Q2 2022 Green Plains Inc and Green Plains Partners LP Earnings Call
Good morning, and welcome to the Green Plains, Inc, and Green Plains pattern partners second quarter 2022 conference call.
Following the company's prepared remarks instructions will be provided for Q&A.
At this time all participants are in a listen only mode. I will now turn the call over to your host Phil Boggs Executive Vice President Investor Relations. Mr. Boggs. Please go ahead.
Thank you and welcome to Green Plains, Inc, and Green Plains Partners second quarter earnings call participants on today's call are Todd Becker, President and Chief Executive Officer, Patrick Simpkins, Chief Financial Officer, and Leslie Van IMMU, one EVP product marketing and innovation.
A slide presentation available and you can find it 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 statements are based on current expectations and assumptions that are subject to risks and uncertainties.
<unk> results could materially differ because of factors discussed in today's press releases and the comments made during this conference call and in the risk factors section of our Form 10-K Form 10-Q, and other reports and filings with the Securities and Exchange Commission.
We do not undertake any duty to update any forward looking statement.
I'd like to turn the call over to Todd Becker.
Thanks, Bill and good morning, everyone and thanks for joining our call today, our second quarter financial and operating results further position the company to succeed in our transformation as we start to gain volumetric critical mass in the last few quarters of 2022 heading into 2023, where we believe we will hit critical inflection points that are proof we are.
Executing on all phases of our plan.
We've laid out to you and begin to demonstrate what is possible with our modernized and upgraded platform.
As a planning and execution on our modernization plan that have enabled us to run.
At 97% of operating capacity in the quarter the highest since Q4 of 2013 and we believe we can still go higher as we continue to optimize the plants that recently started back up in quarters, where we don't have turnaround schedule three.
During the second quarter, we achieved EBITDA above our indications on our prior call overall, EBITDA was $84 4 million, including $27 7 million of Covid relief from the USDA.
Even without the payment our EBITDA from operations was over $56 million as margins remained strong and the team executed well to deliver the results. We reported this morning, our financial results also benefited from our natural gas hedging strategy, which we had been mentioning on our calls since late last year.
On paper consolidated margins continue to be positive into the third and fourth quarter with risk mainly from the physical corn markets historically high basis, although we have seen some signs of weakness in some of the geographic areas, where we operate but we are closely watching that and the conditions of the U S. Corn crop driving demand remains volatile it could impact overall usage in the last half of the year, but.
<unk> have remained steady through July on paper today, we are tracking mid teens per gallon consolidated crush in Q3 and in Q4. We are currently tracking much stronger margins with new crop corn factored in startup of additional MSE facilities and continued strong contributions from Cornell pricings, yet still can be impacted by a smaller than expected.
Corn crop are strong physical corn basis levels, continuing to harvest, but overall, we should finish the year in a strong position both financially and strategically based on todays markets.
As I indicated contributions for low carbon renewable corn oil remained strong as more renewable diesel plants come on line over the next year. In addition, our production yields have also trended higher with our platform, reaching a new high led.
Led by our MSE locations, averaging one two pounds per bushel of oil yield for the month of June as we continue to seek ways to maximize our overall efficiencies and operating performance.
We are constantly discovering new improvements from quality to quantity increases that set the company up and quite frankly, the industry to be a beneficiary of this product contribution for a long time.
Especially with the latest federal clean energy tax legislation, if it passes which I'll discuss later on the call.
On the commercialization front, we continue to see strong interest in our 50%, 60% protein products from Latin America, Southeast Asia, as well as domestically and other locations worldwide I.
I would like to discuss some of our great progress later in the call when we when we dive a bit deeper.
Also announced an exciting partnership during the quarter with the largest truck producer in the Americas River ends.
This led to other interest globally for our innovative products construction on our MSC facilities is moving ahead in our central city location in Nebraska is currently undergoing commissioning and startup activities for the first MSE system, which is very exciting.
And commissioning will begin in late August at Mount Vernon and early October Ed O'brien.
Construction on these projects is nearing completion.
Our team did a great job of executing on the project staying on budget and delivering major projects within a few months of when we expected them to start up we have been we have begun engineering. The MSE project at superior, Iowa, and anticipate breaking ground in November Madison, Illinois next analyst can we expect to break ground on that project early next year.
These projects will take seven to 10 months to complete and our estimate estimation we have.
Made some progress for permitting in Minnesota, which may lead to those plants being completed earlier than expected as well we are planning to break ground on our first commercial Queen sugar facility in Shenandoah. This month and equally exciting construction has started at our MSE turnkey JV with tariffs and ethanol dairy.
During July we converted the remaining $64 million of 2024 convertible notes to common stock.
Each continues to strengthen our balance sheet with our new revolving credit facility with sustainable sustainability linked targets completed early in the year, which further cleaned up our balance sheet. We know who we have now reduced any material near term maturities when combined with the liquidity we have in our balance sheet with over $600 million of cash and a positive outlook for the balance of.
For the year, we remain in strong financial condition to continue executing in deploying capital towards each of our exciting transformation initiatives.
Green Plains partners increased our distribution for the fourth quarter in a row to <unk> 45 per unit.
And Patrick will dive deeper into the results and with that said I'll turn the call over to Patrick to review our financial performance. Thank you Todd and good morning, everyone Green Plains consolidated revenues for the second quarter were just over $1 billion $288 million higher than the same period, a year ago, driven by higher prices for ethanol distillers grains corn oil.
Combined with significantly higher run rates, our plant utilization rate improved year over year to 96, 9% win rate during the second quarter comparing favorably to the 79, 9% run rate reported in the same period last year.
The completion of our modernization program and our focus on continued production improvements reduced fixed cost absorption.
