Q3 2022 Green Plains Inc and Green Plains Partners LP Earnings Call
Yeah.
Good morning, and welcome to the Green Plains incorporated and Green Plains Partners third 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.
Now I'll turn the call over to your host Phil Boggs Executive Vice President Investor Relations.
Bob Please go ahead.
Thank you and good morning, everyone and welcome to Green Plains, Inc, and Green Plains Partners third quarter earnings call participants on today's call are Todd Becker, President and Chief Executive Officer, Jim Stark, Chief Financial Officer, Patrick Simpkins, Chief transformation Officer, and Leslie Vandermeulen EVP of product marketing and innovation.
There's 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 statements.
Now I'd like to turn the call over to Todd Becker, Thanks, Phil and good morning, everyone. During.
During the third quarter, we experienced a challenging margin environment, resulting in a negative <unk> 10, a gallon margin some of which were one time events and the rest largely driven by the record corn basis, we experienced across the Midwest Southern Indiana in Tennessee with impacts from the drought lowering corn yields, which tightened lending grain stocks as a result of three lower than average crops in a row.
In the north to South and again, the northern Hemisphere, we saw higher corn basis ahead of this year's harvest, but we kept our plants running through that the world is not running out of corners, just tighter than normal it was a quarter, where the industry needed to adjust our average corn basis was more than a dollar of our futures with some plants in excess of $1 50, which was higher than last.
Year, and nearly $1 higher than the five year average.
The third quarter margins were lower because of this tightness and farm ownership is in tight hands.
The first impact other than corn basis is that because of these.
Fundamental.
Because of the fundamental situation in corn, we decided to pull all of our seasonal maintenance shutdowns forward completing these at 10 of our 11 plants, which impacted our operating utilization rates and also increased our repairs and maintenance costs for the quarter. The shutdown impacted our margins by about <unk> <unk> per gallon. In addition, as a result of the higher corn basis.
And the inverted ethanol market, we recorded an $11 $2 million LCM or lower cost or market inventory adjustments, which was also impacted our margins by about five a gallon but to be clear. This is a noncash adjustments.
Excluding these excluding these two items our consolidated crush margin would have been near breakeven overall, our EBITDA for the quarter was $35 6 million negative, but right now for the fourth quarter margins are positive for ethanol and have expanded in recent recent days, even before corn oil contribution, which I know a lot of you focus on that fact.
Even with higher harvest corn basis levels and with the fundamentals across liquid fuels Q4 significantly better than Q3, but corn basis volatility still needs to be watched closely although our physical corn coverage grows every day and is approaching 70% for the remaining of the quarter. The Gen. One volatility quarter to quarter has been unprecedented and we remain exposed to that.
For a portion of our business as we continue to transform our third quarter financial and operating results remained strongly influenced by the company. We are transforming from rather than the company we are transforming to.
Operationally, we are seeing strong Q4 run rates at record high renewable corn oil yields with our seasonal maintenance program completed in Q3, we anticipate that the fourth quarter should be the highest quarter of the year for throughput and corn oil yields.
Our MSC technology construction projects with fluid quip.
For 2022 are wrapping up and we are preparing actually have started up the dryer and in central city and are getting ready to start our loadout system up as well.
<unk> build at Mount Vernon, Indiana began commissioning in October and <unk>, Tennessee plant should begin commissioning in the next few weeks one very interesting point is during commissioning the plants begin to benefit from higher renewable corn oil rates well before we bring the dryer online and the load out structures are completed the ability to extract oil individually as the basis of a new offering from <unk>.
<unk> called <unk>, which we believe will discuss later in the call. This increased during startups contributed to a strong renewable Cornwall yield in the third quarter and we should continue to expand that in the fourth quarter as commissioning continues on additional locations.
<unk> for this product remains very firm as there's only a finite amount of low carbon intense feedstocks and this sets us up well for 2023.
As our company has been undergoing a transformation we made a decision to dedicate a senior member of our team to those efforts fulltime Patrick Simpkins has been at the company for over 10 years, serving in a number of senior roles. Most recently as CFO and we are pleased he chose to take on a new challenge the chief transformation Officer.
This was a natural time to dedicate resources for the next several years to all of these important strategic efforts, Jim Stark, who many of you know from his time in Investor Relations is a dynamic background in finance and he will take over as CFO . We also welcome grant <unk> as EVP of commercial who comes with a deep commercial experience and agricultural processing global trade and Jamie.
Herbert as Th Arrow, who joined the organization to further enhance our team and brings a long history of success. These additions bring added depth and leadership to our organization at this pivotal time in our history improves our ability to attract talent needed who can not only execute our plan, but also believe in our transformation.
We broke ground on our CST facility in Shenandoah to produce low carbon intense dextrose, where we are deploying fluid quip screen sugar technology are developing biocatalyst and southwest dialogue, Iowa has long been a showcase plant for us with our first MSC facility.
So lab and our first commercial scale dextrose facility under construction and we'll talk more about that later as well our.
Our company continues to transform we are firmly committed to completing that transformation will began with a vision to explore ultra high protein technology years ago has morphed.
Into a pivot of our entire company to focus on customer centric ingredients innovative AG Tech and de Carbonization, we are executing on that transformation plan and remain on track and we remain on track to deliver on these initiatives and guidance laid out for 2024 and 2025, the growing strength of our commercial operation continue.
To win new customers from our ultra high protein product suite customer acceptance and interest continues to accelerate and we are generating orders and interest around the world across multiple species, we executed a 25% increase in our 2023 volumes already in our pet food vertical for the upcoming product marketing year.
Many customers have indicated they have been waiting for volume scale redundancy and we're finally in a position to deliver on that as we exit 2022, having over 330000 tonnes of annual capacity for these innovative products now available to the market each year for Green Plains when novel proteins, where historically in much smaller quantities has really been a game changer in our disc.
