Gevo, Inc. (GEVO) Earnings Call Transcript & Summary

And Co-Founder and President of Water Tower Research and Head of Sustainable Investing. Thank you for joining us in our ongoing sustainability fireside chat. Today we have Gevo and Pat Gruber, CEO. We're going to be discussing a few topics and a couple of things that have happened in the past couple of months that are investor interest. And again, as a reminder, we provide open access research and content for all investors. You can read our research on our website at www.watertowerresearch.com as well as access other information there about other companies in our sustainability practice. Going through today, I will be asking questions in a fireside chat format. We'll open it up at the end, try to take some from the audience. Please understand we get a significant number of questions from the audience, in the hundreds usually. So I'm not going to be able to answer all of those, but we do want to get to a couple of them and hopefully we answer most of your questions through our fireside chat. As a reminder, this will be available on demand at any time for additional viewing and length today, we try to keep it to about 30 minutes. So with that, again, Pat, thank you. Thanks for joining us again today. Glad to have you back.

And let's go ahead and jump into it. I mean the big news being the ethanol-to-jet, very interesting technology. I think it's something that we haven't really explored that much before in terms of our research, but obviously, it's coming with some interesting patents and technology. So maybe I want to start by explaining, how is that different than the current net-zero plants and how the production works and really compare and contrast what you've been doing to what this brings, the ETJ brings.

All right. So we're going to talk first just about technologies and what they mean and I'll contrast them. So with isobutanol, isobutanol has 4 carbons as an alcohol. It's an alcohol made by fermentation. Then we do a chemical step and to connect these things together to make 8 carbons long, that's octane; 12 carbons long, jet fuel, okay? And -- but the broad category of technology is alcohol to hydrocarbons or some people refer to as alcohol to jet, all right? Now the beauty of an isobutanol pathway is that you can make very high quantities, very beautiful, high-quality isooctane, which has an enormous market in gasoline. It can also make a really nice jet fuel. So -- and you can switch back and forth between these two quite easily. Ethanol fermentation, everyone knows, they know -- it's a brew. It's the same old ethanol. And dehydrating ethanol, you get a 2-carbon building block. So the first step then is you got to connect 2 plus 2 together. Now I have 4 -- now I do 4 plus 4 together, but the thing is, is you wind up with more mixtures because there's -- when you start off with two, you can hook them up in multiple different ways. So you wind up with a mixture, different than what you would get from isobutanol. It lends itself to making jet fuel. Now we signed a deal with Axens where we are the exclusive partner for them in the States. It's great because this is -- they have deployed this technology in the petrochemical industry, starting with the 2 carbon building block called ethylene that -- and they make jet fuel and hydrocarbon fuels or other products, and they've licensed and built many plants on this already. And so now we're working with them exclusively. And they like -- the press release, I think, was interesting because it stated exactly why they're working with us because we get how to do the whole carbon accounting part of it, decarbonization, how to make that happen. And of course, it fits exactly our business system and ethanol-to-jet, ethanol process, making hydrocarbons lends itself to making more jet fuel.

So from a strategic standpoint, looking at the isobutanol, what does this do to the market, the pace that you can scale? Just trying to put it in perspective what it means to getting the volumes and large-scale commercialization, how it helps or it doesn't.

Yes, sure. So I'm interested, my goal and our vision, target, what I'm shooting for when I tell my team is I want at least 1 billion gallons of net-zero type hydrocarbons in the market by 2030. This is -- not that long ago, people would have laughed at me, but no longer. People get it. How can you do that? Well, that takes a combination of isobutanol plants that make them, convert into hydrocarbons and then also taking ethanol and converting into hydrocarbons. Now the challenge with ethanol is you got to decarbonize the ethanol. Obviously, when we're building a brand-new isobutanol plant, we can arrange the renewable energy however we want. But if we're using ethanol, you have a choice of working with an existing plant, but got to decarbonize their energy because remember, fossil footprint in these products is driven by the electricity, the natural gas, the energy sources for those plants. That's what it's driven by. And so the stuff has to be decarbonized. The other alternative is we could go build a new ethanol plant and make hydrocarbons and some people interested in that, too. So it gives us more levers to work and it's good economics across the board. The difference is the isobutanol route, two products, octane, jet fuel, and we can switch back and forth. Whereas with the -- working with Axens technology on the ethanol-to-jet side, you're getting primarily jet fuel.