Help improve margins long term for the quarter, we reported net income attributable to Green plains of $46 4 million or <unk> 73 per diluted share compared to $9 7 million for the same period in 2021.
EBITDA for the quarter was $84 $4 million inclusive of the USDA COVID-19 payment of $27 7 million compared to $50 9 million for the same period last year for the quarter higher production run rates improved corn oil yields and contribution from protein sales allowed the company to exceed prior year same period performance.
Which included optimization and mark to market gains for the period, we realized 28 cents per gallon consolidated crush significantly higher than the first quarter, but lower than the prior year, Our AG and energy segment also came in higher versus 2021 due to improvements in our merchant activities as well as higher realized margins in our grain handling.
<unk>.
For the quarter, our SG&A cost for all segments was $31 million compared to $23 $4 million in Q2 of 2021.
The increase of approximately $6 $7 million is driven by a number of factors with the majority coming from increased personnel costs, driven by higher head count and wage pressures along with higher professional fees in support of our transformation, we expect SG&A to remain higher for the balance of the year coming in around $28 million per quarter as we support continuous <unk>.
<unk> efforts in digital transformation plant automation and commercial development all necessary for execution of our strategy.
We believe these efforts will enable the company to sustained lower operating cost and improve margins long term.
Of that amount, we expect corporate SG&A cost, which came in about $16 7 million in the quarter to be right around $15 million to $16 million per quarter for the balance of the year.
Interest expense of $7 8 million for the quarter, which includes the impact of debt amortization and capitalized interest was $11 $3 million favorable to the $19 1 million reported in the prior year second quarter, mainly as a result of a $9 $5 million charge related to a private settlement of a portion of our 2024 convertible.
What's incurred in the prior year quarter.
As noted in my last quarter comments, we projected cash interest expense to be on average about $10 million per quarter, but now expect that number to be about $10 $5 million per quarter as a result of a higher rate environment.
Our income tax expense for the quarter was $2 9 million compared to a tax benefit of $4 8 million for the same period in 2021, resulting from a cumulative valuation adjustment to our deferred tax asset which is reassessed quarterly.
At the end of the quarter net loss carryforwards available to the company were approximately $104 million, which may be carried forward indefinitely.
Our normalized tax rate for the quarter, excluding any valuation allowance adjustments was 19, 1%.
On slide nine of the earnings deck, we provide a summary of the companys balance sheet as shown we ended the quarter with $629 million of cash and working capital debt.
Net of working capital financing compared to $698 million for the prior year quarter.
Our liquidity position at the end of the quarter included $604 2 million in cash cash equivalents restricted cash and marketable securities along with approximately $70 million available under our working capital revolver.
For the quarter, we allocated $66 $3 million of capital to profit sustaining and growth projects, including $47 $7 million to our MSC protein initiative about $7 $3 million to other growth projects, including our plant modernization initiatives and approximately $11 $3 million towards maintenance safety and regulatory.
Capital.
We continue to anticipate capex for the year $250 million to $300 million based on our 22 2022 plan and current construction schedules.
Turning to the partnership we continue to realize consistent performance earnings and cash flow realizing adjusted EBITDA of $12 9 million slightly higher than the $12 7 million reported for the same period, a year ago with volumes now trending upward as a result of higher run rates at the parent we expect volumes well above MVC levels as.
A result partnership continues to support higher return to unit holders increasingly quarterly distribution to <unk> 45 per unit, while maintaining a one six.
Six times coverage ratio for the quarter for.
The partnership's distributable cash flow was $11 $3 million for the quarter in line with the $11 2 million for the same quarter of 2021.
Over the last 12 months the partnership produced adjusted EBITDA of $51 $2 million distributable cash flow of $45 million and declared distributions of $42 million, resulting in a one seven times coverage ratio, excluding any adjustment for the required principal payments amortized over the last year now I'd like to return the call back to Todd.
Yeah. Thanks, Patrick Okay, So let's get into it again this quarter our progress since we began our transformation has been remarkable but in some ways. We are only getting started as we believe what we are doing with our company is in the early innings of what is truly possible our plant utilization levels and corn oil yields are hitting new highs. This is important as we have said man.
Times are modernization of the Gen. One platform was in preparation for our technology transformation in order for the Gen. Two technology to platform to run every single day.
The financial transformation to recurring predictable growing and non volatile cash flows is predict predicated on the total production unit running well operating safely and protecting our team members at the same time.
Despite gasoline usage being depressed by high prices at the pump we've seen ethanol blending remains strong and at times some of the highest levels ever as a percentage of the gallon.
We are still the most affordable clean octane molecule on the planet and having the ability to sell a 15 year round for the fourth straight summer with potential growth in state and national low carbon fuel standards. We will continue we believe this will continue to provide tailwind does gen. One business.
It looks like Congress might be on track capacity clean energy Bill that has potential to be positive for many aspects of what we do at Green Plains as proposal legislation.
We'll expand.
Extend the dollar per gallon biodiesel tax credit for two more years, which impacts positively our low carbon renewable corn oil created clean fuel production credits starting in 2025 for all renewable fuels, depending on greenhouse gas emission levels create a new tax credit for sustainable aviation fuel, which could include corn ethanol alcohol to debt and our.
Positive way spending.
Expanding to $45 two tax credit for carbon capture to $85, a ton, which can help decarbonize, our company faster and provide $500 million infrastructure.
Ending to fuel retailers $3 15 for higher blends. So we believe green plains is uniquely situated at the Nexus of agriculture technology and energy to deliver solutions to the market and value to our shareholders.
After our successful protein trial, we discussed last quarter, we have turned to executing a global sales an outreach program and are beginning to see success. What is unique about green plains, where not only own and control an amazing IP portfolio, but we can do things with our units that are truly only possible because of this some of you have seen the end to end system that.
It's been built around innovation with three centers.
