Q1 2020 Earnings Call
Green Plains eat in Green Plains partners first quarter earnings Conference call.
Following the company's prepared remarks instructions will be provided for Q1 day at this time all participants are in listen only mode.
Ill now turn the conference call ever to your host feel bogs senior Vice President Investor Relations and Treasurer Mr. box. Please go ahead.
Welcome to Green Plains, Inc., and Green Plains partners first quarter 2020 earnings call.
Participants on today's call, our Todd Becker, President and Chief Executive Officer, Patrick Simkins, Chief Financial Officer, and Walter Cronin, Chief Commercial officer.
There's a slide presentation available and you can find the presentation on the investor page under the events and presentations link on both corporate websites.
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 todays 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.
Thanks, Bill good morning, everyone and thanks for joining our call today for the quarter, we reported a net loss of $16.4 million or 47 cents, a diluted share which includes a write off of goodwill of $24.1 million.
That affected EPS negatively as well as a tax benefit related to the cures Act. The goodwill write off was a noncash adjustment and has no impact on our financial liquidity and at this point, we have no goodwill associated with associated with Green Plains Inc.
Left on the balance sheet.
In addition, we expect the tax benefit to result in a cash refund.
$40 million to $50 million late in the third quarter or early in the fourth quarter. This will surely be a benefit to green plains liquidity as well, we reported 2.7 million in adjusted EBITDA for the quarter. The only impact that was adjusted was goodwill. So the adjusted EBITDA is an operational number the business achieved.
Financial results greatly exceeded the negative market during the quarter due to our risk management program, where where we were able to lock in margins. We're continuing with this program and the second quarter, which we are achieving better margins than the current market as a result.
We produced approximately 240.5 million gallons of ethanol, which put us at an 85.9% utilization rate for the quarter.
Well this was lower than our stated goal of 90% there was the highest utilization rate in the past nine quarters January ran at a record rate, but the back half of the quarter was impacted slightly by planned maintenance and downtime to complete plan project 24 technology upgrades.
Superior and Fergus falls are running well and the shown reduce energy and water usage and a lower operating cost per gallon than we expected. So we're very happy with these results due to the current margin environment, which has been negatively impacted by the ongoing cobot 19 pandemic much of the industry has gone off line or reduce their run rates, we are proactively manage.
Our current utilization, but will not reveal our run rates during the quarter as in the past the quote unquote Green Plains slowdown was used by others to determine their own run rate and proved to be a disadvantage for us.
Industry has reduced its run rate at a record pace never seen before and it's quite frankly, it's about time, we will exercise our operational discretion on each of our plants in order to maximize our variable contribution margin and we will make decisions each facility. The best maintains our cash liquidity going forward.
Since we have done this many times before our ability to be agile and maintained strong liquidity is our advantage in times like this.
You can come consolidated crush margin for the first quarter was negative one cents per gallon with the spot crushed declining sharply late in the quarter as the crude oil war and sued and Ecova 19 began to impact fuel demand well certainly not a number we strive for was certainly better than the daily average market, while the industry production levels have dropped on.
500000 barrels per day inventory levels continue to be at near record highs.
We will continue focus on the things within our control reducing operating expenses through our project 24 initiative and driving additional value through our protein transformation and other product development.
And are happy to report that our first high protein facility and our Shenandoah, Iowa location started up during the first quarter and we have been scaling up to full production rates within the past week or two.
Partners the fluid clip the various contractors and our internal team have done a phenomenal job completing this project on budget.
And we are setting the standard for quality control for the customers of this valuable product Green Plains as I had new high value product that is being used in companion animals and agriculture markets.
As we continue to line out the plan, we will quickly be involving our biotechnology partner to continue the upgrade the nutritional properties in order to move up the price curve.
Project 24 modification that our Fergus falls, Minnesota and superior, Iowa patients were completed and their results mirror. The success. We had at Wood River. We continue to be excited about this project and are anxious to roll it out across our remaining non IC and plans the operating expense reduction puts the these two plants squarely in the top quartile of the industry and leaves us comp.
Then and our ability to reach our goals for the platform to be at or below 24 cents. A gallon. Once all are completed most interesting is that these were both original Delta T 50 million Gal plans and are now each below 24 cents operating cost per gallon actually at par or below some best in class ITM hundred million gallon plus for.
Deliveries.
We are operating these plants much like an ATM plant as we speak we're currently evaluating our capital expenditure plan for the remainder of the year Patrick will have a little more on this later in the call Green Plains partners reported $13.4 million of adjusted EBITDA for the quarter. The recent 75% reduction in the distribution result in a coverage ratio of four times for the first core.
Peter and 1.24 times for the trailing 12 month. This distribution cut was to support a more rapid pay down of our debt.
As we have the goal of being debt free in 18 months at which time, we will look to increase cash returns to unit holders again.
Lastly, Green Plains cattle company had another record quarter, and we expect the remainder of the year to be strong as well. This allowed a dividend to be paid to all partners in the second quarter another factor strengthening our liquidity.
We're closely monitoring the current situations with packing capacity being slowed or shot but since we have supply agreements in place we have not seen material impacts to our business. So as you can see our theme has to conns constantly focus on liquidity and we believe we are in a good position to whether this market as a result of our risk management programs, reducing our operating cost per.
