Q2 2023 Aemetis Inc Earnings Call
Okay.
Welcome to the <unk> second quarter 2023 earnings Review conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded it is now my pleasure to introduce you to your host Mr. Todd Waltz Executive Vice President.
And Chief Financial Officer of a Medicine, Inc. Mr. Waltz, you may begin.
Thank you Kelly and welcome to the <unk> second quarter 2023 earnings Review conference call joining us for the call today is Eric Mcafee, founder Chairman and CEO of the medicines and Andy Foster President of a medicine advanced feels any matters biogas.
We suggest reading our website at <unk> Com to review today's earnings press release, the amount of corporate and Investor presentations filing with the Security Exchange Commission recent press releases and previous earnings Conference call.
Presentation for the call today is available for review or download on the investors section of the <unk> Com website.
Before we begin our discussion today I'd like to read the following disclaimer statement.
During today's call, we'll be making forward looking statements, including without limitation statements with respect to our future stock performance plans opportunities and expectations with respect to financing activity in the execution of our business plan.
Statements must be considered in conjunction with the disclosure and cautionary warnings that appear in our SEC filings.
Investors are cautioned that all forward looking statements made on this call involve risks and uncertainty and that future events may differ materially from the statements space for additional information. Please refer to the company's security and Exchange Commission filings, which are posted on our website and are available from the company without charge.
Our discussion on the call today will include a review of non-GAAP measures as a supplement to financial results based on GAAP, because we believe these non-GAAP measures to serve as a proxy for the company sources or uses of cash during the periods presented a reconciliation of non-GAAP measures to most directly comparable GAAP measures is included in our earning.
Release for the three and six months ended June 32023, which is available on our website adjusted.
Adjusted EBITDA is defined as net income or loss plus to the extent deducted in calculating such net income interest expense.
Income tax expense intangible and other amortization expense accretion and other expenses of series a preferred units loss on lease termination gain on litigation depreciation expense and share based compensation expense.
Let's review the financial results for the second quarter of 2023 rare.
Revenues during the second quarter of 2023 or $45 1 million compared.
Compared to $65 9 million for the second quarter of 2022, principally driven by $33 $6 million of sales from India biodiesel are.
Our California ethanol operation restarted after an extended maintenance cycle, which allowed for the acceleration of the implementation of several important ethanol plant.
<unk> upgrades, allowing for the generation of $11 3 million of revenue during late May and June .
Delivered corn price decreased significantly from an average price of $10 21 per bushel during the second quarter 2022 to $6.
Per bushel during the second quarter 2023.
Gross profit for the second quarter of 2023 was $2 million, a significant improvement compared to a $214000 gross loss during the second quarter 2022.
Selling general and administrative expenses were $9 $7 million during the second quarter of 2023 compared to $7 $4 million during the second quarter of 2022, including $1 3 million for fixed cost of goods sold that were allocated to selling general and administrative expenses during the keys.
Maintenance period.
SG&A included $1 8 million of noncash expense related to stock options and other considerations issued under stock incentive plans.
Operating loss was $7 8 million and $7 7 million for each of the second quarters of 2023 and 2022.
Interest expense during the second quarter, 2023 was $5 $6 million, excluding the accretion and other expense in connection with series a preferred units and our <unk> biogas subsidiary compared to $6 $7 million during the second quarter 2022.
Additionally, Additionally, our emeritus biogas subsidiary recognized $6 $9 million of accretion and other expenses in connection with preference payments on its preferred stock during the second quarter 2023, compared to $1 $5 million during the second quarter 2022.
Net loss was $25 3 million for the second quarter 2023, compared to a net loss of $209000 for the second quarter of 2022, including the impact into 2022 of our grant of $14 $2 million received from the United States Department of Agriculture biofuel producer program.
And the release of a litigation reserve of $1 9 million.
Our India plant contributed $5 $1 million of adjusted EBITDA. During the three months ended June 32023, offset by adjusted EBITDA from our restarted the Keyes plant and other operations.
For total company negative adjusted EBITDA of $4 2 million for the second quarter of 2023.
Cash at the end of the quarter was three $5 million compared to $4 3 million to close of 2022.
This completes our review of the second quarter 2023.
During the first half of 2023 investments in capital projects were $9 8 million investments in capital projects related to admit as biogas were $7 $8 million.
Investments in capital projects related to reduction of carbon intensity of a meta Seth and all and other company initiatives were $2 million.
Now I'd like to introduce the founder Chairman and Chief Executive Officer, Ray met Us Eric Mcafee for a business update.
Thank you, Doug Hey, medicines, focusing on producing below zero carbon intensity products by growing and diversifying our existing dairy renewable natural gas and ethanol businesses in California, and expanding our biodiesel and tello feedstock business in India. We were executing on our five year plan to grow to 2 billion.
With annual revenues and more than $600 million of annual positive cash flow.
We invite investors to review the company presentation on the homepage of the <unk> website.
The minutes five year plan includes growth in our five business segments to produce sustainable.
People want renewable diesel.
These all renewable natural gas and low carbon ethanol along with carbon sequestration of the Sidoti produced by these businesses in California.
Byproducts of these businesses include distillers corn oil in California, and refined Hello from India. So we plan to use as feedstock for our SaaS in the R&D production facilities as well as using our dairy renewable natural gas to replace diesel while trucking our feedstocks and finished products reducing finished fuel cost carbon intensity.
And air emissions.
We already have achieved many of the significant milestones for the current year of the five year plan.
