Q2 2019 Earnings Call
At this time, all participants I know listen only mode.
Later, we will conduct a question and answer session and instructions will follow at that time.
If anyone should require assistance during the conference. Please press Star then zero on your Touchstone telephone as a reminder, this conference call may be recorded.
I would now like to introduce your host for today's conference Jim Stark, Jim you may begin.
Thanks Joel.
Welcome to the Green Plains, Inc. and Green Plains partners second quarter 2019 earnings call.
Participants on todays call or Todd Becker, our president and Chief Executive Officer.
Hey, Patrick Simpkins, our Chief Financial Officer.
There is a slide presentation available and you can find the presentation on the investor page under the events and presentations link on both corporate websites.
During this call we will be making forward looking statements, which are predictions projections or other statements about future events.
These statements are based on current expectations and assumptions that are subject to risks and uncertainties.
Actual results could materially differ because of factors discussed in yesterday's press releases.
And the comments made during this conference call and in the risk factor section of our Form 10-K Form 10-Q , and other reports and filings with the Securities and Exchange Commission.
We do not undertake any duty to update any forward looking statement now I'd like to turn the call over to Todd Becker.
Thanks, Jim and good morning, everyone and thanks for joining our call today as we indicated on the last call. The second quarter would be similar to the first quarter and there was we reported a net loss of $45.3 million or $1.13 cents a diluted share.
Because of our planned slowdown due to market conditions in the first quarter.
We slowly started up during the second quarter as well.
With that said, we produced approximately 224 million gallons of ethanol, which put us at an 80% utilization rate for the quarter.
Madison did not restarted as we had planned.
As the upgrade took longer than expected, but we wanted to get it all done at once.
Madison was restarted last week, and we anticipate achieving a 90% run rate in the coming weeks, which will get our ethanol production back to a minimum of 90% utilization rate for the rest of 2019 across the platform.
Which will also be positive for the partnership.
But it will also continue to drive down our operating cost per gallon.
Because of the slow start medicines fixed cost absorption and market conditions. The consolidated crush margin was negative nine cents per gallon for the second quarter.
The ethanol industry continues to be impacted by overproduction versus current demand overzealous EPA that issued a ridiculous amount of small refinery exemptions.
And a trade war that has dragged on too long for this industry.
Even with all of these negative influences, we're seeing about a breakeven EBITDA ethanol margin in the first part of the fourth quarter coming up of the year and I'll have more to say on this later in the call.
Project 24 is progressing we achieved an average of 29.3 cents with the plants operating in the second quarter, even with the slowdown and medicines absorption.
I will just discuss this in more detail a little later in the call as well, but you will see why we continue to produce at least at least 90% going forward and we will get better from here on improving costs.
As we expected our cattle feeding segment showed significant improvement in the second quarter of 2019.
Compared to the breakeven first quarter of the year, we generated $8.9 million of EBITDA or about $54 EBITDA per head for the second quarter.
We expect capital's financial performance trends remained strong for the rest of 2019 and it could be a record half for the business.
As we did mentioned in the press release yesterday, we have signed a letter of intent to sell 50% of this business to a group of investors, including pension funds. We believe we will have a definitive agreement signed we will be able to announce that milestone within the next two weeks.
We are on a path to close this transaction by the end of August or early September .
This transaction will have a significant impact on our balance sheet as we expect so half the business for approximately $75 million in cash.
And removing $335 million of debt finance working capital for from our balance sheet.
This is over a 10 dollar share positive impact to our shareholders through this change on the balance sheet.
We have an additional interest to purchase more than 50% of this business and we may sell down further in a second close later this year.
Our intent is to grow the business off the balance sheet and we will always have the option to buy back to 50% in the future. If we sell down more today, which would happen through future acquisitions. If we so desire. This would always keep the business off balance sheet and that is a critical component of this transaction structure.
As I said this transaction will have it over a $400 million positive swing to our balance sheet. When it is completed.
But it will also illustrate our low debt levels that remains on the balance sheet.
And should put us back to a least a net debt zero position against the convertible debt, which is our only non working capital financing left on the balance sheet.
We exported approximately 75 million gallons of ethanol for the second quarter, which was 33% of our total production.
The top destinations, where Brazil, India, Canada, Saudi Arabia in Korea.
Green Plains partners reported $13.8 million of adjusted EBITDA and a coverage ratio of 1.04 times for the second quarter.
We continue to meet our stated goal of maintaining the distribution for our partners as Green Plains Inc.'s planned production level is expected to remain strong for the remainder of the year.
Our SGN a expense was down three consecutive quarter by over $8 million year over year year to date is down 24% or approximately $13.5 million versus 2018.
I'm going to turn the call over to Patrick to review, both Green Plains, Inc. and Green Plains Partners financial performance and then I'll come back later on the call to discuss the rest of the year outlook to provide more details on project 24, and our protein technology initiatives.