Gallon Newport, new products like high protein corn meal, and our great results from our capital investment now I'll turn to put call over to Patrick to Rebuke review, both Green Plains, Inc. and Green Plains partners financial performance and I'll come back on the call to talk about the remainder of the year. Some policy updates and provide some more details on our protein initiatives. Thank you Todd.
Claims consolidated revenues were $632.9 million in the first quarter up $194.2 million or 44% from the first quarter a year ago.
The increase in revenue was driven primarily by higher ethanol production rates as compared to the first quarter of 2019.
Our production run rate was 85.9% of capacity in Q1 of 2020 compared to 56% was eight for prior year first quarter.
Our consolidated net loss.
For the quarter of $16.4 million included a non tech noncash pretax goodwill impairment charge of $24.1 million comparing favorably to a net loss of $42.8 million in the first quarter of 2019.
Adjusted EBITDA for the first quarter was positive $2.7 million compared to an adjusted EBITDA loss of $18.3 million for the same go.
For the quarter, our SGN a cost for all segments was $21.6 million up $3.2 million from $18.4 million in Q1, 2019, driven primarily by higher compensation cost related to a onetime true up of our annual incentive plan.
Consolidated interest expense for the company remained relatively unchanged compared to the prior year quarter at $9.7 million.
Capex for the first quarter was about $34.3 million with approximately $6.8 million of maintenance capex and the balance of $27.5 million being allocated to growth capital primarily for project 24, and our high protein production facility in Shenandoah.
In February we provided an overview our capital expenditure plan for the year with a target of $100 million to $120 million Cogent focus mainly on maintenance Capex project 24 at our high protein initiatives.
However, given market conditions, we've trimmed back our planned capital allocation by nearly 50% with an overall target of $50 million to $60 million for 2020.
For the balance of the year, our capital expenditures will focus on essential maintenance and our project 24 initiatives any additional spending related to the expansion of our high protein development plan will be driven by the successful completion of potential financing financing arrangements.
On slide eight of the Investor deck, you will see our balance sheet highlights, we had $252 million of cash and working capital net of working capital financing at the end of the first quarter compared to $373 million for the prior year quarter.
Balances for 2020 exclude our cattle business that was deconsolidated in September of 2019.
Adjusting for the cattle business the prior year cash and working capital total would've been approximately $316 million with the difference between Q1, 2020, and Q1 2019 being attributable mainly to a change in cash of $43 million and networking capital financing.
Our liquidity position at the ended the quarter remained solid with $205.5 million in total cash along with approximately $260.8 million available under our working capital revolvers. This amount does not include availability under our credit facility of the partnership.
For Green Plains partners, we had 240.5 million gallons of throughput volume at our ethanol storage assets during the quarter, which was up 85.4 million gallons or 55% from the first quarter of 2019 as a result of higher production rates at Green Plains plants.
The partnership reported adjusted EBITDA of $13.4 million for the quarter consistent with the $13.5 million reported in the first quarter of 2019.
Distributable cash flow was $11.4 million for the quarter also in line with the same quarter in 2019.
With a reduction in our distribution to 12 cents per unit declared on April 16 are result of coverage ratio increased to 4.03 for the first quarter.
On a last 12 month basis, adjusted EBITDA was $53.8 million distributable cash flow was $45.4 million and declared distributions were $36.7 million, resulting in a 1.24 times coverage ratio.
Going forward at 12 cents per unit the partnership will retain $34 million annually that will be allocated amortizing the partnership's outstanding debt.
Now I'd like to turn the call back over to Todd.
Thanks, Patrick the industry is facing an unprecedented a solid from two black Swan type events first the failure of Opex costs in early March resulted in a swift decline in motor fuel related prices. This was quickly followed up by the beginnings of wide scale shutdown of us and global economy related to shelter in place orders across the country and globe, resulting in significant declines.
In demand for motor fuels, and Biofuels combined with the macro macroeconomic impact from the crude oil situation and you have and then you have a perfect storm at Green Plains, we have acted to keep our employees safe through various work from home measures as well as to support our local communities through our contributions of our FCC great alcohol for the production of hand, Sanitizers and clean.
The agents to the state of Iowa, and Nebraska, and the University in Nebraska for use in hospitals and care facilities. In addition, we donated ground beef to local food banks and charities and gave every green plains employee 40 pounds. The ground beef to take some of the pressure off our employees and their families.
When the pandemic come soon and people begin to drive again Biofuels will continue to be an important strategic part of the fuel supply due to the octane value for the top quartile plants and those plants have diversified margin streams will most likely continue to operate during these challenging times. This is why we continue to focus on these areas. While we continue to wait for China to Reengage and the ethane.
Ill market, we will work to drive this EPA administration to push for the continued rollout of Efifteen as we need better labeling any final EPA ruling to allow efifteen through any 10 pump. Additionally, we believe the future look a little different as companies and individuals look for ways to avoid mads mass transit and air travel and.
Drive more which could be a potential tailwind.
Our protein and project 24 initiatives are instrumental to the future direction of this company. We will continue to work through our total transformation plans for Green Plains at Shenandoah, our early indications from production our protein levels have been consistently been around 52% and as high as 53% without any help from outside.
