Q4 2019 Earnings Call
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And gentlemen, todays conference is scheduled to begin shortly please continue to say goodbye. Thank you for your patience.
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Good morning, and welcome to the Green Plains, Inc. and Green Plains partners fourth quarter and full year 2019 earnings conference call.
Following the company's prepared remarks instructions will be provided for keeping an eye.
At this time, all participants are in listen only mode.
I'll now turn the conference call earlier host Spilborghs Senior Vice President Investor Relations and Treasurer Mr. bogs. Please go ahead.
Thanks Daniel.
Welcome to Green Plains, Inc. in Green Plains partners fourth quarter 2019 earnings call.
Participants on today's call, our Todd Becker, President and Chief Executive Officer, Patrick Temkin, It's our Chief Financial Officer, and Walter Cronin, Our Chief commercial officer.
There is a slide presentation available and you can find the presentation on the investor page under the events and presentations link on both corporate website.
During this call, we will be making forward looking statements, which our predictions projections or other statements about future events.
These statements are based on current expectations and assumptions that are subject to risks and uncertainties.
Actual results could materially differ.
Because of factors discussed in yesterday's press releases in the comments made during this conference call and in the risk factor section of our form 10-K form 10-Q, and other reports and filings with the Securities and Exchange Commission.
We do not undertake any duty to update any forward looking statement.
Now I'd like to turn the call over to Todd Becker.
Good morning, Thank you for joining our call today for the quarter, we reported an adjusted net loss of $14.4 million or 41 cents, a diluted share which excludes the revert a reversal of a deferred tax asset of $25 million that affected as negatively this was a noncash adjustment had no impact.
On our financial strength.
As expected financial results were improved from the prior quarter due to the ethanol margin environment at the beginning of the fourth quarter.
We reported $16 million, an adjusted EBITDA for the quarter and we were free cash flow positive as well, we remain net debt zero against our convertible debt as a debt at GPP is non recourse to the parent and the revolvers at Green Plains, Inc., our secured against receivables and inventories.
We are in a position we're in this position as an outcome of our portfolio optimization plan.
We are now embarking on a total transformation plan, which will I will discuss later in the call as well our quarter was also impacted negatively by a shutdown by the shutdown of Wood River for our project 24 upgrade and the final stages of the Madison shutdown as these occurred during a positive margin environment and we believe this affected our quarter negatively.
By two to three cents a gallon.
Both plants came back to full rates during December and we expect them to continue to operated well during 2020.
We produced approximately 239 million gallons of ethanol, which put us at an 84.5% utilization rate for the quarter. While this was lower than our stated goal of 90%.
The highest utilization rate in two years more importantly in December we ran at 94% once wood River fully came up to speed. After our project 24 upgrades and the repairs that are Madison plant were completely lined out which is also the highest single month over two years with these projects now complete at running well, we expect to achieve 90%.
At or above for each quarter in 2020, our goal has been to run maximum production levels in order to maximize the benefit of our cost initiatives and we believe we will find will be able to demonstrate what this platform can do.
The consolidated crush margin for the fourth quarter was two cents per gallon, but the spot crush continued to decline during the quarter as industry production edged higher weekly EA data printed to fourth highest production on record earlier this year.
While the production levels have dropped since then this industry continues to be oversupplied, we will continue to focus on our things with within our control reducing operating expenses through our project 24 initiative and driving additional value to our protein rollout. Our first project 44 modification at our Wood River, Nebraska location continues to exceed our expectations.
And leave US excited about completing the rollout across our remaining non IC implants in our platform in December and January our Opex was an average of 21 cents a gallon Atwood River, let me explain one more time, how we look at this so you can do a like for like comparison of other companies and plants as there seems to be continued confusion on the map.
Path and how it works first we take the five commodities, we buy and sell to get a gross margin our corn costs natural gas ethanol revenues distillers revenues and corn oil revenues are converted into a gross margin.
From there we take the cost of plant operation to get the EBITDA per gallon inclusive and this is the nature of railcar cost chemical joosten enzymes electricity repair and maintenance production and admin payrolls related to the plant supplies in DNA and find the corn purchase commission to one cent per gallon for your reference and illustration of these.
Points are shown on page six of the conference call presentation.
In addition, what is not included in the Opex per gallon calculation is the fact that natural gas usage is reduced by 25% with the project 24 upgrade further improving the returns on this project. We are expecting all plans to reduce natural gas usage, which helps overall CDAI scores on sustainability scores Wood river operated at a.
A similar cost structure to all of our IC implants are similar size and achieved the second lowest operating cost level in our platform in December showing that these modifications can make our non IC ATM deltatech and Fogo Bush plants competitive with our best IC implant in our fleet and even across the industry our operators are being.
And retrained to operate these like in IC ATM plant and think very differently as a retrofit freight is basically making these IC ATM as the front and back ends or similar already lastly, we were told by ITM that these modifications or even better than what is in many legacy plants. We're obviously very excited about the outcome.
The improved December results, we believe we're on track to achieve our overall goal before the end of the third quarter, we're making progress on the next three project 24 upgrades and they should be running in March or April and we should complete the remaining non IC implants. During the second and third quarters upon completion and want to plants are fully lined out we anticipate the entire platform.
And to be below 24 cents a gallon as originally expected. We believe we could likely achieve 23 cents a gallon overall and we are starting to think about the next steps to drive our platform costs, even lower in the future. The key here is that in order to be six to be successful in our transformation of two protein.
We must continue to reduce our operating costs. So we can run in any environment I will give further into protein in my closing comments of spend most of the time discussing this initiative during the quarter. We completed the sale of our 50% interest in Jefferson energy companies to our joint venture partner for $29 million. This largely completes the portfolio optimization plan that we.
