Q3 2020 Green Plains Inc and Green Plains Partners LP Earnings Call
Thank you for your patience and teams to remain on the line.
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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.
<unk> <unk> at this time, all but [laughter] are in listen only mode. I will now turn the conference call. Your hosts Eagle Bulks 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 grown and 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 websites.
During this call we will be making forward looking statements, which are predictions projections or other statements about future events. These.
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.
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 $1 per diluted share. This loss included a $13.8 million noncash tax adjustment related to charges in our deferred tax assets without accurate noncash adjustments. The net loss would have been much narrow.
Or 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 from almost 14 cents a gallon consolidated crush margin as the completed project 24 upgrades 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 of Q3 was the movement of sales from this quarter to Q4 and Q1 industrial alcohol from New York, Nebraska.
As customers elected to wait to receive USPI grade alcohol as our upgrade is almost fully completed.
This not only solidified our sales book, but expanded it as well I am happy to report that we have begun to make us P grade, but not just not just at the maximum rate yet.
We expect to achieve full rate by late December but.
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 of a more active hedge program. So as you can see there is a lot of noise in our numbers with generating free cash through 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 have achieved over the past few months, including enhancing our liquidity, which we expect to help accelerate our transformation.
We were excited to close on our 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 we than we've seen in the past and secure our path to transforming our 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.
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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 buildout.
Including our strong cash position you can see we are in great shape financially, maybe the best shape and years are 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 Shenandoah and producing value added ultra high protein upon as expected start.
Late Q2 2021.
We are off we have also announced that we have chosen obi and 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 is 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 quick as we can at an estimated initial 15 to 20 cents a gallon uplift, we will be adding $45 million 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.
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 are further upgrading our york location to alcohol Purities above you SP, while we expect York's USBC 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 contract with the flu equip again to upgrade the York location to produce grain new.
Oral spirits, or GNS, which firmly establishes that location as a long term participants in various high value alcohol markets.
Our Mount Vernon location is well underway with his project 24 upgrade and is expected to be complete in the first quarter of 2021, we.
We have also received word from the state of Illinois that our Madison location should receive its permit soon allowing US to proceed with project 24 upgrade at that site.
Given the success, we have seen at 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 and are adding speed to our escape velocity to transform this company and lessons 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 into future. The week. 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 stocks numbers 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 that 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 initiatives.
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 forward.
The quarter, our run rates were 66.8% of capacity compared to an 84.2% run rate for the prior year third quarter. The difference in run rates between years was primarily due to a combination of project 24 at grades 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 as 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 recorded in Q3 of 2009 total.
Adjusting for onetime benefit of $1.2 million and SGN, a in Q3 of 2019 related to reversal of property tax accruals.
DNA for Q3 2020 is generally in line with Q3 2019.
Consolidated interest expense for the company was $10.2 million, which was lower by $2.3 million.
Then the $10.5 million in Q3 of 2019, due primarily to a decrease in overall interest rates and slightly lower balances auto working capital lines.
On slide nine of our investment deck, we present, a summary of our balance sheet highlights we had $226 million of cash and working capital net of working capital financing at the end of the third quarter compared to $288 million for the prior year quarter. The net difference $62 million between Q3 2020 in Q3 2019.
Uhhuh is attributable mainly to a change of cash of approximately $72 million, primarily driven by our capital expenditure program with the remaining variance resulted from changes to net working capital financing the cash and net working capital amount for Q3 2020 does not include proceeds from the recent sale of our cattle business for $80 million.
Our liquidity position at the end of the quarter consisted of $182.3 million in cash cash equivalents and restricted cash along with approximately $349.8 million available primarily under our working capital evolves into late term loan.
This amount also includes $4.3 million available under the current credit facility of the partnership cash.
Capex for the third quarter was $21.9 million, including $3.4 million of maintenance Capex.
With the balance of $18.5 million being allocated to growth capital primarily for project 24, and our high protein initiatives.
Given supported the Metlife loan agreement, we expect full year capex to be closer to the upper end of our guidance of $120 million from 2020. This.
This estimate includes $26 million of Capex spend related to our wood river protein installation.
The majority of we'll buy ins capital expenditures for the announced protein technology installation will occur in 2021.
For Green Plains partners, we had 189.6 million gallons of throughput volume at our 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 rate at Green Plains plant. However, as a result of the minimum volume commitment contracts with Green Plains trade.
The partnership build trade group for 235.7 million gallons of throughput occur.