All focused on product use in development, our customers have seen the benefit and can see the benefit of using our MSE Ultra high protein products are for what we do.
What we referred to in commercial circles as corn fermented protein <unk>.
Firsthand from feed formulations to feed production to feeding that product to their animals to seeing the outcome of the use of the product and everything from salmon tilapia to pet food to swine poultry and a result of all of this is better customer and customer engagement and commitments.
So as we said we are excited to be partnering with reverence under development of nutritious feeds aimed at trout and salmon market domestically and globally and are already beginning to work on the feed mill in Idaho that will be part of the JV. We continue to see great progress in our discussions with customers in Latin America, Southeast Asia, and domestic markets as well as other global markets in both our 50.
60% protein products.
We are in the final stages of securing in country distribution agreements distribution agreements in key markets that allow us to partner with companies with an existing infrastructure to reach customers without having to expand our own logistics and those markets, allowing us to achieve market penetration more quickly.
We expect we expect to have several finalized over the next few weeks you have to remember in some markets. These ingredients trade in as little as 50 pound bags, but the opportunity for expanded margins and good volumes are even greater this is on top of all the work we are doing with some of the largest customers in the world in pet and agriculture in swine and poultry.
Lastly on these points of view are seeing as you are seeing the global protein markets show some of its true colors, if prices have accelerated higher recently, which has been beneficial to our margin structure is going forward.
It is our expectation that our primary product from MSC in 2024 and beyond as well as increasingly during 2023 will be the production of 60% protein even as our day to day production continues to be around 50% since our primary customers where in the pet space. When we started up wood River and Shenandoah.
As we build more and more customer demand, we will pivot to 60% protein as a need for this product remains very strong based on early indications.
As I said one of the strategic reasons, we partnered and subsequently purchase fluid quip with our partners was the fact that the technology had a lot of upside in terms of performance. One example of this success is our best 30 day run at Shenandoah happened during the quarter with corn oil yields near one two and protein yields exceeding four pounds per bushel and we are now.
Starting to see yields exceed four and a half and five pounds per bushel as well.
To revisit our thorough and JV it will be the largest MSE project in the world and we are taking every step to ensure successful build and launch.
We anticipate that for this facility to begin commissioning in mid 2023. We're also in discussions with additional potential JV partners not just domestically, but also globally.
I'm confident that some of these will come to fruition over the next several quarters, but our focus remains completing our platform first.
Low carbon renewable Cornell continues to be a strong contributor to our bottom line second quarter had a record high with MSC plants pushing towards our stated goals of one two pounds.
Clearly clips launch of technology that increases oil yields in a single unit of operation for third parties continues to garner significant interest at a game changing technology to expand the plant's ability to produce more low carbon renewable corn oil with the demand growth from renewable diesel continuing unabated, we believe strong pricing for low carbon veg oils.
First of oils should continue no matter how much corn oil is made in the U S. As I mentioned earlier. It is further advantage under the newly proposed federal tax credit program.
We have yet to make any announcements about potential partnerships, where we continue to engage in substantive discussions.
And see strong and growing benefits from our low carbon renewable cornetto strategy in the meantime.
We have always believed this goes beyond merely an off take agreement and we can remain patient on this front as the earnings remain a significant contributor to our overall business.
We are planning a grip plagued break ground on our first full scale clean sugar technology deployment in Shenandoah. This month, we believe that our growing biocatalyst and Shenandoah will be truly revolutionary for our company and the bio economy.
We have great confidence in our ability to produce significant quantities of low carbon dextrose and glucose from a dry mill plant. We also know we have to demonstrate the potential to the market.
With that said because of our work to produce product at our semi commercial facility in New York, We have ongoing discussions with several potential co location partners and off takers as we speak our product continues to be validated and accepted as a direct replacement for what a wet mill make wet mill mix with a lower carbon intensity and we.
Can customize the great on the fly we recently signed a letter of intent with a co location partner, who is anxious to work with us on completing their project. So they can begin to deploy their own revolutionary process in food production. We believe this is the first of many to come from food to chemicals to bioplastics and even more innovative partnerships than that in other areas that.
The dextrose and glucose and their process in the meantime, once that facility is complete we will be able to ship product by truck and railcar to end customers while the over the fence initiatives are completed we.
We believe our sugar strategy could accelerate quickly from here, but getting the first one done is our current focus.
The last of our strategic pillars is our strategy around carbon or better said the carbonization.
If the new Bill passes with a 45 Q increases with direct pay just about any carbon project can be viable from clean biogenic carbon we produce to the other types as well the operator opportunity set will only grow from here with regard to the summit pipeline to continue to make good progress on the right of ways and we are on track for 2024 and 25 startup.
At $85 a ton our eastern plants become very interesting for other potential opportunities and we should be able to monetize those as well and we continue to look at these opportunities and I also think patience will be rewarded in any of these issue on any of these programs.
We believe alcohol to jet will be a reality in the future, which can substantially revalue the whole industry and we are positioning ourselves to take advantage of that opportunity as well and I will close with that on our on our strategic topics. So as you can see we have many initiatives that we are going to be bad debt are going to be beneficial for our shareholders now and into the future.
We have never quite seen a time like this in the industry that is on the verge of incredible outcomes and so while we still deal with the volatility of the Gen. One assets and business. We can see the future and has never been more exciting for Green plains. Thanks for joining the call today and we can now start the Q&A session.
Certainly ladies.
Ladies and gentlemen, if you have a question at this time, you will need to press star one one on your telephone.
We ask that you. Please limit your questions to no more than two at this time.
I wish to ask additional questions. Please rejoin the queue.
Please standby, while we compile the Q&A roster.
Okay.
And our first question comes from the line of Jordan Levy with truest.
Okay.
Good morning, all can you hear me.
We can hear you thanks Jordan.
