Q3 2020 Green Plains Inc and Green Plains Partners LP Earnings Call
Ladies and gentlemen, today's conference will begin in one minute. Thank you for your patience and please remain on the line.
[music].
Good morning, and welcome to the Green Plains, Inc. and Green Plains Partners third quarter earnings Conference call. Following the company's prepared remarks instructions will be okay.
Excuse me at this time Opex are in listen only mode. I will now turn the conference call over to your host single Bug Senior Vice President Investor Relations and Treasurer Mr. Bob. Please go ahead.
Thanks Carmen.
Welcome to Green Plains, Inc., and Green Plains partners third quarter 2020 earnings call.
It just depends on todays call are Todd Becker, President and Chief Executive Officer, Patrick Simpkins, Chief Financial Officer, and Walter Cronin, Chief Commercial officer.
There was a slide presentation available and you can find the presentation on the investor page under the events and presentations link on both corporate web site.
During this call we will be making forward looking statements, which are 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 and 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.
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, Phil and thanks, everybody for joining the call. This morning.
For the quarter, we reported a net loss of $34.5 million or one dollar per diluted share. This loss included a $13.8 million noncash tax adjustment related to charges in our deferred tax assets.
Without that non cash adjustments the net loss would have been much narrower or closer to 60 cents a share.
More importantly, we are free cash flow positive for the quarter, including another strong quarter of cash distributions from Green Plains cattle company.
We reported 8.8 million in adjusted EBITDA for the quarter.
And our consolidated crush margin was eight cents, a gallon, which included almost six cents a gallon of negative absorption from plants that were shut down due to regional market conditions project 24 upgrades and normal scheduled plant turnarounds.
Our plan for that we're operating earned almost 14 cents a gallon consolidated crush margin as the completed project 24 upgrade helped improve the whole portfolio.
We look forward to the completion of all of our upgrades, which reduced plant downtime that affected this quarter. Another impact the Q3 wasn't the movement of sales from this quarter to Q4, and Q1 I'm industrial alcohol from New York, Nebraska.
That customers elected to wait to receive U.S.P. grade alcohol as our upgrade is almost fully completed.
This not only solidified ourselves book, but expanded it as well I'm happy to report that we have begun to make U.S.P. grade, but not just not just at the maximum rate yet.
We expect to achieve full rate by late December well.
Well, we take all this into consideration Q4 is looking to be better than previous quarters based on current market conditions higher operating rates less negative absorption and the completion of York's upgrade we are trying to do what we can to lock down the quarter are they more active hedge program. So as you can see there is a lot of noise in our numbers, but generating free caster all of that.
Is what we are trying to accomplish as we achieve our path to 2023.
Let me take a minute to review the accomplishments on the total transformation that we achieved that we had we have achieved over the past few months, including enhancing our liquidity, which we expect to help accelerate our transformation we.
We were excited to close on our map on our $75 million protein financing with Metlife during the quarter and continue to have ongoing discussions with additional parties to finance the balance of our protein initiative.
We believe this will result in more financing alternatives that way than we have seen in the past and secure our path to transform your platform as we recently announced we also sold the remaining 50% interest in our cattle business for $80 million, while we strongly believe in the future of this business. We are utilizing this capital to invest in a more accretive and predictable earnings streams.
When combined with the $75 million Metlife financing as well as the estimated $56 million tax refund, we expect to receive from the IRS in the near future we.
We expect to have over $200 million and incremental liquidity to perform the protein build out.
Including our strong cash position you can see we're in great shape and actually maybe the best shape in years, our turned up limited to our convertible bonds and some project based financing and with that said we are basically net term debt zero.
In addition, other than security for our Metlife loan none of our assets are encumbered or used as any collateral for any financings. During the third quarter. We were also pleased to break ground on our Wood River Ultra high protein project as our second installation and we are excited to have them join kinda Dorian producing value added ultra high protein upon its expected start.
Late in Q2 2021.
We are also we also announced that we have chosen will buy in Tennessee location to be our third facility to receive the fluid quip MSC technology, which will bring our total capacity with flu equips technology over 200000 tons and behold Ultra high protein annually, we want to thank the state of Tennessee, as well, especially the Governor's office, who.
Motivated us to finish to do this project and we will continue to work with them to get this up and running as quickly as we can.
At an estimated initial 15 to 20 cents a gallon uplift we will be adding 45 to 60 million in incremental EBITDA from just these three locations.
Buying has been one of our best and most profitable locations over the years and this technology will firmly cemented as a top performing bio refinery if not the best performing in our company and the industry. The 60 million dollar Obi and project is expected to come online by the end of 2021.
We are also announcing that we're further upgrading our york location to alcohol purities above U.S.P., while we expect new York's U.S.P. project to be completed in the fourth quarter and have several customers excited to take that product. We believe that we needed to take next step we have contracted the flu equip again to upgrade the York location to produce grain neutral.
Spirits, or GNS, which firmly establishes that location as a long term participants various high value alcohol markets.
Our Mount Vernon location is well under way with his project 24 upgrade and is expected to be complete in the first quarter of 2021.
We have also received word from the state of Illinois that our Madison location should receive the permit soon allowing US to proceed with project 24 upgrade at that site.
Given the success, we have seen that our other location, we anticipate meeting or even beating our platform opex target of 24 cents a gallon by the second quarter of 2021.
But probably 24 is complete.