Illogical upgrades. This is purely mechanical in the coming months, we will be working with our biotech partners to continue to enhance the value this product through and dramatic and biological solutions in order to maximize the nutritional profile. This will enable us to accelerate towards the 20% incremental margins and even greater as we advance up.
The J curve that we discussed with you on the last call. It's been very exciting to washes process unfold and we hope you built and we hope to be able to host an open house someday to show you all what we've been seeing every single day.
Additionally, we are continuing the engineering for the second and third high protein locations. The full construction of these facilities is somewhat depending dependent on arranging additional financing and we should have one constructive within nine to 12 months. Once the financing has been lined up we continue the range. These agreements and hope to be able to announce that shortly as well but to be clear.
As there was some confusion on the last call. We are focused on arranging project level capital to support these initiatives and we will use minimum cash near term on construction the balance of the funding will eventually come from profitability of protein production as it becomes self financing.
Our aquaculture trials to validate novel ingredients that we'll be using a combination with our high protein products as either a complete feet or pre mix are continuing we're seeing good progress that only adds to our conviction and we're on the right path to transform this company to be a world class protein provide provider.
Our York, Nebraska facility has been instrumental in providing FCC, great alcohol for the production enhance antiserum and cleaning products across the us and globally.
While we were pleased to be able to support our local communities through much needed donation. This facility also cells. This product commercially the FDA approved FCC great alcohol manufactured at Green Plains York, Nebraska.
Is this still specifically for the production of cleaning products and disinfected disinfectants and is higher in purity and quality than traditional fuel grade alcohol and ethanol.
Green Plains does not and will not sell any fuel grade ethanol or alcohol for use in disinfectants or sanitizers.
We believe fuel grade ethanol contain certain properties that make it unsuitable for these applications.
Interest in our product that York has been strong in the near term and should should contribute positively for our second quarter. In fact, many sales we make our replacing batches of sanitizer cleaning products that are being rejected for quality from somebody's fuel grade plants York has made both beverage grade and FCC, great alcohol and last 20 years, but currently focuses on FCC.
Great at this point.
We have now completed three project 24 locations and we will have a fourth completed in the next two or three months. So we are nearing the halfway point as we transform our platform services to sustainable and ingredients and protein production.
Project 24 also enables our locations to reduce their environmental footprint.
Running our plant at the loss lowest cost structures is key to setting up the next step as we transition into adding high protein production capabilities across the platform.
Well I can always talk about a lot of other talk at topics. We are squarely focused on maintaining strong liquidity. During these unprecedented times and managing risk by selling the $780 million of assets over last several years, which reduced our debt balances by almost $1 billion. We are in good shape to weather the storm as well, we are agile and pulling on the right.
Reversed that have put all of us as shareholders stakeholders in a better situation than you probably expected our employees are committed to operating safely squarely focusing on details a matter everyday and I want to thank them as well for their commitment to Green plains as we continue to transform this company.
Thanks for joining the call today and I'll ask the acuity to start.
Please limit your questions to no more than two edits to at this time, if you wish to ask additional questions. Please rejoin the queue to ask a question. Please press star one on your telephone keypad.
And your first question comes from Adam Samuelson with Goldman Sachs.
Okay.
Thanks, Good morning, everyone, everyone as well.
So I guess my first question is related to the ethanol market environment.
[music].
And just thinking about the declines in production that we've seen to date at the industry level and margins that actually the last couple of seem to have gotten a little better because of the strength and drive dry distillers prices.
Can you help us think about.
Kind of what you think the shape of recovery looks like on the production side of the industry level on gasoline demand picked up last weeks off of extremely low levels, but do we think the ethanol industry is in a lag backed by a few weeks and.
Do you think that all the plants can actually come back on its margin structure.
Makes it so in the demand is there.
Yes, so all those.
Basically how we're looking at it is margins have gone up in the last few weeks, but still plenty of plants are still below variable cognigen in negative variable contribution area and ddgs of actually come off while margins have actually gone up because corn has broken.
Back into its recent lows and and ethanol seems to be stable up at these prices. So when you look at that the shape of the recovery from our perspective is I think.
We will probably lag driving demand as some plants have furloughed employees some plants have gone to cold shutdowns.
But as as we know the industry can move very fast where and when we take our plants and adjust our capacity. We go into too much more warm shutdowns ready to act at a moment's notice, but I'm not sure everybody else.
It is like that so I think what you saw last week was the first big draw on EA stocks reported stocks of 1.3 million barrels I would estimate we'll probably see more weeks of draws coming but then will level out and it really is just going to be a matter of watching driving demand and and and figuring out.
When does it is ethanol lagging it by too much and and last week, we finally saw that a little bit.
Which improved margins, but theres still well over half this industry, that's negative variable contribution margin, if not greater than that and I think I think the industry has learned a lesson that while you can be positive variable contribution you are still losing money and use those and you're still burning cash and and I.
I think thats the key to to what's going on today. So you actually make more money in many areas slowing down your plants are shutting down your plants and I think the industry have learned that as well so from our standpoint, when we look at it we have very little interest left from our convertible debt, we have $14 million a year of interest and Thats really the manus.
Commitment that we have and then after that is really working capital financing and other areas, but the management. So thats it from our perspective, when we look at our liquidity and we look at what we're running what we're not running which were not going report to the market right. Now we think we're in pretty good shape, but I think I think the recovery in gas demand will outpace potentially.