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 2019, mainly due to a 6% increase in throughput rates charged by GPP offset slightly by other ancillary costs.
For the partnerships distributable cash flow was $11.3 million for the quarter compared to $11.1 million for the same quarter of 2019 on.
On a 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.
But for the 12 and a half million dollars required principal payments amortized during the quarter and 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.
The ways to accelerate the rollout once you're buying is complete we will be capable of producing over 200000 tons annually generally generating 50% or greater protein levels.
We are very happy to announce that we are almost sold out of Shenandoah is 2021 production to the pet food space and continue to work with customers and Pat aquaculture and dairy to take the remaining production over the next few weeks.
What we are producing as a better and higher protein with very unique amino acid profiles and east characteristics than others are producing in the space more importantly, our fiber in fat content is low which is extremely important.
In the past and Aqua space. So that means all protein is not equal and are certainly has an interesting advantage we learned about every day.
There is 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 plains 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 aquaculture trials at our World Class World Class Aqua 11, Shenandoah and he has some very interesting results 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 dairy we have very interesting amino acid profiles that have proven to increase milk yields and studies already that's why.
On top of the Easter benefit in our ultra high protein products. Finally, we have inclusion in all veggie 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 no designs and now high ash economy that are going to distinguish our protein production.
Auction 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 adds to our confidence that we're on the right path to transform the company and lessen the reliance on traditional ethanol economics and it is.
Final benefit that often goes over looked as though is that the protein production from the fluids business process also increased as corn oil capacity by an additional 50% as.
As a result, we could see our platform capacity increased from about 300 million pounds of corn oil production to 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 corn oil in the market, which can lead to an uplift and additional margins as a result, as we're not just going to give this away and watch those markets earn outsized returns on one of the lowest CDAI score feeds.
Stocks in the market, even lower than soybean oil for your information corn oil is 27% to 30 Psi 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 on the back of our feedstock.
When we produced over 450 million pounds, or almost 60 million gallons of low feedstock that as a future opportunity of its own.
Lastly, I want to touch briefly on how our recently announced high Ashley Conti partnership validates and support the long term direction of 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 wholly owned optimal aquaventure and how our ultra high protein can serve as a high quality ingredients delivery mechanisms partner.
Partnering with high actually Connie proves just that and trials already we have seen our ultra high protein product in combination with high actually Connie technologies provide potential aqua feeds solutions that meet the specific needs of our customers challenged by their spcs selection water quality and infrastructure, allowing 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 Ashley Connie as well so what does all mean.
We are focused on 2023 for our 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.
Protein upgrades are completed we will be producing over 700000 tons of ultra high protein with a baseline earnings at 50% protein of $150 million to $200 million of baseline EBITDA that.
That is on a capital investment of approximately $400 million to $450 million add on top of that Youre and Wood River USPI GNS production of 75 million million gallons a year at a historical dollar to $1.50 premium per gallon to fuel grade.
I 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.
We believe when we hit 55% protein. This adds another 70 million to 100 million and earnings over the 50% protein baseline.
At 58% protein another $170 million over the 50% baseline and as 60% protein based on the current mark to market for 60% protein products, such as fish meal and additional $370 million over the 50% baseline. These are based on additional markets that are trading today and all.
This is outlined in the slides in the deck.
I will give you. An example at 60% protein if you use $1200 a ton replacement cost that has over $1000 ton premium to two traditional distillers grains today.
Each $100 a ton.
That equates to a six cents a gallon uplift to margins or almost 60 cents a gallon total uplift in total margins at 60% protein that is not pie in the sky. We have the capability today as we speak to mechanically produce 54% protein at Shenandoah and in fact have produced on average.
We have over fit out of over 52% mechanically separated only protein already.
Over the past three months.
The importance of our partnerships with everyone from novas items too high she cagny to our exclusive pet food relationships all give us confidence we can produce unique value added ingredients at its as it's not just all about the protein that will transform our earnings power of Green Plains, and we are working on other partnerships as we speak and will be.
Cited to announce each one of them as we complete them, we're thinking very differently about this and expect to achieve escape velocity up the J curve that we previously previously discussed with you.
Finally on this topic thinking about what is happening if you look at traditional processing that is taking place at 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 may traditional dry mill for perspective produces three ethanol distillers grains, and corn oil well we have.