So as you can see all these initiatives we are continuing to execute on our strategy here and are adding speed to our escape velocity to transform this company and lessen lessen the reliance on the ethanol crush.
During the quarter, we produced approximately 189 million gallons of ethanol, which put us at a 67% utilization rates margins have mostly been contained to the spot market and remain inverted in the future. We the weekly EIA data has been neutral to supportive towards margins as production has maintained levels below 950000 barrels per day.
Range until this week, while inventory stocks have been consistently around 20 million barrels.
This stock number support positive spot margins as well, but the weekly numbers are something we are watching closely Green Plains partners continued with stable operations protected by long term minimum volume commitments in place.
And benefited from the rate adjustment that went into effect in July during the third quarter, we began to amortize the term loan we put in place in June and pay down $12.5 million of bad debt now, let's turn to call over the Patrick to review, both Green Plains, Inc. and Green Plains Partners financial performance I will then come back on the call to talk more specifically about our ongoing initiative.
As to transform the company through our GNS alcohol protein and agriculture initiatives and a little more on markets and policy on the election.
Patrick Thank you Todd and good morning, everyone Green Plains consolidated revenues were $424.1 million in the third quarter down $208.3 million or 33% from the third quarter, a year ago, driven primarily by lower ethanol production run rates as compared to the third third quarter of 2019 for.
The quarter, our run rates were 66.8% of capacity compared to an 84.2% run rate from the prior year third quarter.
The difference in run rates between years was primarily due to combination of project 24 upgrades and production adjustments for regional market conditions.
Our consolidated net loss for the quarter was $34.5 million slightly favorable to a net loss of $39 million in the third quarter last year.
As Todd stated the top the call. This loss. This does include a non cash tax charge of $13.8 million related to a valuation adjustment to our deferred tax asset.
Adjusted EBITDA for the second quarter was a positive $8.8 million up from an adjusted EBITDA loss of $13.4 million for the same period a year ago.
For the quarter, our SG in a cost for all segments was up $19.9 million was $1.4 million higher than the $18.5 million reported Q3 of 2019.
Adjusting for onetime benefit of $1.2 million in ESG DNA in Q3 of 2019 related to reversal of property tax accruals SGN eight for Q3 2020 is generally in line with Q3 2019.
Ethanol storage assets during the quarter, which was down 49 million gallons or 21% in the third quarter of 2019 as a result of lower production rates at Green Plains plant. However, as a result of the minimum volume commitment contracts of Green Plains trade. The partnership Bill trade group for 235.7 million gallons of throughput.
Accordingly, the partnership reported an adjusted EBITDA of $13.9 million for the quarter up slightly from the $13.3 million reported in third quarter of 2019, mainly due to a 6% increase in throughput rates charged by GPP offset slightly by other ancillary costs.
For the partnership's distributable cash flow was $11.3 million for the quarter compared to $11.1 million for the same quarter of 2019 on.
On last 12 month basis, adjusted EBITDA was $53.7 million distributable cash flow was $45.2 million and declared distributions were $19.8 million, resulting in a 2.28 times coverage ratio. The coverage ratio was 3.97 times for the third quarter, our coverage ratio excludes any adjusts.
But for the 12 and a half million dollars and required principal payments amortized during the quarter.
I'd like to turn the call back over to Todd.
Thanks, Patrick So our total transformation plan is executing on all cylinders right now and has a multi pronged approach our goal to achieve 24 cents or below of operating cost per gallon at expected utilization rates as it within reach and we anticipate hitting that mark during the first quarter.
Even before all the projects are done.
One production to the pet food space and continue to work with customers and pet Aqua culture in Derry to take the remaining production over the next few weeks what.
What we are producing as a better and higher protein with very unique amino acid profiles and east characteristics and others are producing into space. More importantly are fiber in fat content is low which is extremely important and.
And the pet and Aqua space. So that means all protein is not equal and are certainly has an interesting advantage we learned about every day.
There's a lot of confusion out there, but I can tell you our customers are not confused we are we are already establishing Shenandoah and green planes as the go to company for the highest quality control quality assurance and lastly, consistency and quality of the product. We don't believe we will ever commoditize, what we produce we have completed several awkward.
Culture trials that are World Class Road class Aqua 11, Shenandoah and he's had seemed very interesting result in taste and rate of gain.
We are starting several more as we speak for our for ourselves and customers who are also using our lab for trials.
In theory, we are very interesting amino acid profiles that have proven to increase milk yield and studies already.
On top of the eastern benefit in our ultra high protein products. Finally, we have inclusion in all veg animal feeding diets as the custom consumer is tired of seeing animals being fed to animals and our high protein products will help solve that dilemma, which brings me to our partnership with Novozymes and now hi, Ashley Connie that are going to distinguish or protein <unk>.
Duction from competing technologies and other proteins. We believe we can move quickly to higher protein purity levels and even more important added nutritional upgrades unmatched by other technologies and producers. This all add to our confidence that we're on the right path to transform the company and lessen the reliance on traditional ethanol economics in.
<unk> benefit that often goes over looked at the is that the protein production from the fluid because process also increases corn oil capacity by an additional 50% as.
As a result, we could see our platform capacity increase from about 300 million pounds, a corner oil production do over 450 million pounds.