<unk>, while there are a few one offs here and there that can make a product somewhat similar no one else can supply the quantity as customers are beginning to look at and its novel protein space like we can which is a critical differentiating factor commercial demand is growing in bigger quantities now that we're able to provide a product with unmatched scale and redundancy.
With our expanding scale, we are executing sales to customers in Aqua, Pat swine poultry and dairy globally, some of which are leaders in each of their respective industries.
Being a customer centric market for these new products take time, but we are achieving base load volume for the 50% Ultra high protein product today across multiple species and FERC from customers around the world I will talk about the importance of this as we develop our 60% protein market later in the call during.
During the third quarter, we settled the remaining $34 $3 million of 2022 convertible notes through a combination of common stock and cash, leaving us without any near term maturities in our capital structure.
We ended the quarter with over $500 million in cash on the balance sheet and remain in a strong position to deliver on the strategy. We have laid out for you.
Green Plains partners continues to deliver consistent results and will benefit from the strong throughput utilization rates. Our platform is capable of operating for the fifth consecutive quarter Green Plains partners increase their distributions raising it to <unk> $45.05 per unit.
Once again I'd like to welcome Jim to the call and hand, it over to him to provide you an update on our overall financial results.
Thank you Todd good morning, everyone glad to be back at Green Plains, and I'm excited for the opportunity to lead the finance organization.
Green Plains consolidated revenues for the third quarter were $955 million, which is $208 million higher than the same period, a year ago, which is driven by the higher run rates plant utilization rates improve year over year to 99% run rate for the quarter and that compares favorably to the 75% run.
Rate reported in the same period last year.
As Todd mentioned earlier, we anticipate utilization rates improving during the fourth quarter due to having already completed our seasonal maintenance turnarounds and believe Q4 will be our strongest production quarter of 2022.
For the quarter, we reported a net loss attributable to green plains of $73 $5 million or $1 27 per diluted share that compares to a loss of $59 6 million for the same period in 2001.
EBITDA for the quarter was a negative $35 6 million compared to a negative $16 6 million for the same period last year.
As we indicated in our earnings release. This morning, the third quarter faced challenging ethanol margin environment, driven by higher corn bases, and a weak driving demand limiting the opportunity to generate positive margins.
We also incurred lower cost or market adjustment of $11 2 million on inventories that contributed to the negative ethanol margin for the period, we realized a negative <unk> <unk> per gallon consolidated crush which was lower than the prior year due to the factors described above.
Our AG and energy segment came in higher versus 2021 recording a $2 7 million increase in EBITDA or 71%.
I would note that AG and energy segment has continued a strong performance for 2022 running 60% better than the nine months period last year.
For the third quarter, our SG&A cost for all segments was $29 1 million compared.
Compared to 26 million for Q3 of 'twenty one.
The increase of $3 $1 million is driven by increased personnel costs from higher headcount and higher professional fees in support of our transformation as we noted on our Q2 call. This year.
Interest expense was $9 6 million for the quarter, which includes the impact of debt amortization and capitalized interest was roughly in line with the $9 5 million reported in the prior year third quarter 'twenty one.
Our income tax benefit for the quarter was $1 9 million.
Compared to a tax expense of 7000 for the same period of 'twenty one.
The benefit is due to a reduction of the valuation allowance against deferred tax assets at the end of the quarter Green Plains had a net had net loss carryforwards available to the company of $144 7 million, which may be carried forward indefinitely.
On slide nine of the earnings deck, we provide a summary of the company's balance sheet.
As shown we ended the quarter with $534 $6 million of cash working capital net of working capital financing compared to $698 million at the end of 'twenty one.
Our liquidity position at the end of the quarter included $512 4 million in cash cash equivalents restricted cash and marketable securities along with approximately $155 million available under our working capital revolver.
For the third quarter, turning our attention to capital expenditures, we allocated $55 million of capital to profit sustaining and growth projects, including $44 million on our MSC protein initiatives.
$7 million to other growth initiatives, and approximately $4 million toward maintenance safety and compliance capital.
We anticipate capex for this year will be in the range of $250 million to $280 million based on our current construction schedules, which does include some capital for the clean sugar building Shenandoah.
Turning to the partnership we continue to realize consistent performance earnings and cash flow. Realizing net income of $10 2 million and an adjusted EBITDA of $13 million for the quarter, which is slightly lower than the $13 5 million reported for the same period a year ago.
With volumes now trending upward because of higher run rates at the parent.
We expect volumes well above MVC levels.
As a result, the partnership continues to support higher return to unit holders, increasing the quarterly distributions of $45.05 per unit, while maintaining a one five times coverage ratio for the quarter.
For the partnership distributions distributable cash flow was $11 3 million for the quarter in line with the 11, 5% for the same period of last year.
Over the last 12 months partnership produced adjusted EBITDA of $50 7 million <unk>.
Distributable cash flow of $44 9 million and declared distributions of $42 4 million, resulting in a one <unk> times coverage ratio, excluding any adjustment for the required principal payment amortized in the past year.
Now I'd like to turn the call back over to Todd. Thanks, Jim. So we typically spend some time going through protein oil sugar in carbon, but this quarter I actually want to start with carbon Disinflation reduction Act is a real game changer to our industry and our company and while we may have some transitory quarter by quarter volatility from our Gen. One business we are increasingly opt.
Mystic about the tailwind from the recently enacted Bill and continue to believe we are uniquely situated as a company to capitalize on the de Carbonization de carbonization incentives included in this bill the potential impact of our transformation is immense and it's still under appreciated by the market.
While it doesn't kick in until 2025, the new technology neutral clean fuel production credit or 45 Z will be a significant game changer to fuel ethanol production as we head into the possibility of alcohol to jet later in the decade. The new credit provides an incentive of <unk> <unk> per gallon for each point of Ci reduction Bill.