To recover enough recovery in ethanol production.
Okay. That's that's all that's very helpful and just.
On the liquid on the liquidity point.
Just with the revised Capex plan, how much of project 24, two would be left to finance and spend at the end of calendar 20, and just any updates on the.
Debt maturity at the at the MLP level.
Yes, so in terms of Capex for project 24 at the end of 2020, we will have a little bit left but not very much we should be done on most of the projects that we want to do during this year.
And so we're focused on that we really will have Madison amount burn and left as big projects and then a couple of smaller ones now we'll watch closely what we want to do from that perspective, but I think I think it's critical that those plans get down into that low twentys area as well as well probably 20 fours exceeded all of our expectations. In fact, we're kind of on pro.
Logic 24, 2.0, because what we learn and 1.0 Wood River, we drove to better outcomes and superior and Fergus Falls I mean, these are 50 million gallon plant Delta teams that are running at 100 million gallon plant IC ATM operating costs or lower and we basically have seen even one of those two plants at two.
23 cents, a gallon, which is not inconsistent with so much better quality higher higher quality plants. So weve cracked the code from that perspective, but again, we're going to watch closely if if the market doesnt recover we can always push those projects off but right now we're still planning.
That for and all that elder Patrick comment on that in terms of the.
The debt maturity or for the MLP, where we're very close with most of the lenders today. We have a few left that are now they are still negotiating some terms but.
Our our goal is to have that done by in this next week or so and and get that rolled and we think we're in pretty good shape to do that as well.
So you're talking about.
Ended the year Capex with or without project 24, what could be left over yes.
In that in that forecasted the 50 to 60, I mean, a couple of things as Todd pointed out.
Madison Mount learning, depending on how Q3 Q4 go and then potentially York. The reality is York is doing so well right now we when we were really wouldn't do anything with project 24 that stands right. Now. So you work would probably be the last plant that we would do and under the capital plan that we have right now we could get a good way through.
Madison and Mount Vernon by the balance of the year.
So we have as Todd alluded to we have very little left rolling into Q1 2021.
Okay.
Very helpful color I'll pass it on thank you.
Thanks.
Okay and your next question comes from the line of Ben VM venue with Stephens, Inc.
Thanks, Good morning, everybody.
I wanted to ask about.
Following up on Adam's question, just around the shutdown between.
If you could maybe elaborate a little bit about in this particular shutdown environment, obviously the severity of the.
The losses.
More significant.
But is there is there anything different structurally about the market that you think would.
Allow some of the B production to more permanently stay offline, we saw a big draw down in production.
Last year that kind of trough in September and that came back pretty quickly. So is there anything that would prevent that from happening again.
You know this as an industry that.
Is renowned for bringing it all back up very fast I do believe though that some of the.
Some of the lower core Kyle plants have have to potentially raise liquidity to to come back on so I do feel like some of those lower quality core trial plants would be the slow slower to return than than historically, some companies have announced longer shutdowns to be very specific that they.
Are going to be down for three or four five months and furloughing.
Once you furlough and you have to start back up quickly that's a whole another that's a whole another process. So.
I'm, hoping that the industry has learned this lesson but.
Thats and I think in many areas of of the industry we have.
But.
Again that we'll wait and see on that but I do think though if we go back to.
80% or 90% of normal driving.
The ethanol industry.
Depending on the margin probably has enough to come back from that perspective anyways. So.
I don't know if that will bring those bottom quartile plants up as fast as time, but it's certainly possible.
Okay. That's helpful.
And then I'd be curious to hear your outlook for corn than a lot of moving pieces and that's all its been a big piece of it as it relates to.
Central planted acres.
What is your current house view on corn.
And then if you could give us any update on how basis.
Has been for you guys and to what extent that potential pressure point has done alleviated over the last few weeks.
Yes, we have had a bearish view on corn.
We have we constantly survey our plants and the crop went in at a record pace and I think we're getting very close in many areas to being done and I don't think it we'll see that necessarily in the weekly data, but it should be very strong if not next week, we'll be very strong.
Our views it we're going to plant these acres as best as we can it went in so fast and and Theres really not a lot of time to change.
That are our 97 million acre another 97 million acre number is we're not in big disagreement with that.
We've seen a lot of basis weakness on corn because of the ethanol industry really backing out you've taken off billions of bushels of corn demand out of the market today and it doesn't feel like a plant like us empty earlier question, you're not seeing any strength from plants thinking about starting up.
So overall.
We are having negative view on corn from these levels, we are not bullish on the corn basis, and the United States right now, although if you need corn.
To run nearby it's probably not as weak because the farmer is in the field and really has control. This of this corn of the corn stocks in United States, but ultimately the crop going in the yield models are probably trending higher.
And ultimately the farmer will have to make a decision, but thats probably comes after planting and into growing season, a bit on one to sell as old crop stocks.
But weve definitely added bushels to the carry out I think we'll see that ever you Sta report through the end of the year for the 1920 carry out and I think we're adding bushels to the 20 and 21 carry out.
And I don't think the market's taken seriously enough the.
We drop in demand for corn.
