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

Hello, and good morning, everyone. My name is Peter Gastreich, and I'm a Senior Energy Transition and Sustainability Analyst here at Water Tower Research. Today, I am very pleased to welcome the management team from Gevo, who are here to take us through a major landmark announcement from the company. As a reminder, this is an open access forum for all investors. It is being recorded as well. You'll be able to access this event using the same link for the original registration should you choose to pass it along to someone. I'd also encourage you to look at our website for disclosures and other research on Gevo as well as other companies in the climate tech and sustainable investing sector. You can find that at www.watertowerresearch.com. Now I am very delighted to introduce the Gevo management team, including Gevo's CEO and Director; Dr. Patrick Gruber; President and COO, Dr. Chris Ryan; CFO, Lynn Smull; VP of Finance, Leke Agiri; VP of Finance and Strategy, Dr. Eric Frey. In terms of our format for today, the team at Gevo will take us through a short presentation. We'll follow this with a Q&A session that will be open to analysts and investors. Now with that, I'd like to turn the call over to Eric.

Good morning, and welcome to the special call regarding our Net-Zero 1 Sustainable Aviation Fuel project. I'm Eric Frey, Vice President of Finance and Strategy at Gevo and Chief Financial Officer of Verity, a wholly-owned subsidiary of Gevo. With me today are Gevo's CEO, Dr. Patrick Gruber; our CFO, Lynn Smull; our President and COO, Dr. Chris Ryan; and our Vice President of Finance, Leke Agiri. Before we get started, please be advised that our remarks today contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those currently anticipated. Those statements include projections about the closing of the financing, any effects on Gevo's financials from the financing, and any other statements that are not of historical facts. We disclaim any obligation to update these forward-looking statements. In addition, we may provide certain non-GAAP financial information on this call. The relevant definitions are included in the slides being presented. And now, I'll turn it over to Lynn. Lynn?

Thanks, Eric. Good morning, everyone. Thank you for joining us today. It's our pleasure to announce a significant milestone in Gevo's journey. We've obtained a conditional commitment from the DOE for a loan for the construction of our Net-Zero 1 plant to be located at Lake Preston, South Dakota. It's been a long road to get through the process to this point, and we are pleased with the result. This project marks a major milestone not only for Gevo, but for the entire sustainable aviation fuel industry. We want to thank the U.S. Department of Energy for working with us over the last 3 years to onboard and diligence the NZ1 project and Gevo and for ultimately arriving at its formal conditional commitment of the $1.63 billion project loan guarantee with the Federal Finance Bank being the project's direct lender. This loan is the cornerstone of our financing strategy and a critical step to making the project a reality. Notably, it's the first large-scale alcohol-to-jet project to receive a DOE loan commitment. This illustrates the substantial progress we've made on derisking the project to nonrecourse debt standards. This also serves to focus potential project-level equity investors on the project's merits and attributes, thereby, we believe significantly reducing execution risk and securing project level equity. I'd reiterate that we expect third-party project equity will constitute most of NZ1's project-level equity stack. Gevo does not expect to be required to inject any additional capital in NZ1 at financial close beyond the development capital we will have already invested at that time. In fact, we'd expect our development capital reimbursement at close will be greater than the capital we will leave in as project equity alongside third-party investors, which could result in some cash coming back to Gevo to be recycled into other developments that we have. I'll add for clarity that we define financial close as the point in time at which all debt and equity capital necessary to construct and commission the project is fully committed and available to draw for construction period expenses pursuant to the relevant financing documents. This is a huge step forward for us, and we are excited to move towards NZ1's financial close and to commence the project's construction. Now I'll turn this over to Pat.