Yes, yes, clearly nice clean quarter, you all put up.
Yes.
Hi, Chris rather than just operationally it looks like it was a really clean quarter I wonder if we compare this to <unk> 21, where.
Where we saw kind of a similar margin environment can you maybe walk us through how youre thinking about GP aerie today compared to a year ago, both operationally and from a financial performance perspective, and what I'm getting at here is I know you all breakout hydro in the other segments, just yet, but what are sort of the parameters, we should be looking at to track all the work.
We can have done and continue to do in the transformation are starting to flow through to the results there.
Yeah.
Yeah, I'll talk a little bit about and let Patrick talk more specifically, but Q2 of last year included some one timers.
From optimization and market Mark to market. This was a much cleaner quarter, just kind of shows the capability of our system higher operational run rate better contributions from corn oil better contributions from protein and in all of our initiatives that are taking place. So I think when you look at it it's really.
We don't really compare those two very well I think what youre seeing is the future of our company this quarter versus last year at the same time you saw us have a lot of noise that was still happening within our business I think our ability to increase the capability. It increased the capabilities of the plants that we have even back then some of those plants weren't even online or their online at <unk>.
A very low operating rates, so I think really where we're at today going forward is that what we had said as we got to have a really strong gen. One generation one platform. So the generation two can be built and.
And operator and succeed every single day and Thats really what were seeing so from the technology side we.
We have more deployments coming on and we have Shenandoah and wood river running a full quarter.
And overall I think the company is in a very different position than it was a year ago.
That's great and maybe as a follow up if we can jump back to or at least a few months back with the river. Its announcement I know you mentioned in your prepared remarks the <unk>.
Starting to do the work on maybe if you could just walk us through some of the timeline there and then the implications of that partnership both with <unk> and with other customers in the Aqua space.
So I think I think the key point there is they're a great partner good friends of the company, we're working together on.
Outcomes for their for their production using our products in many different ways and working together on developing those rations and I think what we get out of that.
Some of the leading genetics, if not the leading genetics and salmon in the world and we get to see how our product performs and if you've been to Shenandoah and many of you have on the call. We're actually doing trials right now on those products. So what that really did is it garnered attention globally.
<unk> the industry and we've seen our related activity accelerate.
Of that with large players around the around the planet that need alternatives.
To what they've had in their rations before to feed whether it's to a variety of Aqua culture speed the species. So.
And I think what it did is it put us on the map to say, we have unique solutions for the global agriculture industry, where they can get into plant based corn fermented products that we've shown in the past on some of these calls and in our investor meetings.
What it looks like when your feet a product like this from flash to performance to feed conversion ratios to the ability to start to reduce their dependence on on.
Soy and the anti soy Nutritionals and I think.
It was just the first step in a multistep process, but it really put us on the math from that perspective, I think what's unique about green Plains is and I said it on the in my remarks.
Because we do on the technology.
We can do different things with this technology that really nobody else can in the world, whether we want to increase yield of pounds per per bushel or what are you. What went on in increased protein or additional characteristics. We can start to maneuver back and forth on all of those depending on the customer needs, where we have we have a lot of interest in this product in agriculture globally in.
Especially towards the 60% protein because of that announcement.
That's great I'll take the rest of those questions offline. Thanks guys. Thank.
Thank you.
Thank you.
And our next question comes from the line of Adam Samuelson with Goldman Sachs.
Yes, thanks, good morning, everyone.
Good morning, Adam Good morning, So Todd I was hoping to maybe.
Talk a little bit about the.
Some of the actions in Congress right now and.
As you look at your network today.
Clean fuel producers credit in 2025.
What what do you think the Ci score of the footprint would be or could be at that point.
When you when you factor in.
Yeah.
And the sequestration, there and just to confirm.
Because you can't my understanding is you wouldn't be able to double dip between 45, Q and the clean fuel producers credit just the legal entities would be separated so that you could still.
Paid in both programs as needed economically.
Yes.
Talk a little bit about Ci score and we have Devin Boeger here, who is our government relations VP as well I think maybe comment a little bit about on that as well.
Why you asked the question so from a Ci perspective, we know the first step that we're going to do is reduce the ci because of.
Carbon sequestration and obviously.
Whether it's on a pipeline or whether its direct inject whether its in other products, whether it's something like that.
It starts to go down significantly and then beyond that even at some of our products as well, we're seeing opportunities around taking some of our platform and doing something called an <unk>, which reduces ci scores on a portion of that into an advanced biofuel opportunity as well and thats happening in Gen. One right now which is.
Not commonly known in the world, but the Gen. One platform, we will start to produce probably across the board in many plants. Some advanced biofuels as well because of how fermentation has been changed over the years. So.
From our standpoint, when we look at the Congress and what they are talking about obviously the biodiesel extension is helpful to renewable corn oil.
The sustainable aviation fuel.
We strongly believe.
And have a great conviction now that corn ethanol.
And all of the jet and alcohol to jet is going to become more of a reality I think than people are giving this industry credit for and then obviously the $85 really allows us to focus on projects that we may be.
Sure.
On the edge of being successful at two now can be very successful with things like our eastern plants, where maybe we didn't have perfect geologic formations underneath the plant, but now you can start to thinking about piping at five or 10 miles to a better geologic formation because of the tax credit allows you to do that and I think thats beneficial to us as well so when we can.
Get to $2025 on the base business.
A lot of our plants that are on pipelines are doing projects could be going from an average score of 65% or 70 down to an average score of somewhere between kind of 30% and 40% for this before we even get started on other opportunities like.
The way that we produce energy is or combined heat and power is a topic we have.
Basically to take ingredients that we produce or maybe sell cheaply to convert that into energy. Those are all on the verge as well. So this industry is decarbonising in front of it right in front of our eyes and it might be take a few more years, but I would say this industry is somewhere going to be somewhere between.