From the ethanol industry slowing down and in some aspect shutting down and waiting for China is not going to do come and that China will never be the answer for the U.S. corn market, if the ethanol industry is shutdown or slowing down.
Thanks, So much appreciate the color good luck with Rusty here.
Thank you.
Your next question comes from the line of Eric Stine with Craig Hallum.
Good morning.
Morning.
Just.
So just wondering.
On what you're seeing in the market in terms of your off takers I mean, I know you're not disclosing your utilization then you've got a lot of it hedged.
I mean.
What are your challenges or are you seeing challenges in terms of.
During your product.
Every level that may be.
Sure refiners, if they have no place to go with it I mean in Canada that balance between forcing them to take product.
Versus having to look towards other markets.
Obviously with the long term relationship would that specific customer in line.
Yes, I mean, you see gas demand so gas demand is going to mirror, what we're starting to see in terms of of our customers' ability to take product and I think anybody in the industry because we slowed down the difference with this industry and maybe even what you see in crude oil is that this industry slowed.
So fast in fact, it outpaced demand destruction and that's the first time in our history, we've done that so it came offline so fast.
That we really didn't see ethanol stuck anywhere looking for a home and we're kind of balanced right. Now if you look at last week versus this week versus Watson storage versus what we're producing.
We're actually we're actually kind of balanced in terms of what the refiner needs to take in you know and everybody's going to work with their customers on.
Hi product on contracts.
On all the above and we really havent seen distressed ethanol trains are distressed ethanol inventories really hitting the market at any any big levels. I mean, we do see some week basis weakness in some of the destination markets, but we are still selling some spot values a little bit higher than we expect so it's got its kind of a bit of of of.
Everything out there, but overall.
We talked a little bit about seeing some force majeure. We had won but then they basically backed away and really we have not seen a lot of that happening.
But overall I think we're in a balanced situation that what we're producing is what what we're using at a 50% driving rate and probably going higher and and so I think from that perspective, we haven't seen a lot of distressed barrels and and it's been orderly in terms of working with our counterparties to roll or can't.
Oh product.
Got it that's helpful and maybe last one for me just on the head.
I might have missed it but did you.
Did you disclose how much of second quarter you have hedged.
How long that last or the level production, you have hedged or any color there would be helpful.
No we havent disclosed that at this point I mean, thats something that obviously is.
The first quarter it worked pretty well we continue to into the second quarter. When we saw these.
Outside factors hitting the market. It felt like we wanted to do that protect our cash flows.
Our view is that.
What you saw in the first quarter won't be that dissimilar to potentially what you see in the in the second quarter and it could depend it could be slightly better than that so I mean, we're in a pretty good situation from that standpoint, and some of the things that are that are hitting in terms of lower operating costs. The premiums on protein a little bit of contribution from our York plant.
And so on so I think overall, we're in pretty good shape for the second quarter, as well and even going into going into the third quarter a bit as we.
Obviously, we're not going to give out our production levels, but you can assume that some of our plants are slowed some of our plants are shot and we've made adjustments but.
No it's something that we've been we know how to do very well and we can move very fast and we could we can we can.
Make sure that we protect our balance sheet at all cost and some of our risk management and other initiatives have have helped that a lot.
Got it thanks Todd.
Your next question comes from the line of Pavel Molchanov with Raymond James.
Thanks for taking my question.
You said that China is not the.
Tennessee for the ethanol Clyde by going back three months ago pretty cold bed.
Our were expectations that China would resume purchases post the phase one trade deal and obviously lots have changed by.
Is there any hope for China to resume.
And I'll import so sometime in 2020.
Yes, I think what I was talking about when we just talked about China was corn, the trying to corn purchases aren't going to save us corn market. When you have ethanol demand for corn down so much and that was my reference to China in terms of ethanol, we're still optimistic obviously.
Some of the things out of the administration would would put that may be at pause did but everything else. We've been hearing is that they're going to comply with.
What the trade.
First round trade deal and the rules around that around agriculture, and we'll see if that really happens, but obviously, we're going to watch that closely our view is that yes, they will still.
They still will take some ethanol we've seen.
A little bit a small little parcels go over but more for industrial use uses in our view is what we've seen there hasn't been a lot of there's not a lot of fixtures is not a lot of stuff on the freight market today, but yes, I think I think China has to be very careful on agriculture, which is around.
Around the virus and agricultural prices dropping so significantly do they want to step in a very low prices and by us to almost look to take it almost looking like they are taking advantage of.
This environment to buy cheap use product and I think thats, probably the one thing thats hit putting them on pause a little bit, but thats just a viewpoint now but overall, yes, we would still expect them to if they engage they will and we expect they will engage in ethanol as well.
Understood.
Let me ask a question about the hand sanitizer.
Since the Treasury loosened the rules for who can sell ethanol into the hand sanitizer market lots of ethanol producers have tried jumping on the bandwagon.
How long needle moving and this become in the financial sense beyond just the PR aspect.
Yes, so the FDA they lose them they tighten them they lose them and they tighten them and they are tighter now it's really going to be what we're seeing right. Now is for the hand, sanitizer marketing United States, It's USPI, great an FCC grade.
And and those are the grades that that the customers want they tried fuel.
And in our view, we're replacing a lot of sales out of York to customers that tried to fuel major customers in the United States that tried fuel and realize that does not going it's not going to deliver the quality and the.