<unk> <unk> 50 <unk>.
The program uses the argon greet model and many of our plants are not far from that number today, when we start with sequestration to get below $50. We can then look at to further reduce our ci at each of our bio refineries.
Adding things like combined heat and power to biotech gestures, even wind and solar options and when looking at this opportunity and carbon initiatives from our Midwest plants positioned on summer carbon pipeline to our eastern plants.
That we are identifying partnerships and other opportunities to sequester and decarbonize combined with additional carbon initiatives outlined we are very excited and anticipate significant annual contributions once all of our initiatives are completed just in time to leverage the clean fuel production credit.
Our renewable Cornell business continue to reach new highs in terms of yield as additional MSC facilities come online. The third quarter was another record for us and we believe the fourth quarter will be higher yet again.
Uplift specifically in yields in corn oil values is included in our MSC margins, but the base Cornell of our Gen. One platform produces just under 300 million pounds.
Which at 70 or 80 cents, a pound gross price could generate approximately $150 million to $180 million of consistent earnings above base ethanol, we expect to produce 400 million pounds per year in total as we approach 2025. This is a valuable product stream for us and one is in high demand with the growth of the renewable diesel industry.
There is continued interest by counter counterparties to monetize our desio stream in various ways.
We have the ability to be patient due to the strong market, which seems to grow tighter everyday and prices seems to get firmer.
The extension of the dollar per gallon biodiesel and renewable diesel Blender tax credit is also beneficial to our renewable Cornell values and we consistently see corn oil trade.
At a premium to soybean oil.
<unk> of its lower Ci as high as 10 per pound or more premium at times. We believe this differential will only expand when the clean fuel production credit kicks in.
As new state and National CFS programs come online and renewable diesel producers are further encouraged to source low carbon intensity waste oils as a feedstock you can see from the term structure of the market is very tight and it seems to roll up and tightened as we move through every exploration month, notwithstanding a random macro move lower which is quickly supported in.
Our long term view as low carbon oil stays firm through the end of the decade as the onset of new renewable diesel production has not been felt yet.
Now, let's talk protein.
The protein any ingredient front construction of our MSC platform continues to progress with over half of our platform nearly up and running it has been a herculean effort to deliver five major builds by the end of 2022 with unprecedented supply chain tightness in a challenging labor market almost impossible to navigate.
We will have 560 million gallons online with equivalent protein capacity of over 330% and 30000 tons in 2023 as mentioned earlier Central City is complete Mount Vernon is complete waiting for a permit to start the dryer and O'brien will begin commissioning in the next several weeks and loadout will finish in early January as soon as.
And as soon as we turned on this site, we will start making oil and oil shares excellent.
Our JV turnkey plant is under construction in North Dakota, which will be the largest MSC ultra high protein production facility in the world and we expect a great break ground on our Madison location in early 2023.
As indicated.
Excuse me since the inception of the program permitting in Minnesota for a fair amount in otter tail plants as a gating item that could come as early as nine months and as late as 18 months from now with that said, we can be patient and a large plant from a capital efficiency efficiency standpoint, but at a smaller plant, we will move to install flu equips new desio.
<unk> as permitting is not an issue and the economic return on capital is significant.
We are going after low carbon renewable Cornwallis superior auto tail first with D. C O Tex as we wait for permitting that being said we are on track to deliver on our overall MSC projections with the ability to run larger plants at higher Gen. One rates combined with higher MSC yields we will still get roughly the same overall MSC footprint, but with a slightly different mix of plan.
Our base protein projections continue to be on track to a $150 million to $210 million of incremental value as our gen. One ethanol platform.
Two our Gen. One ethanol platform and can go higher from there as we build out our sixth pro market and other innovative products we are working on.
We also continue to assess what catheter, who invest in our York in Atkinson, Nebraska facilities.
They are the smallest in the fleet and our current run rates across the platform can make up for any shortfalls. There we're maximizing our return on capital, while leaving our guidance intact.
<unk> is a game changer in fluke and use our data and learnings to offer this technology to the industry, which can help monetize our investment there as well as they are preparing a turnkey desio technology solution. We continue to believe the value of fluid quip IP portfolio is significant and significantly undervalued as a component of our overall company's valuation.
Construction of our first of its kind deployment of flu equips innovative clean sugar technology at our Shenandoah, Iowa bio refineries underway.
Adding this technology is the next step in the transformation of our dry mills.
This installation is already generating interest from multiple potential partners and customers who share our vision to build a low carbon footprint <unk> to produce lower carbon ingredients. We remain confident in the rollout of CST. After we prove to the market. We can make this product at scale and in spec.
Our first facility has been designed to produce greater than 200 million pounds with upside to 500 million pounds with additional capital deployment dextrose has been in high demand through.
Recently and current pricing could result in even stronger future contributions. This plant will be able to make refined and unrefined 43, 63, and <unk> 95, dextrose products for use in food chemicals synthetic biology, and industrial production processes to give you an example.
If we add capacity online today, the equivalent margin based on today's dextrose pricing would be approaching a one dollar per gallon or in bushel terms almost $3. A bushel, we will have years of additional investment opportunities in this space beyond 2024, and believe we have strong IP leadership position, we believe can clean sugar will be a.
Significant and growing part of our growth story over the next three to five years as well.
While on longer term opportunities, we see alcohol to jet.
Sustainable aviation fuel as a major opportunity with carbon sequestration in place are lower Cif and all will be an ideal and plentiful molecule for conversion to sustainable aviation fuel at commercial scale, we believe our platform and partnerships position us to have a key impact in this space before the end of the decade.
When you put it all together our 2024 projections, excluding the Gen. One business and ancillary businesses are on track to achieve our previous EBITDA baseline guidance with continued upside opportunities from our MSC protein initiatives based corn oil values and clean sugar.
