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

So I'll start and then Eric jump in and help. But today, under the rules, if you're bundling these 3 practices for climate-smart corn, for example, and you have all the recordkeeping and documentation that's required, you get a 10 CI Reduction. That is value in terms of the tax credit. So there is a dollar amount associated with this. And we know from history of, say, the biodiesel blenders credit that traditionally was shared through the farmer, the blender, the renewable fuel producer. And I see that this is not going to be much different from how those credits have been handled in the past. This is what people know. So if you're able to supply a lower CI corn that gets a company a better amount of that tax credit, you likely will receive more benefit for that for your product than someone who is not getting that company an additional CI benefit?

So it becomes almost a premium crop, so to speak, in terms -- because it's more valuable to the user, more valuable to the CI score for the SAF or whatever might be being produced from that, correct?

That is how we look at it.

Yes. And I'll just add. Remember, the thing that we think is really cool about what we're doing is reducing carbon footprint is a really hard problem. And the traditional way of looking at it is well, we've got cheap energy that pollutes that is greenhouse gas emissions. And then we have really expensive energy that's clean, and that's just the choice. What we're trying to do is make it clean and cheap. And the way you do that -- one of the ways you do that is you have multiple second and third order impact benefits of what you're doing. So for example, many farmers have adopted these practices that Lindsay talked about anyway because it's better for soil health, it reduces erosion. They can increase yield. If you produce more bushels per acre, that's good for you as a farmer. If you reduce your fertilizer use or your chemical inputs, they don't want to use more than they have to. Of course, they want to limit that as much as possible. That's good for growing food. It's good for their business. It's also good for greenhouse gas footprint. But farmers are -- they have their growing seasons and a lot of them inherited farms from their moms and dads and that kind of thing. And you can imagine, farmers are risk averse. So even though there's been tremendous improvements in the United States and elsewhere in agricultural practices, yields have just -- the same amount of acres were planted about 100 years ago as today, but enormous much amount of growth in corn has occurred because of all these cumulative little improvements, but we can accelerate the adoption of those improvements with data that allows farmers to have more confidence in what we're doing. Okay, that worked really well in that field, but it didn't work so well in this other field, for example. And so that's an additional benefit that we should be doing anyway with agriculture, but it also reduces greenhouse gas footprint. So it's kind of a win-win, and it creates a cycle of continuous improvement and positive feedback.

And I know we've had conversations about it before, but I want to remind investors Verity. I mean this is a key part, and it's a solution for helping to track this. So if you could give the elevator overview, if you could, Eric, on Verity and how this ties into this because it's a very interesting part of Gevo that ties into the overall CI score analysis?

Sure. I can unless you want to, Lindsay? So Verity is basically -- it's sort of a software tech start-up that Gevo started about 3 years ago because we needed it for Net-Zero 1. Our management team in their past life invented polylactic acid which was another sort of similar process you start from biomass crops and you do fermentation and you make a substitute for a fossil chemical. Here, similar idea, except instead of making plastic substitutes, it is a fuel substitute. And in that -- from that former life, our management team knows that you have to give the customer an audit trail. So if they pay for something that's clean, they want to know that it was clean, that they could audit it, not only that it reduced carbon footprint, but that -- it had other sustainability attributes, right? You didn't cut down a forest recently to make that farm, because then that wouldn't really be sustainable. So we knew we needed that anyway. So we started Verity. Well, it turns out that lots of farmers and ethanol plants in the U.S. want that too, that are already operating before our Net-Zero 1 plant. So Verity has sort of taken on a life of its own, where it's now signing up. It's signed up 3 customers, about 2% of the U.S. ethanol industry by volume is now customer of Verity. The tool went live last year. And what we're doing is basically it's essentially software that gets paid through Software-as-a-Service fees and profit sharing in the carbon value that's enabled by tracking everything from the field, the individual field where crops are grown through the manufacturing process to the seat in a vehicle or on an aircraft.

And Lindsay, you're kind of in the trenches on this, fighting this battle out there every day. What are you seeing as the key focuses that you're picking up from either from the government side and from the agricultural community. I mean what are the things that they're caring about today, focusing on today -- and really that is driving this forward. And I assume there's a lot of different entities at work here, right? A lot of different pushes and pulls. But what's your take on the overall environment today and maybe compare and contrast with a year ago and where things you think are going in the next year?

