Q2 2023 Gevo Inc Earnings Call
Good day and thank you for standing by welcome to the second quarter 2023 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
Ask a question during this session you would need to press star one on your telephone you didn't hear an automated message advising you're hanging just raised to withdraw your question. Please press star one one again, please be advised that today's conference is being recorded.
Now I'd like to turn the conference over to Eric Fry Vice President of Finance. Please go ahead.
Good afternoon, everyone. This is Eric <unk>, Vice President of finance.
I'm also responsible for Investor relations here at Jabil. Thanks for joining us to discuss <unk> second quarter results for the period ended June 32023.
I would like to start by introducing today's participants from the company with US today are Dr. Patrick Gruber, <unk>, Chief Executive Officer, and Lynn Smull, <unk> Chief Financial Officer.
Earlier today, we issued a press release that outlines the topics we plan to discuss the.
A copy of this press release is available on our website at Www Dot <unk> Dot com.
Please be advised that our remarks today, including answers to your questions.
Any forward looking statements within the meaning of the private Securities Litigation Reform Act.
These forward looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those currently anticipated.
Those statements include projections about the timing development engineering financing and construction of our sustainable aviation fuel projects. Our recently executed agreements are.
Our renewable natural gas project.
And other activities described in our filings with the Securities and Exchange Commission, which are incorporated by reference.
We disclaim any obligation to update these forward looking statements. In addition, we may provide certain non-GAAP financial information on this call the.
The relevant definitions and GAAP reconciliations may be found in our earnings release, which can be found on our website at www Dot Chiba dot com in the Investor Relations section.
Following the prepared remarks, we will open the call for questions I would like to remind everyone that this conference call is open to the media and we are providing a simultaneous webcast to the public a replay will be available via the company's investor Relations page at Www <unk> com.
I'd now like to turn the call over to the CEO of <unk>, Dr. Patrick Gruber.
Thanks, Eric and good afternoon, everyone and thanks for joining us on our call. We are filing our Form 10-Q today and we ask that you refer to it for more detailed information after this call.
Today I'll explain what we have been investing in and what it means how we think about further investments or use of capital and progress against milestones.
At the core Tivo is a whole lot of technology.
We've got multiple technology platforms that we've developed these include the net zero plants for IPA and ethanol and conversion of those alcohols into net zero hydrocarbon fuels and chemicals, we are already tracking and even our version of dairy RG.
We have to drive all of these things to commercialization larger commercialization.
That's our primary mission now.
To get these technologies commercial we think that it is most valuable to shareholders.
For us to take on roles other than just being an investor in projects to make technologies commercial someone has to take on the role a project developer.
Let me explain further.
Now we've been investing in the technology engineering and the plant designed to convert corn kernels into SaaS protein vegetable oil all with the potential of a net zero carbon footprint, we work with multiple technology suppliers. In addition to using our own proprietary technology, we use multiple engineering firms because of their expertise and.
<unk> our plant designs are well thought through by our strong team of engineers and operators for Operability efficiency and troubleshooting, we need these plants to work well.
A deep bench here or people who are good at this having design plants in the past.
We are now investing in the engineering and design of modules.
Do you want modules, because we believe it will be more cost effective way of Derisking plans and allow us more rapid build out of additional plants.
We G though.
One the plant designs and details we are the owners of the designs are the kits as there are sometimes referred to it's hard fought and expensive. It's taken us two years more than $100 billion to get where we are today.
Zero one.
There is no single technology supplier out there that has the expertise to design an LTV plant is jabil, who break that capability.
For example, it is our innovative integrated design that reduced the consumption of natural gas for the integrated entity one plant by about 70%.
Which makes that a lot more practical Andrew.
Is it realistic to achieve net zero footprint or even drive it to negative footprint.
The NV plant designs are ours, no one else has its RFP and yes, we filed patents on that.
We won't have to do this.
Heavy engineering and design lift more than once foreign NZ Atg plant that is based on 100 million gallon of ethanol input we.
We can copy and paste that for use with other sites that we've been working on.
Now to monetize our investment in engineering, we need to get something built and operating.
Does that happen.
To do that someone needs to play the role of a developer someone who get the project lined up for investment and get the Derisked.
Our investors can make that investment confidence.
The developer typically obtained land or a range of the utilities in licenses plan designs pays for the construction and engineering.
Lines of additional investment needed to get that plant built and otherwise takes care of all the details needed to get that plant built derisking the whole project along the way.
As a reward for taking the risk of developing other project. It is common for a developer to recover development capital part financial close.
It is also common for a developer to obtain what is call the carried interest in the project.
Carried interest has an ownership position in the project usually in the.
5% to 20% range with no cash required.
Just made a carried interest.
Project developers also have the option to invest additional capital and with their investment gain more return than a common project investor developed.
Developers frequently take.
The reimbursement money they've got back at the financial close and use it to develop more projects recycling the money if you will.
Project also need infrastructure investors in the project. These investors usually want to see a de risked project matured by the developer.
That is also part of the game project financing project that requires additional capital above what we call the hard cost.
That is the cost of equipment and installation of plant in order to fund the prepaid accounts that mitigate risk various types. However that also enables lower levels of equity and incrementally higher Levered IRR.
That also requires an EPC contractor to give the guaranteed price to the project. The problem is that EPC is typically boost costs and fees and capex surcharges to mitigate risks we have a very good engineering team with lots of project experience. So we're very good at covering a reasonable cost.
So why should a shareholder care about what role we take all the short version is that we can generate higher returns and generate more cash flow faster at less risk.
Then if we handed off development or just did a cereal investment I'm a step through it.
Nevertheless, we expect a high return on capital or why are we expect a higher return on capital.
To answer that let me describe a little bit about what it means for us to be developer projects in sustainable aviation fuel, our SaaS related low carbon products as a developer.