Zero to 35 on average overall, Devin you I'll talk a little bit about the clean production fuel credit sure.
As Todd mentioned after two years, the biodiesel tax credit shifts from a $1 across the board to being based on greenhouse gas reduction and so that further advantages are desio. So it gets the Ci credit not only at the federal level for being low low Ci waste oil as well as the California, or Canada, or Washington State of <unk>.
Oregon credit as well so I believe there's a lot of upside there are being able to double dip on that low <unk>.
But just to be clear the ethanol as well would qualify that you sell just generically apart from just the renewable diesel from from Cornwall.
Correct with a low enough Ci as long as it has greater than a 50% GH reduction it can qualify for that program as well in addition to any California credits.
Okay perfect.
Okay, and just my questions I'll pass it on thanks, so much.
Thanks.
Thank you and our next question comes from the line of Christopher <unk> with Oppenheimer.
Great. Good morning, Thank you for taking the question.
I wanted to ask a little bit about the 2022 outlook that you provided last quarter. The 140 to 160 corn oil 40% to 60 protein how much of that roughly would you say we've captured to date and I'm really just trying to think about sort of the exit velocity of that business as you get these additional facility.
<unk> online in the back half of the year.
What that means for those businesses in 2023.
Yes, I mean, we're still basically on track to hit within the ranges of those numbers subject to obviously, we want to make sure the plant startup of well corn oil pricing.
Still remains.
If its highs, but overall still remains at a premium to soybean oil today in the market and I think with more <unk>.
That's coming on in the last half of the year and into next year. I think we will continue to remain strong relative to soybean.
Soybean oil pricing and we have a great product with a low carbon score now we're seeing a lot of strong demand from that from the protein standpoint.
We're really focused on escape velocity out of 2022 into 2023, when we when we leave the year. We will have about 560 million gallons of our 950 million gallons converted and operating into 2022 2023, sorry.
And more coming on in 2023, so when we start to look at.
Our 2023 outlook, our corn oil volumes will go up our protein volumes go up and Thats really when we start to see critical inflection points, especially if we can get our partnership in North Dakota started up in middle of next year. It gets superior online as well as quickly as we can we're learning how to build these a lot better faster quicker and potentially even cheaper with some of them are.
<unk> pricing coming down so.
Right now we remain kind of on track with our guidance through 2024, and 2025, and we're seeing some things even within that.
It makes us very confident we can hit those numbers and beyond.
That's right.
Really helpful Todd.
Wanted to ask one follow up question related to the river and <unk> agreement and you sort of talked about what that means for this particular market, but I'm just wondering what the cadence of customer conversations have been like since you made that announcement and you touched on it briefly in your in your prepared remarks, but just wondering if you.
Could expand on that for us. Thank you so much.
Yeah, Thanks, I'll talk a little bit about it I'll, let Leslie close on those comments, we are basically now because of that enel.
Announcement.
It's really that is a really important not just on its own merits I mean, I think the partnership is extremely Val.
<unk> both parties I think what we're doing and potential product development is going to be valuable, but what it allowed us to do is really kind of go around the world and talk about and meet with players that need replacement protein products as you see reduction in production, whether it's going to be from the black sea, whether it's going to be from South America.
We're seeing some of the true colors of the protein markets.
Collide, especially what we're seeing in fish meal, as well with Peru and.
And some of the some of the quota is there. So as we indicated we have from that we are in process of finalizing several distribution agreements that we believe will complete it will not only be completed over the next several weeks, but we'll start to execute on those and those are everywhere from South America.
Into southeast Asia into the Mediterranean in Africa, as well as even in Mexico that we're working on distribution agreement. Those are countries that Green Plains has a has a nice reach around the world, but we're not in country storing and distributing products and so we found great partners around the world that have great.
Customer context, whether it's going to be in aquaculture swine in other areas and Pat even in some markets that now we can really move our product more efficiently and quicker into into markets and so it really led to the.
The reach out back to Green Plains from global customers wanting to see the results from trials and agriculture wanting to see.
The positive results that we get and lack the pigmentation and sometimes the opposite from ingredients derived from corn. So I think generally it really has led to expanded activities not only in country distribution agreements, but really with some global players that are looking for alternative protein ingredients a level youngest close on that yes I think.
The other thing to recognize is that.
The <unk> agreement for an announcement came on top of our 60 pro announcement from early this year. So when we made the decision that we wanted to go deeper in agriculture, because we see tremendous growth opportunity a lot of things have been set in motion. So.
To put it in a positive perspective, it was really more a positive title wave that is coming to us from the response from not just a critical players in the feed industry, but just the embrace to continue development on the ingredients by doing the test as Todd mentioned.
Some showing data for growth absorption.
Digestibility.
So everything came together really nicely assets and another piece of confirmation in that partnership to guess it really shows how participants in the value chain can really deliver better better quality ingredients and better quality fish.
Great. Thank you so much.
Thank you.
Thank you.
And our next question comes from the line of Manav.
Thank you.
<unk>.
Hi, Dennis.
Paul.
We revisit this entire REIT.
Conciliation real time with Bill finally, it looks like the administration is doing lot more on to fight climate change and there are multiple provisions in their blenders tax credit extension sustainable aviation fuel and 45 <unk>.
And then it can be impacted by BBC, but then it can be impacted by <unk> help us understand when you look at that Bill.
The things that excite you the most and we think GP Audi benefits the Maus Trump.
Well I mean, you basically mentioned.
What's really exciting about that bill just basically cements. The fact that the ingredients we are making in the products. We make are in demand and de carbonization is the path forward and so we focus on obviously lowering our carbon scores across the board on all of our products.
Low carbon corn oil.