Let me go back to the technology that Axens is bringing again and the patents because, one, the other competing technologies and really at the root here, where did this come from? Why was it there? Why were they not producing it? I mean, obviously, ethanol has been around for a very long time and getting the low-carbon sustainable aviation fuel. So what was behind it?

So sure. Axens is the... [Audio Gap] That's really a good thing. So it's -- so we've been working with them on that. And then as we were talking about it, we're like, well, shoot, it's the exact same technology in that back part of the plant. Once I have 4-carbon building block, and I want to make it into things that are longer chain carbons, it's the exact same technology from ethanol. We're like why wouldn't we do ethanol? And here's how you decarbonize it, and we get along famously well with these people. And they just -- it's one of these paradigm-breaking things. When you know how to decarbonize and have it -- and remember, we take the Argonne GREET model, we break all the energy down, the whole thing. How do you capture carbon, break straight through. We're -- we know that the big task is to get rid of fossil-based electricity, fossil-based natural gas and do some -- if there's ever coal in a system, how to get that out of the system. We -- this is what this game is actually about. And this is no different, by the way. If I -- people say, what about EVs? Hey, EVs are great. Oh, except where did you get to electricity? It came from the U.S. grid, it's like 60-plus percent fossil. Or what about hydrogen, same thing. You got -- where -- how do you make your hydrogen? Where did your energy come from? So this is for all these transportation things, this is about cleaning up energy. That's what this is about.

If I can go back, though, to the execution on this, what does Gevo have to do to really leverage the ETJ? I mean is it -- you're going out, you're partnering big plants, you're going to use that bioethanol plants. I mean just what is -- how does this execute in terms of getting to produce in these plants?

Yes. And you saw in our press release, we're really being open about it. We like to work with lots of people because we think it offers up a new opportunity for converting the ethanol into jet from anyone, if they're willing to decarbonize and we'll help people. We have a good network of people of companies, like Juhl and others who are -- will help people decarbonize their plants. If they want to get out of an ethanol game and move into a jet game, we'll help them. And we see it as a way of just accelerating things. And it could be that maybe we're going to want to acquire stuff. Maybe we're going to want to build new stuff. It all depends upon the partners we have, and our customer pipeline has been increasing still. And we're moving along -- everyone always wants to worry you on contracts. Okay, people, we're making progress. We're getting there, we're plugging along, and the pipeline is getting bigger as the dust is settling about who has the ability to do what and deliver what in what time frame. So it's going to be interesting and sporting for all of us, I think, because we can -- I think we can accelerate things. I do believe so.

If I go back to kind of the whole plant, the renewable plant, new renewable energy in the plant and even sourcing of corn and things like that. If you take a regular ethanol plant or ethanol as it's produced today from the regular plant, and you were to convert that into jet fuel, it's still going to be a lower footprint -- carbon footprint, correct, than oil, of course, because you're using a renewable source in corn. But is that anything -- or are you really just -- you have to go through to make this work, you have to get the whole supply chain and production to really make the carbon footprint reduced enough to make it matter?

You have to look at the -- always, whenever you're touching a -- something that has a claim of a low carbon, whatever it is, you have to look at the whole of the life cycle and we're looking at pieces and parts. You got to account for the whole thing. And this is a very fundamental point of view that we have. Otherwise, you can get the wrong answer. So you look at the whole thing and say, what are all the contributors, right? So when it comes specifically to an ethanol plant, you've got to figure out the right balancing act of what do you have to do about electricity, what about the gas, what are the sequestration opportunities? And you can do that as sequestration because whenever you do a fermentation, this is true of isobutanol, is that you -- the CO2 that comes off, you can sequester it. We can do -- we could do that up at Net-Zero 1. We just haven't made a claim about it yet, but clearly, we can do that, too. And we will, at some point, probably do that. And it's a -- so there's opportunities to sequester. And of course, there's always the soil organic carbon opportunities as well if you could incentivize your farmers correctly. So there's a whole bunch of things that can be done. The task at hand always, get rid of the fossil-based energy as much as possible or get it so that the energy source doesn't have the carbon contributions that pollute the air. That's the task at hand.