Thanks, Lynn. I'm going to step back for just a second and just summarize a little bit about how we got to where we're at. We realized long ago that to eliminate the life cycle footprint of hydrocarbon fuels and then achieving a net zero life cycle footprint or even a carbon-negative footprint, we would need to use renewable carbon and renewable energy. We want 100% abatement of greenhouse gases from jet fuel. That means the product would have a carbon index score, or CI, of a net zero measured across the whole life cycle. We knew that photosynthesis was the most energetically favored source of carbon with plants able to capture not just the carbon from carbon oxide, the CO2, but also you get the electrons and the hydrogen needed for making a hydrocarbon fuel like jet fuel. Energy is certainly used during the production, but we knew that if we use green energy, then we could get to a net zero footprint. We also became aware and understood that by capturing -- sequestering more carbon dioxide in the atmosphere that we needed for the fuel, we could get to carbon-negative fuels, as measured across the whole life cycle. The left side of this slide shows the simple concept, replace the carbon source, use renewable energy and you could achieve a net zero. We developed our plant design using guidance derived from Argonne National Lab GREET model from the very beginning. It's the gold standard for measuring CI and carbon abatement, but we actually use that information along the way as we design our overall plant. On the right side of this slide is a graphic of the whole business system. In measuring the amount of carbon abatement, one really must look at the complete life cycle of the product from beginning to all the way to the end state of the product and back. All right. We're sending renewable carbon, check; green energy for the process, check. But we also had opportunities to capture more biogenic carbon and sequester it. Photosynthesis makes plant sugars, we use the sugars in the fermentation. Our version to produce ethanol has been optimized for maximum carbon abatement. The ethanol process itself releases biogenic carbon dioxide. We can capture that CO2, and that helps to drive the CI score even negative. We also have the opportunity to work with farmers to capture and sequester carbon in the soil. We see a lot of potential for this in the future even if we don't get credit for it today. We came up with a proprietary plant design that incorporates proven world-scale unit operations and technology, operations that have been proven in the petrochemical world, and integrated those who the most modern ethanol plant design ever delivered. What is interesting to note is that a net zero SAF produced at a plant like we designed is actually expected to be massively carbon negative as it is produced at our plant. As that fuel sits there in a tank or a railcar at the plant, it would be about a minus 90 carbon score sitting in the tank is a jet fuel made with renewal carbon holding the energy of the sun literally, it is sequestered, concentrated carbon. It's just sitting there. Now when it's burned as a fuel, it releases a huge amount of energy to power a jet engine, and it also then releases CO2. And as it's burns as a fuel, the CI score rises back up to be zero. Slide 5 shows the reasons why we get so excited about our integrated approach for ATJ. What you see in this chart is a result of a study that was done for us by a global consulting firm with the input from a variety of others showing the different cost reduction for different routes produced renewable resource-based jet fuel. The gray bars on this chart represent the cash cost of production for the various production routes. You can see that the integrated Net-Zero 1 approach to making alcohol-to-jet delivers the lowest cash cost per gallon for SAF. Its cash cost is actually comparable to petrojet, especially considering the future technology improvements that we can see. Net-Zero 1 leverages the infrastructure and abundance of carbohydrates. Net-Zero 1 is expected to start in a very good cost position and get better. It's worth noting that the Net-Zero 1 approach also abates the most carbon. We can achieve CI scores of zero or even negative. Low cost, combined with large amounts of carbon abatement, that all equates to more value per gallon. Cash cost is incredibly important. Imagine the day that a plant like Net-Zero 1 is paid off. It could then compete head-to-head with petrojet on the same fully depreciated basis, except that NZ1 delivers a jet fuel with a net zero carbon footprint. The green bars on this chart represent the required capital returns and depreciation. HEFA, the SAF made from used cooking oil or vegetable oil has the lowest capital cost, it can leverage existing refineries. HEFA will have a higher cash cost reduction because of the dynamics around feedstock. But overall, that product works in the market from a value standpoint. It's a good product and no surprise that this product has gotten to scale first. For our first Net-Zero 1 plant, capital costs are going to be higher than our subsequent net-zero plants, yet the economics work. Why? More carbon is abated. So the jet fuel, the SAF, is worth more on a gallon basis. We do see opportunities to reduce the capital charges in the future by reducing capital of the projects by how we set up our plant modularization system and our project delivery system. We also see that it's possible for future technology improvements to impact both capital and operating costs. In fact, that's what our ETO technology that we previously announced is all about. This ETO technology is not ready for prime time yet. It will take a few more years, but we do see a route to improve further. I find it amazing that we're already this competitive on a cash-cost basis at the very beginning of this industry. It's important to realize that our jet fuel is a drop in jet fuel. It is a jet fuel that just goes straight to the system. It's going to be mixed with petrojet. And then it goes through all the pipelines and tanks and jet engines that work with on all the jet engines there are, all the planes. Now there is a value of this fuel just simply as a jet fuel. Forget for a moment that it's made for renewables, it's just a jet fuel. It's comparable to petrojet, the commodity, on a value basis, just as a jet fuel. However, by producing it with a net zero production system, we can achieve more carbon payment value, and that increases the value of our product. Customers who are interested in reducing greenhouse gases are interested in abating carbon. To understand value, it is the sum of the jet fuel commodity plus the total carbon abatement value it creates. The market value for a net zero fuel is higher, for example, than say, a SAF, a jet fuel, with a 45 CI score. A 0 CI score is more valuable on a gallon basis. I think our President and Chief Operating Officer, Chris Ryan, has said exactly right that our business system and plant designs are all about creating more potential value by creating more carbon abatement per gallon while continuing to drive the cost of production down. He's right. That's been the philosophy in designing our plants. Let me introduce you to Chris Ryan, our President and Chief Operating Officer. Chris is the Officer at Gevo, with overall responsibility for the net zero projects. I want to congratulate Chris and his team on getting us to this milestone. It takes a disciplined, dedicated approach to get us this far. It's hard work. Chris and his team have been good stewards of all of our development money. It is true that the cost of feed and the development work is significant. In the case of Net-Zero 1, that order of a couple of hundred million dollars. Many companies underestimate the cost and discipline required to deliver projects of this scope. Chris and his team are very experienced, realistic and they deliver. Thank you. Chris?