Can be low carbon proteins, we're going to have low carbon sugars sugar's growing into clean chemicals Green chemicals I mean, all of this is basically telling us that we were ahead of our in our thought process around investing behind these products across the board.
From the standpoint of alcohol to jet that's probably the one that I think.
It's really under played relative to what this in our company and even this industry because this industry capabilities to really make alcohol.
Sustainably.
Sorry, sustainable aviation fuel a reality there is only one industry that can gain critical mass to give you to give the world significant quantities of sustainable aviation fuel and thats going to the ethanol and that's going to be the alcohol and ethanol industry any alcohol. We produce now technologies have to continue to get pulled forward, but whether it's what you've seen out in.
The market already or are things that are in the background. Because there is other technologies that I think youre going to see it get pulled forward theres going to be multiple opportunities to create a sustainable aviation fuel from from alcohol as well so.
I just think when you look at all of this even the infrastructure on <unk> 15, and higher blends as a $500 million allocation, there and we continue to press and try to get the mlps, even though somewhat.
A nascent.
Industry today of Mlps Hasnt.
It has been some talk of even going to renewables and mlps as well and we continue to press forward on that so.
I think across the board.
Generally very positive to ourselves our industry, others that make renewable diesel any company that really can benefit from any of these including carbon capture revenue on anything else on that.
Sure.
Perfect. Thanks, a quick follow up here is I think on the last quarter call you were very clear.
Sure.
John So I'll make this process than the initial thoughts where there was a negative cost absorption and that was one of the reasons that earnings are coming in a little weaker bookings for Q1, Q and what you had indicated was that the majority of that negative cost absorption bought had already been done. So when you look at it.
It looks like it's in line and I'm just trying to understand does that statement still staying true that a majority of that negative cost absorption associated with the transformation process is now behind GP Eddie.
Yes, I think that is correct in general we had absorbed a lot of negative cost as we are modernizing our plants. So that we could set ourselves up well to execute against our transformation because of generation of one plant has to run everyday has to run well and have to run.
Towards at lower cost and so that's the reason we spend a lot of time and money on getting our plants with high energy use down to lower energy use now I still think from the standpoint of where the industry is today and where we're at today, we've seen significant inflation in some of the chemicals that we use so I think some of that ultimately.
As inflation subsides over time, we will come back down that has driven the general cost of the industry higher labor costs, obviously had gone higher that probably won't reverse.
And then some other things that have.
Inflated during the last couple of years potentially we will drive will drive costs lower but it's really for us. It's about running these plants as hard as we can every single day, making sure our whole platform runs well.
The wet Millers say, it's all about grind baby grind, but.
A dry mill standpoint, and what we do in conversions, we look a lot like a wet mill. After our conversion that means you have to grind every single day as hard as you can and the plants for the most part are fully set up to do that we have some final little things that we will continue to work on that seem to.
Stay a little bit longer, but overall, our modernization program is effectively complete but it's never done.
We're going to continue to see where we can drive costs more out of it in the future.
Thank you for the detailed response congrats on a good quarter and beyond this bill passes so we can decarbonize.
Yes.
Thank you.
Thank you.
And our next question comes from the line of Eric Stine with Craig Hallum.
Hi, everyone.
Hey, guys how are you doing.
Doing well.
Good.
Good.
So.
I just wanted to talk a little bit about clean sugars, just curious as you think about that.
Obviously, you started with Hy pro and you're progressing there I mean for clean sugars do you expect a similar timeline in terms of when you get to commercial momentum is that a few years out or.
Kind of given.
Some of the progress youre, making in other areas does that potentially speed up the timeline on.
On the clean sugar side.
Yes, I think what we laid out for 2425 is still hold the lease from a rollout standpoint, Queen sugar is a little bit of a longer game.
Will we start to build our Shenandoah plant as we speak.
And we're working with large customers.
That need dextrose for their processes and so the great thing about what we do is it's lower carbon we make the exact same product.
Comes out of.
The current production of a wet mill, we can make it a 95 day 43 day and give them product refined our unrefined filtered air unfiltered and we can give anything they want to do on the fly and Thats a very different.
Proposal than what they can get traditionally.
In the past at a co location because a lot of them don't really want some of the some of the sugars that are only available to them. So we give them a different alternative we're talking with customers that range from.
20 to 30 million pounds, a year to 300 million pounds, a year and bigger right now as we speak and we're trying to convince them that we are we are the best alternative to build their co location site and we're starting to make great progress in our first site in Shenandoah. The great thing is it's a great. It's a great community in a great County in <unk>.
And with excellent workforce and that's part of when you co locate next to Green Plains, you want to make sure the workhorses there.
For the co location plant and we're starting to see that.
Our first step in Shenandoah, we signed our first LOI.
Which we're very excited about it's a fantastic opportunity to prove out and continue to prove out our technology.
We think that ultimately.
As we had said.
The margin structure is significantly greater and sugar than it is in protein to start now at 60 pro it starts to get up there but.
In terms of the first cut margin in sugar, it's still significantly better than anything we can do in protein again quantities may be a little bit smaller to start but ultimately over the next kind of five to 10 years. Our view is that we have we own the leading technology, we have a leading technology, where we're willing to put our money where our mouth is build the plant and we have.
Significant customer engagement opportunities, both domestically and globally for these products and we're very excited about it.
Got it.
Great color.
Maybe last one for me just turning to the renewable corn oil.
And renewable diesel space I mean, just your updated thoughts on whether you prefer long term contracts potentially spot or <unk>.
Mix of both immuno, maybe where your where your expectations are now knowing your work in turn something in the future.
Yes, theres nobody willing today to anybody in the world is going to self pay you. This well they would if it's cheap enough, but I'll tell you. This much for your oil for the next 10 years, that's not what's happening in the market, it's a little bit more of.