Thank you Todd.
Green Plains Inc. consolidated revenues were $895.9 million in the second quarter.
Down $91 million or 9% from the second quarter a year ago.
The decrease in revenue was driven primarily by the disposition of three ethanol plants and the sale of placements vinegar during the fourth quarter of 2018.
Along with lower run rates at a remaining plants.
Our consolidated net loss for the quarter was $45.3 million versus a net loss of $1 million a year ago.
As Todd mentioned earlier, our Q2 financial performance continued to be impacted by weak ethanol margins.
We recognized a tax benefit of $14.6 million in the second quarter of 2019, resulting in an effective tax rate of about 27%.
Interest expense decreased $6 million to $15.9 million for the quarter compared to last year.
The change is driven primarily by lower debt overall debt balances compared to last year offset in part by a charge of $1.6 million to interest expense in Q2 related to early extinguishment of our 2019, 3.25% convertible notes.
EBITDA for the second quarter was a negative $19.8 million compared to positive EBITDA of $41.8 million for the second quarter last year.
SGN, a $21.6 million decreased $8.1 million or about 27% from 2018, primarily due to direction to the reduction of controllable expenses and the asset sales completed in the fourth quarter of 2018.
During the quarter, we issued 105 million, 4% senior convertible notes due 2024 and used approximately $40 million of the proceeds from the convertible note offering to repurchase 3.2 million shares of stock and repay the outstanding 56.8 million dollar balance of our 2019 convertible notes due October onest.
In July the 2024 node issue was upsized $10 billion to $115 million, bringing our total net proceeds from the offering to approximately $13 million net of fees.
Since the board authorized $100 million stock biplane buyback plan in August of 2014, we have repurchased approximately 4.3 million shares of common stock for approximately $59.6 million under the program at an average cost of $13.78 per common share.
Capex for the first half of 2019 was about $23.5 million with approximately $7 million of maintenance capex for ethanol production.
An additional $12 million of growth capital, primarily for high protein feed project, and Shenandoah, Iowa, and our project 24 initiatives.
On slide eight of the Investor deck, you will see our balance sheet highlights, we had $387 million in cash and working capital net of working capital financing at the end of the second quarter compared to $427 million at the end of 2018.
Our liquidity position at the end of the quarter remains strong with $234 million and total cash along with approximately $459 million available under our working capital revolvers.
This amount does not include availability of $68 million and credit facility and the partnership.
For Green Plains Partners Green Plains partners, we had 225.1 million gallons of throughput volume at our net ethanol storage assets, which was down 89 million gallons or 28.4% from the second quarter of 2018.
Again as a result of the Green Plains plant sales in Q4 of 2018.
The partnership reported adjusted EBITDA of $13.9 million for the quarter, which included $500000 of minimum volume commitment payments from Green Plains trait.
The adjusted EBITDA was $3 million lower than the second quarter of 2018, as a result of lower throughput volumes.
Distributable cash flow was $11.7 million for the quarter $3.4 million lower than the same quarter of 2018 again, reflecting the sale of the three plant assets in the fourth quarter of last year and slightly lower ethanol production at Green Plains in the second quarter versus the prior year.
The distribution 47, and a half cents per unit.
Declared on July 18th resulted in a coverage ratio of 1.04 for the second quarter.
On a last 12 month basis, adjusted EBITDA was $59.4 million distributable cash flow was $51.1 million and declared distributions were $49.3 million, resulting in a 1.04 coverage ratio.
Now I'd like to turn the call back over to Todd.
Thanks, Patrick we continue to be in a strong financial and strategic position as a result of executing our portfolio optimization plan launched in May of 2018.
We eliminated a half a billion dollars of term debt unencumbering, our ethanol assets for the first time in our history and as I said earlier should work back to a net debt zero position, excluding any working capital lines left after the cattle sales.
We have significantly reduced our controllable expenses, we sold assets proving the value of our business and with the recent financing we repurchased.
Almost 10% of our shares outstanding which was another commitment we made to our shareholders as part of the portfolio optimization plan.
We do continue to work with interested parties on monetizing additional production assets and hopefully can achieve this before the end of 2019.
Margins are improving in the fourth quarter, but we still have corn basis risk depending on what we see from the U.S. da in August .
As I said earlier in the call. The first part of the fourth quarter has turned slightly positive EBITDA across the whole platform average.
Based on this we should return to a more neutral free cash flow situation and have little or no cash burn more interesting is Q4 2020, a year from now where the returns are although also positive although down from high single digits. We saw a few weeks ago without any benefit from protein, but inclusive of project 24. This shows how crucial it is to complete our initiatives.
The one overwriting thing that has muted the work we have done for the benefit of our shareholders is the impact of the negative ethanol margin curve.