Which will just be getting started and can grow from there and then carbon beginning in earnest in 2025. After the completion of the summit pipeline and other carbon reduction opportunities, which could add materially to these totals on top of that any material shift.
Two a 60% protein product or greater or other protein ingredients and innovations that are taking place would also add to these totals are initiatives and growth pillars are aligned with the macro factors of protein growth expanding bio economy, low carbon transportation fuels and de carbonization and low carbon ingredients and we are executing to create.
Value on behalf of our shareholders our owners our employees, our business partners and our customers and our communities every day with that said thanks for joining our call today and we can now start the Q&A.
To ask a question please press star.
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One moment, while we compile the Q&A roster.
Our first question comes from Adam Samuelson with Goldman Sachs. Thank you for standing by Adam Your line is now open.
Hi, yes. Thank you good morning, everyone.
Good morning, Dan.
Good morning.
So Todd I guess first question is I am thinking about Hy Pro and commercialization you talked you went through the plant kind of rollout rollout in the facilities that are coming on stream by the end of the year and I guess I wanted to just clarify on and thinking about the contribution from incremental high pro.
In 2023 as you now have three.
330000 tons of <unk>.
Of ultra high protein as we just think about the incremental profit that that would generate as you sell those and.
Along those lines.
Kind of talk can you talk about the commercialization of the 60% value high.
Hi, pro and kind of where youre seeing customer interest and pricing indications and when that could be a contributor to the top and bottom line.
Yeah. Thanks, So we expect in 2023 that with these capacity we have on line and coming online capacity. We have in line at the end of the year and Thats under construction, we will see our first real contribution from this program during the year. So when you talk about 560 million gallons converted.
Today, what we're seeing basis current values on 50 pro is somewhere between kind of a 12% and 17 set a gallon margin available today.
And oil shares a strong part of that so we think there's upside to those opportunities as well, but we're continued to developed markets around that so we sold pet food for 2020 to pet food vertical for 2023, we're starting to see interest in agriculture for 2023 significant interest in poultry and swine as well for 2023, so the margins kind of range.
Depending on what the customer wants from a protein perspective, whether it's $48 $50 52 or 54, so as we kind of go into the year and we're thinking about 2023, the starting point is $5 or $60 million gallons converted with margins running ranging from 12 months to 17 cents a gallon depending on what we sell and potentially upside.
There.
Hey, Adam.
Oh.
Our next question comes from.
Jordan Levi with <unk> Securities.
Your line is now open.
Good morning.
Going back to the call Jim.
Yeah.
Can you hear me.
Sure.
Yes, we can but we think we lost Adam but we will see what we can detect them and get them back but go ahead.
Okay.
Just wanted to start off.
Can I ask on your comfort level when it comes to liquidity.
Thinking about the next eight quarters or so we know the focus is.
Let's see.
Good amount of cash.
These swings in the ethanol market.
And sometimes even pull some of that so I'm curious how you feel about the capital runway going into 2023, and maybe any updated thoughts on 2023 capex.
Yes.
So I'll talk first on a little bit on the market. So yes, I mean.
Basically when we look at the third quarter between the LCM, which is noncash and obviously depreciation as well we really while we did see some reduction in free cash flow.
It wasn't significant enough for us to worry about anything as we come into the fourth quarter ethanol margins have turned positive again and have increased over the last week or so.
So from that standpoint in the fourth quarter looks pretty solid from the ability to to begin to generate free cash flow again, notwithstanding the fact that we're going to continue to execute on our build program by ending the year with the liquidity, we have and again starting to see some opportunities to generate free cash flow and bringing on.
Things like Ultra high protein next year as well as these higher prices and corn oil pricing I think what is critical is obviously this was a unique third quarter with the record high corn basis, and we were literally.
Dead on right in the middle of the of the hotspot, we were paying 160 over for corn almost 160 over for corn in southern Minnesota to a 100 over corn in Nebraska and down in Tennessee at the end of the crop year was very tight as well. So we've seen some relief on that and we've also seen margins expand back to allow the industry.
To have a margin and then on top of that our run rates continued to get better and better and we will get execution through that as well. So and then when you look at all of that and you look at the setup.
From the standpoint of liquid fuels, you have a tight or.
Almost unprecedented diesel situation in heating oil situation, you've got tightness in gasoline as well what youre seeing in the term structure and I think we're starting to see some of that fall over into ethanol as well where people are realizing it's a molecule that needs to be used and we're starting to see some increased off takes from that perspective, So I think.
We're in a really good position when you start to look at the forward curve youre not going to see much relative to.
2023, yet in the ethanol margin our view is that where we're positioned right now.
And what we think are the fundamentals I think we're in pretty good position to continue to execute the program without without any issues on our balance sheet is cleaned up pretty well as we have no near term maturities and even more importantly, China can start to kick back in on gas demand in.
In 2023, I don't think the world is prepared for that either so I think we're sitting in a pretty good position to continue to execute on the program and as we said we wanted to get through the clean sugar number one continue to build out all of these or other assets, we're seeing some delays in Minnesota, but we're making it up on our <unk> program that <unk> sorry <unk>.
Program, where we can go after about seven or eight cents per gallon contribution just from from that while we're waiting to get permitting. So I think we're overall we're in a good good very good positioned liquidity wise.
Jim Capex.
George.
To answer.
Some of your question on kind of the 2023 look if you go back and look at what I said earlier in the call.
We kind of brought the top end of our Capex range down for this year to $2 80 at the Max.
So when we think a look at the projects that we have outlined for next year, we're probably going to be somewhere in the range of $2 50 to $2 75 on the spin and then certainly.
<unk> indicated.
Including those Desio Tech.
