things. So that's what we can do to control our destiny and we know how to operate through times when the BTC has lapsed. And when we're given signals to change production plans, but as CJ said, we're very confident in the strong bipartisan support. It's not for a lack of support for the biodiesel industry and the need to renew the tax credit, it's more a matter of when versus if and so it's I think we've got the attention of folks when the largest producer of biomass based diesel in North America shut a plant, I think that's telling for the market participants and policymakers that something needs to change to move forward. So we need to get the tax credit decision behind us and get that back in place.
Todd Robinson -- Director, Investor Relations, Treasurer
Yeah, Hamed, it's Todd. Let me just echo a little bit. You know, I think as CJ mentioned in her comments, right, we're kind of in the caught-in-the-middle kind of dynamic right now where we're not really seeing natural margins in the marketplace because of the uncertainty around the tax credit. So once that certainty is determined and we get that out of the way, we will see things adjust, markets will correct, feedstock prices, RIN prices et cetera and there will be a new normal once we get to some type of certainty. So right now, yes, our current financial reported GAAP numbers do not reflect the true economic value that we are able to deliver. So we need certainty and hopefully we'll get that soon.
Hamed Khorsand -- EWS Financial -- Analyst
Okay, thank you.
Todd Robinson -- Director, Investor Relations, Treasurer
Thank you.
Chad Stone -- Chief Financial Officer
Thank you.
Operator
Thank you. We have no further questions at this time, so I'd like to turn the floor back over to Mr. Robinson for additional concluding comments.
Todd Robinson -- Director, Investor Relations, Treasurer
Thank you, Jesse. Thanks -- thank you for participating and this concludes our call and you may now disconnect.
Duration: 42 minutes
Call participants:
Todd Robinson -- Director, Investor Relations, Treasurer
Cynthia J. Warner -- President & Chief Executive Officer
Chad Stone -- Chief Financial Officer
Patrick Flam -- Simmons Energy -- Analyst
Craig Irwin -- Roth Capital Partners -- Analyst
Unidentified Participant
Hamed Khorsand -- EWS Financial -- Analyst
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