We knew that could be a risk of the programmable without all we have done over the last 18 months, we would be having a very different discussion about the future of the company.
As we discussed in October last year, we wanted to see the margin improvement margin curve improve before we allocated significant capital to buying back stock, but we still delivered on a commitment in June although as part of our ability to get the convertible debt financing done and keep the company from having any near term maturities.
We are developing a plan concerning additional allocation of capital with the board of directors and we believe the stock is significantly undervalued.
Based on the results of the portfolio optimization plan and the continued interest in our assets and our assets at higher equivalent values to where the stock is trading and we know our assets our turnkey for any purchaser.
Green Plains, and the ethanol industry has been hit hard by both policy and geopolitics.
While the RVP waiver for 15 was a victory that was long overdue higher blends is the long term solution for ethanol demand growth.
Small refinery exemption issued by the EPA have absolutely hurt this industry as domestic blending is lower than last year, while the EPA set blending is not being impacted they are dead wrong, and our nacco and are not doing their work, while obviously being influenced by the oil industry. So here's the quick math the oil industry refining industry obligated parties are not being held accountable by this administration to the 15 billion gallon renewable follow volume obligation.
The benefit of the 2000 or so stations with cell, which sell 15 has been lost into 2 billion gallons. The refinery exemptions given over the last few years.
So with blending down year over year by 0.01, which will equate to a 145 million gallons annually.
The fact that 15 sales are tracking towards 200 million gallons for the year and with the rest from not needing to comply with the RV show you can find over 1 billion gallons a real demand loss and we're just getting started it is dumbfounding that the EPA, who is responsible for clean air favors oil over Biofuels Ethanols proven time, and time again to reduce greenhouse gas emissions by 59% versus gasoline.
Exports have weakened over the last 90 days and we anticipate the U.S. ethanol industry will export approximately 1.5 billion gallons in 2019 down from our previous estimate of 1.7 billion gallons. The softness is in Brazil, the middle East and we had believed that the EU would take more ethanol. This year, yet they are still tracking a little bit lower currently.
There have been positive comments reported out of Brazil as of yesterday. So we will wait to make a final call on 2019 exports, which could end up closer to our original number.
But make moment no mistake the industry is negatively impacted by this administration's trade policies and the EPA is disdain for Biofuels in general the present needs to understand the RVP was a long term need and we appreciate this but his EPA needs to be reined in and held accountable for short term problems in agriculture.
I wanted to give you some clarity to the information. We also talked about on our last call concerning project 24, we want to be clear on what we include and not included in this calculation.
Our goal for project 24 is to achieve and operating expense of 24 cents per gallon.
The chart on page 10 of the deck gives you the breakdown of our Q2 ethanol EBITDA crush margin as an example.
To talk the chart takes you through the calculation to arrive at EBITDA per gallon.
The only thing we included in the calculation before the 24 cents of operating costs.
His ethanol and distillers grains revenues and corn and natural gas expenses.
There is a corn oil credit as well, but that is not included in the 24 cents, but it is included in the final EBITDA.
If we would have had project 24 Don.
And protein across our whole platform.
We would have earned 11 cents a gallon EBITDA instead of a negative nine cents.
This shows you the penta value of our company, especially at the stock price. When these initiatives could bring another 20 cents a gallon to the bottom line.
As I mentioned earlier, we were at 29.3 cents a gallon of Opex per gallon for the second quarter. More importantly, though is we are tracking below 28 cents for July and August before any of the capital projects associated with this initiative that even to ever be gone.
We are very confident we will hit our target of 24 cents a gallon. The most interesting thing of this project is our ability to equalize expenses of our IC ATM and Delta T plants.
Basically up basically we have found a bottleneck.
Worked with IBM to fix it and now can expect the market value of our different technologies to narrow between the two.
One thing not even included in this calculation is the fact that energy costs will come down on our non IC implants and that increases the gross margin before opex as well. So the benefit is even greater than illustrated in the chart.
The capital investment for project 24 is approximately $55 million to $60 million with less than a one year payback.
We are working to have this completed within the next 12 months remember we have exclusive use of this improvement for one year. Following the completion of our final plant upgrade.
Hi protein feed technology capital investment will approximately be $300 million to $350 million for the whole platform and we currently anticipate payback of this investment over a two to three year time horizon.
Over the last four months, we have been working hard to reduce the capital required to build this technology out with our providers and expect to announce additional projects in the future. Our goal is to significantly reduce our dependence on ethanol margins and trying to transition to predictable cash flow streams.
We plan to use the current cash and cash generated from additional asset sales do provide the liquidity we need to manage through the current environment provide capital to fund project 24, and high protein feed technology installations, and finally invest in reducing our share count as our per gallon valuation is is well below the results from our recent asset sales and is just too low.