I discovered is how to isolate a high protein fraction from the corn kernel, giving us a real fourth product with significant value and now you SPM GNS alcohol, giving us five and six only a 194 other product opportunities exists for us to go after and when we are done with this one.
We can pick and choose the next highest value in the corn kernel and I can assure you that our 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's always been ethanol ethanol ethanol, but I think there is a dramatic shift coming to the drilling 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 we're heading where we are heading across the whole platform. Thanks for joining the call today, and we start to Q and a.
Thank you please limit your questions to normal more than two at this time, if you wish to ask additional questions. Please rejoin the queue and to do so just press star one on your until.
Certainly we will be ourselves pressed upon key.
Our first question is from Adam Samuelson with Goldman Sachs.
Yes, Thank you and good morning, everyone.
Hey, Hi, Adam how are you.
Im good Todd so I.
Lot of ground that was covered in those prepared remarks, and maybe I'm just trying to think through.
The EBITDA layout that you've provided here.
And so we make sure that those numbers right. So 400 million dollar total capital investment to reach that kind of 2024 run rate.
Run rate earnings.
You think about kind of the value uplift on.
On the high protein side.
Yes.
What do you think the upper limit where can you speak 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.
On the technology and customer formulation in terms of value realization.
Yes, so where we're at today is obviously Shenandoah is now producing at full rate we suspect. So thats 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 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 are almost sold out for 2021 out of Shenandoah, Our pet food relationships are beginning to reformulate.
At around these products and are starting to accelerate the demand and we've seen that already so while we're very excited about that at.
That's only one of our addressable market, but actually I think we're seeing more and more companies potentially start to reformulate around our products our product is different than product that others are producing as well because of our protein purity, but also because some of the other characteristics. So we focus on.
Quality quality quality, but we are also innovating with these customers using our relationships with high Ashley Conti, Inovas IMS 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 we'll hit right now there is an opportunity for that at some point in the future, but then.
It goes to pet food Aqua and everything below that so we're not even exhausting the AUC with space and already being sold out in one one plant and we think when we bring on a second plant will probably hit.
Hit that continued to sell out to the patent market and maybe a little bit more into Aqua, but we're also seeing a lot of interest in dairy as well as really just a function of what is the substitution that year that youre. Your product is being used for for example in our dairy customers. They built their going to formulate around the level of protein the level of yeast to lever.
We'll have fat in the level of fiber and then the amino acid profile. So were not when it when you first talked to a dairy for example, they think all I'm just going to substitute for traditional distillers grains and then they look at the product and then look at themselves and say no. This could be substituted for a blood meal. It can be substituted for other very high value corn gluten meal type products. So we're very.
We're excited about that we are 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 were 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 to formulary around those higher proteins and then you get paid for those higher proteins as well so while you might sell the baseline protein a 50, there is scales above that much like you see in some of the weak markets that you would formulate around as well. So we're very confident around these numbers were very happy that we are.
Able to get the forward sales on the books for Shenandoah, the repeat sales as well that the and we're very happy to see customers starting to formulate long term around those products on the on the labels. So.
As we bring on more we believe every plant that we will bring on we'll have.
Basically can be sold out if thats the way we choose to approach the market.
Okay, and then if I could squeeze just one near term ethanol market question in.
Sure as we get into the winter and the slow driving season.
How do you kind of how do you see the supply demand relationship olden methanol inventories ticked up has ticked up a little bit off the lows that aren't that bad yet but how.
How are we how do we.
Okay, and the supply demand balance and capacity utilization over the next three to six months.
Yes, I mean, I think right now we've probably seen the lows in the numbers on the EEI data for stocks and probably production for a little while as we get into into winter driving.
The interesting thing, though is we're coming into the fourth quarter really.
Still at a pretty narrow level of stock below 20 million barrels.
And while we expect probably over the next three to four months as as driving May slow has historically slow down.
We would expect to see those stocks build the only difference this year is that obviously with cove it.
We continue to see draws almost on it but we continued to see draws almost on a weekly basis as driving.
Demand continues to pick up in terms of just week over week year over year, even in terms of people flying less but.
But I think what's also important is what we're not seeing in the numbers, which we believe is the expanded blend rates that are taking place with efifteen being rolled out and in several states and even some at some of the demand that we're seeing increased from from blends as well and thats not inclusive of a little bit of a continued export program pace overall, and we and potentially that.
Pickup over the winter, if China decides to engage once and for all on on ethanol, 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 an 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, our overall, but if you look at the data and you plug 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.