Build outs that we want to do which I know, we haven't disclosed to the market yet what those costs are but those are at a lower cost than building a full MSC out there today. So we're very mindful about the cadence of capital, but feel pretty good about the liquidity position, where we are today and how we see the guide I think I would add onto it.
We're bringing up over 200000 plus tons of Hy Pro here now as we speak which had not been in our run rates for the last nine months. So that left plus the additional oil lifts should also as Tom just pointed out on Adams question should add.
Add to the bottom line when we get into the first part of next year.
Thank you great color.
A quick follow up to that Kevin you brake systems.
Systems online central fairly certain.
Curious how startup has been going I know Todd you mentioned.
It starts to corn, the corn oil yields start ticking up before it comes on but just curious what that timeline for startup has been trending.
If thats changing at all.
No.
Our view has always been take about a quarter to get it fully up and running ramped up sometimes.
Sometimes we go a little faster as we learn more I would one thing is as everybody is well trained to run the systems now because they are trained at other facilities, but what we really wanted to do is start to when we started commissioning.
And we literally start making oil on day, one and oil share today at 80 cents a pound you want to make as much as you can because thats, helping pay for the investment in fact oil alone can almost start to pay for the investment to just be a longer return, but that's not why we built. These so the great thing is we get the benefit of that during startup which early on when we started up Shenandoah the oil market was very <unk>.
Back then so we're pressing hard for oil yield and then we bring on our protein drivers after that as we said central city literally started up the protein drier this week and we started making product and we're starting to send it to our silos and the products coming in on spec.
And now we just continue to ramp higher so ramp ramp rates happened very fast once the dryer.
Comes online again in Mount Vernon.
We're waiting it's around on November 15th 20th permit permit time that the state will allow us to turn to dryer on.
And so we have to wait for that and sometimes those are gating item, but in the meantime, again, we're running the system.
You've seen this system. We just continue we can continue to run and really extract and segregate that oil fast and thats going to help our fourth quarter as well. So we're really starting to get into as I said I can't do much about a record corn basis in the third quarter and how this thing played out what I can do is point to when I can see inflection.
In 2023, as we grow our customer base and protein as we bring on.
Continuing to bring on more systems, and even more importantly than that we know that what we possess in a low carbon feedstock waste oil is very very valuable and we believe we still have significant opportunities to monetize that stream even above what we're seeing today in the market. We continue to get approached constantly on partnering.
For the stream in one way shape or form or another but in the meantime in the meantime, what's been great is that we are trading at a premium to soybean oil.
More renewable diesel demand continues to come on every day and and the pull from this industry is significant so.
The plants have to run we're going to run them hard we're running them harder everyday and.
And we're very comfortable with how we can startup MSC systems now much more than in the beginning when it was a bigger learning curve.
Got it thanks a lot.
Pat.
Thank you.
Our next question comes from Kristen Owen with Oppenheimer and co incorporated.
Thank you for standing by Christian Your line is now open.
Hi, Good morning, Thank you for taking my question.
Good morning.
So you talked about shipping in the fourth quarter to a variety of protein markets.
Poultry among them.
Yes, hi, advance or the discussions with these partners and can you speak to just generally the cycle times that youre seeing in terms of customer conversations.
The macro backdrop that we're working on.
Yes. It was it was hard to get engagement. When you would show up and you have Shenandoah running youre, making 45000 tons of protein or 50000 tons of protein. It was hard to get engaged with them to believe you that you can that you can ship a full vessel full hold of a vessel somewhere in the world or ship unit trains of this product and when you are.
Want to get now we have seen other people startup.
Much similar smaller systems, but we're dealing with that as well in the market and there's a bit of confusion on product, but we're getting through that now when somebody shows up and says can you ship us this much quantity and now we can say, yes, and thats. The difference. So now you can get real attention paid to you to get included in real rations across a full system and we are.
Built a sales team that is highly focused on that customer engagement. So we can now talk to and agriculture producer in South America, South of southeast Asia, or shrimp producer or a salmon producers somewhere in the world and we can now talk to them about significant volumes available consistent volumes available in volumes available with redundancy.
Because youre just not going to get the attention of a customer unless you have three or four or five of these plants running because they are very nervous he can't execute much like what we saw with our pet food verticals. So as you know pet food was one of our first verticals and everybody has been trying to get this business from us and and that has been something that we obviously.
To deal with but when the customer.
That we've developed a relationship with and customers that we have developed durations with show up and say.
We want it and we want to make sure you have redundancy, we can get we can get still get the business and we still got it at a print and we still get it at a premium to the market. So.
That's one thing that I think is to our advantage and we haven't even been able to necessarily take advantage of that yet because we haven't had the volume.
So again now that we have the volume and somebody comes in and says I need 100 cars a month of this product or I need 200 cars a month of this product or I need 10000 tons in a hold of this product. We can say, yes, now and thats a different engagement. So we have a full team of salespeople nutritionists.
And in customer support and product development that is working with customers not just domestically, but internationally on inclusion and how to use this product best and again, it's not always the same when it comes out of any system. Our system is very unique in our ability to give consistency is very unique at any at any protein level that they are looking.
Four or even from the standpoint of used as well.
That's super helpful.
A related question that I have for you.
Is is related to the 2020 for EBITDA guidance, which you said you were on track for I am wondering if you can can you give us your updated thoughts just given that you are pricing protein office that soybean meal base.
How youre thinking about protein pricing, maybe in that 2020 for 2025 timeframe across the J curve, just given the expectation of how much more soybean meal is expected to come online.
Yes, I mean, that's been a question that we've been discussing with a lot of our.
Our customers shareholders et cetera, when you go back and you take a history lesson, we brought on in two years and the ethanol industry 40 million tons of protein into the world.
And while it might've been chunky for a year or two it was absorbed a very fast in.