We have been putting our capital into things like site selection purchasing of land front end engineering.
The detailed design engineering permitting contracting with SAP off takers are finding out in discovery.
<unk> in the marketplace working with carbon capture partners of setting up those contracts are ranging utilities that we ended the green hydrogen partners setting that up so it's done on a depot basis over the fence in a contract.
And we have a race EPC agreements.
We've also arranged to have the option to.
We've created RMG from our own dairy LNG project that has the ability to take.
R&D up to that plant that net zero one.
We have an option.
We've done the work on identifying the best of ethanol and ethanol project technologies, improving them and then integrating them into a design, we've led the engineering and specifications of the process.
We've been signing up the farmers to work with a verity carbon tracking platform. So that we can measure verify an audit carbon reduction at the individual field level back to all the way through the whole value chain, including our plant and.
And this all achieved low carbon.
SaaS and other products, we achieved on the kit the design and the specification its intellectual property.
I expect that the engineering and design time and money that we have spent will pay off we are the owners of the MP plant designs thibeault will be licensing the plant designs to the projects will get paid for that and so we are actually more than just typical developers.
We also through technology and innovation.
Given that this market is so big we may even license our plant designed to other developers for fees or royalties.
Number two.
Less of our capital is required so what I mean by this again, it's can measure with a role of a developer or the amount of capital that is required is lower compared to the amount of later stage project level capital that would come in to complete our projects I already mentioned that it is common that developers get a carried interest that means we get an ownership position.
<unk> before we contribute any additional capital from vivo.
It is common for projects to have multiple classes of stocks with different returns developer shares in a project, commonly get more return and the dividend as a reward for the work in creating the project and Derisking. It.
Said differently, we expect higher returns on our capital that goes into the project.
By doing good development work, we enable something much bigger, namely infrastructure capital could come into the project because we've derisked it.
And we are working and it shows up in things like.
Our success in getting the term sheet space with the Doe.
Our recent announcement that we've entered into due diligence.
And the teamster negotiation phase for up to $950 million of debt on our ANZ One project.
And the USDA loan guarantee program.
One of the things that I liked in that letter that we got it said that Gee those net zero. One project is highly qualified and suitable that's actually a quote.
Number three we are also a licensor of technology know how and IP.
This can enable more rapid EBITDA growth capturing value from our IP.
So when I was talking about our progress with the year, we had <unk> a moment ago I said, we enable something much bigger well what is bigger mean.
It means that the end markets for these project so enormous and they are right for disruption from a drop in low carbon.
Carbon negative alternatives no single individual company can meet the market needs and the demand.
Regarding SaaS consider that jet fuel demand in the U S alone is about 20 billion gallons per year and growing.
And there are nearly 200 ethanol plants in the U S with the collective capacity of roughly 17 billion gallons per year. This presents <unk> with many opportunities, namely enabling ethanol the jet plants, using our modular I standardized envy one kit.
We want lots of the ethanol from these plants converted to SaaS with our kit.
We plan on developing class.
But we may just licensed plants to others too.
All about the growth and bring it into money.
In addition to the 80 J kit, we've also developed a.
Different set of kits to lower the ci of existing ethanol plants.
We need ethanol from existing plants decarbonize, our NZ innovations that we've just bet. This time in engineering.
<unk> and bringing in our innovations will apply there to those learnings can be transferred.
Warranty carbonized ethanol is more ethanol that may be suitable as a feedstock for our Z atg kit and innovations.
We also have the development opportunities like what we see with P 66, and ADM, where we enabled them for ethanol to jet we used our knowledge to catalyze something we can do ourselves.
And the good news is they agreed to pay us up to $125 million over the course of the next several years as they execute their projects will gladly help them be successful.
We want to see that $125 million, Carthage, Evo and hopefully starting sooner rather than later.
We are also addressing another enormous and market plastics and chemicals, there's tons of interest.
From the marketplace about this type of thing.
It's a market that appears more than 400 million tonnes at one hundreds of billions of dollars. We have proprietary technology to make olefins are building blocks for most chemicals and plastics plastics and chemicals made from our olefins would be massively carbon negative if theyre made in N Z style of plant.
We think that we have an outstanding position.
<unk> and cost to deliver ethylene propylene and butane to other media other intermediates with Royall just hasn't seen before.
Lots of companies have technology to convert ethanol into ethylene ethylene goes into chemicals plastics fibers, everyone has heard of polyethylene and normally it's made from petroleum, but people have long ago figured how to make ethanol into ethylene we have chosen access technology as part of our atg process.
In that process one of those steps takes ethanol makes it into polymer grade ethylene. So we could supply that market too it's built into the ANZ one process.
If we chose to supply ethylene to chemicals and plastics, we would expect our ethylene we massively carbon negative the lowest in the industry and we think probably the lowest cost given the scale of what we're doing and the infrastructure that's built in.
Now in addition to that for the last decade, we've been developing proprietary ethanol to all of our technology or E tail as we call it.
With a focus on <unk> and propylene.
<unk> is a proprietary technology all by GMO that reduces the capital and operating cost to convert ethanol for all of us using proprietary catalysts.
We filed patents on this it's our pieces our intellectual property, we believe that E mail, we will save money on opex or capex for fuel plant sure buckets.
But this proprietary Eto technology also enables conversion of ethanol to carbon negative polymer grade propylene and beauty.
And Atg net zero plant that has ito install we could simply convert the all of us to SaaS or diesel.
But we would also have the ability to selectively produce propylene and serve it to the chemicals plastics and materials markets propylene is a key ingredient for a range of polymers and plastics fibers used today in everything from car capacity to consumer goods carpet diapers packaging propylene made and as the plant with nito kit will be massively carbon negative.
We think it's going to be valuable and it's very interesting.
For the chemical industry at large.
Solving a problem that other people have tried to do but we have that technology now we have to commercialize it well, we're not alone LG Chem. Thanks, Rhonda something too that's why they've done a license and development deal with us.