All right I appreciate all that color I'll pass it on thank you. Thank you.
Thank you. Our next question comes from Craig Irwin with Roth capital.
Good morning, and thank you very much for taking my questions. So Todd I Love the slide Slide number 10 from your presentation, it really lays out for us.
The progress over the next two years, so that we can we can expect.
The difficult thing from our side 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 the cheese savings on 24.
The base U.S.P., and then different protein and.
U.S.P. upside potential can you can you just.
Shared the numbers with us now.
So we see sort of the step up sequentially moving into 21.
Yes, I mean, I think we have a stronger finish to the year based on at least the spot ethanol margin running at higher rates moving some of our alcohol sales high quality alcohol sales from Q3 to Q4 and Q1.
You know that market has certainly changed over the last six months from really aggressively taking the low b. grades 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 going to 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 execution of our high quality alcohol our protein.
We still continue to have a good protein margin as well so I mean, I think it will finish the year strong.
I think when we look at the baseline going into baseline 2021.
You can see that.
We're predicting some of the 20 project 24 upgrades to 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 USPI.
At a dollar premium, but the market is higher than that we know that and USPI upside is of beyond that the markets even on the higher side of that today, but there's a lot of U.S.P. coming on so we're going to be conservative in our estimates going forward on predicting what high quality alcohols will be until we fully go to GNS.
Which we believe that at that point, we can we can get longer term given longer term contracts on.
But theres too much USPI believe coming onto the market, but from from a standpoint of us getting there very quickly with York because we are ready made 80% of what we shipped out to York was already U.S.P. grade, but the other 20% just didn't make it. So we would not sell U.S.P. as a company, while others would take the risk and do that and sell a lower quality and we weren't willing to to sub.
The two and take the risk of that so it doesn't take much to get to the final stage of that and even GNS. That's new York used to be a beverage grade facility anyways, 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 GNS, but I think thats. The long term, where you have to go with all of your product I don't believe that.
I think USPI will be there will be great and GNS will be the old USPI grade and I think thats, how the market is going to go and so.
Well, we're also seeing a lot of customers that again initially we saw delays in shipments because of the buildup in 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 we get premiums over 50% pro to 53 to 54 to 55 as we continue to finally start to execute on some of our other biotechnology upgrades and obviously the Hashitani partnership is very important. So I think what we've laid out is a small contribution from ethanol a baseline contribution from alcohol.
Paul a good contribution protein as we're rolling it out.
But even more importantly than that obviously theres 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 finish 2024 stronger or 20, I'm, sorry, 2020 stronger again lots of moving.
Mrs Corn.
Corn 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 an uplift in.
Distillers corn oil values DCIO values into the the diesel and biodiesel and renewable diesel markets.
We are.
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 our product is very important and especially with some of the startups that are happening around renewable diesel.
And when somebody is earning over $2 a gallon on a product that were selling because our CDAI scores. So low we're going to be very stingy with with who and what we sell and 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 field trials that you're doing right now.
You have your own sophisticated aquaculture lab.
At Shenandoah and that they are doing great work to help educate your customers didn't show.
Quantitatively, what hi, pro can do that.
Where do we stand right now as far as active trials and potential trials for products, you're developing with no designs and other partners and.
What's the body of work, we need to see before.
Before some of these large potential customers start.
When bidding.
Much higher prices than what we've seen I mean is there.
Are there specific milestones you can share with us that we should look for.
And I think we're going to do a lot more of that in the next several conference calls as we as we continue to get the results we have ongoing awkward trials today.
Thus far every all the trials both commercially at customer sites as well as in our lab have proven successful in terms of.
Great of gain taste texture, and things like that using high pro alone or as well as high profile combined with our partners technology, we've seen better fillet colors already in terms of what we're getting out of a.
Traditional awkward diet by using high protein ultra high protein that we produce in Shenandoah. We already are seeing that customers are saying that they were already seeing better taste profiles will get much more deep into the technology side of the business in the next several quarters in Q1.
We are starting palatability trials continued our increases in palatability trials for pets, because I think this product will get fully the first several of our plants could fully stay into the pet food market.
And they are really trying to innovate and reformulate around this product, especially as we move into higher protein remember this is a yeast product. It while we talk about protein. This is 25% yields to we're really feeding it for yeast a dry distillers yeast they hold inclusive of ultra high protein beyond that we're going to have our first Easter.
Aqua in in the second quarter, that's going on we continue to work with every single one of our partners whether its dairy.