We believe our initiatives are the best pathway to control our destiny in an industry that lacks the ability to show discipline when needed.
Thanks for calling in today and I'll ask Joe Alpha start to question and answer session.
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What's your question Steve.
Our first question comes from Adam Samuelson with Goldman Sachs. Your line is now open.
Yes, thanks, good morning, everyone.
Morning.
So Todd I was first hoping to dig a bit more and into the ethanol margin dynamics today and thinking about we've seen corn basis, and cash breakeven and marginal variable costs for single operator plants I mean, how.
I guess I've been surprised at how resilient production has proven to be over the past two two to three months and just would love to get your take and just your expectations and view on industry production.
Through the end of the year given the margin environment we're in.
Yes, I think even some of the best plants today are starting to finally feel the negative EBITDA environment.
People that we talk to some of our even our best plants saw some of that and a lot of it was driven last quarter by the strength in the cash market around corn, the corn basis moved significantly which then reduced.
Margins overall it late in the quarter, and then going into Q3, and so what we've seen is with the lack of information and knowledge that we have around next year's crop. The farmer has basically taking control of the remaining stocks, which then drove margins, especially in the eastern corn belt.
Into a significant negative position I think we've seen some plants slowdown weve seen some plants shutdown, we've seen some plants closed forever, while not always being reflected in some of the data I think were maybe this is a week, we finally see it.
The cash market in ethanol remains still remains from the index values still remain firm. So I think there's a disconnect between what we are.
Seeing in EA data and actually what's happening out there. So I think hopefully this is the week. We finally start to see that some of the marginal plants a slowdown theres been plants in the industry that have had trouble buying corn to run their plants and have had to slow down as well or have had the shutdown. So I think overall, it's everything EA is a lagging indicator, it's not a leading indicator, but it's treated as a leading indicator and so we see a lot of noise and movement in those numbers and maybe this will be the week that we finally start to see the reality of of what Weve.
Been experiencing in the industry.
And with that.
And especially where maybe there is a.
A more subdued export kind of environment over the balance of the year Ashford and just the total year to date number I mean, how long do you think it might take before we start getting the industry stocks back to a more appropriate and balance level.
Yes, I mean, the last week was a out with a bit of a gut punch with the bill that we had towards almost a record I mean, we really need to get our stocks back down into the high teens very low twentys in terms of million barrels and so thats about we're probably four to five days of overproduction.
And that could take we could wait to see it could be another four to six weeks before I still think we start to see even the end of <unk>.
Some of these contracts at the plants have on that half to deliver against.
And maybe we start to see draws at that point, but I still think that each day as I said is a is a lagging indicator and it's still could take some time before we start to see draws although.
It doesn't feel like.
From the demand side domestically that there is a lot of that is access that the EPA has reported is out there because.
There's a lot of markets that are still from Theres a lot of markets that still has struggled buying some of the ethanol that they need.
It's not like we're sitting on ethanol that can't get sold whenever we produce it and so we're in a unique situation, where the physical market and ethanol isn't really matching up with what we're seeing in the inventory levels and I think thats, because we would see much much.
Weaker physical market and a much weaker financial spread in terms of the curve on the.
The forward curve in the in the financial markets and the swap markets and Thats not representative of the stocks that we have as well so.
It's just one of the things I think the biggest driver, though we still come back to has been this from corn basis. When we were paying on eastern corn belt was paying 75 over for corn coming from the western corn belt and and the breast is paying 20 over in a normal 20 under market. That's 40 cents, a gallon or or 40 cents, a bushel which is almost.
15.
14, 15 cents, a gallon and I think thats really been the major impact to where the margins have gone here as of late and hopefully as we get into Q4, we start to get back into more normal basis levels, especially.
If the FDA gives us something positive next week.
Okay. That's helpful. And then just on on the capital allocation kind of actions I mean, and you alluded to the significant discount and the equity value today relative to the at the year and the board's view of view of.
Of asset value.
It just why not try to think about trying to do something more aggressive in the near term or do you think that the longer term opportunity between project 24 and high Pro just is in the best long term interest to shareholders that gap just seems very dramatic just before the stock price is today.
Yeah, I think we have to focus on project 24 first.
Because that's getting the house in order and in terms of keeping it.
Competitive in the long term 24 cents a gallon across our whole platform. If you do the math the way, we do it and Thats what in the market that's a compare themselves to.
24 cents a gallon, we think puts us back into that top 10, or 15 percentile of the industry, maybe 20 percentile and thats whats needed for the long term.
Maintaining our us good strategic position in this industry in any market and I think we're starting to see that already on the forward curve. When we start to plug and 24 cents versus 32 last year or 36 in the first quarter you, we can see our ability to start to withstand.