Embarked on two years ago, all told we have sold approximately $780 million and assets and paid off or deconsolidated nearly $1 billion of debt.
Green Plains partners reported $13.3 million Majestic EBITDA and a coverage ratio of 0.99 times for the fourth quarter and a 1.0 times for the trailing 12 months, we anticipate that as Green plains production level hits the targets laid out during the during 2020 of greater than 90%. These coverage ratios will improve.
We will continue to look for opportunities to grow the partnership through accretive acquisitions and will be audio offensive. During 2020 ideally these would be in multi product terminals backed by multiple long term customers.
Lastly, our cattle business had a record quarter and we expect this to be continue to be continued in 2020 with strong returns as well now I'll turn the call over the Patrick to read review, both Green Plains, Inc. and Green Plains partners financial performance and I'll come back and discuss the outlook for 2020 give a bit of a policy update before provide more details on our protein initiatives.
Thank you.
Green Plains Inc. consolidated revenues were $715.7 million in the fourth quarter up $132.2 million were 23% from to hold 40 years ago.
The increase in revenue was driven primarily by higher ethanol production rates as compared to the fourth quarter of 2018.
Our production run rate was 84.5% of capacity in Q4, 2019 compared to 71.1% run rate for the prior year fourth quarter.
Our consolidated net loss for the quarter was $39.7 million, including a noncash tax valuation allowance adjustment at $25.3 million compared to net income of $53.5 million in the fourth quarter 2018, where we recognized $150 million gain on the sale of assets.
Adjusted EBITDA for the fourth quarter totaled $16 million compared to adjusted EBITDA of $128 million.
There are go which also included the impact of gain on asset sales mentioned earlier.
For 2019, adjusted EBITDA was a negative $35.1 million versus 20 $225.8 million in 2018.
For the quarter, our SGN a cost for all segments was $20.6 million down 11 million $11.9 million or 37% from $32.5 million in Q4, 2018, driven primarily from the reduction of controllable expenses and the asset sales completed last year.
This change does not include an additional $2.6 million reduction to SG nay from discontinued operations related to our cabinet business.
For the full year 2019, our DNA costs were $77.1 million all segments as compared to $108.3 million for 2016.
Interest expense decreased 20.4 million to $8.7 million work is lower debt balances lower interest costs and the write off of unamortized debt expense in 2018 due to the retirement of our term loan b.
Capex for 2019 was about $75 million with approximately $24 million of maintenance Capex for ethanol production, an additional $49 million of growth Capex, primarily for project 24, and the high protein feed project in Shenandoah, Iowa.
For 2020, we will focus capex spending primarily on the completion of our project 24 initiatives and expansion of our high protein development plan, along with normal maintenance Capex.
Opportunities to deploy capital can always be impacted by the overall margin environment that as of now we are targeting approximately 100 $120 million and capex spending on our operate based on our operating and financing plans.
On slide nine at the Investor deck, you will see our balance sheet highlights we had $275 million of cash in working capital net of working capital financing at the end of the fourth quarter compared to $428 million the into 2018, the balances for 2019 numbers excluded balances from our cattle business that.
It was deconsolidated in September.
Our liquidity position at the ended the quarter remains solid with $269.9 million in total cash along with approximately $221.8 million available under our working capital revolvers.
This amount does not include availability of $67.9 million into the credit facility of a partnership.
For Green Plains partners, we had 240.1 million gallons of throughput volume that our ethanol storage assets during the quarter, which was up 32 million gallons or 15% from the fourth quarter 2018, as result of higher production rates at Green Plains plants.
The partnership reported adjusted EBITDA of $13.3 million for the quarter, which was $1.9 million lower than the fourth quarter of 2018 as a result of that sale to three plants.
Distributable cash flow was $11.2 million for the quarter $1.9 million lower than the same quarter of 2018 again, reflecting the sale of previously mentioned plants.
The distribution of 47.5 cents per unit declared on January 16th resulted in the coverage ratio of 0.99 for the fourth quarter.
On a last 12 month basis, adjusted EBITDA was $54 million distributable cash flow was $45.3 million and declared distributions were $45.1 million, resulting in a one times coverage ratio for 2019, now I'd like to turn the call back over to Todd. Thanks, Patrick Let me discuss the.
Industry briefly last year, we faced numerous industry headwinds. However, there are number of positive opportunities as we begin 2020, even as margins remain under pressure.
As we've continued to remind everyone to solution remains the same the industry remains oversupplied and needs to rationalize supply at this point undercapitalized players continue to find a way to survive in the past. It was the green plains slowdown that was the main driver for reduced supply, but because of project 24, and the fact, we lose more money slowing down our store.
That is used to run full out and drive our cost per gallon lower.
The last time, we slowed down all that happened was the industry sped up.
We had positive net income margins begin to appear in October as supply was below 970000 barrels per day and since then the last five week average was a 1.065 million barrels a day with some weeks even higher.
We believe some of the slowdowns never happened that were announced by other players are carrying capacity as an industry to the best of our knowledge is 1.150 million barrels per day, when everyone is running and some of the good eastern plants come back on line.
The good closed eastern plants come back on line, which is over 17.6 billion gallons per year I'm, not saying, we will run consistently there, but we can take care of any demand that shows up.
I would say our average estimate going forward is 1.100 million barrels a day or 16.8 billion gallons annually, so whereas demand demand going to come from what we know that 10% of the fuel supply is 14.3 billion gallons and exports are 1.5 billion gallons. So our baseline demand is 15.8 billion gallons can trying to take one.
Billion gallons, yes, we'll day, we will find out can you 15 grow fast enough to help yes will it we're working hard to get there. We currently have 2070 station selling efifteen and are projecting we will be at 3000 by the end of 2020 with demand of 200 million gallon 200 million incremental gallons and we can achieve.