What's the opportunity set what can how does green plains sure how to Green plains shareholders benefit from that if I want to just sell oil and lock in price I have three years of forward curve in Chicago Mercantile exchange I can go and start to edge oil or find somebody in the over the counter market to do that as well. So I just wanted to hedge oil I can do that by one.
I'm never worried that I won't have a home.
Or the industry actually in general we're.
We're not worried that we won't have a home for this oil as it is.
Significantly lower carbon intensity and what happens in soybean oil and other veg oils theres only one lower than US today I think we're going to continue to drive those carbon scores lower we will see what happens if carb takes a re look at that again because of the carbon carbon sequestration out of oil how oil qualifies in low carbon fuel markets. So we're very confident.
That what we have is very valuable as we get to the end of our <unk>.
Program building out our own plants will be pressing towards 400 million pounds, a year, while not the biggest in the world.
The top five of corn oil producers.
And we think we provide a very strategic feedstock to somebody who wants to make it very compelling for us to lock our lock or our volumes in but it's more we're not just looking for an offtake. We're looking for a partnership we're looking for some opportunities that really drive.
Above and beyond just me just us selling oil as a company and I think we're going to get there.
We continue to remain in discussions with several parties on different opportunities that we think would be beneficial.
And I think it's just a matter of time, but in the meantime look if we stay in.
We don't do anything it's going to be a fantastic contribution to cash flows in the future.
Yes understood. Thank you.
Yes.
Yes.
And our next question comes from the line of Ken Zaslow with BMO capital markets.
Hey, good morning, guys.
Good morning, guys.
Can you talk about the economics of hydro how much will you actually realize the profitability of what the economics in play.
Yes. So we initially said when we rolled out our 50 pro or basically as an alternative to soybean meal at 48% to 50 Pro. We initially said that initial margin is 12 to 15 cents a gallon equivalent.
And we also said when you're trying to go higher than that it goes to a little bit higher in the low fifties. It goes 15 to 25 cents a gallon equivalent and then we're still in the 60% protein and that 40% to 50 cents, a gallon equivalent as well and Thats. Obviously has some contribution from oil from the oil uplift and top of that the protein.
Per unit value of protein as we said and maintains a higher value.
Because of the finite amount of 60 pro and above versus 50 pro and below so we're still on track for all of those that's going to be what the product mix will be the interesting thing what we found with our technology is that if we have a customer who says I only need 48% protein we could run our.
It's a lot harder and actually increase our margin structure, because when we talk about making.
We initially said we were going to make $3 to $3 five pounds per bushel, we're now talking to four to four 5% to five pounds per bushel. So our yields are going higher which then allows us to run harder and if we see maybe a <unk>.
48% protein customer in large volumes, we might make more money doing that than selling a 50% or 52% customer in small volumes. So we're really starting to play around with product mix and yield and production and thats. The uniqueness of owning a technology versus buying a technology when we have the founders and.
We have 40 engineers that all they do all day is build these things in.
AD technology around these things we get we get the C with the best of the best is relative to this technology and as I indicated we've seen yield as high as five pounds per bushel, which is literally unheard of and <unk>.
High protein relative to who we compete with around the world in corn so.
It's a bit of a product mix, but overall all of the margins are holding in in fact.
If you press harder.
With maybe a less lesser protein you actually could make more money because of the yields.
There's a little bit of that going on as well, but we're very positive on the margin structure that we've laid out and some increases that are that are even going on from there.
My second question is in 2023, what do you expect your product mix to be.
How do you kind of give some ranges.
What you think how much will be 60% how much will be 48, how do you do that.
Is there a composite.
Profitability that you can sorry to that and that would be very helpful.
Yes, I think thats, something we will probably work on over the next several quarters as we look at R. R.
Our takeaway capacity at the end of at the end of 2022 and we're just going to start to go into negotiation season for 'twenty three 'twenty four with customers and I think it'll be a mix, probably a bigger mix still towards fifties low <unk> versus $60 for 2023, but once we get into 2024, we hope.
Our goal in everything we're doing at Green Plains around this technology around our product development around our customer development is to flip the script in 2024 and start to produce higher levels of 60 pro versus 50 pro and and that's really when we believe 2024 will be.
The time, when we start to get a good critical mass in those higher proteins and even looking at ways that we could drive protein is even higher than that so.
I think it's a bit of a mix in 2003, and we'll give you more guidance on that towards the end of the year and at 24 is when we make we think we'll be able to flip that a little bit more.
I look forward to hearing from you.
Thank you.
Thank you and our.
Our next question comes from the line of Michael <unk> with Roth capital.
Okay.
Hi, It's Craig Irwin Thank you.
Hi.
Todd.
You were really clear in your prepared remarks.
The second half of this year should be a pretty pretty healthy financial outlook.
During the quarter with geopolitical events and some of the other happenings the volatility in corn has been a fairly active discussion.
Shareholders.
Looking at the stock to potentially accumulate here.
Can you maybe unpack for us what volatility in corn it looks like.
A positive or negative.
For the third and fourth quarters can you, maybe give us a little bit of color.
Your position for these quarters.
And how should we think about the fact that corn has been coming off since.
Certain countries started started exporting again is this something that maybe it does help us a little bit more in the back end of the year.
I don't think its just a corn story necessarily and I think when we look at corn, certainly we had a view that.
That overall.
Corn.
Fundamentally at 850, bearish corn at that point, because we felt like Ukraine became the storage of the world in the U S became the residual supplier to the world and that kind of all happened and now we've seen the market structures come back where the job of the U S. Market again is to be there is residual supplier to the world and we're seeing that in the <unk>.
Structure, and we're seeing that.
And the ultimate price of corn today now.
How we finished this crop is going to be critical to.
The ability for the U S too.