Whether its aqua, whether it's Pat on 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 Nova Zions, especially and Ashley Cagny and go to a pet food customer and say what characteristics.
You need so that increases palatability or increases gain or it those type of things and it's so while people look at Novas I'd, just say Oh novas items, just going to help you increase protein levels that that's a very short sighted I mean basically today, we're already mechanically able to produce 54.
And working with our partners at fluid Quip, we believe week, we're going to be able to mechanically increase before you are going to have to worry about anything.
Enzymatic increases at all and so really its about now bringing in the Nova times library on top of that to help our aqua and our pet customers develop and formulate products that and we can also innovate with them and I think thats really where you start to think about the transformation of Green Plains look.
Look if you think about of wet mill as Ive 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 thats, where were going ahead and drilling over a long period of time that everybody is going to adopt this.
It takes a lot of capital and it takes a lot of commitment I mean, you just cant 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 it last quarter, we made a lot of negative.
Cost absorption I think we'll need a lot less this quarter in fact, I know, we will going into 2021 as we continue to rollout.
Project 24, our negative absorption continues to go to go down we really want to get Madison started back up but.
Well, we state of Illinois is going to give us our permit to get project 24, going and we have been running that plant. We're still looking at our total portfolio say is there are things, we would swap out and if we even within our portfolio as well as things that don't really fit and there is still a market for ethanol plants I can tell you we've seen active participation in a more.
The partition participation in the long term thinking about ethanol and I don't think anybody transacting at this point, but if you think about even ethanols contribution to renewable diesel there is a lot of there's a lot of potential partnerships that are going to take place there as well so.
Look as I said, we are transitory, it's going to take a little while we're going have a lot of noise.
We are in some of the best financial shape, we've ever been and I think we'll have plenty of access to capital that we will need to build out the rest of this high protein and we continue to talk with partners on that and I think we're on a really good Pat notwithstanding the fact that we're going to have noise in quarters like this but if you think about this quarter. What's the most important thing we generated free cash flow.
So you can look at all the numbers are accounting numbers, yet, but in a quarter like that we are 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.
Thank you. Our next question comes from Ben Thank you Neil.
Please go ahead.
Hey, good morning, everybody.
Good morning.
I've got one short term question and one long term question.
On the short term question the the six cents of negative absorption you called out three buckets the let's.
The scheduled maintenance the profit 24 upgrades and the resale market conditions anyway, you can size those within the six cents and then how do you kind of tease. This in the last answer.
But.
How much of that six cents should we expect to linger into fourth quarter or is it all going away.
Yes, 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 if you break down the absorption two thirds of it is.
Is as plants purposely offline relative to market conditions, a third of it relative to project 24. However, when you think about the other 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 absorption would not have been there had they had prior.
24, which can back they will so so it's a it's a little bit of chicken and egg Elaine if you just look at the strict numbers with respect to Q3, that's the break up but when you think about actually layering on project 24 that negative absorption effectively goes away in 2021.
Got it okay.
Nice long term or intermediate term question is as it relates to hydro and the financing of these projects just based on the current pace, which is been a solid pace of getting these projects.
Up and going.
And it seems like you could kind of get to self funding by mid or late 2022 is that too early is that a realistic timeline and how are you thinking about the threshold at which you start to be able to self fund these projects.
I think we'll yes, if we if we go slower we could probably sell fund.
The projects.
By the middle of 2022.
But it also depends on the protein price if the if we move up the J curve quicker they cellphone quicker, but we want to build them quicker.
I think our goal would be to get obviously wood River Dawn Obi and done and we want to get a fourth or fifth even done.
In 2021, so that would be five total done try to do five the next year and if those probably kind of self fund themselves, but 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.
In 25 to 350 million tons by the time, we get there that that's our the denominator the down denominator. That's what we believe the Mart addressable market, we will be able to go into it.
If green plains builds out their total build out their total platform, we're going to add 700000 tons of supply total into a 12 to 15 million tonne growing market per year on a 325 to 350 million ton total addressable market and.
And so we can't build it fast enough.
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 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 on projects five through 10 by the time, we get there.
Yes, okay, great makes sense. Thanks. Thank.
Thank you.
Thank you. Our next question comes from Ken Zaslow with bank of Montral.
Good morning, guys.
Hi, Ken.
So when you get some of these projects in over the next three four years. What's the end game are you looking to just stay as is and just trying to.