Of our 2021 goal over a 10000 stations it will increase incremental demand to over 800 million gallons per year now we could blow past. This number in the event US da comes through with $100 million for infrastructure, which they are moving quickly on it was into president budget proposal to Congress when added to the based demand it starts ever.
A real impact on margins and excess supplies. We also believe that other countries will continue to increase demand as well.
So regarding the 10th circuit extend circuit ruling EPA administrator indicated 10 circuit ruling would have an impact on the way they handle small refinery exemptions and they would be announcing soon how they intend to move forward on it but they do have 45 days to appealed the decision should they choose to go that route our guess is that they don't rock the boat.
Either way and an election year, but find a way to adhere to the deals so that 15 billion means $15 billion.
With these things happen, we may find leases along the RFS work as intended as intended as I had said before our story was hijacked by the oil industry and we must take it back. This is the most successful low carbon program ever implemented globally as we continue to reduce tailpipe emissions by 40% to 45% and even more importantly, the industry's footprint continually.
Continuously gets better with reduced natural gas usage and reduced water use per gallon of production, which is not even calculated in the missions yet.
We remain focused on controlling what we can control, which is reducing our cost through project 24 extra extracting value through new sustainable feed ingredients by capitalizing on our investments in protein technology. This is what we're referring to as a total transformation plan for Green Plains. If you refer to the last side of the presentation before the appendix.
It illustrates what our year would have looked like of all of our plants had this technology deployed at very reasonable expected protein levels of 50% and 53%.
You can see the results are impressive which is why we are headed to become a true bio refinery that is maximizing the value of each colonel corn through the application of technology, and New York, New New use Easton enzymes.
All while not being dependent on government policy and this is why our partnership with no designs as well as our joint venture with optimal Aqua are sold so important.
I'm happy to report that Shenandoah has begun commissioning our first high protein production Phil facility last week.
And we expect the dryer to come online 30 days later to achieve maximum production shortly after.
We have recently increased the volumes of the off take agreement and for all intensive purposes. Shenandoah production is spoken for Additionally, we have begun the engineering for our second and third high protein location and expect one more unit to be fully constructed before the end of the year. We are discussing offtake agreements for a second and third facility as well we will make the.
Final decisions on the location and announced that shortly.
We continue to focus on the current technology running successfully in available in the market, which is fluid CWIP technologies. Thus far we have not seen another technology that gives us the base quality, we need from solely mechanical separation, which gives us a baseline 50% protein product, we have seen some chemical and flocking and processes, but our aquaculture.
And pet food customers have indicated they do not want a product produce like this and more importantly, we don't believe we can get those products, except the globally from those processes processes. So we continue to focus on the technology. We have chosen and is operating at scale today, producing product that is being used around the world.
This technology is another step in the transformation of Green Plains, two world class protein provider. In addition by partnering with no designs. We believe we will be able to increase the value of the products, we produce everyday and together provide solutions for our initial nutritional partners in the aquaculture animal feed in companion animal food markets worldwide.
Utilizing advanced biology with potential pathways up to 60% protein.
So let's talk about the margin potential in front of us, which which is much higher.
Then the 12 to 15 cents per gallon, we talked about in the past on protein.
This was based on our 50% protein product, let me walk you through what we have been calling the J curve of protein profitability.
At 53% pro the potential margin contribution rises to about 21 cents, a gallon and at 56% pro the potential is approximately 36 cents a gallon.
The North star for Us to achieve is a 60% protein products combined with novel feed ingredients that could add as much as 57 cents a gallon at prices near $1200 aton for the product.
This illustrates why we're so excited about the direction. We're headed we're currently in aquaculture trials to validate novel ingredients that will be used in combination with our high protein products as either a complete feed or premixed further enhancing the profitability of this product. We're on a path to transform this company to be in AG Tech posted focused.
Company maximizing the value of the assets in coming years and it begins now.
In combination with our transformation to sustainable ingredients. We are also led launching our ESG initiatives as much of what we do already gets us close to what the market is looking for in this investment thesis.
We just haven't articulated all of what makes this company and industry right for a new around of investment from investors and capital looking for SG opportunities. We will begin to highlight things like carbon intensity greenhouse gas emissions and carbon reductions natural gas and water reductions land use efficiency gains protein increases to help conversion.
Inefficiencies and aquaculture, which reduces land used to feed ourselves finally finally.
We were just awarded Patton for the novel process of using thins still it from an ethanol plant to produce algae oil at protein rich biomass, which we haven't quietly and successfully scaling in our York, Nebraska pilot and research facility, which is now in full trials for use in Aqua culture feeds. This is a bolt on technology that can be applied to any corn.
Based ethanol plant. This is different from the other now the ingredients mentioned earlier when most don't know is New York, Nebraska has a full scale world class pilot fermentation facility that we acquired along with the ethanol facility not many of these exists in the world. Today. This has helped accelerate the ability to prove out can get this technology patented.
Lastly, another aspect of our ESG initiative is our corn oil production.
This is one of the based feedstocks used in a renewable diesel processes a benefit of our protein initiative is the fact that corn oil production goes up between 50 and 100% depending on the facility.
We have a very constructive price view on vessel oils, and fats pricing with the expansion globally of renewable diesel production and we will benefit from this and our DSD strategy overall, we have already been exporting our oil for this purpose even before the use has scaled up this is a low sea ice score oil that helps plants achieved their targets more to come on our overall, yes.
The strategy, but we believe well we are already a very environmentally sustainable company. When we combined these new protein initiatives with what is going on an optimal aqua and the early results from project 24, we truly believe the 2020 will be looked upon as an inflection point in Green Plains history. Now we are firmly on the path to more predictable.