And our view is when we look at what's coming online in soybean meal in the next kind of three to five years somewhere around 15 to 20 million tons based on the current announced projects. It is our view and it's just our view that this will get absorbed until into the world very quickly and that this whole glut might last for a quarter or two.
But people are building soy crush is on credit crush plant near the river to export because they believe the export market will continue to grow we had Argentina continues to be a bit of an issue in the world is not really a reliable supplier and we see protein demand growing at 10% to 15 million tons per year in terms of demand globally and that.
Has happened really on average for the last 10 15 years has been 9 million tons, a year and we've seen some years as high as 12 to 15 million tonnes. So if if each year demand for protein grows somewhere between 10, and 12 million tonnes and we're going to bring on 15 to 20 million tons of total protein over the next three to five years in soy crushing.
Our view is that it will get absorbed in our view is that the market will quickly adjust to that notwithstanding maybe a year of <unk>.
Junkie, a chunky market in the meantime, we offer a very different opportunity for our customer and while the market wants to price. This office soybean meal, we are not a soybean meal replacement. We are an ingredient that provides other added benefits to them and we can continue to go through those benefits with you but.
While today.
Some in the market want to price it off of.
The replacement of soybean meal and certain applications and other applications. We are a new ingredient that's getting added into their platform and I'll just Leslie maybe gives us two or three of the key components of why this product is very different in soybean meal.
Yes, so I think.
One of them.
The other.
Aspects of taking into account is that as a product as it comes out of our bio refinery we have a distinct advantage when it comes to the physician on carbon which is very high on the list of our customers. So we're getting a lot of traction there where people are looking for not only.
And advanced nutritional products like our product as it comes out but also additional benefits.
To address the other question you had on the on the J curve, if you really look at it.
As you proceed to get into the higher protein products P 50, 860% you are disconnecting.
The products on the soybean meal basis, and youre getting into a completely different category, where youre looking at corn gluten meal fish meals other concentrates and all of that can come from our same system. So there was no additional requirement from an investment perspective, and last but not least the fact that our products are fermented. So it comes in a pre digested state for a lot of these animals.
<unk> is of extreme importance relatively relative to solve and extracted products like soybean meal.
Thanks, so much for the color I'll pass it on thank you.
Yeah.
Thank you.
Our next question comes from Ken Zaslow with BMO.
Ken Thank you for standing by please go ahead.
Hey, good morning, guys.
Good morning.
I would just ask two questions. One is can you walk us through how you're thinking about 2023 expectations on a consolidated EBITDA.
You went through a lot of pieces I, just my mind isn't that smart to be able to build.
Altogether.
Kind of work that out for us just kind of thinking about 2023 consolidated EBITDA, how do I think about that.
Yes.
<unk>.
The last conference we did we basically said.
MSC is in that $90 million to $120 million range opportunity for 2023, corn oil was about $165 million opportunity.
AG and energy typically in that $30 million range.
And corporate overhead and that $60 million range getting to a range what we outlined at the last conference of $225 million to $255 million.
At the last place we presented this range.
There are definitely some moving pieces some some higher.
Prices and corn oil that are potentially an opportunity. If we can maintain this 80 cents a pound pricing through 2023.
That will be an opportunity on the upside and we have to watch pricing obviously on the downside seemed to watch kind of MSC, whether it's 90 to 120 or 80 to $130 ranges in there, but all within that same.
Mid range $2 95 to $2 55, you could say.
Low of 200, plus and a high of $2 60, plus somewhere in that range and I think that there's opportunities to even potentially go higher than that but we're going to.
Kind of leave our and that doesn't include any ethanol at all and I think while you can look at Q3 and say ethanol will never be good again.
That's not the case I mean ethanol is in positive margins before corn oil this quarter already.
We're starting to see the curve recover a little bit in 2023 as the market is very clear that it was undervalued as a molecule and nobody is paying attention to it and we've seen those curves start to move so we don't while from these numbers we take the view that we're going to give you. We will let you decide where ethanol is going to come in our view is still in the forward curve that.
<unk> will be not necessarily negative all the time and potentially positive over the average so and that's where we're at today relative to 2023, leaving our 2425 guidance intact.
And then how much of a premium price you're getting less high pro relative to you how much of your premium youre getting on your Hy Pro and is it consistent across your portfolio.
Yes, so with every customer in every application if prices a little bit different so when we look at more of the commodity side and what we have to compete against we can run our plants, our MSC plants harder and make a lower protein. So it's not always necessarily the exact price premium or discounts you would get is how much March.
When youre going to make and so when we guided you early on when we initially did this.
Investment thesis, we said the uplift is 12% to 15 cents a gallon going to 15 to 20 cents a gallon over time for on our base product and we believe the 60 pro product is significantly higher than that as we move into those markets over three years to five years, we didn't know how long it would take us to produce 60 Pearl we've now no we can do it in Mt.
I'm, sorry, and Wood River and now we feel very confident we can do it in Shenandoah on demand. So we reached that point now as well so when we look at it we will price every market different depending on the protein that they want so if it's just a commodity protein we will run our plant harder it instead of making three pounds per bushel will make <unk>.
<unk>.
We will get higher volumes out of it and we will go against a little bit lower protein to be competitive at the 48 or 49 pro market. If somebody wants to a 53% to 54 pro market, we can run a little bit slower and again it still comes down to that margin of kind of basically what we've outlined the base margin was 12 to 15 the opportunity for upside.
15% to 20 now we're still now even today, where we've seen soybean meal.
When it collapsed a little bit against replacement corn, but now its expanded back out those are those are margins today that are now possible.
Great I appreciate it guys. Thank you.
Thank you.
Thank you.
Our next question comes from Adam Samuelson with Goldman Sachs Goldman Sachs. Thank you for standing by Adam Your line is now open.
Yes, hi, sorry about before.