And well expand that will be sold what is the end goal here as you develop yes very concrete plan that has it an end to it and then what happens after that.
Well I think Thats 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 in in diodes 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 are going to need unique products to continue to innovate and what they do as well. So I think what you are seeing number one.
One the.
The question is how far do we go up the J curve on protein and then number two.
What products move on the next level of formulation. So I mean optimal aqua, which we've talked about is all about.
Feed production ingredient production and innovation, especially with the high Ashley Connie partnerships I mean somebody needs to meet the challenges of Rs and there's not a lot of innovation that's taking place.
In addition, somebody has to meet that somebody has to meet the challenges of the fact that when you grow.
Agriculture systems inland Theres, a taste challenge and we believe that's the importance of our partnership with with our our cash economy as well as no designs is that we already believe we have products to address some of those today. So.
Well certainly you have to have your base load of products in your base sort of earnings there's there's addressable businesses beyond that which we are already starting to build with our partners. So I.
I think it's more of let's get this done first.
And obviously on on parallel path, we are building an ingredient.
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.
That you know that that number obviously is very large and on top of that you can continue to innovate ingredients I just think there's.
Ken as you know and you've seen it in soy crushing theres, a big protein hole in the world today, and Theres 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 soybeans left in United States and maybe not a lot of meal left in the world to sell and I think thats. The if you think about it theres not net a height a soybean crushing plant isn't innovating to higher proteins like we are today. So we're not just.
Filling the 48% protein gap, that's existing and Thats why soy crush margins have enjoyed the last five years of demand pill pull from protein and probably into the next five years after that where.
We are innovating to higher proteins, and you're not seeing that anywhere else in any other industry today.
And get ignite.
Another question just a short term what percentage of the capacity do you think will not come back.
After we get through all this.
Hi, good variety of answer isn't curious to see what your answer would be.
Well there is 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.
Theres a president today that is in office that favors the internal combustion engine, which I think is good for Green Plains is good for the Iowa farmer and there is a potential president if the other guy wins that favors obviously TV, but I think also favors low carbon fuel standard.
Was potentially means less.
Less gasoline, but more ethanol just because what youre seeing today ethanol is reducing C eyes, 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 our CDAI scores and less energy use less water use or even our ability to supply renewable diesel.
With a very low corn oil I think what we're seeing is that as the economies recover around the world and people drive more.
They are still too.
250 million internal combustion engines on the road and or more in the U.S. and all over the world and while he is coming I think depending who make who comes in office.
It's all probably pretty good for ethanol demand longer at least for the next three to five years.
In in either in either party, but but more importantly, I think what ethanol will become part of is potentially potentially.
California has low carbon fuel standard movement, but albeit that as an expensive thing to do and we'll see if that really happens, but I think overall.
As the economy recovers out a co bid and we get back to more normal driving patterns and more normal demand and I think we'll get there obviously.
I think thats, 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 hasn't shown a lot of discipline over the years, but maybe this time we will.
Great. Thank you very much.
Thank you.
Thank you. Our next question comes from Jordan, Levy, which relates to security.
One of the top content.
To touch on something you just hit on as well.
Those kind of projects 24 gets wrapped up and what that does to the carbon intensity of the plant and the fuel coming out of it is their potential there to target specific markets on the fuel ethanol side, whether it's.
Looking to get those to California, and realizing the uplift or something along those lines or to the economics just.
Makes sense. So just so the way you guys normally do.
What we've seen is the traditional ethanol industry.
Me too much low CPI for the southern California market and Gameboy, a lot of that margin I think as Lcs spreads potential spreads than we are probably won't there'll be an opportunity to earn more of that margin back on low CDAI scores.
Today, we're focused more on protein and protein development and let ethanol be what ethanol is and it will be a contributor but it won't be the story and so we're not going to spend a lot of money right upfront on deciding we want to just be the lowest API producer because that really hasn't paid off yet although there are several seo two projects.
That are starting to take shape we.
We see them in Texas, we've seen some up north and I think that will help lower the CIA scores a lot.
But again, it's going to be about discipline, and where does the margin go to I think what we've seen is obviously in and bio and renewable diesel they keep a lot of that.
And ethanol, we haven't been able to plug because we just make too much so.
Overall, we are not going to put our bet around low CPI as much as we are about putting all of our future into.
Into.
Into protein and innovation.
No.