So that was a loaded question. So I think, first and foremost, the agricultural space really felt -- I don't think they were thrilled with how 40B landed. They were really hoping that the writing on the wall from USDA with Climate Smart commodities programs and all of these incentives out there to implement climate smart Ag practices on your field that there would be more inclusion within this credit. But we're in May and for a credit that's over at the end of the year. So right now, the shift in the agricultural community is, okay, come June or July, I need to be thinking about how I'm going to handle my fields after I harvest September, October. What am I doing with fertilizer? Am I doing no-ill or low-ill? What cover crops do I need to get ready to plant. All of those things need to be rolling in order to be thinking about what is going to happen on that field for the next growing season. In addition, they're all -- they're working with companies that are still buying their commodity today. So they may have corn or soy or something that is left from this growing year that they still haven't sold yet. So is there a mad scramble to have all the documentation that I need to meet this requirement and maybe you have some feedstock that can qualify for 40B if someone is out there that could take it and process it. So that's kind of one aspect. Another aspect is what -- who can we talk to, to help them understand what practices work where. So again, maybe no-till doesn't work everywhere, but low-till does. How can we be really clear about what that means and what that looks like. Cover crops? Do they work everywhere? Can you harvest your cover crops for seed. That's something that a lot of farmers actually do. And so how do we make sure that what is in 45Z as allowable accountable towards CI is actually practical for the agricultural community. It's something that they're doing. So that's on the Ag side. On the producer side, on the industry side, we're looking at, okay, the next credit 45Z, how do we get this implemented, right? How do we get guidance out soon? We know there's going to be a request for information coming out from likely USDA, maybe DOE in the coming months, how can we get information to them again so that more decarbonization strategies can be included in a menu sort of way, not in a prescriptive way. And I would say the third and final thing is, what is our next opportunity for a credit extension. So this next credit is only 3 years. How do we get this to be a 10-year credit? How do we get this to be in line and consistent with other big tax credits for renewables so that it is more in line with the investment needed and the time to build and bring new infrastructure online. Those are the things that we're all looking forward. And there's this thing happening in November, [indiscernible] details. And how that plays out, will determine, I think, how things move forward. And if anybody tells you that they know November -- if November turns out this way, this will happen and vice versa, they're full of it. So we're all kind of looking at this and there's a number of options of how things can play out depending on what happens in November, and we're working in all of those avenues, all of it.

And one of the things that seems interesting this time around is it seems like agriculture is getting on board, understanding the value in this. And maybe that's a different perception or a sea change. If you look at the agricultural lobby, for example, it's a powerful lobby, right? And if they want this, it certainly helps to incentivize politicians and other people who are making some rules on this. Am I correct in thinking that because they're able to benefit from the way they're growing -- from these processes and growing practices, there's money, right? We all like to be green, but we want to be green for the sakeness of cash, right, just to save the world. So they're aligned in this, if I'm understanding it correctly, in terms of...

I mean, yes, I think we are all generally rowing in the same direction on this because farmers understand that there will always be volatility in agriculture. And so the more opportunities you have to kind of reduce that volatility is a really good thing. So we're implementing these practices because it will help my field be stronger in the event that there's some crazy, I don't know, a duration of something comes through. We're insulating ourselves that way. We now are expanding on the markets that our product can go to. Is it going to on review? Is it going to sustainable aviation fuel? And now there's a market for the carbon intensity of our product as well, in addition to for corn, the distillers grain, the corn oil we're just broadening the market bases, which gives them more stability. So yes, I think we're rowing in the same direction. We want to see these policies continue and improve and expand.

And I'm going to jump back. I know you talked a little bit about, Eric, on the economics of this, but I just wanted to circle back, why do investors care that this happened or didn't happen. I want to reiterate that so that they can really understand why this is important and where it's going. So I know you talked a little bit about the production and the $1.75. But if you go back and break that down a little bit, I'd like to revisit that.

Yes, sure. So just to emphasize that, it's really 2 things. One is the magnitude of the credit for us is very substantial because that's -- because we're not just looking to make sustainable aviation fuel, we're looking to make it in a way that abates a lot of carbon cost effectively. And so if that's your strategy, then a tax credit that rewards you and goes up and increases depend on how much carbon abatement you succeed in -- been doing is extra valuable to us. Again, to quantify it, $1.75 a gallon of SAF would imply once Net-Zero 1 is operating over $100 million of value if we get to Net Zero, which is our target. Our target is actually just a little bit under Net Zero. Even if we don't hit Net Zero, we still abate a lot of carbon and that's still a significant number for us, which we've long expected value for our carbon abatement through a number of different mechanisms. But this is a very visible mechanism that everybody can point to and see, and we have to have certainty about it, some degree of certainty about it to do our lending process and financing for the -- building the project. That's number one. Number two is that we also believe that we had -- we're sort of -- we're to some extent, proud that we had the foresight years ago to have a purpose-built plant that gets you well into that strike zone. If you just built an off-the-shelf ethanol plant design with an off-the-shelf unit operations to convert ethanol to jet fuel, and you didn't try to design the plant to use wind power and to reduce its consumption of fossil methane and to integrate the plant to reduce its energy footprint. If you didn't try to do all those things. you wouldn't get this tax credit. You wouldn't abate enough carbon to get there. You might abate some carbon relative to fossil fuel, but you wouldn't have enough to qualify. The majority, about 60 points of carbon intensity. So fossil fuel -- fossil jet fuel is about somewhere about 90 points of carbon intensity is the way to think about it. We get something like a 50- to 60-point reduction just from the plant design being a wind-powered plant. It will be connected to the electric grid because wind is intermittent. But it's designed so that all or most of the electric power consumed by the plant is wind and as much energy as possible uses electric power. So that right there gets you well into the ZIP code of qualifying for the credit. Then in addition, we have these options to do carbon capture, to use climate smart agriculture and then to bring in biogas, which we think very comfortably will get us into that 0 or negative -- could be very negative range. If certain things go differently, we could be positive and not a 0 native. But the point is that we're really competitively positioned, we think, relative to almost any other renewable fuels company that's out there, and we're not using new technology. We just put the effort on the front end to have a purpose-built plant design that is low carbon.