And sustainable margins and cash flows.
Challenges in this industry of maneuver numerous over the past year.
And couple of years, we will continue to do our best and to be transparent with you. We believe we positioned ourselves through our portfolio optimization plan and to our cost reductions as you cannot transform unless your generation one platform is efficient and low cost. In addition to the protein strategy, we have outlined which puts us in the best possible puzzle.
I want to succeed as we continue to transform ourselves in the Green Plains 2.0.
What is important as while ethanol margins have been under pressure for the last 18 months.
We have a very dynamic plan to reinvent the company now while while it may take a while we're set up very well to succeed thanks for joining the call today and now I'll ask.
Our moderated to start to QNX session.
Ladies and gentlemen to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.
Please limit your questions to no more than two at this time.
We wish to ask additional questions. Please rejoin the queue. Please standby, while we compile the Q and a roster.
Our first question comes from Adam Samuelson with Goldman Sachs. Your line is now.
Thanks, Good morning, everyone.
Hi, Adam.
Hi.
Just went through a lot of details on on the high pro initiatives and I guess first in the Capex that you outlined that I mean.
Presumably as cash on hand in any cash from operations, but talk about the financing plan. Both for further capital spending this year and also to get the whole ticket the whole fleet converted to high profile. I think you talked about 350 to 400 million opportunity in the slides just any pathway on the financing of getting there and timing.
And maybe how does how do we accelerate some of these investments to get to this end state.
Yes, so thats. The key is we want to accelerate this this project and go as fast as we can to roll. This out so we've been talking with several different financial partners on from the debt side in terms of banking and and other lenders and we believe that our goal is to get somewhere between 100 150 million.
$1 of debt for these projects to get them kick started in addition, we have also been talking with other partners around.
Accessing.
Partnership in terms of equity investments into some of these ventures to accelerate them. So we're kind of being we're going to look at has to be very creative. The first the first though is if we can get to $150 million line to start we believe we could build three or four of these very quickly those three or four would add to Shenandoah, which gets us to five of these projects they start to.
Self finance each other very quickly so five projects with self finance another two to three that gets us up to eight self finances self and answers the rest.
Now in terms of off cash balance sheet. We also want to make sure. We always retain a strong cash position. We still believe we have some liquidity available through other levers that we can pull as well to finance. Another one of these with with equity. So it's a little bit of everything no. We're going to look at everything across our platform as well to make sure that that we are optimizing.
And where we can also find other sources of liquidity, but our goal is to now really begin to think about.
More aggressively funding this plan because of what we're finding out in terms of offtake agreements.
Shenandoah starting up we already know there's a plant two plants operating that are doing very well.
Product is being very widely accepted globally in the market and so our goal is to move as quickly as we can and we're developing that plan right now, but we are in talks right now to potentially use debt financing to move quicker.
That's helpful color and then just on the on Shenandoah I mean, I know the based investment plan here was predicated on a 50% protein content I mean any sense at this point kind of where you where you think your initial product will be from protein content perspective, and timeline to get that higher towards the upper bound of your hopes on.
The 56% to 60% range.
That's our goal initially is obviously the whole thesis was based off of 50% protein.
But we already know that mechanically just mechanically we can get a little bit higher than that and that will kick off our partnership with no was items that continue to work with them to move up move up the J curve and we believe quickly we can get to the the 53 type pro within.
Six to eight months and from there start to move up as we laid out 53 would be the first stop 56 is the next stop we think Thats a year to 18 month development program.
Then from their move up the J curve, which is a two to two to three year development program to get the 60 pro with novel ingredients. I think the key is is that it's a combination of not just the high profile, but also some ingredients that that we've been using in our awkward trials and in our Aqua feeds that.
That we've been we've been producing for for some some of our customers already through the optimal venture and so from that standpoint, I think we'll move very quickly to 53, and then and then from their step by step as we move up the J curve.
Okay and then just finally from me just on the base ethanol outlook and any comments on exports and I know I mean, the phase one trade deal did include ethanol in the language in the in the document any any signs of any product inquiries from Chinese customers any sense that they're getting the tire.
Our flavors to really make that arb make more sense of that current fuel prices just to comment on that demand outlook ramping up a little bit.
There is some discussion we're going to learn a lot more later this week, but we're going to have to wait and see on that.
I don't think anybody seen much inquiry on the phase one trade deal yet as we're just obviously, we've got to trade deal, but we also got we've got a virus at the same time so.
As we work through that and as the administration said they've talked to their counterparts in China that theyre going to they're going to continue on with their idea that theyre going to that they're going to purchase. These products. Our view is constructive I think we'll learn a lot more potentially later this week, we have been told at ethanol and Ddgs are included in the trade deal.
And and we're hopeful that that we'll learn more soon but in terms of inquiries im not sure anybody has seen very much at all on any of these products yet as I think the buyers, but it off just a bit.
I appreciate that color I'll pass it on thanks. Thank you.
Thank you. Our next question comes from Pavel Molchanov with Raymond James Your line is now open.
Thanks for taking the taking the question.
Going back to the previous one.
Regarding China.
Have you gotten any clarity from from your kind of traditional Chinese counterparts.
If the.
Karen 70% paraffin U.S. ethanol.
We'll be lifted at any point, then foreseeable future as part of phase one.
Well, yes, I mean, I think we're going we know that.
From what we've heard what we've been told is the 70 will go down to their more traditional level and then from there.
What we're hearing as positive developments in terms of it could go lower than than what it was before we started so.
But thus far all we've been told is the 70 was a was the level that was put on as punitive when when they.