Our agreement with LG Chem is specifically decided to develop bio propylene for the production of drop in low carbon alternative.
Two the typical polypropylene products, we want to drive the carbon negative products.
Our agreement with LG Chem includes a license and development agreement, we've already received the first payment from them.
Under this agreement we've already outlined the terms for investing in the projects.
LG Chem is a great partly partner hugely committed to decarbonization and our E tail helps that.
We can create something much bigger and faster by playing the role of licensor and developer.
Eto, Israel and gives us an entry into another giant market that have carbon negative plastics chemicals in fibers leveraged off NZ.
Plants and their designs.
I think it could be a really big deal.
We look forward to announcing more examples of being a developer and technology licensor related to our verity carbon tracking platform. Our NZ projects of course and that includes Isobutanol and other projects.
Those things are still alive and kicking we just don't talk much about them.
The fourth advantage.
Our approach is creating optionality, how he's our capital this is super important.
We have.
The option to invest in development of projects and we can also invest directly in those projects like other investors.
Obviously, we want to take as much of the cash flow streams, we possibly can.
We want that EBITDA.
But we also have to be prudent in our use of capital we are going to overcommit. Our balance sheet. We also don't want to be forced to raise NAV dilutive capital at the <unk> level.
We're going to be careful about this.
As we make choices on how we put our capital to work the choice will depend upon us Wayne the availability and attractiveness of third party project level capital and the availability and attractiveness of new projects that we can develop at those higher developer returns for less of our capital remember, we get a disproportionate reward if we'd been the developer as we look forward.
From today it may make the most sense for <unk> to recycle some of its capital to develop new projects.
We also like our project and we want to invest in them.
It's not.
One or the other it's both developer and Investor we want as much of that EBITDA as fast as we can get this means the balancing act to be the licensor developer and co investor in the project as we go forward I wouldn't be surprised we think a significant stake in SD Wan above what we would get just by just by taking.
The development Cary.
That choice, we driven by absolut options available to us at the time.
As the decisions and financings get made.
In other words subtle point.
Is that getting NZ plants built is not the only way to you will becomes profitable.
We don't have to have those plants built.
To become profitable.
We like them and want them, because we will get much bigger faster growth between R&D very specialty chemicals and fuels as well as other initiatives, we have multiple pathways to becoming EBITDA positive in the near future.
Okay setup.
We want those empty projects built out.
Not just by us, but by others as well.
Now, let's talk about key milestones, we have achieved year to date.
I'm working off of the milestone slide in our investor deck, we have.
Four business areas that we bucket it things into what is the hydrocarbon projects.
And their development.
So.
First part progress in ANZ, one financing, while we still need to secure the equity investors that should be we can make progress on that more now that we have an indication from the Doe that should help us we still need to know what the rules are for SaaS and ethanol from the IRS in the rulemaking under 45 C suite can update the carbon.
And therefore the returns on the project we have been in close contact with our airline partners, who understand that timelines are changing we don't anticipate any issues regarding timelines and contracts with them is a very much of a partnership approach and they've been very very good about it.
We will have to start out any economic issues that might arise from the rulemaking on an IRS on a 45% none of us knows exactly what it's going to include we've told it should be favorable but you just never know until it's done.
We've been discussing all of this with them and with potential equity partners.
So how to solve the issues should they arise. So we should we see a little more information we will get this thing done and figure it out.
Second one.
Under this section is finalized the price and schedule for the EPC contracts, where we had a contest we worked with several companies who have the potential to come EPC contractor is looking at how they worked and what they do and we selected our lead horse Thats Mcdermott. The EPC terms look good they are still working through pricing they've promised to be transparent with you.
No gameplay my team is going to make sure that that happens.
And our next milestone was entered the diligence process for the Doe loan done.
As I mentioned, we are invited into the term sheet phase we announced this on August 7th.
And this term sheet negotiation is for up to $950 million of loan guarantee to finance the ANZ one projects, there's a really big deal for us and our shareholders.
As a reminder in January of this year. The Dia, we invited you to submit a part two application to Doa titled 17 long guarantee program.
We completed that application and other qualifying work that went with it.
It's a lot of work.
And getting through this successfully and the huge milestone towards Dob's conditional commitment for the project debt of zero, one and the financial cost.
We still by the way.
To get this closed on with the deal that's going to take till probably in the second quarter of next year.
Complete the design of ATK critical module. So it's all about derisking the build out of the <unk> plant and we're taking a modularized nation approach we're doing.
Much more heavily modularized than you would've done say five years ago. This.
This is all about derisking the build.
Under way the design is being worked on.
This is a strength that both mcdermott and price with whom we work.
The next milestone we had listed was signed the agreement with existing ethanol plants for a T. J. This is on track, although at a slower than we'd like because of lack of clarity around the IRS Bill.
And the 45 Z.
I expect this will still happen with the folks of Decarbonising ethanol first as a prerequisite to building out a T J.
Complete the FPL to design for <unk>, that's the 300 million gallon ethanol input to 195 million gallons of Atg done. This was done by Burns <unk> Mcdonnell with one of our other engineering firms with whom we work.
No more money is being spent on this right now it's shelf that's going to sit idle for a while as we finish financings on SD Wan.
One other item on the ANZ Atg front.
We verbally agreed with accidents to extend our relationship for two years, we like each other as partners. It's a great relationship.
They are really good we still have two paper up disagreement but.
Theyre really we work together well all over the world.
The next business areas Verity here.
Here the milestone first milestone is to sign up additional customers and partners for Verity, we already have sire with 135 million gallons per year ethanol plant now we have an additional ethanol partner that has signed up more than 100 million gallons per year. The golar Verity here is to capture carbon value that's been left on the table and monetize it.
So we want our partner companies to make a lot of money and we will make money as they make money progress looks good we expect to add more companies this year.