Much of our corn oil is sold as a low carbon feedstock into the renewable diesel industry and with the growth in that industry. We believe there is plenty of demand for additional Cornell in the market, which can lead to an uplift an additional margins as a result, as we are not just going to give this away and watch those markets earn outsized returns and one of the lowest Ci score feet.
<unk> in the market, even lower than soybean oil for your information corn oil is 27% to 30, Ci and soybean oil is around $53 to 54 I believe this is not being paid attention to from a green plains valuation perspective, if you look at the margin per gallon that renewable diesel produces are achieving in the back of our feedstock.
When we produced over 450 million pounds are almost 60 million gallons of low Ci feedstock that as a future opportunity of its own.
Lastly, I wanted to touch briefly on how our recently announced Ayachi Connie partnership validate and support the long term direction, providing sustainable high value proteins and novel ingredients to support the growing global demand in human and animal nutrition last quarter I talked a little about our Holy on optimal Aqua venture and how are ultra high protein can serve as a high quality and.
Greedy and delivery mechanism partnering with highest economy proves just that and trials already we have seen our ultra high protein product in combination with high actually Connie technologies provide potential aqua feet solutions that meet the specific needs of our customers challenged by their species selection water quality and infrastructure allow.
Owing us to better tailor products for improved feed conversion ratios and better cleaner tasting fish and seafood consumer products. Additionally, we believe our protein will ultimately find its way back into additional markets through high ash economy as well so what does all mean.
We are focused on 2023 for a completion of our transformation while that is a few years away time goes fast and we continue to see real proof points of this happening with that said, we will define what that means and baseline 2023 earnings for Green Plains. When protein upgrades are completed we will be producing over 700000 tons of <unk>.
A high protein with a baseline earnings at 50% protein of $150 million to $200 million of baseline EBITDA.
That is on a capital investment of approximately $400 million to $450 million.
Add on top of that York in Wood River USP GNL production of 75 million gallons a year at a historical dollar to $1.50 premium per gallon to fuel grade.
That would equate to 75 $210 million of additional baseline earnings on top of that of course is our project 24 benefit.
Of approximately $80 million per year, but even with a zero baseline ethanol margin, we could we could achieve $225 million to $330 million baseline EBITDA before you even add the fuel margin on top of that.
Even more exciting to these numbers is the fact that we are producing higher protein purity already which only increases these numbers for example.
We believe when we had 55% protein this adds another $70 million to $100 million in earnings over the 50% protein baseline at.
At 58% protein another 170 million over the 50% baseline and at 60% protein based on the current market market for 60% protein products, such as fishmeal, an additional $370 million over the cage percent baseline. These are based on additional markets that are trading today and all.
This is outlined in the slides and the deck.
I will give you. An example at 60% protein if you use $1200 a tonne replacement cost that is over $1000 on premium to traditional distillers Greens today.
For each $100 a tonne.
That equates to a six cents a gallon uplift to margins or almost 60 cents a gallon total uplift and full margins at 60% protein that is not pie in the sky. We have the capability to day as we speak to mechanically produced 54% protein at Shenandoah and in fact have produced an average of.
Over pit of over 52% mechanically separated only protein already.
Over the past three months the importance of our partnerships with everyone from Novozymes too high she county to our exclusive pet food relationships all give us confidence we can produce unique value added ingredients as it's not just all about the protein that will transform our earnings power of Green Plains, and we are working on other partnership.
As we speak and will be excited to announce each one of them as we complete them. We are thinking very differently about this and expect to achieve escape velocity up to J curve that we've previously previously discussed with Ya.
Finally on this topic think about what is happening if you look at traditional processing that is taking place a corn wet mills. These plants owned by some of the biggest agribusiness and food companies in the world. They produce over 200 products from each kernel of corn, a traditional dry mail for perspective produces three ethanol distillers grains and corn oil.
Well, we have discovered is how to isolate a high protein fraction from the corn kernel, giving us a real fourth product was significant value and now USP <unk> alcohol, giving us five and six only 194 other product opportunities exist for us to go after and when we are done with this one.
We can pick and choose the next highest value and the corn kernel and I can assure you there are companies and technologies that will emerge from this thought process and we expect to be one of the leaders pursuing this path I'm sure Nobody has put it this way before as a focus it has always been ethanol ethanol ethanol, but I think there is a dramatic shift coming to the dry milling industry.
Once again, our employees continue to inspire my confidence in our transformation path, but I invite all of you to come see what is happening in Shenandoah York or Wood River and you'll get a complete view of where are we heading where we are heading across the whole platform. Thanks for joining the call today and when you start to Q&A.
Thank you and please let me get questions normal more than two at this time, if you wish to ask conditional question. Please <unk> and to dish solid just press star one on your telephone.
And we'll be ourselves press the pound cake.
My first question is from Adam's Hamilton with Goldman tank.
Yes, Thank you and good morning, everyone.
Hi, Adam how are you.
I'm good Todd so a lot of ground that that was covered in in those prepared remarks, and maybe I'm just trying to think through.
The EBITA layout that you provided here.
So I Wanna make sure that I had those numbers right. So a 400 million dollar total capital investment to reach that kind of 2024 run right.
Run rated earnings Uhm.
Think about the value uplift on.
On the high protein side.
What do you think the upper limit like where he speaks there where you are today in terms of both technology in terms of production in terms of sales and where you have very clear line of sight between.
Technology and customer formulation in terms of value realisation.
Yeah, So where we're at today is obviously Shenandoah is now producing at full right.