Some of this volatility a bit more as we get through the project. So that's number one but thats not going to be the greatest use the use of our cash secondly protein has a long game, whether we build one now and eight later or whatever we build eight now in to later, that's going to be dependent on our responsibility to our shareholders to allocate capital properly.
And so we're going to meet.
Our board of directors, we meet regularly and our next discussion is going to come up here and our view is we're going to develop a capital allocation plan against getting this our value correct in the market and certainly we're going to get pushed around basis. The current ethanol margin, but thats not representative of number one where we sold assets number two where were getting indications of value for our assets.
And number three what we should how we should look at our current stock price and our board is highly sensitive to that they take it very seriously and I think that we're going to look very seriously at allocating capital to to get that back in line, it's going to be obviously.
The ethanol margin environment is something that often will overtake any effort to do that but then what you. We want to do is position ourselves by reducing share count in the future.
That when a small turn comes at the Big return for our shareholders and with a book value of the low Twentys and a stock price in the low eights theres a significant disconnect people are looking to short term at this company and not taking a viewpoint of the fact that once cattles off balance sheet.
We will have.
Well over a quarter billion dollars of cash to withstand what's going on in Q4 is about a cash burn.
Slightly positive slightly negative based on the current market. So things are already changing so we're not going to go away for quite a long time and especially the fact that we don't really have much debt left on our balance sheet. So I think overall, it's going to be.
First and foremost getting project 24 done secondly, looking at our capital allocation relative to our stock price and obviously the long game is going to be transitioning the protein, but we cannot ignore that we believe we are significantly undervalued in the market today, and we wont ignore that.
All right I appreciate all the color I'll pass it on thank you. Thank you.
Thank you and our next question comes from Exxon with Craig Hallum. Your line is now open.
Good morning.
Good morning, maybe just maybe just on your production in the context of the industry is a I know that in the past you've cut back the industry.
Did not follow and now you've got you've made the decision to be at 90%.
And run that going forward I mean, if given that it seems like we're the industry potentially at a pain point in that.
Could see a real drop in production is that 90% level something that.
You will even if it's for a short period of time, you would revisit given that you take some off it would have a good to have a pretty big impact on the industry or is this something where 90% is locked in and given your balance sheet. You can just you're just going to wait it out.
Yes, our view is we have to in order to achieve project 24 part of the.
Our ability to achieve that is to run at above 90% and we actually think our plants can run well over 90% and Thats something we will look at as well at this point only having 1.1 billion gallons I'm not sure that's going to make or break this industry anymore. When we had 1.5 and were able to take off three or 400 million gallons. The interesting thing is that had very little impact in the first quarter and we hear out there that everybody is waiting for green plains to slow down.
And I can at least stay today that that's not our intent is actually our intent to run at night above 90% not only to benefit our project 24, but also the benefit.
Our ownership in the partnership as well and so we cannot achieve 24 cents a gallon without running hammered down every day and that's what we're going to do and and even tried to get below that number basis anything thats only basis, 90% production. We believe our assets can run as high as 94, 95% on a daily basis, driving our opex per gallon even lower.
And we think that puts us in the best position, we were not in the best position last year, we weren't in the best position two years ago. Our Opex per gallon was 32 to 33 cents a gallon and now we are fully focused on driving that significantly lower and that is that would that has a significant impact for our shareholders and while we have done the job for the industry in the past and as I said, they worked really well the first time. It didnt. It was about a push the second time and last our shareholders significant value. The third time. The fourth time, we're just going to keep going and it's the responsibility of this industry to also.
Decide when they need to when they need to do their work as well and I think this cash burn is equal opportunity at this point.
And so there are others that need to probably stop or slow down and we're starting to see that and I don't think green plains has to do the work anymore for this industry.
Yes got it okay. Thanks for that clarification.
And then maybe just last one for me I know part of the optimization program has been thinking about selling assets and it sounds like thats still a possibility but given.
That.
Different from end of last year, when you sold your three.
Its now very much a buyer's market, so kind of what you're seeing in the market on that front and maybe if you could handicap chances that you do.
Sell something or one of your plants are a couple by the end of the year.
It's not a buyer's market for Green plains plants, because we're not we're not going to sell distressed values number one.
As I said on the conference call. Our plants are turnkey theres nothing that needs to happen to them. When you buy them. The option are the Capex has been done in the maintenance has been done to safety and environmental as up to date and our plants are in turnkey shape and thats, a very different value proposition for a buyer than other processes that have been out there.
And other things that and other plants that might have been for sale.
And so how we look at it is now we don't want to sell a lot more if we sell one to two more possibly maybe one to three but I don't think that I think it's more like one to two.
I would hand, we are working with interested parties, we still have parties coming in and they know that we're not going to sell it a distressed value. We don't have to do that especially with the fact that we're our balance sheet is in such good shape. Our cash balances are high margins are getting back closer to breakeven for the fourth quarter and so there's really not a need to sell anything at distressed values, although we would still like to get.