The next milestone and expand Verity acres track to 100000 acres or more this was slowed a bit because the USDA grant process has taken longer we just got the final award notice and the final contract last week. So this should get going soon and once you have the money in the bank and be able to spend at that $30 million is going to be useful.
<unk>.
And with the USDA money in hand, we would expect to have 100000 acres by next season.
One that we added as a milestone is that get.
Verity tracking.
Carbon tracker applications working at launch that has been done at worst attract carbon in Ci field by field and should help farmers make better decisions on how to lower Ci that's very good progress by the very team. The results look good we can see field level differences in Ci this going to be very very important in the future as we make the case as to why improved agricultural.
Practices can be measured.
And reported we actually believe that we run into people in the government ago, they actually their toll.
Not possible to measure while we got the data that says, yes, you can and we have it here and its straightforward to a lot of work to create it and its proprietary but you know what.
It works.
The next milestone is to provide guidance for 2024 and beyond for parity revenue and do this by year end I'm looking forward to seeing this too Im sure Paul Blum, who is in charge of Verity, we'll wait until the end of the year to give it to us but thats. Okay. His team is making progress.
Q2 R&D.
First milestone complete the expansion of our R&D and achieved greater than 90% 400000 million Btu is by the end of the year. This project on track equipment is already being delivered to expansion is going well. We also have a milestone Bruce more than 300000 million Btu at 2023, our team has achieved 90% of capacity already.
And.
Guarantee plant is running incrementally positive cash flow basis, even with a low.
Temporary Ci score at minus 150, which is low.
And of course low.
L CFS.
Carbon values.
We expect profitability to improve once the score of minus $3 50 is approved and capacity increases.
The next business segment that we have is chemicals and specialty fuels. The goal has been restarted RBA and octane sales. So all of those plans being put in place the interaction with customers is occurring already we're out there working on it we're seeing a lot of interest for Iva and ISO octane it'll start off as a specialty business specialty product, especially.
Fuels and then I think it will grow from there is time to get the contracts in place.
For the <unk> and isooctane and in the long run we would expect to be a really big business too.
Next milestone is to scale up Youtube swap Ito to the pilot plant stage. While this is on track.
So we've developed a lot of proprietary technology here at Tivo, it's showing up in our NV plant designs for <unk> T J for methanol and IPA.
Proprietary technologies like E mail and IPA I like the opportunities that are opening up for chemicals and plastics.
Because of our technology intellectual property.
We're excited about verity, both about what it can do NDA intellectual property, that's being created as we do it tomorrow.
Tomorrow, we get into it the more potential we see this isn't for Verity. This isn't just about tracking carbon it's all about monetizing that carbon that's where we want to get too.
Now at the core of <unk> are several technology platform. So just lifted some.
By taking on the role of a developer Licensor in addition to project investment.
We think we can optimize the use of our capital and grow EBIT <unk> faster leveraging those technology platforms.
So overall, we will stay focused driving towards a positive EBITDA sooner rather than later and managing our balance sheet optimizing the use of capital. We are keenly interested in like you see in our share price be maximized now.
Now I'll pass it off to lend to talk through the operations and numbers, including our dairy R&D asset.
Thanks Pat.
<unk> Q2, combined revenue and interest income with nine 3 million with the interest income benefiting from higher interest rates.
Our corporate spend that as SG&A was $6 7 million for the quarter, excluding noncash stock based compensation of $3 9 million, which is a <unk> 2 million decrease from Q1 as a result of our cost control efforts.
Debt related to the northwest, Iowa, RMG project was 67.6.
$6 million.
<unk> of $68 2 million face value less on unamortized pre.
Premiums and issuance costs.
We ended the second quarter of 2023, with a strong liquidity position of $426 million in cash restricted cash and other liquid investments.
Restricted cash portion is associated with our northwest, Iowa, RMG bonds and certain collateral related to the development of net zero, one and totaled $77 8 million.
During the second quarter of 2023, we invested in capitalized $17 7 million cash and capital project.
Comprised of $9 8 million into net zero, one $3 million into northwest style, RMG and $4 9 million and for other LNG project.
As has been discussed we intend to finance the majority of ANZ, one capital necessary to fully construct and start up the facility at the net zero, one project level with debt and third party equity.
It's also worth noting that while the Doe loan as the primary track to secure construction that we are exploring a syndicated bank loan process in parallel so to keep our options open.
Our dairy RMG asset in northwest, Iowa has been injected into the pipeline since June of 2022.
This last quarter the project achieved.
Breath of year, one performance against its designed capacity onstream injection of 97% uptime of 91%.
R&D revenue realized for the quarter was $2 9 million using the carb low carbon fuel standard temporary pathway approval of negative $1 50 Sci.
Despite being constrained to the temporary Ci score, we achieved positive standalone R&D EBITDA in Q2, and we expect to improve results with the carbs final approval of the project negative $3 50, Ti applications middle anticipated to occur in 2024.
We can't say when exactly in 2024 is timing is dependent on the card process.
But achieving the permanent pathway will substantially improve <unk> credit revenues under the California program itself as well as per the terms of our marketing agreement.
In addition to the project having approached its full design capacity with an annualized production rate of 355000 members to use last quarter. We are expanding the project capacity to 400000 that might be to use per annum expected to be completed in Q4.
Regarding our Eto technology, we received payment of $1 3 million for the second quarter and expect to get another $1 $2 million over the next two years associated with joint development efforts, we expect other payments upon commencement of commercialization, including royalties on net sales from future production volume.
<unk>.
Overall, I'm really pleased that we have a pathway to positive cash flow.
Trimmed back our corporate burn from what was originally planned in our project spend is expected to decrease cash flow from RMG and fees and licenses have helped put our net burn on a downward trend.
With that I'll turn it back to Pat.
Thanks Lynn.