It's bad took us about four months startup, we think wood river will take us about a month. So it takes a little bit longer as we're just learning how to use the system.
Where we're at today is mechanically before we even kick in other relationships were producing an average of 52% to 53% protein as high as 54% protein. What's really important is what I said in the call.
Was the fact that we're almost sold out for 2021 out of Shenandoah, Our pet food relationships are beginning to reformulate around these products and are starting to accelerate the demand and we've seen that already so while we're very excited about that.
That's only one of our addressable markets, but actually I think we're seeing more and more companies potentially start to reformulate around our products or product is different than products that others are producing as well because of our protein purity, but also because some of the other characteristics. So we focus on <unk>.
Quality quality quality, but we are also innovating with these customers using our relationships with high actually Connie and Novozymes as well. So we see the path, which is when you think about the how the value chain works. It's obviously human nutrition first which we don't think will hit right. Now there is an opportunity for that at some point in the future, but then.
He goes to pet food Aqua and then everything below that so we're not even exhausting jaquess space and already being sold out in one one plant and we think when we bring out a second plant will probably.
Hit the continue to sell out to the pet market and maybe a little bit more into Aqua, but we are also seeing a lot of interest in Derry as well and it's really just a function of what is the substitution that your that your your product is being used for for example, and our dairy customers. They bill they're going to formulate around the level of protein the level of use the level.
Fat and the level of flavor and then the amino acid profile. So we're not when we first talked to a dairy for example, they think Oh I'm just going to substitute for a traditional distillers grains and then they look at the product and and then look at themselves and say no. This could be substituted for a blood meal. It could be substituted for other very high value corn gluten meal type products. So we're very.
Excited about them, we're starting to see that as well and dairy markets and it's all about level of protein and how to reformulate. So all of these numbers that we're giving you are really just replacement products in the formulation I think in 2021 will be on a path to a higher protein consistent higher protein at Shenandoah.
And our customers will formulate continue formulae around those higher proteins and then you get paid for those higher proteins as well. So why you might sell a baseline protein of 50, there is scales above that much like you see in some of the wheat markets that you would formulate around as well. So we're very confident around these numbers were very happy.
That we were able to get the forward sales on the books for Shenandoah repeat sales as well that the end, we're very happy to see customers starting to formulate longterm around those products on the on the label so.
As we bring on more we believe every plant that we will bring on will have.
Basically can be sold out if that's the way we choose the approach to the market.
Okay, and then if I can squeeze just one near term ethanol market question.
As we get into the winter and the slow driving season how.
How do you how do you see the supply demand relationship old <unk> take that have picked up a little bit off the lows, but aren't that bad yet, but how are we how do we create in the supply demand balance and.
Has utilization over the next three to six months.
Yeah, I mean, I think right now we have probably seen the lows in the numbers on the EIA data for stocks and probably production for a little while as we get into into winter driving.
The interesting thing those were coming into the fourth quarter really still at a pretty narrow level of stocks below 20 million barrels.
And while we expect probably over the next three to four months as as driving May slow has historically slowdown.
We would expect to see those stocks build the only difference this year is that obviously with covid.
We continue to see draws almost we continued to see draws almost on a weekly basis is driving.
Demand continues to pick up in terms of just week over a week year over year, even in terms of people flying less.
But I think what's also important is what we're not seeing in the numbers, which we believe is the expanded blended rates that are taking place within 15 being rolled out in several states and even some some of the demand that we're seeing increased from from blends as well and that's not inclusive a little and will continue to export program pace overall, and we and potentially that.
Pick up a over the winter if China decides to engage once and for all on on ethanol of which we only seen a little bit a little bit of inkling of that but nothing I would I would make a bet on at this point. So I think overall, we probably go into winter like every winter expecting to see growth in stocks.
And probably a uptick in supply as well in terms of production as you run as plants that were running are probably running more efficient and better with the cooler temperatures. So overall overall, but if you look at the data and you've plugged it into the models. This data is still supports a positive spot margin, but that's all we're really getting as an industry maybe.
Spot the 20 to 30 days and after that you just have to wait and see what happens.
Alright, I appreciate all that color I'll pass it on thank you. Thank you.
Thank you. Our next question comes from Craig Arena with Iraq capital.
Good morning, and thank you very much for taking my questions.
I Love the slide Slide number 10 from your presentation that really lays out for us.
The progress over the next few years that we can we can expect.
<unk> from from our site is.
He didn't give US 2020 can you maybe help us sort of sketch out.
What the 21 increase is over 20.
On an operating basis, where are we at with the chief savings on 24.
Debase, USP and then different protein and.
USP upside potential can you can you just.
Sure the numbers with us now.
So we see sort of the step up sequentially moving into 21.
Yeah, I mean, I think we're gonna have a stronger finished to the year based on at least the spot ethanol margin running at a higher rates moving some of our alcohol sales high quality alcohol sales from Q3 to queue for in Q1.
That market has certainly changed over the last six months from really aggressively taking the low be grace and a lot of those products that we saw probably didn't make it to market all the way through us increasing our quality of alcohol. So I think we're still gonna have a stronger finish.
On paper today.
It would definitely be our best quarter.
And could be a very good quarter for US again, we don't want to give some very specific guidance, except to say that it's definitely trending higher and it comes through the final executions of our high quality alcohol or protein.
We still continue to have a good protein margin as well. So I mean, I think that will finish that you're strong.