The even the smell that they're looking forward from products. So I think what you're seeing a small participation in.
Some of the fuel aspects been much bigger participation and if you can make FCC or USPI grade and and that's really where we're focused on we just happen to have a plant in York that that has been making FCC grade for many many years most of it had gone export.
But at this point most of its going to stay domestic will although we do still have some export sales on for the remainder remainder of the year and so.
In terms of we're not giving any guidance in terms of.
What the future will hold for this product I mean, I think it's still part of the the change in society and what we're going to do to operate open up this country and part of it will be around cleanliness and I think we're in we're in a good position take advantage of that we just happen to have a plant that makes a really good product and and we're starting to see some returns from that.
Thank you.
Your next question comes from the line of Craig Irwin with Roth capital.
Hi, good morning, and thanks for taking my questions.
So Todd I wanted to ask about.
Opportunistic capital projects at Fairmont, Fergus Falls and superior.
Did you execute any of these over the last six months quarter.
As you were getting all the work for project 24.
All of our projects there have been around project 24 upgrades. So other than anything we talked about a wood river superior and Fergus falls Theyve all been abound.
Around operating those in at a much lower cost of production and we've been very successful of that it's actually shocking the results as we've talked about we've have wood river operating at 21 cents, a gallon, which was a delta used to be a delta T 113 million gallon plant and operates at the low end of the spectrum of.
Cm plants now in effect I assume would tell you it operate some some respects better than IC implants. Today, So we've kind of crack the code on our.
On our platform, where we're going to drive down our operating cost per gallon. Once you could really see the benefit and a quarter like this when you go from Wood River three years ago running at 35 cents a gallon to today running at 21 cents a gallon same thing with a superior now running into mid Thirtys now to running in the low Twentys and that's just when you start adding that over over a lot of Gal.
And that really changes your variable contribution margin.
Calculation, but no. There is we haven't done many other things so those plants at this point.
Great. Thank you for that should in New York.
Obviously, it's a great opportunity too.
Ill provide a product that's in need now for four people all over the world I guess.
Can you talk about the.
The incremental capacity there.
Is there was there.
Historic moderate level utilization at the plant have we moved up to 100%.
And then can you maybe give us a little color as far as the off takes there.
Would you expect to be predominantly serving FCC, great ethanol towards sanitizer.
Markets or would the historic markets.
But youre concerned.
Be willing to pay some of these higher prices that.
Scarcity is driving.
Yes York has always running at full capacity and it continues or on a full capacity. It's approximately a 50 million gallon planned per year, and we're still maintaining our delivery schedules for the export market.
And starting to see more interest there as those values have.
Have started to move as well, especially into.
South America, Mexico, and the far east and so we're starting to see those those values uptick and we're not going to abandon our our.
Worldwide distribution, because I think thats very important long term.
And then obviously in the domestic markets. We're very focused on remember its FC agreed FCC, great alcohol, which is much higher much higher impurity, it's not an ethanol plant, we don't sell our alcohol if we sell our alcohol for fuel there. We failed what that plant was was is capable of awards.
Made for and we don't we feel very little of that plant.
In any of the fuel markets in the last five years with four or five years since we've owned it so we've always been making that product.
And we just happen to be in the right place. The right time from that standpoint, you just cannot while a lot of people have tried youre not going to take a fuel grade plant and qualify for FCC grade and what we saw as the FDA FDA approved the extended that through the end of the through the end of a pandemic is what they basically said TTB extended.
Through the end of the year. So we think we're in a good good situation. This year to take advantage of that and it certainly will help our our quarter or potentially couple of quarters.
Do you think there is a longer tail and just a couple of quarters. So we have to see how the pandemic plays out.
I think we'll have to see other pandemic plays out I mean, I think everybody else can decide how long were going to be using client more cleaning solutions in hand, sanitizers and everything in between I mean, this product isn't just about isn't just about cleaning salute our hand sanitizer I mean as use it's a very high quality high purity product that's being used in cleaning.
Solutions as well.
And in combination with.
Where prices have you SP, what we heard of gone I think we're in a pretty good situation, but you're just not going to convert a bunch of U.S. ethanol plants to make a bunch of FCC, great. It's very expensive to do.
And you're not and a lot of plants are not in the situation to do that and so it's kind of takes a long time to get that done so I think from our standpoint.
Hopefully the trend continues.
But we're also ready for it if it doesn't.
Great. Thanks, again for taking my questions. Thank you.
Your next question comes from the line of Laurence Alexander with Jefferies.
Good morning.
So can you help us think through what the normalized tax rate.
Going forward.
Yes, I mean, you first of all have have carry backs you normalized tax rate for that.
Going to be around 27.5%.
But we do obviously with respect to carriers that have tax carry backs with respect to in a wells so that affects the tax rate, obviously relative to where we end up on.
On PBP.
That effects that the tax rate so that that the real real.
Reported tax rate can be.
A bit misleading.
But generally when we think about things internally, it's kind of it at 27 half percent tax rate, but again, we've got both the cares act, which will impact.
Obviously the.
The actual calculate attach rate.
Based on where we are on PBT and then we've got obviously other credits that will probably come into play with respect R&D in future periods.
And then can you give some color on how the proteins discussions and.