We're making a really a lot of progress. It is good to see some of these things come through.
Looking forward to our success.
Great, Let's go forth, let's open it up for questions.
As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
We'll be taking questions from research analysts at this time, please standby, while we compile the Q&A roster.
The first question comes from Sameer Joshi with H C. Wainwright Your line is open.
Yes. Thanks, good afternoon, everyone. Thanks for taking my question.
Just a clarification on the R&D revenue.
The $2 9 million dollar amount on 77000 odd.
Btu.
Does that also include the <unk>.
CSS.
The key then.
And as PFS with a score of negative $1 50.
There's some other.
No. It has it has the Lcs at minus 150 value in there.
Okay, Okay, and then confirm but the 400000 btu capacity.
What are the additional steps you did.
Additionally, the money needed to reach that capacity over the next two quarters.
It's it's small so small enough that I don't recall, so it's stuff that we had already done as part of the project. So it's a it's.
It's a few million dollar expansion.
<unk>.
And some of it probably would be subsidized by the I forget what part of the 40.
The IRI Bill what's section of 45. It is the investor tax credits, it's probably cover some of it too we'll see but it's a small amount of money the equipment on site.
It's about optimization work, we have extra capacity, we have extra room to inject more into the pipeline.
So we might take advantage of that so it is going along pretty well that's got to get that project.
Up to 400000 million Btu rate that will happen in the fourth quarter is what the team goal is expected to happen that way and we should be in pretty good shape as we head into 2020 for guaranteed.
LNG business is actually pretty exciting business, we have figured out stuff that no one else seems to know about.
How to really optimize the heck out of this we did throw quite a few engineers at this and a lot of data scientists to sort things out and it's paying off for us like it.
Yes, it's good to see.
Actual revenues on that.
On that front over the last couple of quarters.
On the.
One front is there.
Sort of.
ECC.
Process that needs to happen before that.
Lou.
One can be finalized are there any like interconnections.
Dependency.
There is because you have to have APC, yet there was some price done to finalize the loan.
The trick is that we like Mcdermott.
And we like the potential in how they operate and compared to the other guys, who we've been talking about for EPC lump sum turnkey in that.
In terms of reasonable they're pregnant as they want to see this done they want it.
Work closely with us.
Good good one of the problems that we have in an inflationary environment as you ask for the lump sum turnkey priced now or as opposed to aspirate six months from now I guarantee you that have been patented <unk> like crazy amount of padding.
So it doesn't make sense inflation has.
Is moderated in some places equipment.
Supplies have loosened up and so perspectives are changing so if you don't ask for it at the right time, it or you don't work through that and you get it premature you get crazy.
Number and.
And so we have had we've been keeping track of all the capital all the way along my team is actually capable of doing that itself and so it tends to be very useful for us as we work with different potential epc's, we can know when to call somebody.
We know we know how to call somebody out.
So it's a balancing act that we do we have to have the final updated numbers, but you don't want to ask from too soon because it'll be wrong and so we'll be working through that paying down to EEP.
Lump sum turnkey price with the lead horses Mcdermott, we are a backup already.
And.
We will get there in the right time frame for the Doe loan close.
But we also I guess at this point the other thing we're watching carefully is what.
What happens and when in the 45.
For the 45 is that section of the <unk> build that talks about the credits that would be applied and what method. The thing is is that the.
They're going to give initial guidance on a part of that 45 section anyway.
And the IRS is going to come out with some rules about how this is supposed to work we've been told that should come out favorable for people like us.
But you never know what it is we got but we do need to know what the what the value is and how to calculate it. So we can plug it into the economics.
And we're not alone in this this is everyone's got the same issue. So we're all kind of watching and waiting to see how this all works out.
We have heard input from all kinds of us we've been we've been up with the administration and the Capitol Hill all the departments.
Lots of people and they're.
We're really getting to clarify to use Argonne, Crete, and there might be slight variations of it but it should be it should come out in pretty good shape as what I would expect at this point from what I'm told.
Nothing counts.
Until it's done.
What we still need it done or at least indicated is which direction. It's going so we can plug the economics into the overall equation.
Thanks for the color.
Sure.
<unk>.
Interesting development on the Eto front.
You mean the amounts.
<unk> been talked about.
Some DC seems small but I'm sure.
Much much bigger approach entity.
In the mid to long term.
Yes.
Like.
The businessman maybe.
Like what are the next steps on this launch this initiative work with LG.
Well the Ito technology is something that we have worked on for we've been doing people often said gosh. What are you guys switching your technology from alcohol from Isobutanol and ethanol for us, they're all alcohols and the chemistry on them is very related so we've been doing this for years and we have a bunch of patents on this hundreds.
What's interesting about <unk> is it looks like it cuts out a huge amount of capital out of the alcohol to jet process that is typical from whether its actions or ERP or anyone else who's out there it saves it saves steps and it's and it saves operating cost and capital Thats, what it appears and looks like and so we are.
Looking at it from that standpoint, but we also recognize that we can we can adjust the catalysts are operated so we can make propylene refueling.
Propylene is one of the ones. That's one of the hardest molecules to make from a bio base and high yield and it.
It's also one of the most valuable products in the marketplace in terms of its overall volume.
And what it's useful for because it is a typical thing in consumer goods typical ingredient for consumer goods or plastics or fibers and clothing and theres a whole bunch of stuff.
How do you what's.
Whats interesting about this is our propylene would be <unk>.
We're in the.
Approaching maybe a minus 100 Ci score.
That's interesting, but it doesn't seem that before that's what attracted.
LG.
And they see that there is an opportunity there. So we have to go work through its scale and figure out what we don't know yet, but that's all going along pretty well we've been operating it and many plants for a long time.
And we just got to go through the work of figuring out what is it if theres anything we don't know and work through any of the Operability issues. If there are any we don't see any.
That's what has to be done next and then it would.