At least one to two more Don I would handicap that with the parties that were working on.
At 50, 50 or better by the end of the year.
And I think we have an opportunity, possibly even greater than that to get something done that would just give us more cash onto the balance sheet to allocate obviously like we just talked about.
And really position Green plains well in.
Project 24, reducing our share count and investing in the next generation screenplays 2.0, which is protein so.
While you have seen processes get pulled some processes get done cheaper, we're really not a we're not we're not we're not that type of seller. So if anybody approaching us from a buyer's market perspective, we're probably the wrong Guy the approach at this point.
Got it thank you.
Thank you and our next question comes from Craig Irwin with Roth Capital Partners. Your line is now open.
Thanks for taking my questions.
So Todd your comments about the EPA and how the administrators chosen to implement the renewable fuel standard.
Clearly the harsh just most critical comments I've heard you make in more than 10 years.
You kind of.
Being careful and cautious and criticizing the EPA over the last several years and this I think was blind as I've heard you Ben about some egregious missteps there.
Do we really need to see EPA come in line.
And be an honest broker and implement the renewable fuel standard properly to find our way out of this difficult margin environment is it possible for us to see remediation without EPA actually taking the correct steps in that in the near to intermediate term.
I think one thing that we've seen relative to the EPA is.
Administering this RFS and even these srs fees is.
That with the with the old administrator out who made up the rules for what we would call friends of his in the oil patch.
And that the backbone of agriculture, which is the ethanol industry suffers.
I think that that viewpoint is coming through it's still a battle.
It is still a oil driven EPA as from my view.
I think that with the removal of Pruitt and now.
Wareham as well going away, we have a chance now to at least get.
Some better viewpoints this administrator understands the importance of infrastructure and Efifteen and rolling it out.
I think they've gotten bad data from their friends at oil on blending and we know they have because nobody is held accountable to 15 billion gallons into our and the saris allow them not to be held accountable to that which is why they have to stop and I think thats why this president is getting involved.
So I think overall.
With what's the changes in the EPA, the president getting involved in refinery exemptions.
And the fact that agriculture is suffering so great under the current policies.
I think we have some potential remediation I did when I think its financial remediation, but I think its remediation from the fact that.
What's happened over the last couple of years in the first couple of years administration at EPA versus the next I think we have a chance now to at least have our voice heard.
And the fact that Theres some big big.
Decisions that have to get made in the future. So while I certainly am have been I am very highly critical of what's happening there today I am optimistic that changing of the guard and continued involvement by this administer might as president in agriculture, we will get some things that we need out of EPA as well, but make no mistake. This is a this is not a biofuels EPA. This is a oil industry EPA today.
I would agree with you I think Trump remembers 118 at the 230 counties that slipped Obama to Trump or AG counts so hopefully.
Administrator Wheeler can can do the right thing moving onto project 24.
So.
I understand the endpoint it makes a lot of sense, but in the.
In the short term, we're feeling quite a lot of pain from the negative crush margins and down.
The necessity of running the platform at high levels of utilization to implement.
Project 24.
Shouldn't we really factored into increased cash losses, as we as we run at higher levels of utilization.
Into the overall.
Returns on project 24, I mean is this something that we think we do you think we need to look beyond in the very short term of course, we'll see some some quick results or.
Are we really looking at Ed at returns when you factor the cash losses today.
That are a little bit lower.
I think the problem right now is this curve is in this ethanol margin curve is in the area with that if I run slower I burn more cash.
Because variable contribution margin for us as we reduce our opex, even at 28 cents a gallon of ethanol and not a lot of that is driven by that's just driven by watching some of the things that we've been doing making better decisions getting better contracts those type of things.
The slower I run the more money I actually burn.
So now that we're getting into the twentys instead of the Thirtys on our opex per gallon and going into the low twentys.
The more I run the more cash at these levels that we would actually burned so.
It's going to be up to a different part of the industry to run slower because that's what happened to us in the first quarter of this year, Craig we ran slower and we lost more running slower to try and get the industry back in balance yet the industry decided to take advantage of that and run harder.
And and just offset everything that Green Plains did with our project 24 program. We there's really only one way to run these plants today unless you get margin to get so negative we are being variable contribution is negative.
And at that point, we can always look at it.
But today, the harder I run or the slower I, Ron I will we will actually burn more cash and that's we're not going to do that for our shareholders anymore, especially in that position financial position that we're in today, which is to really.
Move project 24 as fast as we can we're trying to accelerate it as fast as we can so that when we get into into 2020, we're getting very close to those levels.
By the second quarter that we will be basically just having to run all day everyday hammer down and and the difference, though if you think about it let's say.
Let's even last year, when we were at 32 cents and if in 2020 or 24 cents eight cents a gallon over.