I think when we look at the baseline going into baseline 2021, you.
You can see that.
We're predicting some of the 20 project twenty-four upgrades that come through.
And that's at a zero equivalent margin and we'll just take the upgrades as the baseline margin we've got.
On top of that just a baseline USP.
At a dollar premium, but the market is higher than that we know that and USP upside of beyond that the markets even on the higher side of that today, but there's a lot of USP coming on so we're going to be conservative in our estimates going forward on predicting what high quality Alcohol's will be until we fully go to GFS, which we believe that point we can.
We can get longer term even longer term contracts on.
But there's too much USPI believe coming onto the market, but from from a standpoint of us getting they're very quickly with York because we already made 80% of what we shipped out of York was already USP grade, but the other 20% just didn't make it. So we would not sell USPS accompany while others would take the risk and do that and sell a lower quality and we weren't willing to two subs.
<unk> and take the risk of that.
So it doesn't take much to get to the final stage of that and even gnps that bjork used to be a beverage great facility anyway. So we're just putting it back in some of the.
Some of that technology. So it doesn't take very much to get back to you GFS, but I think that's the long term where you have to go with all of your product I don't believe that.
I think USP will be the old B grade and <unk> will be the old USP, great and I think that's how the market is going to go and so.
We're also seeing a lot of customers that again initially we saw delays and shipments because of the buildup and some of the some of the stuff that was being sold into the consumer markets, but now we're seeing a lot of that clear the shelves and potentially stabilizes demand back to a better level and.
And from there on top of that obviously is if.
If we get premiums over 50% pro to 53 to $54 55, as we continue to finally start to execute on some of our other biotechnology upgrades and obviously the Hashi County partnership is very important so I think what we've laid out as a small contribution from ethanol a baseline contribution from alcohol.
<unk> a good contribution protein is we're rolling it out.
But even more importantly than that obviously, there's other parts of our business like our agribusiness segments and others that have contributed as well so.
We just wanted to kind of lay out what like for like would be year over year uplift and I think we'll finished 2024 stronger or I'm, sorry, 2020 stronger again lots of moving pieces.
Core market starting to rally a bit but ethanol is keeping up with it. So so correlations are still high and if we can and I think just the stocks number is something we have to watch it the ethanol industry increases production significantly or build stock significantly obviously that could pressure margins, but at this point, we're still have a a spot margin available to us. In addition, we're also.
Seeing Craig and uplift in.
Distillers corn oil values desio values into.
The the diesel and biodiesel renewable diesel markets.
We are <unk>.
Not willing to forward contract at this point at the same levels. We were we believe the market will continue to move higher for that product or product is very important and especially with some of that started for that are happening around renewable diesel.
And when somebody's, earning over $2 a gallon on a product that we're selling because RCI scores solo we're going to be very stingy with with who and what we sell on how far we go out on as well because there's other ways to skin that cat. So I think we'll just we'll watch those markets as well.
Great Great. So then high protein can you maybe describe for US the branch of feed trials that you're doing right. Now I know you have your own sophisticated agriculture lab.
<unk> and that they're doing great work to help educate your customers and show <unk>.
Quantitatively what high protein do we.
Where do we stand right now as far as I can trials and potential trials for products, you're developing with Novozymes and other partners.
<unk>.
What's the body of work we need to see.
Before some of these large potential customers start.
Beating.
A much higher prices and and what we're seeing I mean it is there.
Are there specific milestone she can share with us that we should look for.
Yeah, I think we're gonna do a lot more of that in the next several conference calls as we as we continue to get the results we have ongoing aqua trials today thus.
Thus far every all the trials both commercially at customer sites as well as in our lab have proven successful in terms of.
Right of gain taste texture, and things like that using high pro alone or as well as high pro combined with our partners technology, we've seen better fillet colors already in terms of what we're getting out of a traditional aqua diet by using high protein.
<unk> high protein that we produce in Shenandoah, we already are seeing that customers are saying that they are already seen better taste profiles will get much more deep into the technology side of the business in the next several quarters in Q1, we're starting palatability trials continued our increases in palatability trials for pets because I.
This product will get fully the first several of our plants could fully stay in the past food market.
And they're really trying to innovate and reformulate around this product, especially as we move into higher protein remember. This is a used product while we talk about protein. This is 25% used to we're really feeding it for east a dry distillers used a household inclusive ultra high protein beyond that we're going to have our first Easter.
Aqua in the second quarter, that's going on we continue to work with every single one of our partners whether it's theory.
Whether it's aqua, whether it's pet and innovating around these products and what that really means is that it's not just going to be around levels of protein. We can sit there with a customer today with our partners from from Novozymes, especially in high she Connie and go to a pet food customer and say what characteristics.
Do you need so that increases palatability or increases gain or at those type of things and so while people look at Ah Novozymes, just say Oh nobody's items, just going to help you increase protein levels that that's a very short sighted I mean, basically today, we're ready mechanically able to produce 54.
And working with our partners at fluid quick we believe week, we're going to be able to mechanically increase before you even have to worry about <unk>.
<unk> matic increases at all and so really it's about now bringing in the Novozymes library on top of that to help our aqua in our pet customers develop and formulate products that and we can also innovate with them and I think that's really where you start to think about the transformation of Green Plains.