Increase tariffs on many products during during the trade War and I think we'll go back to our to our normal I think it was 20% to 30% Tara I don't have the exact number off my head, but it was 20% to 30% tariff originally and then a potential for that to even go down further so I think we're going to come off the high one but again, what what happens after that we.
We don't we don't know yet.
Okay and in that context.
China's decision this was actually before the virus to suspend it he can mandate for 2020.
Do you have any sense when they may restore kind of with five.
He hadn't target.
Plus I think theres some confusion in that as well I mean, when you look at the announcement. He 10 is already being has been accepted and being used in many provinces and many large provinces and so while that came out it doesn't necessarily affect the fact that they still blend ethanol and still want to blend ethanol.
I think would they realize that internally, it's going to be hard to hit some of these mandates because they haven't built plants and they don't have those plants, but that doesn't mean, they're not going to buy ethanol at all in fact, we remain very constructive on Chinese ethanol demand going forward, even without that because I don't think that that was really.
That impactful to what our program will be because even if they use eve five or six it still is a significant amount, but some provinces have already made the switch fully to eat 10, and we believe they will they will continue to buy that even more aggressively as as these trade barriers are lifted.
Okay very helpful. Thank you.
Thank you.
Thank you. Our next question comes from Ben Beyond with Stephens. Your line is now open.
Hey, good morning.
Good morning.
Ask.
You guys sold 230 million gallons of ethanol in the quarter, which is.
Capacity.
That's because of Wood River and Madison being down 424 petition and then some improvements.
Right.
Thats correct. So if you take a wood river plant with produces about 9 million gallons for months and a medicine about 8 million gallons month, that'd be 17 million gallons a month times approximately.
A couple of months of production overall, and so yes that would that negatively affected our quarter and negatively affected our EBITDA per gallon because those plants. Both had positive EBITDA margins during some of the highest margin his experience and they were down and they were offline. So we weren't able to take advantage that at two large plants, which we think overall affected our quarter by.
Two to three cents a gallon on our ethanol gallon, but look that's a that's a short term investment for a long term solution and so we knew that the risk is when any of our plans go down for these transformations that.
We would be potentially.
Giving up margin opportunity, that's what happened in the fourth quarter.
Got it okay. So as you guys worked through project 24 implementations in 2020.
What percentage of your capacity would you expect to be offline in the midst of that.
So we're probably going to take offline one plant a month.
For.
And it just before cop two to three weeks is the switch over time, depending on on the size of the project at each plant so potentially as one plant per month.
These two thirds of the mob that would be down starting with.
The first three that are going down right now there is too small and in one big one and then after that.
Another small and goes down and then two large ones and then a small and so it's it's basically going to be every couple of plants become one of our bigger plants.
But thats going to be over seven month period, where it's not all down during the same time.
Okay perfect helpful. Thank you.
And then I wanted to ask in the Agribusiness segment had a nice quarter and still.
Total segment EBITDA down relative to years past I'd, just be curious to hear kind of what happened in the quarter.
Sure I understand mechanically what drove that nice result, and then how should we be thinking about that segment.
As it relates to kind of your full year EBITDA contribution.
Yes.
Yes, So thats segment had good earnings from storage.
Returns.
Brands that we had in stores that space its went up and we're able to achieve much better sales levels. In addition.
As our grind went up as well they achieved little more service revenues and then finally in our AG IDT energy are in the energy side. We just didnt have the same fourth quarter opportunities in our natural gas merchant businesses that we've seen in the past I'll, just because of reduced volatility reduce prices and weather and so sometimes that.
Im Superchargers, our quarter still very committed to that program.
But it just wasn't a year that it was a big contribution were in prior years past that was off in their strongest quarter in our merchant businesses. So we still think we'll we'll still hit 2020 as much will return back to normal for that segment has been.
Has been running for the last several years, but just not as much opportunities in our merchant energy businesses this quarter.
Okay, great. Thanks.
Thank you.
Thank you. Our next question comes from Craig Irwin with Roth Capital Partners. Your line is now.
Hi, good morning.
And thanks for taking my questions.
So Tom your comments on project 24.
Today and on previous calls have been really clear.
And I should say congratulations on the progress there.
Last call you discussed our side benefit of project 24 that you uncovered an opportunity to.
Address natural gas usage usage.
Ed Wood river, the opportunity to save maybe as much as eight cents a gallon.
Can you maybe share with us whether or not youre uncovering.
Similar side benefits as you execute project 24.
Plants that are in the pipeline for the next couple of months are there.
Will projects.
Thank you weren't you're in planning to execute that could deliver similar returns.
Yes, I think I think if you take a history lesson on on Wood River, which is really the best way to look at when we bought that plant in 2014.
It was running at 35 cents, a gallon and thats while a.
Similar Obi and plant was probably running in the low twentys at the time cents per gallon.
So that was the delta that we needed to overcome and a lot of it was driven by the difference in distillation and energy use and other inconsistency that were in those plants.
Fast.
Today, we still we were reducing overall our costs at wood river, but never could get much below 30 cents a gallon.
We ran at sub 21 cents a gallon below 21 cents a gallon in December in a little bit above 21 cents a gallon in January.
So you can see the impact of this this transformation and project 20.
For now that's just operating costs and Thats basically just straight in operating cost that we outlined for you.
In the slide in our presentation not inclusive of energy reductions that were that we're finding out as well so.
What will happen is it's not just a function of reducing 2000.
19 operating cost per gallon of Wood River was 30 cents a gallon 2020 should be in that 21 to 22 cents a gallon. So we were going to pick up the whole eight cents, a gallon reduction and it'll run very similar to.
I see endpoint now there are definitely a handful of IC implants that run below 20 cents, a gallon and sometimes ours do even so.
So weve, but we believe that in relative terms that gets us very close to much of the rest of anything thats ITM out there, but beyond that is the fact that our cost of goods sold.