So several important events are scheduled over the next few months.
And then India biodiesel business $33 $5 million of biodiesel contracts were fulfilled by the met us for the <unk> III, India government oil marketing companies during the second quarter of 2023 generating $5 $1 million of positive adjusted EBITDA. During the second quarter. We are now shipping new O&M see orders for the third quarter.
We're seeing steady improvement in the speed of the AUM see procurement processes and note the positive impact of cost plus pricing that is now being used by the AUM sees to purchase biodiesel.
India business is debt free.
And now generally funds its own operations without outside working capital financing.
Planned export of refined tallow from the India facility to renewable diesel producers in the U S is making steady progress with final negotiations underway for storage tanks at two California ports and feedstock sales to several bio refinery customers in active discussions and.
And the <unk> biogas business, we closed the second $25 million USDA guaranteed loan to build their eggs biogas digesters for an additional eight dairies, bringing our total to 15 fully funded dairies that are designed to produce a combined 400000 and that would be to use a renewable natural gas each year.
At $100 per <unk>, you expected revenues when the low carbon fuel standard carbon intensity pathways for the Med is biogas project are issued by the California Air Resources Board.
These 15 dairies are estimated to generate approximately $40 million of annual revenues and more than $30 million per year of annual positive cash flow under primarily 35 year contracts, including optional extensions.
Until the California Air Resources Board pathway approval is processed and we were able to begin selling into the renewable natural gas markets at its full <unk> value.
We will be starting the renewable natural gas, we produce underground and carrying it on our books as inventory.
We already have signed agreements to build biogas digesters for 37, dairies and plan to build Digesters for 65, there is in the five year plan.
We now have built and are operating.
Seven there either digesters, a 40 mile biogas pipeline, a central biogas to RMG production facility and a P. G any utility gas pipeline interconnection unit.
The 20 year long term debt financing provided by the U S Department of Agriculture renewable energy for America program known as reap is now funded $50 million of project financing to a medicine biogas.
An additional $75 million of USDA guaranteed project funding is in process with an expectation of obtaining USDA commitment letters later this year.
In total we plan to receive $125 million of USDA funding and commitments for med Spa gas by the end of this year.
We plan to continue to utilize USDA loans for the construction and operation of the Mezz biogas projects. We are negotiating a repayment of the third eye capital financing by a new lender.
We expect to close the new financings <unk> biogas this fall and along with an allocation of investment tax credits to fully repay the third eye capital financing that funded the launch of the medicine Biogas project.
The meadows was biogas central dairy project is expected to generate more than $60 million of federal tax credits under the inflation reduction act by bringing the 40 mile biogas by one central R&D production facility and other biogas and that is biogas assets in service in the first half of 2023.
In the process of selling these tax credits to a large corporate buyer.
We expect to receive more than $50 million of cash proceeds upon closing of the IRA investment tax credit sale.
And the medicine enable aviation fuel and renewable diesel business, we have nearly completed the two primary permits for the construction of the 90 million gallon S. A up an R&D plant at the riverbank site.
The conditional use permit and California, environmental quality Act approval, allowing the use of the 24 acre site for construction of a sustainable aviation fuel and renewable diesel plant was posted for public notice and is expected to be approved in the next month.
The authority to construct air permit is expected to be approved by the end of September in order to allow project financing to close early next year.
And the amount of carbon capture and sequestration business.
We designed C O two carbon capture and sequestration systems. So the riverbank and key sites and recently were awarded the first C. O two characterization of well permit ever issued by the state of California. The.
The C O two characterization well is designed to provide soil data for the E. P. A plastics injection well planned for the riverbank site the.
The well site compacted access road and high capacity well drilling pad have now been engineered permitted and constructed at a cost of about $500000.
Let's briefly review progress with external legislation regulations and incentives, including the federal.
Inflation reduction act and the California L CFS.
The external political and regulatory environment for renewable fuels and the reduction of carbon pollution in U S and India has improved significantly during the past year. The passage of the inflation reduction Act in August 2022 provides an estimated $400 billion of funding toward renewable energy and carbon reduction projects on.
June 21st of this year, the IRS issued guidance for the process to transfer IRA tax credits.
Re investment tax credits the <unk> biogas business generated during Q1, and Q2 of 2023, replacing six Digesters 40 miles of biogas pipeline and the renewable natural gas production facility with utility interconnect in service in late January are expected to be sold to a single corporate buyer in the next.
Month or so.
We expect that more than $450 million of inflation reduction Act transferable tax credits will be generated by the med is biogas business in the next four years and substantial amounts are expected to be generated by the reuse use of C. O two by the ethanol plant construction and operation of the Saf plant.
And underground sequestration of C. O two the sale of investment tax credits is expected to be booked as other income and could generate a substantial amount of adjusted EBITDA cash and after tax earnings.
During the second quarter, the California Air Resources Board held an L. CFM scoping plan, a webinar, where staff stated that carb plans to significantly increase the number of credits required under the low carbon fuel standard program starting in 2024 by significantly expanding the L. CFS mandates carb expects the.
Increased mandates will raise the price of LT are past credits to more than $240 per credit in the next two years.
Discussions have focused on a 48% reduction in greenhouse gas emissions by 2030 up from 40%, which should have a positive impact what I'll say about credit prices.
L C. L. CFS credits generate revenues for medicine, all of our U S businesses and indirectly benefit our India business that produces feedstock for you, but it will diesel sustainable aviation fuel by refineries.