Look if you think about it of wet mill as I as I gave you. The example, they still make ethanol, but nobody really cares about that it's just a product that they make because they had the other 199 products that they make are all very high value products and I think that's where we're going ahead and drive over a long period of time not everybody's gonna adopters.
It takes a lot of capital and it takes a lot of commitment and you just can't rollout ultra high protein without having nutritionists without having sales teams without having marketing without having innovation without having partnerships like we've announced and more that are coming I can assure you. So I think we're really on a path look in the meantime, we are transitory.
You saw last quarter, we ate a lot of negative.
Cost absorption I think we'll eat a lot less this quarter in fact, I know we will going into 2021 is we continue to roll out project 24 are negative absorption continues to go go down we really want to get Madison started back up but we state of Illinois is going to give us our permit to get project twenty-four done and we haven't been running that plant we're still looking.
Total portfolio to say is there are things, we would swap out and we even within our portfolio as well as things that don't really fit and there's still a market for ethanol plants I can tell you we've seen active participation in a more active partition participation in the long term thinking about ethanol no I don't think anybody's transacting at this point.
But if you think about even ethanol contribution to renewable diesel there's a lot of there's a lot of potential partnerships that are going to take place there as well so.
Look I as I said, we are transitory, it's going to take a little while we're gonna have a lot of noise.
We are in some of the best financial shape, we've ever been in I think we will have plenty of access to capital that we would need to build out the rest of this high protein and we continue to talk with with partners on that and I think we're on a really good pet notwithstanding the fact that we're going to have noisily in quarters like this but if you think about this quarter. What's the most important thing we generated free cash flow.
You can look at all the numbers are accounting numbers, but in a quarter like that we were positive EBITDA and cash flow positive.
That's a good place to be well congratulations on the execution the difficult environment and we'll look forward to the high pro progress and all the other initiatives. Thanks. Thank you.
Won't kill our next question comes from <unk>.
Please go ahead.
Hey, good morning, everybody.
Good morning.
I've got one short term question in one long term question Uhm on the short term question. The the sixth sense of negative absorption you called out three buckets. The the scheduled maintenance the 24th graders in a regional market conditions any way that you can size those within the six cents and then how did you kind of teach this in the last answer.
Sure.
But.
How much of that six cent should we expect to linger in the fourth quarter or is it all going away.
Yeah, I'll just comment on and Patrick will comment on more of that but one thing I think we also missed this some of.
Our quarter was impacted by the role of our high quality alcohol from quarter to quarter I think that was part of it but I'll, let Patrick talk about the other three buckets go ahead, Patrick Yes, I think generally who break down the absorption two thirds of it is is plants purposely offline relative to market conditions, a third of it relative to project 24. However, when you think of that.
Two thirds remember those plants will actually get project 24, so if you're thinking about it in terms of future. Those are plants that actually would have been on that negative sorption would not have been there had they had project 24, which is in fact, they will so so it's it's a little bit of chicken and egg I mean, if you just look the strict numbers.
With respect that too Q3, that's the break up but when you think about actually lay around project 24 that negative absorption effectively goes away in 2021.
Got it okay.
My long term or intermediate term question as it relates to high pro and the financing of these projects just based on the current pace, which has been a solid pace of getting these projects.
Up and going.
Yeah. It seems like you could kind of get too self funding by mid or late 2022 is that too early is that a realistic timeline. How are you thinking about the threshold at which you start to be able to self fund these projects.
I think we will yeah. If we if we go slower we could probably self fund.
The projects.
By the middle of 2022.
But it also depends on the protein price if if we move up the Jacob quicker they sell fun quicker, but we want to build them quicker.
I think our goal would be to get obviously wood River, Dan O'brien done and we want to get a fourth or a fifth even done and.
In 2021, so that would be five total done tried to do five the next year and those probably kind of self fund themselves, but they they will probably need some excess funding as well so that we want to move as fast as we can because the demand is so deep remember the numerator for world protein demand is 300.
And twenty-five to 350 million tonnes by the time, we get there.
Arthur denied that it out denominator, that's what we believe the Mart addressable market, we will be able to go into.
If green Plains bills out there total build out there total platform. We're gonna add 700000 tons of supply total into a 12 to 15 million ton growing market per year on a 325 to 350 million tonnes total addressable market.
And so we can't build it fast enough and.
And our customers are telling US you can't build it fast enough you need redundancy and you need volume.
So to reformulate you have to have volume and redundancies and so we're talking to.
Major feeders major industry participants that they don't want.
40000 tons from Shenandoah, They want 250000 tons, a year and they won't they won't reformulate until you get volume and you'll get redundancy and that's why we can't move fast enough. So while we could certainly start self funding sometime in 2022, obviously, we want to be well under construction projects <unk>.
Through 10 by the time, we get there.
Yep, Okay, great makes sense. Thanks. Thank.
Thank you.
<unk>. Our next question comes how can <unk> bank of downtown.
Good morning, guys.
Kent.
So when you get through these projects in you know over the next three or four years. What's the end game are you looking to just stay as is and just kinda.
London.
Or stand or be sold <unk>, what is the angle here as you did you have a very concrete plan that has it and into it and then what happens after that.
Well I think that's just to get you to.
All of our plants built out.
But that doesn't include additional value added from optimal aqua as well. So I mean, we want to be an end to end solution for customers.
That are growing.