100, and a 1.1 billion gallons at $190 million to $100 million of additional cash.
That we get just by running even at the same margin structure. So.
I'd like to say that Green Plains is going to do the work for the industry going forward, that's not going to be our responsibility for much longer.
Great and then last question if I may is around Catalent see lots, so I think everybody understood.
You are core competencies at Green Plains.
We're good match for entry into the cattle business and.
I guess the world's changed so everybody also understands your and your deconsolidation.
Post the consolidation do you think we still retain some of the.
The benefits that we're chasing originally from from being in the feed lot business intelligence on demand for distillers grains.
The understanding the economics on the on the on the demand side for the distillers grains that it brings from being a large size operator in that market.
And would you expect that to be a consistently positive contribution contribution on the.
On the operating income line looking forward.
Absolutely and all that actually so the cattle business joint venture will be will be housed on our trading floor, we will be still managing treasure or providing services for treasury risk management overall accounting those type of services.
IP out we will have a board of which we will be part of but it will still be a very closely.
Aligned to our platform in terms of.
Getting the benefit for both because the cattle feeding operation gets the benefit from the fact that we produce a significant significant amount of the feed that they use and also by a lot more corn than they do.
And the platform to production platform still we will get the benefit of the fact that we know what's happening the rations, whether we'd as being better corn is being fed will how did the stores work in but even more importantly, now is as we evolve to Green Plains 2.0 in the future.
When you think about producing high protein you're going to have the ability to dial up more high protein, which will then.
Produce different types of products other than distillers grains.
Which has an energy value in the cattle feeding business and we think that puts us an advantage as well so.
Not much is going to change on a daily basis for the guys that run the business will be involved to help them and it's a decision making processes risk management processes and really on the acquisition side as well it will be really up to green the Green Plains team to still go out and Fi along with the head of the cattle feeding business, which which we have today anyways.
To go out and find acquisition targets diligence the acquisition targets and help L brands financing for that.
So while off balance sheet from a optical perspective and to make sure that we can deconsolidate the debt.
Green Plains will still own 50% of this business and we're going to try and double the size of this business going forward off the balance sheet, we could never do it on the balance sheet, we like the business a lot. It provides high price high return on equity high return on invested capital.
And it's not it business, we're interested in exiting but it's also confuses.
Potential investors on debt levels, and I think we just wanted to get ourselves to a very clean position that when you look up Green plains on your Bloomberg machine, you're going to see our convertible debt you're going to see our working capital financing for some grain as methanol you're going to see cash and that's all you're going to see and you're not going to be.
Subjected to figuring out where is the sort of three or $400 million of debt coming from and if you go back in a couple of years ago, we had close to $1.5 billion of debt.
And now a couple of years later through portfolio optimization and getting cattle off balance sheet.
We're going to basically have almost a zero net debt not inclusive of maybe 100 $150 million working capital financing fully backed by inventories and receivables. So.
We have put this company in a very good position obviously the market is not participating with us on that but we put the company in a very good position that were not going to go anywhere anytime soon.
Great. Thanks, and one more question if I may.
Shenandoah and the the hyper growth.
Seems in your presentation, you're pointing out with a lot more confidence towards 16 cents a gallon rather than the range of sort of 12 to 15 Youve talked about.
Yes, two times over the last couple of years.
Can you update us on where we're at with Shenandoah do we expect this to start making positive contribution at the end of here.
What did you learn.
Well, we've learned a lot of things and so one of the things. We learned is when we went back and worked with our technology provider.
We talked to them about that Capex is just too high office is just too high and we want to get more margin out of this project.
And they did a great job coming back to us with a reengineered plan where.
We reduced our capex overall, the project by about seven or $8 million, while reducing operating expenses and increasing the margin overall and really setting it up for duplicating that technology among with others that we're also looking at as well. So it won't we won't just be a one technology company.
So what we've learned is number one we wanted to get the Capex now we didn't think long term that was the way that it was just really too expensive over the long term and so secondly, we've also learned is the product is now being sold from a few plants around the United States that make this product today and the largest one.
As already announced a second largest producer as already announced a second plant and.
We are sure that there is going to be three and four or five more that are two or three that theyre going to.
Announced as well so.
Our view is the product our view and our intelligence tells US the product is getting sold at Soymeal plus.
It is a 50% type protein product.
It is being exported and used domestically.
It has been widely accepted as a high value product.
Even more exciting than that is that we are starting to see technologies coming out of the.
Enzyme and chemical companies that are taking this protein not only to 50, but the 50 to 54 56 with the end game trying to get the 63 mechanical and an enzymatic increases and that all of a sudden takes a product into a $1200 ton range instead of a three or $400 ton range and Thats what were focused on so absolutely everything that we've seen every assumption so far we've made.