Are going to go down as well as we use about 20% to 25% less natural gas because of this.
Project 24 upgrade and Thats not in our cost reduction is just in a reduction of Cogs from from commodity procurement and so if you look at.
Plant now the thing is is that depending on as gas prices are $2. Today. So the benefit is not significant at low gas.
It is but if a plant uses three bcf in at $2, you about $6 million in gas, maybe it saves us another 1 million and a half dollars millions and millions of dollars in overall costs, which is just about another penny a gallon penny and a half a gallon, but but we didn't even without that take another penny depending half again across all of the project 24 plants and now you're talking about.
Another $6 million to $8 million of of savings just on our Cogs. So that's what we discovered now beyond that once we complete this we're not done yet I mean, we still actually believe there are other things we could do once we start to operate like in HCM plant that is still another step. After this then now you.
I can start to de bottleneck, even further your cost structure. Because you are much like implant and as I said I cm has made it very well known to us that what we did to improve that middle part of the plant is actually a bigger and more robust and a lot of legacy IBCM plants out there because there.
Technology has changed over the years as well so we're very happy about it.
I think the interesting next Ics that step will be superior and Fergus falls and those are 260 million gallon plants.
So we'll see what the impact on 60 million gallon plants is next now we don't expect that operate like 100, but overall Craig what.
We believe as we will be below 24 cents, a gallon trending towards 23 cents a gallon across the whole platform and then we will take it from there and see how much lower we can get it.
Great. Thank you for that so then on hydro I guess, we've been hearing that pricing is maybe in the range pricing for the offtake agreements. This maybe in the range of.
Roughly $100 over soy meal.
Can you, maybe discuss that and whether or not theres opportunity for these two to achieve a greater premium as maybe some of the since you're working on whats known designs and greater customer experience out there.
Accumulates over time.
Yes so.
Our first contract was not quite a 100, but was not far from that in terms of just value for 50% protein being put into aqua and into Pat and so that was the first step in and it's really a function of.
Getting it in more more aggressively and.
Insistently into products, where it gets on the label or gets into the into the diet and once it's in we believe it will stand and so thats why our initial customer came back and up and upsize. The original offtake agreement because it's working so well for them and they like the product. So much so with that said, though most.
Testing is.
A question being will Aqua lose this product to Pat oral Pat lose its product aqua or will be enough for both today, it's a comp it's a bit of a competition starting at the 50 pro because it does have other quality is running assets.
Around other factors in terms of of.
Sure and things and the diet and certain things that happened in the process. So they like the products a lot. It's already being included in all vegetable riots in poultry producers as well. So we're starting to see that coming because of the way that they like the their product as well.
I think going forward as we move up the protein curve it's not.
To linear curve in terms of value of protein, we're soybean high protein Soymeal has been at 47% on high pro for ever.
We and not really going much higher are the great thing about high pro coming out of an ethanol plant is the fact that starts are using the flu equipped system. It starts at 50 pro mechanically before even do anything.
Sales and then you can start to move up grew up the curve and I gave you those numbers. So we believe theres another.
100, $150 a ton if you can get to 53 pro and we believe there's another $300 a ton to get too.
56 pro and each each $100 a ton is worth about six to seven cents a gallon of.
Lift in the ethanol margin.
So we're very excited about it and we know it works because the offtakes have been increase because we've been delivering our the product to our customer from alternative sources that are producing stay as as the industry does not have a lot of redundancy and we're helping each other out but but more so.
We're very excited to start delivering them, our first products next month and and start to include those so.
We have plenty of interest for offtake agreements from multiple different species and we believe that when we announce as we get close to announced the second location. Our goal is to have an off take agreement very close behind that.
Or at the same time.
Thanks again for taking my questions.
Thank you.
Thank you. Our next question comes from Elvira Scotto with RBC capital markets. Your line is now open.
Hey, good morning, everyone.
This question is on the MLP so good.
Other transformation.
GTR you can you talk about how green plains partners fits into broader Green Plains strategy.
Actually the great thing about what we're doing at Green Plains is the fact that in order to be very.
Bill in the Green Plains 2.0, and their total transformation plan our generation one platform has to operate.
Continually at high levels and a low cost.
Which is a very beneficial we believe for the MLP going forward as we've stated publicly we want to run higher than 90% we ran a.
94% in December and we want to continue to run as hard as we can going forward, which that increases the volumes at least or stabilizes and potentially increases the volumes at the MLP for everything that goes through their which keeps the.
The dividend and the distribution very very stable and potentially.
Growing so our view is that is very constructive for fourg ERP to have green plains transform reduce our costs and run more consistently than we have in the past. In addition, the way that we used to be we used to be the governor of supply and reduce our supplies during low margin environments. We don't really have to do that anymore.
As we lose more money reducing than we do running so.
Overall, and then you take into consideration things like China Efifteen.
Our our terminal in Birmingham, which is very well.
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Terms as running very well with lots of capacity goes through it over.
Overall, we think it's very beneficial to Green Plains partners for us to do everything we're doing invest behind it in our original generation one platform.
Okay and then just.
As a follow up I think.
Hi, you've said that.
You want to grow Green Plains.
And.
Maybe diversify the asset mix.
Beyond ethanol so.
We think about Green Plains partners I have is talking about GPP.
When do you have any sort of targets in terms as you know what's the target for third parties as a.
GPP customer base to where you know what kind of diversification across product you're thinking of.
Yes, we have targets to reduce the dependence on green plains as as a.
Parent organization to GBP and get us get it to be more independent in terms of volumes that go through.
And so I think as we've been fixing green plains and getting it to a point where it can operate more consistently in any environment and drive more volumes for Green Plains partners.