Get rolled out.
I think pretty quickly and plans to get built and it would be along a net zero.
One style brand.
Right along the same exact same concepts that we just engineered wood reapply here.
And.
You will be I think we're going to have a pretty youll see on the fuel side, we're going to turn up with a pretty interesting partner there to watch this and sees the value of it.
<unk>.
Two it's going to be a good technique.
Saves money.
<unk> production cost base capital.
I wish it was ready for Prime time today, just isn't we got to do little more work first.
Yes, I'm sure you will have.
The carbon reduction.
Technology energy usage point of view that would further reduce debt.
What does that what you hit on an interesting 0.1 of the things that we look at is people are all interested in these materials I look at we are the first to do it.
Fully renewable PDT I've seen others, claiming to be first we did it first maybe like a decade ago Big deal. We can do that we have technology for its about putting the business system together, we're not looking for and we want big business systems that leverage each other the fundamental thing that we're doing is we can make these basic building blocks for the petrochemical industry.
Alright basic building block in building blocks that they use.
And we derisked, the hell out of them to make them make them from renewables and make them carbon negative and they will be I believe the lowest cost that can be made because of how efficient they are with economies of scale and the whole business system approach that we're taking so even though we focus on fuels.
I think sometimes people put us as a it's a one trick pony Nintendo that's the wrong thing nobody does that Thats stupid.
What you do is you use the fuels to drive economies of scale, but you open up all the chemical opportunities along the way.
That's important that's what we're doing that's how we think about it and is this all becomes more real I think people in chemicals scope that.
That is going to happen that's interesting.
Yes.
It is really interesting what youre doing there.
Just a bookkeeping question last one from me.
The factory I linked costs.
Should we expect it to be around $1 million for the next few quarters.
Do we see any change in that.
Depending on I guess ethanol prices and so.
What cost was that I'm, sorry, Oh.
Oh, sorry.
The line item in the income statement called facility idling costs.
Oh that'll stay the same that's where all the burn plant. It is sitting there and we're going through the process when to start it up how to start it up how do we use it. It's a it's a very good development site and so I would just it's going to be.
I think that total cost for the year is like a couple million dollars. So thats something we should confirm with you and a follow up call, but it's not a huge amount of money, it's not a huge amount of money and it's just basically idling. It we're actually using that plan right now to educate customers. So we've had more than 65 <unk>.
Airline customers. So these are customers of airlines the people downstream of them up to our plant sites showing them. What we're doing how we're doing of taking them off the farm showing them, how modern planting equipment works because its been.
And usually the result as their minds are blown about the state of art of what's actually happening versus what if you just listen to the press and the Doom and gloom.
It's wrong, it's just plain wrong, so it's quite impressive to see and so we've been using it for stuff like that but I think what will happen. Its future probably is that we have some we got finished cooking the plans, but it would be at some point, we'll probably started back up and use it for making specialty products, that's what I would expect.
Yes.
Okay.
Thanks Lynn.
That's a lot.
Please standby for the next question.
The next question comes from Derrick Whitfield with Stifel. Your line is open.
Thanks, Good afternoon patent team and congrats on your updates thanks.
Regarding your northwest, Iowa, R&D project expected negative 350, <unk> pathway is considerably better than the temporary and the previously noted negative 240.
Could you comment on what's driving the variance between the current and previous expectations and if that Delta is the result of the optimization work of your engineering team.
Yes. The answer is yes. It is it's the optimization work, we did some modifications to the Digesters and how they operate also lagoons.
And then.
It's more of having real data available to us.
That all went into the calculation for it so that's what should happen it should be a minus 350, you never know what carb will do.
So, but thats actually what it pencils out compete with real data and now we are data hogs.
This is <unk>.
You know this already could you spent enough time with us, but we sure like we count stuff and we got sensors all over the place. So our stuff is more interesting instrument than what you would find at other operations from what we've been.
Told her what we have seen as we've met with other people and we take it we believe that R&D should be treated like a manufacturing plant.
Manufacturing operation there is a lot of value here to be operated right managing it like you would a plant with.
With operating discipline is a concept that.
For people, who are operators, who run plants, they understand what I'm talking about but you do it with engineering approaches and plant operations approaches and discipline and measuring and improving along the way and Thats, what youre seeing here.
And we.
We also have a bunch of stuff of equipment that we put in.
How to think about how do we make things work properly intuit's was robust because you don't want plants that are going up and down that screws things up royally, you want them to be steady and that's what we've been able to achieve we have a question in front of front of us and we are sorting it through and I don't know what the answer is yes, but how do you how do you best.
Expand this capitalize on it further how do you do that in a way that balances against our other capital needs at GMO that stuff, we're looking at right now and.
I think there'll be some dust settling here in the near future where people who have <unk>.
I haven't taken didn't have maybe the engineering capability you have.
No whatever their problems are there might be some deals out here. So we're paying attention to that I don't know what I don't have a firm opinion, yet, but it's prudent to take a peek and see what's out there and what we can apply our knowledge to fix and make it work.
We get paid for it of course.
With that said, that's exactly where I was going to go as my follow up question does it behoove you to lean more into R&D, given the expertise you've picked up through that operation and would that be a <unk>.
Operating development.
Perspective, where you invest or would that just be in a similar developed licensing licensing type approach.
I think it's that in R&D, we'd want to.
Yes, we want to expand their and to want to operate assets as what we'd want to do not just not just help people because it takes discipline to do to operate this stuff you really got to be a plant operator.
Mentality.
And we want to find those opportunities now we could the problem that we're seeing is that there was so much euphoria over our LNG and.
All the stuff that might occur people bid bid up the cost of manure and they bid up the cost of access to firearms and they bid up.
Everything and so people, it's a rational now the price in California, being low is going to help to adjust those people out and so I think there's can be some development projects that are fail people, who have projects planned are developers trying to push them I think will fail and so I think theres going to be opportunities. So part of this is trying to find out what those are I think what this beginning.