Now Andy Foster the president of <unk> biogas, and most advanced meals businesses will review some highlights and thanks, Eric late last year, we closed our first USDA $25 million financing and just last week, our second USDA $25 million financing utilizing the renewable energy for America program.
Allow me to quickly recap the medicine biogas RMG Q1 project milestones.
We completed the installation of 40 miles of biogas pipeline, we completed commissioning of the biogas to RMG upgrading facility. We completed commissioning of the RMG interconnection unit with PG Nice pipeline. We now have seven fully operating digesters and we'll be constructing eight additional digesters. This year. These 15th.
<unk> Digesters are expected to generate approximately 400000 btu per year of renewable natural gas.
We recently received our default negative 150 carbon intensity pathway approval for Ford areas to begin generating <unk> credits and expect two more approvals in the coming weeks.
While we await the approvals of our provisional L. CFS pathways for credit generation, we are storing our RMG underground and carrying it is inventory until we deliver it to customers.
With the dairy RMG business now operating seven Digesters and with a more dairy is fully funded and underway. The approval of card L. CFS pathways for each digester will significantly increase revenues for our LNG that is already being produced we are working diligently to obtain the provisional L. CFS.
Carbon intensity pathways as quickly as possible, which we expect to be in the negative 415, Ci range, resulting in significantly more revenue than the negative 150 default pathway that we're currently using while the full pathway applications are in process.
Operationally, we are focusing on executing the construction of additional dairy digesters to fill our 40 mile biogas pipeline with the centralized biogas to RMG production facility and the PGA interconnection unit, which are all currently owned and operated.
Let's briefly discuss progress at our Keyes, California ethanol production plant during Q1 and a portion of Q2. This year, we completed an extended maintenance and upgrade cycle for our Keyes ethanol plant, which helped us to avoid significant losses during the quarter due to extraordinarily high natural gas prices, but equally.
Important helps us avoid future plant shutdowns that would've been required to install key components of our energy efficiency upgrades.
The result is an acceleration of our reduction of energy costs and driving lower carbon intensity of our biofuel through several plant efficiency and electrification projects.
We also accelerated the installation of an entirely new Allen Bradley decision decision control system Dcs with artificial intelligence capabilities, along with several of our other important process upgrades.
While the top priority for a medicine is to maintain our decade long track record of continuously operating the keyes plant to supply feed and fuel to local markets doing so under extremely negative conditions that developed late last year and continued into the second quarter of this year in California.
Natural gas markets would've been unsustainable and frankly irresponsible rather than just shutting down and furloughing. Our employees. We instead chose to use this time to conduct an extensive plant maintenance program and pull forward. Many of the critical components of our energy efficiency projects in the long run this decision to focus on fund.
Mental improvements in our energy efficiency will save us millions of dollars in project costs through avoided down days and loss production and save us time and completing the projects. Ultimately this also puts our puts us on a faster path to improving our operational expenses through increased energy efficiency.
We restarted the Keyes ethanol plant in late May and ramped up production during June and July .
As a strong endorsement of our carbon reduction in energy efficiency energy efficiency projects, a medicine has been awarded $16 million of energy efficiency and other grants by PGD, The California Public Utilities Commission and other entities to supplement our own funding to complete these projects our goal is to significantly reduce.
Or even eliminate the use of petroleum based natural gas at the Keyes plant. When these projects are completed in 2024, we expect that natural gas usage at the Keyes ethanol facility will be reduced by 80% or more.
This transformation from traditional natural gas to renewable electricity will put a met us at the forefront of de carbonized manufacturing facilities in California and is expected to reduce the carbon intensity of the fuel ethanol produced at the Keyes plant by double digits.
The installation of the solar micro grid mechanical vapor recompression or MBR operation of the all electric Mitsubishi Zebra dehydration unit the replacement the replacement or upgrading our various heat exchangers and other process equipment and the installation of a new AI enabled Dcs system will allow.
L. A med is to achieve meaningful energy cost savings and increased revenue through lower carbon intensity fuel ethanol sales in summary, despite some facing some temporary and highly unusual external headwinds in the first and second quarters of this year and our ethanol business operational performance and.
<unk> milestones for the <unk> biogas and ethanol plant business continued to be on track with our five year plan Eric.
Thank you Andy.
Let's review, our growing biodiesel tell a feedstock refining and glycerin refining businesses in India.
The National Biofuels policy in India was updated in 2022, and now is being implemented to achieve a 5% blend of biodiesel is equal to about 1.25 billion gallons per years.
During the second quarter of 2023, the three government oil marketing companies issued tender offers.
Diesel under a feedstock plus pricing formula that was used very successfully last fall to bring biodiesel plants into production.
The tender offers for delivery during the second quarter of 2023.
<unk> selected specific delivery locations in the mouse then receive supply contracts for about $34 million of biodiesel to be delivered during April may and June of this year.
The cost plus pricing formula used by the oil marketing companies is expected to be the ongoing format for sales to the open season.
We expect the formula to be a successful mechanism for the rapid growth of biodiesel production in India due to the predictability of the pricing formula.
Our plant in India is uniquely situated to benefit from the successful feedstock plus pricing mechanism and ideas. So there's importing biodiesel or renewable diesel is not allowed under India law and in Memphis owns and operates the largest production capacity biodiesel plant in India.
We are negotiating the sale of pellet feedstock is refined by our tableau pretreatment unit in India for export to the U S for the production of renewable diesel and sustainable aviation fuel.