Our sheets are shaking out scrum team, particularly.
How should we think about large volume discounts as we scale up.
And is there any noticeable pricing differential between what you're going to get the pet food market versus the.
What we should expect could you aquaculture market for the same grades.
While we were actually thinking about large scale premiums as we scale up not discounts. So when we look at what we're able to do is mechanically get as high as 53% protein.
With the fluid CWIP system, which we thought was going to be around 50 pro and the first biological uplift will be at 53, we're very.
Pleasantly surprised on what this technology can do.
Now that might be somewhat due at the corn in that location, but we're going to we'll figure it out at the next location.
When we look at it there's a shortage of protein like this in the world today. So as we scale volumes, we will be able to hit bigger markets that want redundancy and actually our won't pay as high for product today, if they don't have redundancy. So as we create redundancy, we actually think that.
Matt.
Actually brings us into more premium markets that will pay a higher values than we're achieving today, especially as we move up the J curve.
Our first step we're going to move quickly with our our biotech partners to move up on nutritional value and protein levels.
To try and get to 55 to 56, which is which is the next step.
So we this anti soy movement is really helping us in terms of looking at protein for aquaculture as well and we have some other characteristics in this product that help water management for aquaculture. So then as we look at it and you look at the price of corn gluten meal pushing into that six to $700 a ton.
Thats kind of our next step where we believe we're can.
Someday will remove all the way up to the 60 pro market because.
While we thought that would be a longer term.
Thing to achieve and it's still will be over the over a period of time, starting at 53 to move up the curve is much better than starting at 49 and 50 to move up the curve. So.
This is a already in pet food today, it's already in companion animal markets. It's.
Going to be and in in certain aspects of the Aqua feed market very soon and as we as we make more is really what the market gets excited about versus not making enough. So we're very bullish on this project.
And then in terms of the project finance.
With the payback on pretty might be for those.
It all depends on the protein right. So right now at 50 to 53 pro we're right around a three year payback that 55 pro you'd cut off almost a year potentially and it's obviously a 57 probably cut off another half a year. So it can accelerate very quickly which is why it's so appealing for project finance is that the paybacks are so big on these price.
The next and again.
You have to start in the plants that are low cost operator, Shenandoah Wood River fair amount will be done and those plants also have ring dryer. So we're in a very.
We think is a positive situation because this is a ring dryer product and we already have ring dryers in place, which reduces our capex on our first four or five or six projects more so than what you would have to build that a straight IC ATM plant that doesnt bring dryers. So there's a bunch of different advantages, obviously, we're going to do project finance and.
We are very clear on that again I think last call. There was a bit of confusion on what we're going to do and how we're going to raise it and hopefully after one or two or three of these things they become self financing just think about it like this.
If we can get wood river, let's just say wood River is one that we've looked at and Shenandoah running thats over 200 million gallons or production at 20 cents a gallon this $40 million to $50 million, a year and cash flow coming from the projects that cost.
Less than $100 million to build and affect those two plants will probably be in that 80 million to $90 million range to build so you're talking about very quick paybacks.
And and you and you start to think about every every two projects build another one in every three project build one and a half and so on so if we could just get two of these up and running we can move very quickly with project level debt and cash flows from these projects to become self financing.
Thank you.
Thank you.
Your next question comes from the line of Ken Zaslow with bank of Montreal.
Hey, good morning, everyone.
Good morning, Ken.
What percentage of the plants that are close are going to be furloughed for a longer period of time you mentioned the idea that there's please that.
Hard stop versus ones that are light stopped.
Terminology is but can you distinguish between what you're seeing what you expect to come online.
Yes, we think.
We don't have the exact numbers. So I'm just going to give you anecdotal I think 10% to 20% of the plants in the United States. They have calmed down a furloughed employees.
I don't know how many of them have gone to a cold shutdown versus a warm shutdown I mean warm is basically being ready to be up and operating within a week cold is within six weeks and to retraining employees getting all higher back in those type of things and so and then there is some legislate off their employee straight now you have to remember some plants and we were not.
Eligible cost for the size of our company some plants got PPP money and allow them to maintain their workforce, but that money one last.
Much longer in terms of the burn of of running so.
Just anecdotal I think 10% to 20% of the plants are in cold shutdown and furloughs and then after that.
It's probably a mix of of all the other options that you have.
Then as since we started how do they we start with getting working capital as well as bank loans like how does that work it doesn't seem like that.
Is it possible that we actually might get a more permanent we working of the industry what would be what would lead you to believe that or what would you the lead to not to believe that.
Yes, I'm always a bit.
Skeptical to say that ethanol plants come down because they're not hard to start up if you could raise local capital or some investor group comes in and says I'm going to run it better than the last guy. So an ethanol plant can always be started up whether it's an old one or a new on and so thats going you have to always.
Be cognizant of but the ones that are on today Theres definitely gonna be some that have limited amount of working capital. So they're not going to start up just a burn cash at negative EBITDA.
So I think I think we could be in a bit of a lagging startup versus demand, but this industry has been famous for.
For doing the opposite so we'll see what happens this time, but I think this time, you're right theres definitely plants that have not enough working capital not enough debt left or they have debt that and they can't get anymore and I am should any AG banks are going to decide who starts off with who doesn't start ups overall.