I mean this goes back if my memory serves, all the way back to selling low-carbon ethanol in the California market, right? I mean it's going back to that same principle for ethanol production.

Well, it is, but this is different because the ethanol market in California is probably what, 1.5 billion gallons because you get 10% blend wall. It's something like that. And so we're talking jet fuel. Jet fuel is projected -- it's already, it's 100 million gallons and people want to increase it. And technology-wise, it's these technologies that we're doing are ready for prime time, whether it's from isobutanol or from ethanol. These are prime time. And so it's about making sure that the customers will be there, signing them up, showing that we can go build for that demand. And it's a type of work kind of a game where you've got to, is it going to really be there? How will you do it? And then yes, we can do it, you're going to buy it? It's just back and forth all the time. And it's getting interesting because now when I'm out there talking about -- I wouldn't talk about trying to achieve $1 billion by 2030 if I didn't think it could be done. I wouldn't, but I think it can be done. But -- and we can do it through a combination of these different kinds of technologies. And for the business system is the same. This is the thing, so it's the same. It's securing low-carbon feedstocks. They've been sustainably grown, sustainably sourced. It's about applying the renewable energy. It's doing fermentation and it's the same kind of chemistry, whether it's ethanol or isobutanol and then on to hydrocarbons.

So let's move on to one of the milestones you hit and this is inking a deal with an EPC, Kiewit. And you announced that. That's -- what does that mean? What is it relevant to? Obviously, it's part of the -- Kiewit to actually plan and construction, but as a perspective, if you can [indiscernible].

Kiewit is one of the largest construction companies in the world, and they're their EPC company, too, engineering, procurement, construction company in the world. These are a giant. They've done tons of work over the years with petrochemical companies, and I'm really happy to have them. And because these guys have the ability to carry out and execute multiple projects at once. That's an important factor when you start thinking about what we're trying to do and how are we going to grow. And these guys have a reputation of being the best in the industry. And so we like working with them, what we've seen so far, and we've been working it for months, many, many months now. We just didn't get a chance to talk about it publicly. But it's a -- they're really, really, really good. And yes, we expect them to be the EPC wrap company. What that means is they're the ones who go build the plant at a price and guarantee the price and that the plant works. That's what they are. And so we've more -- we've still got to finish off our engineering, and then we got to finish off the EPC wrap. We still got to rate the -- align the debt lenders and they need to see what the EPC wrap looks like. That's all that stuff we had already talked about in the past would be next year, right? But Kiewit, I'm tickled to have these guys because this answers that question of, "Gevo, what are you going to do? These 45 million gallon plant sequentially or what?" No, because I can just say, "Kiewit, here's another opportunity right there. Off we go."

And what's the process with them, and obviously, you got to start doing development, but what's the next steps that they would take? Obviously, the investors are looking for this validation of the technology and commercialization cost, return just maybe a little perspective for those that aren't familiar with how an EPC wrap works.

So when we're talking about doing project financing, so this is off-balance sheet project financing, nonrecourse project financing is the topic we're talking about. This means that we have Gevo, Inc. is at a high level. We're an owner and that we invest in a project level. At the project level, there's equity and debt. The equity, Gevo would plan on putting up the equity into Net-Zero 1. Although as we said, we may take in other partners near the time of close because what the heck, we want them engaged and it helps defray some of the equity costs down there. We may do that. We'll see. And then you have debt that you apply. And this is a -- you go -- and this will be like municipal bond-type debt. The way that this works in a project financing is you got to have offtake agreements that are financeable, you got to have an EPC wrap guarantee that said that the engineering company says, here's the cost there. And you also have to have other process guarantees, so there's assurance that the whole thing works because the debt people don't like risk. So that's how this works. Okay? And so the EPC company is saying that we can build it for this price, this time frame, and it will work. And then they're on the hook to make it work if there was a problem. That's what an EPC company does. So that gives comfort to the lender.

Right. That's how people understand, that's part and parcel for you have to have that as you go into project finance. And this is a...

Yes, everybody wants it. People always think about, why don't you just do that? I got to tell you, you want somebody like a Kiewit who's not at -- they're really good at it. They're not just a little bit good at it. They're really, really good at it. They took our guys down to see one of the projects they were doing on the Gulf Coast. My god, it was a skid built that they had to roll off a ship. It's so big, building in modular. It so it's like these people have their act together. They're quite something.