Assets our goal now is to start to refocus.
On what we originally have put in place.
At Green Plains partners to expand it as a vehicle to find third party terminals that we believe we can help.
In terms, our own volume going through there as as a base volume, but have a multi product terminal because ethanol is always a very important part of a lot of terminals out that we see or whatever that.
We go through and so overall, we are starting to than reassess how to grow Green Plains partners in the future and use it as a vehicle was originally attendant intended for and reduced the dependence on on sponsor volumes.
Great. Thanks, very much thank you.
Thank you and our next question comes from Laurence Alexander with Jefferies. Your line is now open.
Good morning, two questions. One is can you speak a little bit about how you see your competitive most evolving and I'm thinking in terms of.
Which of your competitors have the knowledge of the agriculture markets to.
Follow you along this path and then the which assets can follow you along this path.
Optimization and are the assets that can be upgraded in the wrong hands actually be upgraded.
And then second question is can you speak a little bit about.
Okay.
Great on tons with heard you guess enthusiastic about it platform.
Can you speak a little bit about how you see to guard rails.
That is what would have to go wrong for you to pitch and say, it's time to look for something else.
Well in terms of the competitive mode.
We know that the customers we deal with will not by.
And that depend on a single location high protein.
Production facility, because if that one location goes down there is no redundancy and they are very dependent on a high level of quality assurance and quality controls.
To make sure that product causes no damage to the two there.
So their diet or their or their what they're using it for and so we believe that alone is a potential competitive moat, which is why we're we have to work together with those who have also put it in.
To their locations there is only a.
Few so that we can provide some initial redundancy, but our goal to roll it out to all 13 facilities provides an awkward customer OCC aquaculture customer globally or domestically with redundancies, which is extremely important and it's not just redundancies and volume as redundancies in quality and quality control and so.
While certainly there will be more of these built we all the key to building. These.
Protein.
Operation is to maintain quality, but also to main price maintain price discipline on this product because it would be the dream of many for us to produce a lot of high protein and.
Ties, it and and reduce the price, but I don't think that were on any type of path as an industry to do that and anybody that looked at high protein understands and our view when you get into the Fiftys and the sixties that that is a very unique special product that needs to be protected at at all costs and so I think.
But those that are interested in high protein around the industry understand some of that and believe that if there because it's not a chief investment when you're talking about $35 million to $50 million you can't start these up and immediately cheapened the value of your product you've got increased about either product and everything we're doing.
With our customers.
An awkward trials at Shenandoah Shenandoah, if you open up a world class Ocho lab that is now doing trials of these and other novel ingredients for customers globally as well as other areas. Other other customers that are using our high protein and other triarco trials as well and seeing the benefit of that so I think there's a good competitive moat that we will.
I'll have as a as good as a company, but also around others that are want to participate in protein and understand that they have to maintain value because the investment is very big not a second thing I project 24 optimization, yes, we have.
Develop this alongside.
Device with ITM on Rolling this out across our platform now the one thing we do is that when we're done with it we do have a.
A bit of a noncompete time that gets us mostly through 2021, and then other plants, obviously could always look at spending the money to.
Roll this out as well later on after after late 21 and potentially into 22, but we feel like we'll be at a good competitive advantage by then well rolled it out throughout our whole platform, but we did get a head start it doesn't mean that it doesn't mean that we're going to the only ones that ever do that but at least we know that we've protected a head start for little while.
While and and then at that point, others can do this but again capital is going to be the key for any of this you want to invest in 24, you want to invest in protein. These are we're talking about lots of capital needed at individual plants and the way that this industry has shaped up over the last 18 months capital has become very tight.
In terms of guard rails.
With everything that we're doing obviously.
We can only do what we can do from a standpoint of.
Of others, and what and how they and how they participate in how they behave.
But in terms of the guard rails capital to start and there's not a wide availability of capital.
Capital to anybody that wants to do this we believe because of the what we've done around project 24, and what we've done around.
Our portfolio optimization plan delevering the balance sheet.
Significantly where we really have no all of our assets are unencumbered at this point.
We have the ability than based on offtake agreements.
To get we believe access.
Cheap financing cheaper financing not cheap financing, both low cost financing to build it out again, we don't want to lever up the balance sheet, but when you have the opportunity to earned 16 18, 20, 128 cents 35 cents a gallon on offtake agreements. We believe you can pay those back.
Very quickly because our goal is never to get into a position again, where we have a term debt maturity facing us as a company.
Thank you.
Thank you as a reminder, ladies and gentlemen that Star then one to ask a question.
Our next question comes from Eric Stine with Craig Hallum Your.
And is now open.
Good morning.
I was wondering if you can just talk a little bit on kind of your updated thinking on marginal production in the industry I know.
You went if we went back a couple quarters.
It kind of looked like.
Given the financial troubles, given the market.
Good conditions that there was actually a structural change underway in now your commentary today would suggest that some of those.
Didnt, even happen some of those plants didnt, even come down I mean, how long do you think that these marginal plants can hang on in this current environment.
Just updated thoughts would be great.
Yeah, I think I mean.
We are very surprised by the EA data.
Actually not sure if it's correct or not but thats. All we have okay. This is obviously first quarter as is always.
A week quarter cyclicality, it's weak.
And we're living up to our expectations this quarter as well but.
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During the fourth quarter, we did see reductions for down to 960, a day in and we saw that evidence of that.
I think.
If we didn't.
Reach a breaking point of these lower core trial plants than I.
I do believe.
We've now we are in this 30 day period, where people are going to have to make decisions on what they want to do in terms of cash burn and what do they should be running or not I think someone to try to make it through the first quarter to see if they can get to driving season.
But I'm not sure I think the banks have reached their.
There.