Since our Indian subsidiary has no debt and a 50 million gallon per year of biodiesel plant 50 million gallon per year tower refinery facility and the glycerin plant are fully constructed we are well positioned for profitable operations as we scale of operations to meet but won't see requirements for biodiesel blending.
Let's discuss our carbon zero sustainable aviation fuel and renewable diesel project in Burbank, California.
A year ago, and it took operational control of the 125 acre riverbank site for construction of our sustainable aviation fuel and renewable diesel plant as well as the riverbank portion of our C. O. Two sequestration well project, we have signed and announced more than $3 $8 billion of sales contracts with Delta Airlines.
American Airlines, Japan Airlines, Qantas and other airlines, we've now completed offtake contracts for contracts for about 45 million gallons per year of blended sustainable aviation fuel to be produced at the riverbank plant.
In addition, we signed a $3 2 billion dollar renewable diesel sales agreement to deliver 45 million gallons per year under a 10 year sales contract with a major travel stop chain for its northern California locations.
Instead. It is included in the recently passed IRA legislation expand the market for sustainable aviation fuel by allowing a price to airlines that was about 10% higher than petroleum jet fuel and is partially or entirely offset by of course see a carbon credits generated by the airlines.
During Q2 2023, we continue to make steady progress toward air permits and other building permits for the 90 million gallon per year riverbank Saf Rd plant, we look forward to completing engineering and permitting in order to begin construction of the riverbank renewable jet diesel plants later this year or early next year.
Let's review our subsidiary <unk> carbon capture.
Currently <unk> captures the 150000 metric tons per year of C. O two emissions from our ethanol plant near Modesto.
And reuse is D C O two for local customers.
This reuse of C. O two generates 45, Q transferable tax credits under the inflation reduction Act.
In phase one of the best carbon capture project, we plan to inject up to 400000 metric tons per year of C. O two emissions from our biogas ethanol and jet diesel plants into two sequestration wells would you plan to drill nearer to Biofuels plant sites in California.
We expect to construct two C O two injection wells that each have a minimum of 1 million metric tons per year of injection capacity with additional C. O tubing supplied rather emission sources.
Esther as planned total of 2 million metric tons per year of C O two.
During 2022, a med has completed the purchase of 24 acres at the riverbank site and built a heavy equipment access road and a well drilling pad for the soil characterization well to provide data for our EPA classics injection well permit.
The initial phase of construction includes drilling to characterization of wells to provide empirical data for the EPA classics permits we expect to receive our first well drilling permit for the walls. So that characterizes securitization world last month, which we've just recently achieved but this is key in that it's on track with our well development plan.
The direct feature of the inflation reduction Act provides a federal tax credit of $85 per metric ton of C. O two as a cash refund and medicine each year for the first five years of production. The planned 2 million metric tons of Cotwo from the med is carbon capture project would generate an expected $170 million per year from the federal.
World direct pay tax credit.
As well as an estimated $400 million per year at a projected $200 per ton for sequestered Z O two under the low carbon fuel standard in California.
We believe the fixed amount of $850 million provided by the direct pay funding over the first five years of the project could support the funding of the estimated $250 million capital cost for the two injection wells and related equipment.
In summary.
The India biodiesel business showed 5.5 dollars $1 million of adjusted EBITDA on sales of $33 $5 million in the second quarter while.
While the <unk> ethanol business wasn't a maintenance and upgrades like the cycle during the quarter in response to the temporary exorbitant pricing of natural gas in California. During the first quarter and early second quarter of this year.
This extraordinary natural gas price of that behind us we restarted the keyes plant and continue to expand a diversified portfolio of negative carbon intensity projects.
Dairy renewable natural gas biodiesel in India, sustainable aviation and renewable diesel fuel low carbon ethanol using zero carbon intensity electricity and renewable hydrogen and so to sequestration.
All of these projects are synergistic and create what we refer to as a circular bio economy within a met us and which we use byproducts and waste products from our facilities and local areas as feedstocks to produce low and negative carbon intensity renewable fuels.
Our company's values include a long term commitment to building value for shareholders. The empowerment of in respect for our employees and business partners and making significant and positive contributions to the communities we serve.
Now, let's take a few questions from our call participants gallium.
Thank you Mr. Mackey will now be connecting our question and answer session.
Have any questions or comments. Please press star one on your phone at this time.
Your question. Please pickup your handset of listening on a speaker phone to provide optimum sound quality can you talk just a moment, while we poll for questions.
Your first question is coming from Manav Gupta with UBS. Please pose your question your line is live.
You have a closer visibility with car than probably anybody else, who know those people very well and they listen to you. The DQ on inputs help us understand I mean, we hear that God wants to fix this are that the price is too low right now for new development what are the next milestones.
You should look for anik when we as this process unfolds and when can we expect some kind of commitment from their side, which helps the higher price of carbon to move higher and benefit it made us in multiple ways.
What do we have Andy yes over that he's hey, manav.
Good question I think we're sort of in the interim period, where the curve is obviously re scoping the <unk> program.
A pretty significant undertaking that started last fall and there are hoping to have wrapped up this fall. They certainly sent a lot of very positive indications about the direction, they're going but currently they are doing things like working on the tier one calculator, which they've sent out to all the various stakeholders.
To receive comment and feedback and any kind of insights from industry and other groups to to help them as they as they start to finalize the rules that will be a part of this new L. CFS. So I think in in that period of time Manav. It's natural that there is some level of.