Let's talk a little bit about technology. You had a couple of patent announcements and interestingly, Butamax -- and who are new to story probably don't remember all of that from many years ago. I kind of do from covering the stock for quite a few years, gone through a lot. But Butamax, interesting change of events. Maybe talk a little bit about that and the other patents.

Yes. So the history of around Butamax, Butamax as a company in the old days was owned by BP and DuPont, and they were an arch competitor of ours, and we were in a patent -- nasty patent lawsuit for years. In 2016, I think it was, we settled in a cross-license agreement where they go do their thing, we do go to ours and we don't sue each other anymore. Well, what happened is that, that company kind of broke up, and the residual parts got put into a company called IFF. Anyway, what it is, is that, that patent portfolio was sitting there, and it's a lot of patents -- several hundred patents. And so what we did is just acquired it. We spent $9 million. Our patent portfolio now around the pathway from securing a carbohydrate through isobutanol through making hydrocarbons is about 600 patents. And so I kind of like that because these are viable active patents, and we can leverage them and create new ones from it and do all kinds of things. And so it just -- it ties things up and gives us an advantage. We control the intellectual property. So what the hey? It's kind of cool to get that under our belt. It's nice to get that finished off, and we also don't have to worry about paying attention to the cross-license agreements that existed, they're gone, and it's nice, man. So that's what -- we got a really strong -- like an outrageously strong proprietary position, outrageous.

And that's what I think is interesting in the proprietary nature because going back, I remember, those are 2 behemoths that we're trying to get workarounds and do the same thing you were doing and it was a big issue for Gevo many years ago. But obviously, it's worked its way through and here we are.

Well, you know what, our focus has always been on hydrocarbons, always. It's been on hydrocarbons. And so -- that's why we're here still because we called it right a long time ago.

Let's go on to the GREET model. I think this is maybe not fully understood or appreciated just how important it is. We talked a little bit about going back to even carbon sequestration and the [indiscernible] supply chain.

Shawn?

Can you hear me?

Yes, you were -- you're froze a bit.

Okay. I was just saying let's talk a little bit about the GREET model and how important that is. I know you -- and again, stressing how this is key to low-carbon footprint and measuring it. And this is one of the things I think people have a hard time to understand. I don't fully understand yet. This has to be measured, tracked and accounted for, just like this was any other part of the supply chain, whether it was components for semiconductors or whatever. This is the same type of supply chain management. And just talk a little bit about the GREET model and what it means and what you've done with it.

So the Argonne National Laboratory GREET model is, I think, the gold standard for doing life cycle emissions, life cycle sustainability. It's a life cycle inventory analysis tool. And what it does is it tracks emissions throughout the whole of a business chain, all the way from, in our case, we're interested in where your carbon come from as a raw material? Well, how has it grown? What happened at agriculture? What happened in the plant? What was the kind of energy? What were the products? How did it get to market? What was the transportation involved throughout the whole chain? And then it burned and you measure all that, add it up. And they have these different modules and stuff. And in fact, they just announced an update for their model. Now the thing that Argonne is they've been at this a really long time, decades. And they are the most scientific way of going about it, and you have a lot of other people saying, "Oh, we don't -- we disagree with GREET. GREET has enormous quantities of scientific literature that they stand on. So yes, okay, people can say, "Oh, I disagree with GREET." But I got freaking news. They're the ones who actually collect the data, have been working at. They've been the expert for years. The way to think of it is something like this. Suppose I have -- people say to me, "Hey, Pat, well, electric cars, they don't have emissions at the tailpipe." Excuse me, where did you get the electricity? Did you count that because that's part of the life cycle that you have to account for. And so is it fossil-based? Is it coal-based, natural gas-based? Or is it wind? Or what is it? You're really talking about here? And so that's actually what the discussions about is accurately accounting for things across the whole way, the whole of the life cycle. For us, it's accounting CO2 in the atmosphere into the corn, into the plant. It has to take into account how the corn has grown, what kind of tillage practices, low till, no till, conventional? What kind of -- how much fertilizer and stuff like that was put on, the whole bit gets accounted for. So -- and then in our plants because we're using -- we plan on using wind power and biogas, it is accounting for how do we use those inputs into the process. And so it's a real different game when you start thinking about how to manage it and optimize it because a company like us, we're making money by defossilization. Literally, we are making money by defossilization. Yes, we've got a hydrocarbon product. It's a beautiful octane as a hydrocarbon. If we never told anybody it's renewable, we could sell it as a premium hydrocarbon product. But we are going to make money by defossilization, getting rid of it and accounting for it, improving it.