Is validated.
Is coming through and so our view is it we're very illustration purposes, we put 15 that theres going to be times, it's going to be 20. There is can be time that it's going to be 12, but overall, we believe over the long term 15 as the baseline that we're going to use for our investment thesis, but everything that we've looked at has validated. The fact that there is a market for this product it's accepted and and we are still continuing to work on opening new markets for this so when we come on in Shenandoah.
Late in the fourth quarter, we expect that our product we'll have a we'll have a home and will start to contribute positively in the first quarter of 2020.
Thanks again for taking my questions.
Thanks.
Thank you.
And our next question comes from.
Come off with Raymond James Your line is now open.
Thanks for taking the question.
In the case of biodiesel, what we've seen as China stopped buying us soybean.
And as a result.
Biodiesel margins went through the roof.
Now that it appears that China is effectively halted purchases of all U.S. agricultural commodities, including corn I'm curious could that actually be at tailwind.
From the standpoint of.
Crush spread.
No not really I don't think thats necessarily it's a different case I mean I think that.
Obviously $9 beans and.
And and cheaper oil have given the ability of the biodiesel guy to make a margin because of China, I think China backing kind of was not really big corn buyer, China is more important to the ethanol market long term for us.
Because they do have a significant demand pent up there and we think up to 3 billion gallons.
And in the last time, China was taking our product we were at a positive 15 to 20 cents a gallon margin and that was with our higher opex by the way.
And so as we go forward.
The China situation is definitely something that we're going to have to deal with we think the positive comments out of Brazil are beneficial for us around potentially taking more tariff free or dropping to tariff altogether or at least the extending for now that demand for them. The demand in that market continues to grow every year.
And I think we're going to be good good trading partners with them, but I don't think from the standpoint of China for us that's a positive to the crush today.
Okay.
One more about China so.
I suppose officially there still.
Mandating E 10 in 2020, nobody believes that that will happen, but what's the what's the current level of kind of the average nationwide blend in the Chinese market that youre aware of in practical terms.
Oh in practical terms, we think they make about 500 million gallons internally by the 600 million gallons internally over a 30 to 40 billion gallon.
Market. So it's a very small percentage and that's why we think the market could be up to three 3 billion gallons plus potentially even higher than that.
In the Chinese market. So, it's a very small where they can do internally today.
And I still think some of the province's wants the product, it's really just going to come down to the end of this trade war.
And when it will end and how it will end and that will be much more impactful on the ethanol industry going forward.
What I think will be the supplier at least in the short term short to medium term of any product they need over and above where they can produce internally before they start to potentially ramp up their own production.
Okay. That's helpful. Appreciate it.
Thank you.
Thank you.
And our next question comes from Selman Akyol with Stifel. Your line is now open.
Thank you.
Can you remind us how long.
GPR he has to use up the MBC payments on a go forward basis.
Yes, we should have.
Most of that wrapped up by the end of the year.
And potentially into the first quarter, a little bit but overall.
The heart, we're just trying to obviously.
If we can ramp production and run at these higher than 90% run rates, we can use that up much faster and.
But that should be potentially by the end of the year early in the first quarter.
Okay and then.
Just going back to the Jefferson terminal I know is kind of one of those assets that could be dropped in.
But given sort of the optimization.
Upstairs.
Do you guys ever look at just trying to sell that straight out in order to raise capital.
Yes look we think Jefferson was built and started up right at the beginning of a trade war.
So performance to date.
Has been adequate for Green plains, Inc., but to drop it to Green Plains partners.
It would be.
Not optimal for the.
You didn't holders of Green Plains partners today, and less obviously, we see resolution of trade wars et cetera throughout.
Throughout the world with us.
But overall, we've been running.
Anywhere from seven to 10 trains through there a month with our partner at fortress and that is not something that I think we would not look at going in the future.
We think though there's a strategic reason for having it but there's also other reasons to say that maybe we could allocate and get better returns on our capital doing something else as well.
So I guess, what the question is.
So would we ever look at potentially divesting that terminal that is always an option that weve always had as well to allocate that capital better back into Green Plains, Inc. and its something we look at as well.
Okay. Thank you very much.
Thank you.
Thank you.
That is all the questions. We have for today I will now turn the call back over to Todd Becker for closing remarks.
Yes.
Thank you everybody for coming on the call today, obviously, a challenging quarter, but green Plains is also executing on the final stages of portfolio optimization plan, we're putting ourselves in a very good position going forward. We are setting the company up well to succeed obviously, we need a few things to happen around trade.
And the industry in the margin, but I think long term the company's going to going to be here and we are in solid shape to continue to get through the current environment and we think set ourselves up well for our shareholders in the future. So thanks for your support and we'll talk to you next quarter.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude todays program and you may all disconnect.
Everyone have a wonderful day.