I think it's going to be a bit of a mix of of all the above and hopefully we maintained a discipline as an industry do not not put ourselves in a situation where we've been in for last few years, but.
I can't I can't.
Predicts that at this point.
And then on the U.S., China trade deal.
Oh.
President Trump's seems to maybe reversing his role on this would meet I don't know what your thoughts on that can you provide us how you think thats playing out in do you think that could possibly be a reversal, where maybe things don't go out to go the way.
It was expected and in that case, well that lead to more permanent shutdowns I mean, how does that all play out. It do you think industry just waiting for China.
I'll leave it there.
Yes, I don't know if the industry is naturally waiting for China, I mean, it's going to be very helpful. We do need this.
Overzealous EPA to make some changes for ethanol that are positive and they're just so focused on the oil industry that it's definitely a challenge even though the present at supports it.
The EPA doesn't and and we even need to us it just part of agriculture to weigh in as well. They are very focused on direct farmer payments and less on industry payments and so we're kind of in the middle once again as as an industry, but I think overall.
The Chinese say, they're committed to fulfilling their obligation on the trade the trade deal.
And also part of that but again, we can't predict what's going to happen there, but if they do engage we do believe there will be some ethanol sold and.
And then obviously, we want to get more you 15 in the market and we were make we were making good progress when people were driving so we need to get these economies opened up as well. So I think all of those could be potential tailwinds, but we've been talking about those tailwinds for several years.
Think this industry just needs to stay disciplined and and that overall and against demand, which is what we're famous for.
Great I really appreciate it thank you.
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Your next question comes from the line of David Driscoll with DD research.
Great. Thank you thanks for taking my question.
Thanks, David.
Great I wanted just to start off with ethanol exports I apologize. If you said it earlier, but do you have the any guesses as to what you think exports will be in 2020, and then just could you make a comment on how that export market prices does it price on energy equivalents or octane substitution.
Thats hard to predict 2020 at this point, we definitely are seeing customers that are are.
Delaying and canceling some shipments I think past June.
Theres still a pretty good book kind of business, but as we move through the month of May will decide how June.
We'll end up as well so we are starting to see some nearby.
Export demand either get rolled into 2021 or get canceled outright and and June anything June July forward is remaining on the books for now so I think we could be potentially still in that.
Billion won the billion three range, but I would that's only that's probably on the high end of the range renewable bio in Brazil is kicking in and so while certainly nearby they'll probably push off some of that export program. They still need us ethanol down there to help support or no vial program.
At all globally gets priced and a couple of different ways. It's against gasoline is against octane, it's against clean air standards in different countries and every country has a little bit different view, but a lot of its octane blending and and I don't view that as a and there are certain parts of the of the world that just are going to buy ethanol, but.
But overall debt will definitely struggled through the end of the year on our export program and until the world's starts open up a bit more and drive.
On Green Plains partners I think you mentioned that you wanted to be debt pretty in 18 months.
Can you just described how you get there at the end of 18 months, how does it actually work because I don't think theres enough cash.
In order to get there. So there's some other actions that I think you alluded to.
Yes, I mean, we have a plan in terms of monetizing assets continually at Green Plains, Inc., which then obviously that benefit to Green Plains partners. In addition, obviously through the normal cash flows that it will help reduce it and then they had some asset there as well that if we need to monetize we'd be willing to do that we want to get this cash flow to be very.
Clean and the stream to be very clean and and and we'll do everything we can to get as close as we can and at the end if.
If there is a little bit left that's fine, but our overall goal is to to be as close to debt free as we can after 18 months.
And then just one final one just to follow up so I feel like there was hearing you say that just super excited about the high protein lets you delayed.
Your Capex is shrinking this year because of the margin environment, that's happening right now.
Would it be fair to say that if ethanol margins editor of driving demand comes back we potentially see change your mind on Capex and move forward with the high protein I'm just trying to understand just how aggressive would you want to be on putting these high protein technologies in your plants I mean, they sound still margin positive.
It's just hard due to understand why.
You wouldn't want to move forward.
Faster pace.
I want to move forward very fast, which is why we're trying to get project level financing, but obviously cobot.
To get the attention for project level debt today, because the co. It is a bit hard to do we are we are on a path to get $75 million to $150 million project level financing that would move very quickly.
I think we'll get some of that Don still on in 2020 will move as fast as we can from a capital perspective.
And as I said, if we can get two of these on they will start self financing number three as well as.
Getting project level financing, so we want to move as fast as we can but we also be cognizant of the environment that we're in protect our balance sheet at all cost protector liquidity at all costs and to make sure that Green Plains is emerges from this very strong in 2021 and Thats. The way, we're setting up the company. So if I could move faster I would.
But I think we also have to be somewhat cognizant of of the of the balance sheet and protecting that.
Very helpful. Thank you.
Thank you.
At this time there no further questions.
All right everybody thanks for coming on the call obviously.
Challenging environment, but we're doing everything we can to manage the risk of that and put ourselves in position to come out stronger on the on the other side of this we have good strong liquidity, we've got some other things coming in like the tax refund and uplift from other areas around the company and we think we set ourselves up well to get through the second quarter, and we'll see with third quarter brings.
But overall thanks for your continued support and and we'll talk to you soon thanks.
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