And that ends up having to be a label on it, right? I mean if you're an airline and you're buying SAF, you're going to have to -- first, you have to prove the carbon footprint or common reduction of that particular gallon of fuel, right?

Absolutely. So that's -- we've been all over that in how to account for it. And we believe like -- I think we upset some of our competitors some time because we believe in full transparency of it, just laying it all out there in the open and say, here's what it is, and accounting for it. In fact, this is why we're doing the blockchain DLT technology with Verity Tracking. That's our group that does setting up the whole tracking system because we intend to put it to blockchain is what we want to do. And then we'll -- and everybody, I think, is familiar enough about blockchain to know that you can attach data and it gets immutable and you can't be messing with it. So yes, we'll have it audited. So yes, it will be audited. It'll be put in the blockchain. It will be transparent. That's what we plan on doing. That's how we think it should be done. And we'll do it down to the field level. Now that's something that gives people pause. We think it has to be done that way down to a field level. And if I was using municipal solid waste as a feedstock, which, by the way, we can do, we can use municipal solid waste, too. I just need to be able to prove its sustainability and there's enough of it, and it's at a cost that's competitive. Those are things that -- same thing applies, same rule supply. You got to prove it the whole way through.

I'm going to stop there with my questions, Pat. We have many questions, as you can imagine. And I bet you can guess what the first one, but I'm going to summarize dozens of them into one, and that's offtake agreements and updates. So maybe let me ask the question in a different way that you might be able to add some color. I mean when you look at the pipeline, is it getting deeper with a few big players? Or is it still a lot of potentially smaller but going across multiple partners -- or excuse me, customers? Just maybe some color on -- and anything that's changed there since we last talked, I think, obviously, people are looking for any kind of color.

Well, I can't remember when we talked -- we talked about Chevron with a 150 million gallons.

Yes, Chevron. This question's on Chevron, too, which is going to be my next one. So we can wrap it all up...

Yes, the Chevron. Look, Chevron. Do you think -- do you think they just go and say stuff willy-nilly, really? I mean, come on. And is it getting bigger, 150 million gallons. That's like, what, 3 net-zero plants. And that MOU discusses then investing at the project level, too. So that answers part of the capital question. And so we got to get the definitive agreements done with them. And so are they getting bigger chunks? Well, there's a bigger chunk that we're talking about. And so you're talking about, yes, we're getting bigger bites from people. We are also getting more bites from more people. And so these contracts, remember, a contract -- total contract value from a net-zero plant probably is upwards -- it's upwards of $1.5 billion. It's $1.5 billion to $2 billion across the life of the contract. These are nontrivial people. This is nontrivial. You just -- you don't walk in and go, "Hi." Just why don't you remember, we're talking about financeable offtake agreements as a prerequisite for building anything. And so it does take time.

We have a couple of good questions on the strategy around the ETJ. Is it going to be a hub-and-spoke strategy where you collect the ethanol plants? You have a centralized location, would you license the technology with the ethanol?

No. So here's what I think we should be doing is I think we should be partnering, JV-ing, working with partners to acquire stuff like that, get a first priority. Obviously, we'd have to have the capital for it. But we could -- with partners, that's possible. We have -- there's certainly going to be a licensing component to this, but that's not the main strategy because this is an early-stage growth market and people who try to license too early fail usually. So when you -- I mean, I'm talking about if we just sat back on our hunch just said, oh, this licensed technology, usually companies fail at that at this stage of life. It sounds great, but in fact, historically, they fail. So this is all about making sure the stuff gets deployed properly, put in the marketplace properly with the right price points, hits the margins and stuff like that. So the opportunities are, you could do a hub and spoke, where you have people supplying ethanol to a centralized facility. That's a possibility. You'd have to pick exactly the right locations because right now, the RFS doesn't allow transfer of an intermediate and get it -- allowing it to be having RINs. So I couldn't ship the ethanol somewhere and then expect it to be RIN by making into hydrocarbon. There might be an exception or two, but it's a -- generally, that would be the rule. And then -- so that means you're going to more likely will be a hydrocarbon attached to an ethanol plant. And so would we acquire ethanol plants with partners? Would we maybe -- will we build one new? With partners, maybe, because maybe there's a better site when you're talking about the optimization of renewable energy and sequestration and corn and shipping and access to the market and all that kind of -- yes, there are some cool places we could do something. And so it's going to be interesting to see how this unfolds. And yes, there are some big ethanol plants that are really interesting. [indiscernible], I'd like to work with those guys.