Of kind.
Kind of wait and see and we did see a nice little run up in the El CFS priced about a month ago.
Think there is there is a <unk>.
<unk> number of credits that are out there, which obviously, that's that's not helping the price. So I think our view is that it takes it takes a long term view of your investment or or the marketplace and how we're building our business.
Probably seeing improvement in the first quarter, hopefully they'll send some some more clearer signals by the end of this year, but in the first quarter of next year when they begin the author of the reauthorization in the implementation of the new El CFS, we know that theyre going to increase the requirements of the program. We know that for a fact they've stated publicly.
They set up to order differently.
48%, 58% so so.
Unfortunately, we are in that kind of middle zone, right now where everybody is sort of waiting for this to happen a lot of projects are being built out as you know carb.
Is.
<unk> has a huge backlog of applications that are sitting with temporary or default pathways.
Theres a lot of projects that want to come online a lot of projects that are looking to actively participate in the program that are sort of in the queue right now waiting for carb.
To get through those applications, where we have six of them ourselves in there and.
And we're meeting with carbon having good open dialogue with them about how we can help help them as an industry. How we can help them improve that process because I think once people start to see these projects really flown through the pipeline. That's also going to have a very positive effect because the state of California needs to be mindful of their obligations and meeting their own goals and the renewed.
The natural gas business is really at the front of that line in terms of helping them advance the program and meeting there.
So their obligations under the <unk>, so long answer I apologize for being windy, but I hope that gives you some insight.
No perfect I'm going to keep it to the macro again looks like the EPA also came out and with the RVO is going to be very supportive of renewable natural gas, maybe not as supportive of renewable diesel, but definitely they supportive of renewable natural gas and we have seen the price of deeply risk.
Onto that so any thoughts on EPA being supportive of LNG, but maybe it was not a supportive earlier, but <unk> was a little tricky area, but it looks like now they want to grow R&D and they want they want you to use it in the transportation vehicles.
That's right and I think.
They received a lot of input from industry to be honest with you over the last few months, we worked with the renewable gas.
The RMG coalition and other groups, giving giving a lot of feedback.
Submitted a lot of information to the EPA and I and it appears that they were listening. So so yes, we're happy with the developments there and hope that they continue to.
Two shows strong support for renewable fuels in general because.
Despite the lofty goals and aspirations for.
For Evs, which we certainly we support evs, but but theres an aggressive timeline that everybody is looking at in the one sector that can deliver and has proven it can deliver as renewable fuels.
Thank you so much guys and congrats on all the positive developments that are happening and they made us.
Thanks, Matt I appreciate you joining the call.
Your next question is coming from Derrick Whitfield with Stifel. Please pose your question your line is live.
Thanks, and good morning, Eric and team.
Hey, there.
For my first question I actually wanted to pick it up with where manner left it there on on macro but really focused on river bank in light of the less favorable before RVO announcements could you update us on your latest thoughts on the macro environment for Rd, and staff investments and separately could you call.
On your degree of flexibility that you would have on your operation.
And supply agreements to produce and allocate production to SaaS.
Absolutely, let's take the second one first we have invested.
<unk> extra $30 million investment to use the holler cop, so hydro flex.
Process with Petro Flex allows us we can run the play at a 100% renewable diesel any percentage of SSA up all the way up to 100% sustainable aviation fuel.
<unk> is less on <unk> aviation fuel, but the economics would drive the decisions of what percentage of say up in R&D. We produce currently we've got our contracts was 50% R&D and 50% S. A F.
So, let's then talk about what would drive our decisions.
The D for RIN and the deep fiber and others. The renewable volume obligation of $2023 24, and 25 is being discouraged by the EPA.
You have set targets that are below the known volume coming into the market and frankly.
The signal was don't produce as much biodiesel as youre, producing now and just kind of try to play the magic of go make Saf happened, but oh by the way don't produce as much renewable diesel is your plan to either so it was it's essentially a discouragement signal from the EPA for building renewable diesel plant, which is the kind of plant that makes them.
This molecule so there's a contradiction between the white house's 3 billion gallon 2030 target for sustainable aviation fuel production and an RVO that's below the current capacity to produce existing biodiesel and renewable diesel now our response to that is that we believe people will be disk.
<unk>.
Well in any market and whats your other producers are discouraged means the amount of capacity they produces less but I would tell you that people that drop discouraged or our customers in the Saf business. The airline industry consumes about 100 billion gallons per year worldwide of aviation fuel, there will be no battery or hydrogen or nuc.
Earlier powered airplanes anytime soon to displace.
This petroleum jet fuel and the airline industry is fully committed and driven by penalties and Europe and incentives in the U S to a rapid displacement of as much of that 100 billion gallons as possible. So we end up with one of these classic situations, which customers want the product, but government policy is lagging.
What industry needs, which is they have supportive policy. So we as I said in our commentary, we will be fully permitted and frankly going to the financing closure here.
Very soon and so we see it as many projects that are a year or two or three years behind us due to litigation or other problems very possibly may be further delayed or not that gets built at all.
Providing even a bigger gap between the reality of the customer of the airlines willingness to pay for this sustainable aviation fuel solution to their <unk>.
The conversation goals.
And the actual production so what the EPA is set up is a basically.
Miss on the 2000 33 billion gallon goal by telling US we don't need to build any renewable diesel production capacity.