We have a big ethanol it is a very classic SG industry that doesn't get any credit for it we use less power use less gas, we use less water and we do a horrible job of selling our SG story to the world as an industry and we are 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 low carbon fuels produced in the world today and getting no credit for that because our story was hijacked as you've heard me say in the past. So we're trying to do a lot more around our yesterday story and what we're doing at Green Plains is so significant even think about protein.
Let's go back to protein in talking about ESG and what we're doing.
However, the more we replaced our product into aquaculture.
And do you think about land use it take a little over one pound of feed to make one pound of gain in aquaculture versus the cattle business. We just sold is 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 discussed as part of our story, it's a pretty big part of the story.
And I think Thats part of the reason why we have such attractiveness from not only our customers, but potential investors and even financing around our lowest lower SG are better yesterday story, and I think you're going to see more and more of that come out, especially got to Green plains.
And we're excited to tell that part of the story, but I think it's a land use play around SG with this high protein as much as it is.
And I would put my investment into that before I, just think seek low CDAI scores as the way to the way the Nirvana.
So it really makes a lot of sense and then just as my follow up.
On on the.
Optimal and the recent agreement as well on the aquaculture markets.
In terms of the high protein.
How the plants rollout is their buys is there a time, where you get to that point of redundancy volumes, where you're at the scale you need or is that something that can be done you know as wood River gets brought online and you don't you don't need a ton of plants online to really target specific customers in that market.
I mean I'll give an example is it really just depends.
On how many products that we are going into but for example, one of the largest poultry companies really doesn't even noticed you until you have 1000 tons a day of something as an industry and today. The us ethanol and are we don't across all of our plants and others that are building, we're getting closer to 1000 tonnes a day, but thats.
801000 tonnes 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 produce 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 at Green Plains, where through our first three or four or five plants could end up in Pat and maybe into Aqua before we even get into other markets, Although I will.
I'll 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 dairy impact.
In terms of meat milk yields from our refining levels and 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 and dairy.
And so we've run we worked on the Cornell studies. This is a this is truly what we think is traditional dairy feeds us has soy passed in it because of the way that it's structured this has actually performed better than soy pass and dairy trials as well so.
We're very excited about it I think that it's going to be even our 700000 tons doesnt make a dent on the world protein demand or world protein supply, but it makes a dent on our company and Ed and even if the whole industry roll this out which I don't think they Wilkes I think it takes billions and billions of dollars to do that so it takes a long time.
Even if the whole industry rolled this out we probably produce somewhere between 7 million and 8 million tonnes total as an industry in a 15 million ton growing demand per year. So we can only produce as an industry half the total demand growth in protein per year, and I think thats why were so excited about this and.
Again, it's just like if you think about a wet mill Theres, a 102 hundred products and we're going to have five and six now and one of those products competes with what some of the high protein that they do but the demand is so big.
Great color. Thanks, so much thank.
Thank you.
Thank you and our next question comes from Eric Stine with Karen Howard.
Hi, everyone that you've covered a lot side just I'll. Just go is one but you mentioned USPI.
At York you'd be upgrade GNS just curious.
Thoughts on doing that it wouldn't river and when you may if you do that when when that may come on line.
Yes, I think from the industrial alcohol business upgraded GNS is necessary, especially at that youre because the cost. It just doesn't cost very much because it was already a beverage grade 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.
No 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 I don't see us hiring a bunch of GNS salespeople I think.
We'll work with other companies that do this and we're talking to others about just.
Basically using their distribution channels, but I don't see us I don't see us again, putting a bunch of GNS salespeople out there, but I do believe that we will participate in some of those end use markets that take the highest quality market, our highest follow alcohol, whether drinking or pharmaceutical or or even or beyond that in terms of wood river, we're going to.
We're going to go to U.S.P. first let's see how we do in the GNS markets Theres plenty of USPI demand and consumer products today.
That we're seeing that or I'm, sorry, you SP 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 as 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 Ben.
Perfect for US was the fact that York was already a beverage grade facility at one point and make such a high quality product already that are passed to GNSS is much faster and cheaper than it would be taking taking wood river there.
Got it very helpful. Thanks all.
All right. Thank you very much.
Thank you and I'm not showing any part of the questions in the queue.
Alright, everybody. Thanks for coming on the call I know, we talked a lot probably spend a little more 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.
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 this as quickly as we can to transform and hopefully can read back through what we what we presented today and and any questions. Please give us 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 that dissipating in today's conference you may now disconnect have a wonderful day.
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