I was hoping to maybe clarify just some of those those guidance points and make sure we're not.
Double accounting so that you talked about 12 months to 17 cents per gallon uplift from hydro, but there's also a kind of reference to distillers corn oil. So I just wanted to be clear is that <unk> is that 12 to 17.
Purely.
The high protein value or is it a hybrid protein value plus corn oil on the 550 million gallons that's been converted.
And I guess.
I'm just trying to I'm trying to just clarify that for you yes.
Yes, no we've clarified.
We have never wavered from this corner that we'd number. We gave you is based on the pre MSC volumes that we've made across our system, which is close to 300 million pounds. A year. So if you take 300 million pounds, we figure, it's 12% to 15 cents per pound and cost to make the corn oil. So next year, the market's 80 cents a pound.
And take 12 to 15 cents off that your EBITDA revenue will be 300, approximately $300 million, maybe a little bit less than that 290 million pounds times.
65% to 67 cents, a pound something like that and so that's about $180 to $190 million of opportunity on the high side on the lower side. Obviously, you can do your math if it gets to 50 cents a pound you can do your math or 60, or 70 or 80 cents a pound so.
That is just on the non MSC corn oil included in the MSC has always been a corn oil oil share.
And what we're seeing right now is even with.
With higher corn oil prices, obviously, we feel better now that our systems will run with a higher oil share and even potentially with a.
The shrinking at times and now today it is not like that between distillers value and a high protein soybean meal value those spreads will move in and out but since we have this base load of oil earnings in our proteins MSC systems, and we feel confident that when we always when we sell something we're starting to see.
These margins so it's a little bit of it is in both places if you actually just separated oil today.
Our oil earnings.
Separation outside of protein would be would be higher than what we're giving you, but we included it MSC for the MSC is really not just a protein system. It's a separation system that separates lots of different products, including oil and including protein.
Okay.
That's really helpful. I'll pass it on thank you.
Thank you.
Thank you.
Our next question comes from Eric Stine with Craig Hallum. Thank.
Thank you for standing by Eric. Please go ahead.
Good morning.
Hello, Eric.
So maybe just on carbon capture.
Obviously the tax credits.
<unk> is being made there in the Midwest Express you've got that on one hand, but due notice or see that it seems like the local or state level.
Kind of pushback are digging in versus pipelines going through.
Fields counties et cetera.
So obviously optimistic about this and starting to be a contributor in I believe 2025.
But maybe just your thoughts on the push and pull here as you look at carbon capture going forward.
Yes. It is.
An interesting well I think first of all let's look at the economics of what's what's at stake here.
The new IRA a bill inflation reduction act is an absolute game changer to our company to our industry and even to the pipelines that are being built out there. It provides a finally it provides something to invest behind and whether it's on a pipeline or it's a direct inject or whether it's.
Something in our eastern plants.
Where we can capture carbon and move it around and look at that area as well. These are game changers to our industry not only from the fact that the economics are so significant and the opportunity is so significant things we've never seen before but the fact that we will make low carbon ingredients and protein and oil and in alcohol, especially now.
Call as we think about alcohol to jet later in the decade. So when you kind of look what's going on with what we've committed to.
Six of our.
Eight of our plants on a pipeline they continue to make great progress. They continue to continue to get higher and higher right away percentages locked down.
And many many states and we continue to support that at all of our plants.
From the standpoint of trying to get our farmers at least to commit to allowing that pipe to go through their ground and we've been successful at that there will always be some hold us when you build a pipeline and it's not just I don't know if you just look at that and say that that's immune to a.
Just two carbon because there's 40000 miles of pipe and sitting in the state of Iowa today.
And pipelines are going to build a couple of hundred miles just to get carbon out of the state. So this is just a bit of a.
Chicken and egg.
For these guys that are building pipelines, but ultimately for agriculture and for the U S. Farmer. There has been no bigger opportunity then to try and sequester carbon out of ethanol plants and continue to drive the potential of this industry. So we're very excited about it but if you look at the economics in a vacuum.
And you look at what we've put out there for our 'twenty four 'twenty five 'twenty six numbers and beyond.
It's even hard for us to when we stare at it.
Hard for us to even imagine that.
This cap of this money is available through this act and and it's not just available because of the sequester carbon it's available because now youre going to be incentive to lower your <unk>.
Energy from fossil fuels, so do things like combined heat and power systems do things like.
Fluidized bed boilers do things like capture of anything that you can do to reduce your commitment to fossil fuel energy and do things that you can be almost your own co. Gen site. The money is all there to do this is 25% or 27 clean fuel production credit is really an incredible opportunity for this industry to decarbonize.
When we get out of that and if alcohol to jet is successful, which we believe theres a high probability of success.
In using alcohol to produce jet fuel because it'll be the ci scores will be so significantly lower when you go out and you look at 24% and $25 26 for a company like ourselves. If we put those numbers that are available under the IRA and our guidance Nobody would believe us so.
No.
It's a great opportunity for us we're committed to sequestering carbon and.
And I think there is a high chance of high probability of success that the projects that were on their pipeline will get built.
Alright, Thats great perspective, thank you.
Thank you.
Thank you.
Our next question comes from pharma towards Tiano with Bank of America.
Thank you for standing by your line is now open.
Yeah, Hi, Thank you very much.
One question, just a little bit about how you know.
What you have to manage your ethanol Houston, you mentioned that you brought.
Forward.
A lot of maintenance in China allows I'm just wondering given how.
<unk> the basis was.
Where are you considering actual shutdowns of our facilities that meet these would happen again.
Say.
The corn harvest and may not be great. If this wont happen again next year.
What options do you have to manage our system to kind of avoid EBITDA lawsuits.
Yes, I mean this was such a unique I mean, I guess, a unique but more unique than we've ever seen this inverse you have to.