And I'd also highlight that a lot of that is in your control, like using wind and RNG and the economics of the plants aren't dependent on climate smart agriculture, for example, I mean, do I say dependent, you can still qualify. There's still a return. I don't want people to have a misperception that, well, if they don't -- they have to have this in order to have the plant or get the DOE loan. I think adding some perspective around that would be helpful, Eric, just to talk about -- these are great additions to the CI -- just reductions, let's say, to the CI score through the additions of these other things. But these aren't -- in and of themselves, those aren't make-or-break-type incentives.

Yes. There's a slide -- there are 2 slide decks on our Investor Relations website. One is our sort of corporate presentation and the other is what we call our deep dive. And in the deep dive, you'll see an updated version of the slide that we call the carbon intensity walk and it shows you, okay, you started like a 90 carbon intensity for fossil jet fuel. What are all the things that we do in Net-Zero 1 to target 0 or negative. And what we do is we highlight on that slide, here's the bucket of things that are just intrinsic to the plant design that are not really variable, if that makes sense. And then here are the things that are more variable, like, for example, the precise timing of a carbon capture pipeline will determine the timing of when we have CCS and when we get carbon abatement from CCS. The precise agricultural practices that farmers choose to use and how they're accounted will impact the magnitude of Climate Smart Ag. But the point is that, that intrinsic plant design and carbon reduction that you get just right off the bat, makes -- puts us in a really good spot where there's all these paths for us to be successful that don't hinge on one single thing that has to go our way. It's -- there's just many ways for us to succeed in reducing and abating carbon and for that to make the plant economic basically. But there's also lots of ways for there to be upside from that. And critically, it's in a cost-effective way. These are things that are not -- we're not putting a square peg in a round hole by buying climate smart Ag. Many -- we chose the location in Lake Preston because 70% of the farms up there according to our survey already use less than conventional tillage practices, for example. South Dakota has a lot of wind. So it's a good place to have a wind farm. It's just there's not much demand for wind. But if we build an electrified plant, now it makes sense to exploit that natural win that's there. So we're doing things that are natural to do if that makes sense. And we think the way these regs are shaking out, the 40B puts us in a very competitive position to have a plant design and a business model that's for people.

And Lindsay, I have one last question for you, and then we'll wrap it up today. Not asking you to look in your crystal ball to provide answers or outcomes, let's say, but in your world, what are the things on the horizon that are important to you and important to Gevo. Again, not asking about which I think the outcomes are, but what are the events or things that are happening that investors need to be watching for, looking for updates. I'd love to have you back in as we get through some of these other milestones. But what are those milestones that we need to be watching?

So I mean, I think from a government sort of perspective, looking for when are we going to start to see something on 45Z, whether that's through a request for information coming out and taking note of how is -- how are Gevo and others commenting on this? I would love to see that guidance actually be wrapped in final before the end of the year so that people know how they can move forward. So keeping an eye from the federal side there. There's a number of things happening in the states right now as well that is worth watching and we are actively engaging in. So whether it's California, Washington State, Minnesota, Michigan, New York, Massachusetts, there's a whole lot of state policies going on, and that's a coffee talk for another day and how those things are moving forward. Will we see actual progress this year beyond New Mexico? I don't know, I would love to say yes. And then to kind of broaden it out, we've got elections going on in Europe in about a month. And so we have a SAF band in Europe, and we're looking at how do we expand production, how do we keep moving forward where there are markets. So I think it's -- keep reading the newspaper, keep staying tuned, and we'll keep talking about what we're doing, but I promise you that we are all over and we are pushing this ball up the hill and making progress.

Thank you for that Lindsay. That's very helpful. And thank you, Eric, for joining us today as well. I think this is a great topic. I love to have you back because this is an ongoing dynamic situation to say the least and looking forward to more updates and having some additional conversations with you. Thank you, everyone, for listening to today's podcast. Again, you can access additional information on Gevo and other research at watertowerresearch.com. And thank you for subscribing to the podcast. If you have any questions, you can reach out to me and certainly to Eric as well at Gevo, if you'd like to address any questions specifically to the company. With that, I'm going to conclude today's podcast. Again, thank you, everyone, and look forward to having you all back.