To see some of those guys go by the wayside.
And they have there's only a few of these technologies that work well there aren't there isn't like theirs.
I'm talking about the actual digesters.
People are finding out that there's lots of problems with the European style Digesters.
So.
It's one of these things where there really is knowhow here and we're going to take a peek and see where we can fit and how do we expand but we have to do it in a way that balances against our other capital needs I really do want to see I want I wanted to.
My money into an NZ one project too.
The actual investment in the project too and so we've got we're looking for the right opportunities and so if you know Derek you kind of tell us because I am interested in those and we'll look at them and see how we play and how it can add value and make it accretive for us.
That's great and then maybe shifting over to your licensing and development business model that you articulated during this call and similar to what you have whats LG Chem.
How should we think about the returns and capital requirements for this approach and more specifically on the revenue side will it be recurring and linked to the carbon credit markets.
Well I think it will almost always be related to carbon value. So the ball truth of it is there is no technology honors that compete with low cost petrochemicals for making renewables into.
That are de carbonized and low carbon.
The.
Nichols or cheaper. So it is the carbon value of that has to come into play now. The thing is we can get the cost pretty darn close you've seen our economics. So you'll notice that our economics, they can come pretty darn close and they're good but.
Justify that on a cash cost basis anyway, but on that capital cost basis, where you've got to include those economic returns.
We have to deploy new capital so that has to be supported by somebody's perception of carbon value that can be done in the market directly by placing the products with the right channels those tend to be specialty products at this point, where it has government support. While this is why people are choosing fuels because that has government support both at the state and federal level.
And in the chemicals market, it's interesting because the.
The chemicals market.
You've done the math you would probably you know this is that.
A plant like ours.
Like a plant like ours, the 65 million gallon.
Hydrocarbon plant that's like when you put that in tons, it's big it's in the hundreds.
One thousands of tons its giant chemical plant.
So even though for us we sounds like while it's just a 65 million gallon plant that's pretty small in the Grand scheme of fuels. That's true it's small in the Grand scheme of fuels, but and the world of chemicals, It's a world scale plant.
And that's the disconnect that occurs so this is why we like our approach.
Being able to leverage off of stuff, we're already doing.
Are you, making olefins and in that sort of one design, Brian making the olefins.
We can add incremental units to make even different kinds of olefins and we should divert those there'll be some of that stream into the chemical market because that is a significant size or at least potential size.
What its flexible too because we don't have to send it just turned it on where to fuels anyway.
That's how we think about it in terms of the value of it I think that there really are specialty markets that are that make a lot of sense.
Just have to figure them out.
Maybe lastly for me.
Just with kind of what's going on inside the beltway.
What's the latest unexpected timing on 45 Z rulemaking from U S Treasury.
I think what they'll do is.
I think it is going to be in the fall here sometime in probably late fall I've heard estimates go from September to December .
And I haven't heard anyone say, it's going to get pumped into next year at least not very many people say that most people think it will be sometime in the late third early fourth quarter something like that what we can expect is youre not going to remember the 45 Z for the blenders tax credit or the producer's credit that comes into effect in 2025, which youre going to see.
<unk> is like the precedent set as to how to do some of the other rules better related to 45 section 45, and how to kind of carbon and stuff like that you'll see that start to get described here in this rulemaking, but it won't be a final rule set but it will be good and.
It'll be good.
Indication of what to expect and it will also might draw some battle lines, where we're going to fight for stock too because we're trying to count all the carbon and make improvements and in virus I, sometimes I think an virus don't want anything and they don't want any.
Any fuels made they don't want from any source. So is this very weird dynamic that is going to occur I think that because the people are anticipating a split Congress next year Thats actually helpful. So by taking that approach, we actually measure carbon accurately and rewarded and you do it that transparent.
Transparent measurable way that plays that place to everybody's Commonsensical approach, let's get the damn data and measure it and reward people for making improvements and do it that plays in it's hard to argue with.
But we see some of these.
Far out and borrow Sir.
Verify to that even.
That's helpful. Thanks.
Sure.
As a reminder to ask a question. Please press star one one on your tablet.
Please standby for the next question.
The next question comes from Manav Gupta with UBS. Your line is open.
Good afternoon guys.
If you don't mind, just stick to more macro question I wondered with Brean.
You have indicated that you expect eventually to have a negative carbon intensity of minus $3 50.
Liam.
Jack and I strongly believe this to be honest with you there are people see.
You should not even be part of the comp and be client gap at that minus 100 minus 150. So I'm just trying to understand when you hear those things what is your response and is this something you'll be lobbying for where you'll say you know minus the 50 is what we need to do because that's what the.
The value we are adding.
Well I think when you follow the rules to measure this stuff like California has outlined its minus $3 50 is what pencils in I don't think of it like that at all minus a completely different paradigm I think this I think.
Methane fossil based methane natural gas is one of the greatest polluters.
<unk> generators.
Fossil based <unk> and greenhouse gas emissions there is I know that.
In evaluating our net Z plant designs.
The biggest enemy was the use of natural gas, which is why we've made such improvements.
We could transfer we view that Theres, an LNG business here, where you can transfer at attractive prices to a plant like our ANZ plant or are there any other plant for that matter, where you can make good money on an R&D project and you don't need current California at all.
In our long term plans, we don't need, California or that Ci score.
So it's a very different point of view that we have it's about the transfer price at whatever the rulemaking is under more like a great model with standard greet model. So we are not.
Counting I wouldnt youre not going to see.
I guess real bluntly youre not going to see me bet Big investment accounting on California at minus $3 50, you are not going to see that from us you're going to see us do it at.
Market prices per nm Btu that work to make good money at a dairy LNG project like we have they are efficient ones and then transferring it to some production facility of some type where that carbon value can be transferred.