Airlines, who are our customers and frankly, our partners are very encouraging and very supportive and trying every way possible to participate in our project. So we are very enthusiastically moving forward in partnership with our customers and frankly, our technology providers and.
One of the reasons, we have high level of comfort and confidence as we are a feedstock supplier to our own plant. Many of the reasons. Why these projects will get delayed is a lack of feedstock supply chain confidence either price or just the physical you can have a great price, but if you can't get the physical volumes that obviously the plants that can operate.
And our 50 million gallon tallo refinery already built already debt free in India, plus our distillers corn oil production.
At our plant in California, and other access to other domestic tell supply puts us in a very unique position to be confident and move quickly. While at this point in time I would suspect that many projects are being looked at again very closely feedstock has always been.
It's something to look at closely but now with the <unk> five and <unk>.
A question Mark of what the price is going to be I think it's going to provide a less competition for the <unk> plant and that's good news for our customers we have been asked to expand.
The capacity of our plant in phase, two and phase III and I can tell you right now we could easily triple the amount of contracts, we have with our existing customers and still not be anywhere close to what their goals are.
That's great and I completely agree with you on the SASSA macro backdrop.
With my follow up I know that you were expecting your first ITC to close in Q2 late Q2 early Q3 could you offer your latest thoughts on timing of when it will close and note. If there are any meaningful remaining hurdles to clear.
Yes, I heard guidance is in the next month or so I feel very comfortable that as of today, that's conservative guidance and theres been a team working on this.
At least a half dozen law firms and accounting firms and a bunch of other people consultants et cetera.
For many months and we are reaching the end of that process. So we're looking forward to a $50 million plus closing we believe it will certainly be one of the largest ever done in the United States may be the first large transaction in United States, so dealing in that environment of uncertainty.
It has required the work of a lot of industry, leading tax lawyers and accountants and so I think we've gotten that guidance guidance a place I would think the IRS for their June 21st guidance 264 pages tremendous amount of work by the IRS and it was very very helpful and bringing.
This transaction too.
Near close kind of where we're at today and hopefully closing here in the next month or so.
That's great. Thanks for your time.
Thank you Sir.
Your next question is coming from Jordan Levy.
Please pose your question your line is live.
Haile and <unk>.
Appreciate all the details maybe just on the <unk>.
Palo business in India, just curious if we could get a little more detail on how you expect that to progressive.
<unk> discussed that Youre in.
Negotiations for some space in California ports and that sort of thing so anything there on timing or realized revenues.
We are very.
Very well positioned for production in India, that's not really been a constraint. The constraint has been tankage at the ports tallow requires a heated tank.
And then the.
Actual carbon intensity pathway in California is a about a six month process to get the.
Tallo in the plant to do the 90 days of testing and all the other things required to that process. So.
We are steadily moving forward and I feel very solid about the ability to get the tankage in place we're actually in contract process. There and then in terms of customers we have pretty.
Pretty much every renewable diesel producer in California, or our neighboring states, Nevada, who are excellent candidates for this and so we've had.
We have one particular refinery that will can take all of our capacity. So we are we do not have a projected shipment date, yet, but we hope to have that in place by the end of this quarter and be looking at our revenues in the fourth quarter shipments of course from India to take a little time, and then you've got posted through the.
The storage tank into our customer reports really revenue, but we are targeting to have fourth quarter revenue and we'll see whether that that flow starts. We of course, if we sell the one customer with pretty much all of our capacity would be looking to scale. This up rather quickly and so really the scale up speed is what we're focusing on.
And I think once we get the tankage in place will be a much better position to start the shipments.
Thanks for that maybe shifting over to the R&D side, just curious now that.
Southern Digesters online, it's built a lot of scale in that business.
How has the reception I guess, Ben from the dairy owners in that area either the ones that.
Already as part of the business or that.
Youre looking to add onto the business.
Is your confidence level.
Five very targeted at the five year plan.
And <unk> spent a lot of time with various of Andy wants to give us a update on that Derik I think over the last three years, we've seen a real kind of evolution in this process, where when we first started.
Frankly, I first started talking to dairy is back in the summer of 2018 and it was sort of like what are you talking about two now going in and asking us questions about the <unk> price.
They become a lot more sophisticated.
So I would say that.
I think most of the dairies that we're targeting all of the dairies that we're targeting certainly know that this is something they need to move forward with.
I think the biggest the biggest obstacle for everybody in the in this business right. Now is just the fact that the dairy business as a whole is not doing well margins in.
The price the price of milk as LOE and <unk>.
So our approach.
<unk> has always been to look at well capitalized dairies dairies that ours can sustain these peaks and valleys.
It's not altogether too different from the ethanol business honestly.
When you have these peaks and valleys from a margin perspective.
So I think the <unk>.
So we're dealing with are nobody's happy right now because it has nothing to do with R&D. It has everything to do with the fact that there are no prices not very great.
<unk> heard some encouraging signs about where that's going so.
I bring that into the equation because.
<unk>.
While our LNG as a central business point for us and we come into work every single day beaten on R&D and thinking about R&D from a dairy producer perspective, it's the last thing we were thinking about and so our challenge. There is just trying to keep people focused and hey, we're moving forward we're paying for all these projects at their facilities and trying to just keep people.
Energized to realize that this will be another stream of revenue for them in.
And the faster we get these projects built the more it will help their bottom line.
From a revenue perspective, and hopefully improving their margins a little bit so.
There's there's great education about about what's going on in the requirements of the program and their requirements as producers.