To have a good to have a good crop and I think there's definitely areas are fantastic.
Results and I think we've seen some probably slip in yield over the last.
A couple of weeks because of this weather.
And what you see it as record heat wave that will last another five to 10 days, but notwithstanding that the rains in the Midwest have set at least Iowa, Nebraska, Minnesota, South Dakota, North Dakota up well to deliver and Thats kind of the most important states I think the mid south.
Little bit dry, but overall, we probably anticipate today yields.
Lower than what the USDA has.
It probably put out had put out.
No.
You haven't made any money in the last five years betting against the corn crop and weather.
And I think Thats, that's mainly the driver here of the reduced prices overall as well as obviously you started exporting out of the Black Sea <unk> got tens of millions of tons of more.
More corn hitting the market on top of that as we had said earlier the Russian wheat yields were significantly better.
Than we expected and those those are hitting the market as well, which is why you saw the market helped drive the car market lower so.
When you look at it.
Ethanol still remains a significant discount to gasoline whether its 50 or 80, plus you have the ran on top of that.
You can go a long way in corn before you really start to affect this industry because.
Turns are higher because the economics of blending ethanol are so favorable it helps reduce gas prices today.
Our end market helps reduce gas prices today.
Seen expanded blends and even with some of these higher stock levels. We've seen margins maintain themselves we're going to watch it closely I think the bigger thing that we have to watch in the U S. Because we saw some very elevated corn basis levels. This summer.
<unk>.
But we're still we're still able to make a margin with those elevated corn basis levels and I think.
So we're really a lot higher than the historical highs when you are paying a 150 and 200 over the.
The futures for corn in Nebraska, and you are still we're still able to make a positive margin.
It tells you that ethanol is not going to go away anytime soon it's an important part of our fuel supply.
And we see more and more demand for the product every day and we're seeing good exports as well it hasn't been what it is in some years, but I think the world wants cheap molecule. So.
So overall.
I think from here not a lot of downside left in the corn market and.
And probably more risk to the up but.
Corn crops pretty smart and betting against weather in the last five years Hasnt done very well.
Yes, no that makes a lot of sense.
My My next question's about calling from mentioned protein so.
In your press release, you are very clear.
You expect this current quarter to be one of your strongest in new orders.
I assume that's maybe predominantly 60, probably maybe a little bit of 50 probe.
But more importantly would you expect these to be.
Excuse me would you expect these to be announced or orders.
Orders that we might have to wait until the next earnings call to hear about and is there a possibility we start to hear about tonnage commitments.
In these different contracts.
I think the thing we have to do is be very careful about what an announced will order is because we announced our pet food relationship and anybody that makes any product with any protein now is trying to steal the business away, but we have a great relationship with them. So we don't want to just lay out our playbook to everybody in the world to see of where we're going to sell this product I mean, but we have we have.
Product moving into many markets globally I'll, let Leslie just talk a little bit about that but I mean, we have <unk>.
Now.
Great momentum coming into this quarter, whether its going to be.
50 pro if somebody wants a little lower with higher yields we can do that if you want 60 pro we can do that I think we're going to see a a variety of orders come in this order this quarter not just for nearby but also for the.
Really what were waiting for is the programs to start to kick off for 2023, and the campaigns and that's really what we're setting ourselves up for.
But I think we could see strong interest in our 60 pro product for 2023 volumes I think will have very strong interest in our 50 pro plus product for later in the year in 2023 volumes and we've been setting ourselves up remember we haven't had any product to sell we've had wood river in Shenandoah and they always want customers that by high value products.
One <unk>.
They want to see the production running before they give you big orders that are bigger than what you can produce today and I think we're finally able to show these customers globally.
That we can provide a volume in.
Into 2023 that have never been available before Leslie I'll talk a little bit about maybe some of our progress, we're making specifically in some countries and without without kind of giving our whole playbook away.
Yes, let me try I think the point, you're making here and I would like to echo that it's imperative for us that as we've established and positioning ourselves to build very strong and deep relationships with some of the major players in the world again, those names would not come as a surprise to you that they also have a certain sense of.
Our view on their own proprietary dyansen as we're trying to help them it's to our advantage to really become a nutritional partner to them that solves problems because when we move into <unk> other people move out of the diet.
It's a very delicate balance that we're trying to address here we understand of course, if the market would like to see all of this broken out but for US it's really that go and deepen those relationships you could imagine that the multinational companies food companies in the world have markets that we can access today some of them that need some more development for tomorrow, but it's.
We started this journey several years ago and.
I mentioned earlier in response to your other question about the agriculture progress, it's really picking up so we have to respect. The fact that some of our partners are even saying we want to we want to benefit from your technology platform from your ability to make our products better, but it's also not something that they want to announce immediately.
Due to as I said, the aforementioned position in the market.
Thanks for taking my question.
Yeah.
Thank you.
Now I'll hand, the call back over to President and CEO , Todd Becker for any closing remarks.
Hey, thanks, everybody for being on the call as you can see we're making great product.
Progress and product by the way so.
We are really optimistic for our departure out of 2022 operating a well over half or over half of our platform with more coming on in 2023, and I think thats really when we will start to see the critical mass that we need to start putting up good results in all of our segments, including the <unk> protein.
Our ultra high protein production, we're seeing great evolution of this product innovation around this product customer acceptance of this product and we could see inflection in almost two to a point, where we know in 2023, when when we really start to see a.
A different green plains, appearing your eyes, so until then.
As I said, we're in great financial shape should finish the year with positive margins, you've got to watch some things to make sure of that but based on it based on today's market.
There for us to deliver and.
And we have a lot to do but right now we're executing well. So thank you for your continued support and we will talk to everybody next quarter.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.
Okay.
The conference will begin shortly to raise your hand during Q&A you can dial one one.
Yes.
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