The growing demand in and diets and protein around the world I mean, we don't want to make we don't want to grow the fish necessarily but we want to as we see the increase in inland fish production, they're gonna need unique products to continue to innovate and what they do as well so I think what you're seeing number.
One the question is how far do we go up the J curve on protein and and number two what products move on the next level of formulations. So I mean optimal aqua, which we've talked about is all about.
Feed production ingredient production and innovation, especially with the hi, Ash economy partnerships I mean somebody needs to meet the challenges of Raf's and there's not a lot of innovation that's taking place in.
In addition, somebody has to meet somebody has to meet the challenges of the fact that when you grow.
Agriculture systems inland, there's a taste challenge and we believe that's the importance of our partnership with with our our hi, ash economy as well as Novozymes that we already believe we have products to address some of those today. So.
While certainly you have to have your base load of products and your base load of earnings. There is there is addressable businesses beyond that which were already starting to build with our partners. So I think it's more of let's get this done first.
And obviously on on parallel paths, we're building an ingredient production.
Production business as well and innovation business because you have to do both at the same time.
Where it leads if we can get all the way up to the top of the J curve and.
You know that that number obviously is very large and on top of that you can continue to innovate ingredients I just think theirs.
Kennedy, you know and you've seen it in soy crushing there's a big protein hole in the world today, and there's not enough protein production in the next five years to meet it and you're seeing it play out this year as China in steps up their purchases you have a very good chance of having not very many soil.
<unk> left the United States, and maybe not a lot of meal left in the world to sell and I think that's the if you think about it there's not.
A high a soybean crushing plant isn't innovating to hire proteins like we are today. So we're not just.
Filling the fifth 48% protein gap, that's existing and that's why so it'd crush margins have enjoyed the last five years of demand pill pull from protein probably enjoy the next five years after that.
[noise] innovating to hire proteins, and you're not seeing that anywhere else in any other industry today.
And getting night.
Another question just a short term.
What was I have the capacity do you think will not come back.
After we get through all of this you I've heard variety of answer isn't curious to see what your answer would be.
Well, there's a lot of capacity that can still probably come back if the demand increases and so if we get into thinking about the politics of what we're seeing today.
There is a president today that.
As an office that favors the internal combustion engine, which I think is good for green plans are good for the Iowa farmer in there as a potential president if the other guy wins that favors obviously EV, but I think also favors a low carbon fuel standard which potentially means less.
Left gasoline, but more ethanol because what we're seeing today is ethanol is reducing C is all over the place whether it's through carbon sequestration, whether it's through what we're doing on project 24, which you've already lowered RCI stores and less energy to use less water use our even our ability to supply renewable diesel with a V.
Low Ci corn oil I think what we're seeing is that as the economy's recover around the world and people drive more.
Still.
250 million internal combustion engines on the road and or more in the U S and all over the world and while <unk> is coming I think depending who make who comes into office.
It's all probably pretty good for ethanol demand longer at least for the next three to five years.
And either in either party, but but more importantly, I think what ethanol will become part of is potentially potentially.
A california ask low carbon fuel standard movement, but albeit that is an expensive thing to do and we'll see if that really happens, but I think overall.
As the economy recovers out of Covid, and we'll get back to more normal driving patterns or more normal demand and I think we'll get there obviously.
I think that's all probably pretty good for supply for demand growth for ethanol, especially with higher blends, but don't don't don't let's not kid ourselves the ethanol industry has capacity and they can move very quickly with that capacity and it hasn't shown a lot of discipline over the years, but maybe this time we will.
Great. Thank you very much.
Thank you.
Can care. Our next question comes hung Jordan <unk> security.
One of the tub.
Todd to touch on something you just hit on as well I was kind of project twenty-four gets wrapped up in what that does to the carbon intensity of the plant and the fuel coming out of it has the potential there to target specific markets on the fuel ethanol side, whether it's you know.
Looking to get those to California, and realizing the uplift or something along those lines or to the economics just.
It makes sense to just sell the way you guys normally do.
What we've seen is is the traditional ethanol industry.
Made too much low ci for the for the California market and gave away a lot of that margin I think that's L. CFS spreads potential spreads then we'll probably won't there'll be an opportunity to earn more of that margin back on low ci's for us today.
Today, we're focused more on protein and protein development and let ethanol be what ethanol is and it'll be a contributor but it won't be the story and so we're not going to spend a lot of money right up front on deciding we want to just be the lowest ci producer because that really hasn't paid off yet although there are several C O two projects.
That are starting to take shape we've.
We've seen him in Texas, we've seen some up north and and I think that will help lower the Ci scores a lot.
But again, it's gonna be about discipline, and where does the margin go to I think what we've seen is obviously, an and bio and renewable diesel they keep a lot of that.
And ethanol, we haven't been able to but.
Because we just make too much. So overall, we're not going to put our bed around low ci as much as we are about putting all of our future into into.
Into protein and innovation.
We have a big ethanol is a very classic ESG industry that doesn't get any credit for we use less power you left gas will use less water and we do a horrible job of selling our ESG story to the world as an industry and we're trying to change that.
And I think the industry needs to start to change that because we are really the lowest carbon fuel one of the lowest carbon fuels produced in the world today and get no credit for that because our story was hijacked as you've heard me say in the past. So we're gonna try and do a lot more around resp store and what we're doing a green plants is so significant even think about protein let.
Go back to protein and talk about ESG and what we're doing remember the more we replace our product into Aqua culture.