I think a lot of these most of the dairy amount of it really educated themselves and so we're dealing with a shorter sales cycle from the perspective of.
We walk in the door. They are informed and they are and Theyre excited I think the fact that we have the 40 mile biogas pipeline is a.
It was a significant capital investment for us that has paid off time and time again, when we go in and we talk about it it's something that's real on the ground. They can see it as they saw it being built they know that there will be a home for this gas. So it makes it very real.
And and the fact that is connected to the ethanol plant, which they have seen operating for the last 12 years.
Completes a nice circles, so I would say.
No lack of enthusiasm for our LNG projects, it's just overall the environment and the dairy World right. Now is is not Super happy we've just because of the price of milk.
No that's really helpful perspective, I appreciate it.
Hum.
Your next question is coming from Keith Blair with Tudor Pickering Holt. Please pose your question your line is live.
Hey, good morning, Thanks for taking my questions here first one is on the India biodiesel segment. It looks like EBITDA profitability per ton was around 200, which is about half of what it was in the back half of last year.
You talk about what what drove that number lower.
And is that a good number going forward or what are your expectations for.
Future profitability.
The margin in the second quarter reflected higher feedstock prices, we had sort of a global increase.
You track soy prices for example for renewable diesel you would have seen that.
We think the margins are sustainable where they are today, but we have some opportunity to expand margins using a proprietary technology we developed over.
Last half decade, a decade or more in India, which allows us to use lower cost feedstocks and Jerry is the same high quality.
Biodiesel, we currently produce and we generate about 10% of additional margin when we use that lower cost feedstock and about the same yields actually so we are going to increasingly have up to a third of our revenues be from this lower cuts to comstock using our proprietary technology, we have expanded the capital.
Our investment in that activity over the last roughly four months and have quadrupled that capacity and so we'd expect that to have an impact increasingly in third quarter and then as we go into the fourth quarter and into next year.
Do you expect up to a third of our revenue step that lower cost structure.
Sounds good and then on the California ethanol segment.
Could you help us understand what what drove the $4 million EBITDA loss in Q2 was that due to like restart costs or maybe you had to work through higher cost inventory and as you look into Q3.
Do you think the EBIT will be positive.
For this quarter.
On Q2, it was restart we only really operated for one third of the of the quarter and the.
The combination yields and just some onetime charges around contracts, we had with customers et cetera, really led to the EBITA effect. There are there was not a large about from any single thing, but it just add up some smaller things related to start and so we see these as onetime startup related costs.
In terms of Q3 of margins going into Q3, we're much better we're still.
Looking to get our production to be able to have full maximum and take full advantage of the current margin environment.
We're about one month into Q3, and we will see how corn does but corn has shown.
Of low price trend, let's say and then lesser some strange weather effect that appears to be the market condition. We're in a really good questions around ethanol I personally am looking for <unk> to increasingly be part of the discussion we have over the next year or two.
<unk> is taking our national consumption of ethanol from a 10% blend which is roughly roughly 14 billion gallons to over 20 billion gallons will the entire production capacity entire United States, only 17 billion gallons of which we export a little less than 2 billion gallons. So <unk> 15, 15% blend of ethanol.
Except that in 49 states by the way is not currently allowed in California, California is at 90% petroleum gasoline mandate and so we are working closely with our friends at Corp to complete a multi year process to get 15%.
Blend approved in California, we're the only state that can set our own blending rules by the way and that would in California alone be over 700 million gallons a year of new ethanol demand in the state that already consumes over $1 2 billion gallons. So we're looking at.
Some external realities of the 15 being us being allowed in all 50 states as being the really underlying demand driver last quarter point I would make is that we sell our ethanol for roughly $2 50 or $2.60 a gallon, but then we turn around and across the street, we paid $4.50 to buy it back.
It's a 10% blend, but we're paying $2 a gallon more for it and so there is significant margin opportunities in the ethanol business simply by solving the supply demand curve and that's what <unk> is doing gradually over the next year or two.
Sounds good thanks for your comments.
Sure. Thank you Matthew.
Your next question is coming from Amit Dayal with H.
Please pose your question your line is.
Thank you alright, guys, so with respect to the Keyes plant.
Are you running at full capacity for the third quarter with them.
We're going to be by the end of the third quarter for sure, but we aren't really August and September .
July was another wrap up as I mentioned junior library or ramp up months. So August and September we expect to be at full capacity.
Understood.
Thank you for that and then the Digesters targeted.
Or will they be completed and brought online this year.
And in due.
During school.
We haven't what half of those under construction. There is there's probably five of those four or five of those that are currently under construction. We may we may have one or two of those completed by the end of the year, but I'd say.
Safe is kind of a safe timeline for you to think about is by the end of Q1 of next year, we'll have all eight of those.
Completed and online.
Thank you, but but again, they're sort of sequential and we will have we should have a few of those will be online. This year, it's just that.
Yeah.
He gets weird with what kind of winter or are we going to have and if we have a winter like we did last year.
It might slow some things down but but.
By and large we're pretty far along on a few of those so we will definitely have.
Two to three more that should be completed by the end of this year.
And the size better operating days are they running as expected other running at full capacity et cetera.
Okay, Yes.
Yes.
Actually Ben.
We've been very happy with our operational uptime and performance.
<unk>, our expectations honestly and production is because.
Because these are ambien.
Temperature Digesters production is is really dependent on the weather.