Make a decision on any given day to run through the inverse and west decision we made.
And every year in history or a lot of years in history, the in versus break and they break hard in a breakfast and you don't want to be off and not running during that time. This one just lasted longer and and our plants just happened to be.
Basically.
On a square one of the high basis levels in United States, Fairmont, Minnesota, 150 over Nebraska 100 over.
And in the ethanol industry did not adjust to that as we are in Q4, and we still see elevated basis levels and rising in Q4, we see that the need for our product and the need for this molecule to be made in the need for the low carbon oils to be made is driving the fact that ethanol margins are positive before contribution from corn oil.
At this point so.
I think it was a unique situation could it happen again, yes, we need to grow corn in the United States, we need to we need to have a good growing season, we need South America to grow well as well we need that to come off this year better than that.
The last couple of years as well so we've got to watch that weather closely.
But the river system helped a little bit backing up some corn into the system I think that.
We're only running at a 1 million barrel pace as an industry and that's not going to do it if we can get through winter and not build stocks and we get into driving season next year, and we get China to re engage in and their economy and start to drug instead of exporting gas use their own gasoline I think its setting ethanol for 2023.
To have a great opportunity on top of everything we're doing but we're going to run.
Through these situations for the most part I mean, we could have probably shut a plant down or two but the cost of doing that versus the cost of bringing it back up in the rest of it we just ran through it.
And in the middle of all that we're seeing increased ability to drive these plants harder with our operations team that we have in place than we ever have had before we've had 15 of the last 30 days were a record run rates with our with our with our product with our.
With our suite of plants, and we're going to continue to drive that and by bringing.
Our <unk>.
Maintenance forward from Q4 to Q3 and is driving hard to do 10 turnarounds in one quarter, it's almost unheard of but we did it. So we can position ourselves now to run to run how we should be running and take advantage of harvest basis levels and it really hopefully drive too.
Get ourselves back on track here, but we're going to run these plants, because we're going to run protein, we're going around oil and we're going to run sugar and when this is all in place a negative <unk> 10, a gallon margin would've been a significant positive margin under our system today and and so this was worst case scenario without without <unk>.
Protein fully on board, yet and without sugar coming online and with corn oil yields through protein than we.
We're in a pretty good place as we approach 'twenty three 'twenty four to hit our numbers.
Okay perfect.
I also wanted to ask you mentioned that.
With regard to that rate benefits.
A few years.
Number two to your what you would expect nobody would believe it but I think if we were to try to do something like that I think the idea is that with the.
With a new easily.
These two cents a gallon for each pulling thunder CIL suites. So.
So based on kind of the Scott where ethanol.
Ethanol plants.
Ci score is right now and what projects you believe you could do.
Can we actually try to put some numbers.
To what can happen Master 295.
Yes.
I think we'll start to.
Put that into some of our forward ideas on what is the art of the possible, but when you look at it and you look at it as a starting point under argon greet our plants are just above 50 carbon intensity.
When you sequester on a pipeline you reduce it by 25% to 30 points.
Under 45, Z Theres 40, <unk> and 40 <unk> in a combination of all of that and which one you choose is all subject to interpretation, but our view is you choose the 45.
You get you to a point below 50 on your reduction obviously.
We share that with our with our pipeline partner, but on top of that we can do things like combined heat and power.
It's a <unk> <unk> per point again, there and you can maybe reduce your intensity by 5% to 10 points and your and your capital is kind of a one to two year payback on that basis. This program because youre getting basically the U S. Government has put a program in place to Incent you to do this on top of that you could even go lower on your carbon.
<unk> intensity by doing other things. So there is a shot that <unk>.
Get into that zero to $15 <unk>.
Range to have a low carbon fuel and that's just it's just such a game changer in California at that point doesn't really in California. If you ship there great, but this greenfield production credit that's not a California program. That's a U S program and it just allows you to benefit.
Over the whole United States to ship your product, but if you get into a low carbon market like California, Oregon, Washington, There's even upside from there. So we're talking in the potential of hundreds of millions of dollars of opportunity to go after.
Think thats a little bit different from when we first went onto pipeline a.
A couple of years ago, and they're the only program in place was a 45 Q at $50 and a little bit of <unk>, which has come down significantly. This is really set us up to succeed as a as a business and carbon reduction as well as our partners that we're going to be partnering with us help sequester, our carbon as well to succeed.
Thanks Peter.
Thanks.
Thank you at.
At this time there are no further questions I will now turn the call back over to Todd Becker CEO for closing remarks.
Yes, thanks, everybody, obviously, not the quarter, we wanted to have but the quarter. We want to have is starting now in the company. We want to have is starting in the fourth quarter, that's why bringing on the rest of our capacity delivering on five major projects during supply chain and Covid and tightness and all the rest of it that we've been dealing with.
To deliver these five projects and with the biggest under construction as we speak we believe we are executing on our strategy. We laid out as we approach 2023, 24, and 25 and we maintain that the fact that we are developing new markets unique opportunities low carbon ingredients the ability for us to strategically.
Ourselves as a low carbon feedstock provider to renewable diesel markets. We believe we'll be able to monetize that opportunity going forward for our shareholders.
We also believe that Decarbonising. This platform will have significant effects on our financial capabilities as well and producing low carbon alcohol has to be made into sustainable aviation fuels.
From 2025 and on his position positioning us very very well for the last half of the decade and on top of that.
The dextrose glucose opportunity, we will know a lot more as we continue to build out this first plant and Thats, just really our pathway to.
Opportunities that I don't think any of us really thought of when we started this so we're we're in a great place where financially sound. We're in a great financial position as we launch into Q4 and going into 2023, we're very excited about the opportunities that are ahead of us and we appreciate your support thank you.
Thank you for participating in today's conference. This now concludes the program you may now disconnect.
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