That's how I think it is going to unfold in the long run so we wouldnt bet on it.
Counting on minus $3 50 in California, or California, now CFS saves the day, we just don't think like that we're looking at a different business actually we think of it as creating the option.
To get rid of fossil based natural gas out of our business systems. That's how we view it in the long run.
Perfect and I agree with you on my quick follow up here is one of your peers or competitors yesterday, and said look fashion to the exchange market the demand is and finite and the suppliers.
And then they made some comments on pricing and I'm just trying to understand from you from a long term perspective, when you talk to the airlines and stuff how do you see them actually pricing SaaS like.
How much higher versus the jet fuel.
Any benchmark how should we think about the pricing on the SaaS side.
Yes, that's a really good question, that's the thing that we're <unk>.
Pretty close attention to because.
The real practical matter that youre alluding to is that airlines themselves can't afford to pay premiums for SaaS at least not very much.
They find a way to pass it onto their customers and get them to embrace of the customers have to embrace it.
Everybody has everybody in the industry has to do it all at once and say theres going to be a surcharge for these new fuels.
But then there's a chicken and egg problem. So this is part of the problematic issue, we have in and around SaaS the way to break it down and think about is like this.
A product like ours made in a net zero system.
Pretty darn low cash cost is reasonable.
It's our capital that has to be paid for that's what builds up the cost right. So you think about.
What's that going to take and then you look at how much carbon value is going to be in the marketplace.
So the way to think of revenue is this our jet fuel for sure has at least as much if not more value technically just as jet fuel than a petro jet molecule right.
Without counting carbon the carbon value itself then comes from.
The RFS.
The 45 Z if they ever pin it down right.
State programs and there are several of them Theres no CFS Theres, a buck 50 available on in Illinois, and other Buck 50 in Minnesota.
Sure.
Oregon beats, everybody because they have a higher premium for all those things.
And so you got to take all those things and stack them up and then ask what's left on the table and is it something that the airlines can accept while our contracts say, yes. They can.
<unk>, it's reasonable in the small category so it's incremental.
And so you have to have investors at the same time, we have a long term view that carbon is going to be valued.
Now in our point of view and and as we started thinking about this years ago. We believe that there is fickleness in government policy and you know what ultimately want to be consumer trade and consumer trade something that we can show to consumers. So think of say, yes. I think this is worthwhile and I pay for it and I can see it. This was the genesis of our Verity tracking.
That is the purpose is to get it bullet proofed audited measure transparent. So you want to fight about data bring it we've got the data we'll lay it out in the open for Ya and Thats had the discussion about facts because what we see in this space all kinds of BS and waiving of stuff and you see that being attack right now even out of Europe with some of.
The issues around these.
Carbon offsets and stuff, we're doing in sets the actual real carbon attached to real products and measuring it and thats. What ultimately has to happen Thats a system are created and the airlines love that and because thats, all part of creating the value across and making the carbon bulletproof. So yes. It requires some extra premium from airlines.
Yes, it requires carbon value from state and federal policies and yes, it's going to require carbon value I think in the long run.
It will be something that grows over time as consumers find out that no really it's real.
I think it's going to unfold, but we're already in the hunt of.
When you take all the Carbonite added up and you just say you use that as a carbon credit against or use that credit against the total cost you know what the economics work and it is in the range of affordable for airlines already at least with our stuff on other People's stuff is different there at a higher price.
Last question for me and really be able to follow up on <unk> question.
You clearly an RMT offering.
I think thats pretty supportive.
We kind of the key end markets.
Would you like only two suppliers in the transportation market or is it going to be mostly utility market like how would you describe your end markets on the R&D that we're producing thank you well well today that paradigm is that we're selling the transportation fuels in California, because that's where you make the most money there'll be a question in the future barring any changes that occur.
Any new influences from government policies that shoot we should take that gas up to our net zero one planned drab the Ci score down further that could be something we would do and theres potential there and it will depend upon which is more valuable sending a transportation or sending it over there too.
<unk>.
<unk> gas to do the thermal load for a manufacturing plant. There are things that are wildcards here, though I was talking to some folks yesterday were talking about the hydrogen in the potential to generate hydrogen and how do you get mark Green hydrogen and how do you blend.
Carbon negative R&D type with brown agent to make more hydrogen so there'll be an opportunity. There show me the money, let's see what it is and we'll look at it and see.
So I can see there's definitely could be influences from government policy as they weigh into this stuff I've seen hypothetical things I don't know that I believe them yet about the 45 Z of being kind of a windfall towards R&D.
The projects I don't know if I believe it but if it's true well that's going to cost you will pay attention for a while but it's not going to be sustainable in the long run thats, an unreasonable amount of money from what is being talked about.
Could that influence yeah sure fine you want electricity made out if I get paid an extra $20 1 million Btu's fine electricity I can make that happen no big deal.
So we have a point of view route to make money is what we're doing here.
And we have not a luxury but we havent, we havent unusual capability as a small company and then I got really strong technical people engineers operators practical people and so we can adjust the stuff as it unfolds and that's kind of how we view. It we will go where the money is man that's what we'll do we just got it I just don't want to speculate on it.
Thank you so much.
I show no further questions in the queue.
I would now like to turn the call back to Dr. Patrick Gruber for closing remarks, well. Thank you all.
This was a longer one today, we felt it was important to try to really get on the record how were thinking to make it more clear I don't want to have people think that we're not planning on being an investor in our projects. We are planning an investor but someone has to play the role developer we are playing the role develop over the best suited to do it but were more than that too with our technology developments and so that.
Makes us in the role of people, who really do pay attention to technology and how to improve things.
So we're trying to clear up a whole bunch of these questions. Thanks for sticking with us through this thanks for your support and I wish you all good evening.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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Okay.
<unk>.
Yes.
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Yes.
Okay.
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Okay.
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