And do you think about land use it take a little over one pound of feed to make one pound of gain in agriculture versus the cattle business. We just sold as like five six pounds.
Feed to make one pound of gain and think about the land use reduction in making protein out of our high protein products that we can even discuss as part of our story, it's a pretty big part of the story and I think that's part of the reason why we have such attractiveness from not only our customers, but potential investors and and.
Even financing around our lowest lower ESG are better ESG story, and I think you're going to see more and more of that come out, especially got a green plains.
And we're excited to tell that part of the story, but I think it's a land use play around ESC with this high protein as much as it is.
And I would put my investment into that before I, just think seat low Ci towards is the way to is the way to Nirvana.
Totally makes a lotta sense and then just those my follow up on.
<unk> on the optimal and the recent agreement as well on the Aqua culture market in terms of the high protein.
How the plants rollout is there is there a time, where you get to that point of redundancy volumes, where you. You know you are at the scale you need or is that something that can be done you know as blood River gets brought online and you don't you don't need a ton of plants online to to really target specific customers in that market.
I mean I'll give you an example, it really just depends.
How many products that we're going into but for example, one of the largest poultry companies really doesn't even notice you until you have a thousand tons, a day of something as an industry and today the us ethanol.
We don't across all of our plants and others that are building, we're getting closer to 1000 tons of day, but that's just 801000 times a day, that's just one customer.
And so I don't know that we'll ever get to a point.
In order to even need to get to a point, where all of our plants have to be running but I would tell you.
The more we produced the more we see inclusion rates and.
We can't really even get into big time animal production systems with our product because we don't have the redundancies and Green Plains.
Our first three or four or five plants could end up in pet and maybe in the Aqua before we even get into other markets. Although I will tell you.
We are developing the other markets and would sell those markets as well and I think we will do some of that especially dairy there's really a big theory impact.
In terms of immediate milk yields from our methionyl levels in our amino acid levels that we're already seeing milk yields go higher and we can already replace high value products like like a blood meal or something like that in Derry.
And so we've run we worked on the Cornell studies. This is a this is truly what we think is traditional dairy feeds has has soy passing it because of the way that it's structured this has actually performed better than soy pass in Derry trials as well so.
We're very excited about it I think that it's going to be even our 700000 tonnes doesn't make a dent on the world protein demand or world protein supply, but it makes a dent on our company and.
And even if the whole industry rolled this out which I don't think they will because I think it takes billions and billions of dollars to do that so I'll take a long time.
Even if the whole industry rolled this out we probably produce somewhere between $7 million and 8 million tons total as an industry and a 15 million ton growing demand per year. So we can only produce as an industry half the total demand growth and protein per year and I think that's why we're so excited about this.
Again, it's just like if you think about a wet mill. There was 102 hundred products and we're gonna have five and six now and one of those products competes with some of the high protein that they do but the demand is so big.
Great color. Thanks, so much stuff thank.
Thank you.
Thank you and our next question comes from any time with <unk>.
Hi, everyone that you've covered a lot. So I just I'll just go as one but you mentioned U S. P.
At your he'd be upgrading djns just curious.
So I'm trying to doing that it would river and when you may if you do that when when that May come online.
Yeah, I think from the industrial alcohol business upgraded GFS is necessary, especially at York because it cost. It just doesn't cost very much because there was already a beverage great facility and our quality of our product is so good even before we do anything that we know we'll get there very quick with some of the highest quality.
And hopefully at that point.
We're going to protect the relationships for sure that we have the customers that have really helped us along as we develop this they're going to have long term potential and we're going to really try and make sure that we maintain those relationships first but I think beyond that.
Don't see is hiring a bunch of GNL salespeople I think will work with other companies that do this and we're talking to others about just basic.
Basically using their their distribution channels, because I don't see I don't see us again, putting a bunch of <unk> salespeople out there, but I do believe that will participate in some of those and used marquisette take the highest quality market all highest follow alcohol, whether drinking or pharmaceutical or or even are beyond that in terms of wood river, we're going to.
We're gonna go to the USP first we'll see how we do in the GNL markets, there's plenty of USP demand and consumer products today that we're seeing that are I'm, sorry, USP demand that we're seeing consumer products today, and we have a lot of these major CPG companies that have done business with US now that are waiting for the upgrade in wood River as well. So I don't think we need to go all.
The way there because it's going to be costly to do that if we see the value to to do that we will again the benefit for US was the fact that York was already a beverage great facility at one point and makes such a high quality product already that are passed to gnl's as much faster and cheaper than it would be taken.
Taken Wood River there.
Got it very helpful. Thanks.
Alright, Thank you very much.
Thank you I'm, sorry, I'm not showing any part of that question for next year.
Alright, everybody thanks for coming down to call I know, we talked a lot probably spend a little more on on on our future than we have in the past in terms of outlining the numbers, but I think it's important for everybody to see that there's a lot of other information around page 10 that we'd love to share with you.
We continue to make great progress on our on our sales programs and the interest in innovation and again later.
A lot of transitory stuff going on as well, but we're on a path and we believe in the past.
And I think we're going to accelerate as quickly as we can to transform and hopefully can read back through what we presented today and and any questions. Please give us a call and we're very excited about the future. So thanks, a lot for coming on the call today, and we'll talk to you next quarter.
Thank you, ladies and gentlemen, thank you painting and for both Comcast Nowadays connect to have a wonderful day.