Coming up on the half hour so I'm going to take one last question or kind of combine some. We have a number of questions on the GREET model. And then -- and some points on that is, is it already audited results? And I think what they mean is, can you prove through the production of Luverne, right? And then the Net-Zero 1 concept that you hit those GREET numbers and that they're kind of audited or validated, I guess.

Yes. The answer is, yes, we did that -- we've done that already. And so what you have here is, remember, what drives the footprint. It's the farms and the agriculture. Remember, when we did RSB and we talked about that, that's -- I don't know if we did talk about it with you, but we did that auditing last year. It's on our slide deck. But RSB and ISCC, they did the auditing of the agriculture. Well, after that, it's all about the energy. That's just a freaking technical report. I mean it's the energy. It's a -- we show the data. So it's pretty straightforward. And so the answer is yes, it works. And I don't know if -- maybe people missed the press release that Argonne National Laboratories is actually going to -- they're doing their own independent study sponsored by the DOE of what we're doing up there at Net-Zero 1 because they think it's pretty cool. And they -- we did learn the techniques of how to decarbonize and how to choose equipment and how to make choices. Because remember, we're optimizing to lower the CI score. You know what this means? It is not about being the cheapest, lowest cost capital equipment on earth. That's not what we're doing. We're making choices about how does it impact power? How does it impact the CI score? And so yes, we're paying a little more for capital on stuff because we're picking different kinds of maybe more efficient pumps, more efficient -- whatever technique it is that we're using is unit operations. So we're using that kind of information. So it's kind of cool that they want to go ahead and do their own study then write their own report. I think that will help us.

Do you get any intellectual property out of this? Or is it kind of just know-how of building these things?

Well, we have a ton of intellectual property around it because the whole point about how do you decarbonize really and how do you integrate the energy really. I got wind. I got biogas. I could have energy from the grid on some days. I have hydrogen to work with. This is like a pretty -- I got manure biogas to work with if I want. I've got all kinds of different sources, and I might have sequestration to work with. We don't talk about sequestration because everybody else -- [ their brother ] is talking about sequestration. But I do think it can be a -- that can be also a useful thing for us. We just haven't talked about it yet, but that will be another part of it. So there's -- we got -- Net-Zero 1 is unusual because of the levers and how we're doing this integration of energy into the process. Who designs plants like that? No one, except us.

That might make a great topic to have you back. So I really think the GREET model and the whole supply chain is just absolutely critical to this and addition, obviously, the technology itself for conversion. But you got to count from the plant to the pump and the whole process. So I want to thank everybody for joining us today and for all your questions and participating. Look forward to having the audience back again. And Pat, I'll turn it over to you for any closing remarks, and we'll wrap it up.

Well, we are entering a very exciting time because what's happened is that there's been an acceleration of interest, particularly in jet fuel and the gasoline stuff has been there. It's rock solid. It's driven by -- because that's -- that market is still the biggest by far. But the jet fuel thing is accelerating, and it's interesting to see where -- we're going to keep an eye on this. It's going to be interesting, I think. And it's supporting for us because the Net-Zero 1 project is going along pretty well. The RNG project, we did not talk about it. That's going to start up on time, we expect. So that's really good. I like that. And I also like as we're thinking about how to get to that 1 billion gallons, that's a fun problem to work on. But by god, we can change things for real, like no screwing around and get on with it. And of course, the -- we got to figure out all the business models and how to do it and all the rest. But that's a cool thing we can do, and I can show people and convince them it's doable, which is even better.

All right. Thank you, Pat. Talk to you hopefully in the next few weeks again. Thank you.

You bet.