The weather in California. This winter or this summer has been a slightly cooler than normal so that as that is a little bit of an impact, but as far as the nuts and bolts of how these things are running we've been very very happy with.
The performance of the equipment and the pipeline and the R&D upgrading facility and everything Thats associated with this project, we have been very happy with with the the operational uptime and efficiency.
Thank you.
And then with respect to the.
Kelly I think we lost in that.
Maria.
Hello.
Yeah.
Yeah, we can hear you now tried again.
Yeah. So I was just trying to go back to the Palo feedstock from India.
The permitting and the qualification et cetera that was required as a one time thing or will it be required for each shipment that takes place.
Good question, it's actually a one time thing it's the carbon intensity of the fuel produced when <unk> is used from a new region. In this case from India. So theres some default pathways, but then you can get a much better score. If you actually show for example, we ran 100% biomass energy in our plant in India.
The underlying default has coal as the electricity source and so we get lower carbon intensity score than the default.
That sort of like our biogas business were running along at a negative $1 50 default pathway, we want to move to a negative 400 415 provisional pathway, which is award means our projects pathway, India has the same kind of dynamic it's quicker because it's a tier one pathway, it's not a tier two which to choose more project specific tier one.
It's more of a standardized process, but it still takes you.
Six weeks six months to get done.
Let me say.
Just last one on the India.
Hum for modeling purposes should we assume similar levels of production and shipment in India that we saw in Q2.
For Q3, yes looking at too.
I would take it down a little bit we're we're.
We're doing multiple procurement cycles, they've been expanding the number of locations, we're shipping to and so it's not the entire quarter. We contracted at this point in time, but where are we.
Two thirds of the way there and over the course of August and September will be looking for additional orders. So we'll probably be press releasing sometime next month as we get the full order.
For the quarter done, but what they do is they move quickly which is what we wanted so we can continue production and keep on going in August but that meant that they have.
July and August that meant that they haven't quite gotten all their tenders done for the September timeframe. So, we'll probably put out a press release once we have good visibility on the quarter.
Okay. Thank you guys. That's all I have appreciate it.
Thank you.
Your next question is coming from Ryan Todd with Piper Sandler. Please pose your question your line is live.
Okay.
Great. Thanks, maybe just a just one for me.
Congratulations on the continued progress on Digesters and the R&D side of the business.
You're still building gas in storage at this point can you maybe walk through your latest thoughts on potential timing of gas monetization, whether you need to see to start monetizing gas and maybe timing or progress on LSA at best.
Pathway approval.
Sure.
Have our default pathway approved for four of our Digesters. We have two more we expect to get here in the next few weeks. So we have six of our digesters that can generate revenue at the negative 150 timeframe.
There is a requirement that we have to shift or not in the quarter. It has produced not in the next quarter, but in the quarter after that.
Have to actually ship the product or to get El CFS credits, we can't just let it sit in the ground for 18 months.
Very possibly might it be exactly what we want to do in order to maximize our L. CFS revenue. So we will be showing.
Some revenues as we meet these minimum thresholds, but we are working diligently with the carb team to get our provisional pathway negative for 15 is what we estimate to be <unk>.
<unk> and then we will be able to ship everything that's in the ground and in that quarter and the quarter. Afterwards. So we are definitely meeting the minimum requirements.
And in Q3, we will be showing revenue as a result of that in Q4 as we have to do a look back to the earlier quarters, but I can tell you our business model would be just leave it in the ground until it's negative 415, and we're working diligently to get that approval in place as quickly as possible.
Great. Thanks, Eric.
Sure. Thank you.
Your next question is coming from Dave storms with Stonegate capital. Please pose your question your line is live.
Good afternoon, just two quick ones for me on the generics gesture side with.
With the additional $75 million of upon their inspections closes here can we just do simple math and say that translates to about 21, new digesters being funded.
That's approximately correct the size of the dairies will have an impact on that so it's a range it would be somewhere in the 18, which would be six per for funding to 'twenty two so.
Yeah.
Probably plug in 'twenty, and then true it up as you see press releases come out because it will allow so many dairies are in each project.
Perfect and just a follow on to that is there a critical mass of dairy digesters that youll hit where you'll have to ask.
Extend that pipeline.
We're essentially extend that pipeline for every dairy, but just think about it as having a main trunk line in place and then there is a half mile away, we will run a pipeline out to them.
The good news is its very quick and rebel reach so it's not a material part of the budget.
Well I mean, the only thing I would add is that when you. So Eric is right on track in terms of what we would call sort of the legs to the dairies, but with.
Because many dairies as we're building out it ends up turning out to be about another 20 miles worth of pipeline yes.
Not all of the one time so it's neither now you can expect.
Youre not going to see a big chunk of money all at one time, but it's as we as we build out these areas. When you when you look back and everything is completed it's going to be.
<unk> 40 miles of pipeline, but closer to 60.
Understood that's very helpful. Thank you.
Mhm, Thank you Dan.
There are no additional questions in queue at this time I would now like to turn the floor back over to management for their closing remarks.
Thank you Kelly and thank you to a meta shareholders analysts and others for joining US today. Please review the medicines company presentation that is posted on the homepage of the <unk> website.
We look forward to talking with you about participating in the growth opportunities at <unk> Todd. Thank you for attending today's <unk> earnings Conference call. Please visit the investors section of the <unk> website, where we'll post a written version and an audio version of this <unk> earnings review and business update Kelly.
This does conclude today's conference call you may disconnect. Your lines at this time. Thank you for your participation.