Breaking point as well in terms of allowing.
Plan to term out there.
Revolvers and that happened last year as as margins got better. So I think we're at that point.
Kind of feels like we're at that point, where.
The bottom 10, 20% of this industry.
He is does not have a lot of capital left to continue if any to continue to support running.
If we just needed to get back to Ninesixty today, and we'd be in a very different margin situation ninesixty today, we had margins throughout 2020, along the whole curve in high single digits, and we had seen f. for awhile. So.
We're going after what production closely it's a combination of production and stocks I mean stocks right now at 23 million barrels are high and we need those to come down as well, but overall I think it feels like we are.
Starting to reach.
Some breaking points on some of the industry players out.
And we'll see we'll see how the reaction is but.
Overall, it does we're not it doesn't take much.
A Chinese program Anderson me 15 to kick in but but we have shown that we could also make a lot ethanol very fast. So our view is that let's let's continue to build our protein let's continue to do the things with project 24, and if we at.
All of those in line today, you would be the result of 2020 and the last page of our slide deck Yep.
Okay, and then last one for me in the.
In the release.
You mentioned being complete with the portfolio optimization plan I mean should we take that as that plant sales you're done with.
It is or is that something that you still would consider if you're able to accelerate project 24 in the high protein initiatives.
Yes, I mean look at I don't think today the market is very deep for people that want ethanol plants at this moment.
Yes, I can never say.
That we wouldn't.
Continue on with the program with the right. If there was something there that would help us accelerate project 24, but at this point.
We don't have very active processes going on just because of the kind of last three to four month and ethanol has put some people on the sidelines I do believe.
Overall.
Well Theres still a.
Theres still demand for good plants. Our goal is to get all of our plans to look like and feel like the best plants in the industry, because I think theres a misconception that a delta T is not an IC ATM or Vogel, which was not an ATM and really it comes down to the middle of the.
Plant, which is what we've worked with a nice GM to basically transform all our plants. The front end the same where you grind, the corn and and and add the eastern Kevin or the chemicals to an enzyme to transform it into sugar the middle of the plat and fermentation and distillation, obviously is where the money is made and.
Thats why were transferred putting basically full IC and systems into the middle of our plan in the back end of the plant and load out distribution. That's all that's all the same so we didnt want to just sell plans to sell plants. When we knew we can invest.
Under about 10 cents a gallon for upgrade their pays us back about.
10 cents a gallon.
And so we believe when we come out of project 24, you will not be able to differentiate.
Our technology from the best technology in the industry and that we believe alone in any margin recovery environment increases the value of our assets aggressively and then from there.
Put protein on top of that and then you start to be able to really start to predict cash flows over and above ethanol margins and EBITDA.
That's an all margins are zero.
Because of what we've done a project to 24.
Utilizing the protein in our total transformation plan, we can be earning 15 to 30 cents a gallon.
And just on protein alone and and that's really the transformation that is run very bet run the very plant very best you can low cost drive your costs down your generation, one assets buying a better and selling a better and making it better is extremely important and then moving into the protein, which just basically stabilizes and cash flows to be very.
Predictable and you'll be able to see that most of we probably will not.
Just to build a protein.
Production facility.
Without significant offtake agreements and we believe that for every protein facility. We will build we will have an off take agreement if we want one.
Got it very helpful. Thanks, Thank you.
Thank you and our next question comes from Ken Zaslow with BMO capital markets. Your line is now open.
Hi, everybody. This is actually been made you on for Ken.
I just have one question for you today.
Im just wondering about.
The domestic demand environment and what is assumed in your 15.8 billion gallon sort of base case assumption and does RFS have any upside to that given the recent court ruling. Thanks, yes, and so that we use that as if we use the fourteenthree as the base demand.
But we also know that any waiver issued will be added to 15, and then reduce back to 15 pharma standpoint, that's the based demand needs in the United States now.
You can buy Iran, and get out of the blending requirement, if youre blender and not Glenn 15.
Or you could blended and make 20 to 30 cents a gallon in the blend and that by the rent. So our view is that while I outlined to you that 14.3 billion gallons is 10% of the fuel supply today 15 does equal 15, one way or the other so we're either going to reduce the red bank.
Through these through the 15.
Equals 15 program and people off the buyer in the get out of their blending or with this recent court ruling people will just blend 15, and it will come through a little bit of 15 uplift and potentially the rest of just increased blends overall as we are working very hard with EPA on relabeling and labeling concerns that we.
At around 15 from the beginning but more importantly is what the president put in his budget around 15 infrastructure and and we think that could even move very very fast to start to roll out you 15 at a much bigger platform nationwide infect New York, obviously, they've approved it so.
While our used.
During three if you use 15 and use 700 million gallons.
All of a sudden you are 10, 15 20 million barrels more of demand and you can take care that supply that supply overhang very quickly so.
It's really hard to say.
What the Blender will.
Do because I think they're nervous about the outcome of this ruling and our view as a 10th circuit is the law that EPA must comply with them and they probably won't do much with that they probably won't do must appeal that.
Got it thank you so much.
Thank you.
So much.
Thank you I'm not showing any further questions at this time I would now like to turn the call back over to Chief Executive Officer Pot Becker for any closing remarks.
Yes, thanks for the coming on the call today, we are embarking we've left portfolio optimization behind and in our Barking on total transformation.
We think we have a great.
Great plan, we're out we're going to figure out how we finance. This plan, it's transformational to the way Green plains looks in the future.
It helps out all of our SG initiatives that were embarking on and we believe that it will put green plains into the very good position in the future to give you a predictable cash flows and predictable.
Earning streams, while reducing volatility the original generation one environments. So thanks for supporting us coming on the call and we'll talk to you next quarter.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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