Thanks, Pat. We designed the Net-Zero 1 plant in Lake Preston, South Dakota to be an industry-leading net zero farm field to SAF facility projected to produce 60 million gallons of SAF per year. The plant is also expected to produce about 1.3 billion pounds of protein and animal feed products and about 30 million pounds of corn oil, making it a truly integrated solution for both energy and food. Our plant design incorporates electrified unit operations to reduce natural gas use with zero-carbon wind power. Then we have energy integrated, the ATJ and ethanol production operations to further reduce the gas usage. The end result is a projected total natural gas usage that is less than 25,000 BTUs per gallon of hydrocarbons produced, which is about a 2/3 reduction in the amount of gas one would expect with an ethanol plant and an ATJ plant that are not integrated with the way we have done. The electricity that is needed will be supplied by a direct connected new wind farm. And the hydrogen required in the final production step, which is a much smaller amount of hydrogen than many of the other SAF production technologies will be green hydrogen. When you couple that design with CCS using the biogenic CO2 off the fermentation plus the climate-smart ag practices, you get not only net zero SAF, but you have low carbon protein and corn oil, which enables us to further decarbonize the food sector. This plant design is one we intend to replicate at other sites and for other people. The patent pending plant design and business system is one we intend to license to others to enable growth of the carbohydrate to SAF industry. Slide 8 shows the project cost for Net-Zero 1. The first thing I'd point out is this type of project finance comes with costs driven by the need to reduce risks that investors and debt providers need to see addressed. And this type of risk reduction comes with a cost reflected here. The second thing I'll point out is that there's a capital cost associated with driving down the carbon footprint of the SAF. By spending more on capital associated with the zero carbon SAF, we are saving money as compared to building more gallons of SAF capacity with a higher carbon score. The third thing I'd point out is that this plant scope is for an ag commodity, in this case, corn, to a finished SAF product. That feedstock comes directly from the farm. So if you compare our plant to typical SAF plants, we are further back integrated into the farm field, which allows us to have a lower cost of feedstock and a lower operating cost to produce SAF. That gives us a long-term competitive advantage in the SAF industry since our SAF production cost is arguably the lowest in the industry. This all translates to a project with attractive multiples, which we think equity investors will appreciate. While it's true this Net-Zero 1 facility has a higher capital cost than we would have expected when we first started the engineering work, we're still happy with the end result. Over the past few years, we've seen construction costs come up significantly. Construction labor tightened and EPCs, engineering, procurement and construction companies, moving to reduce their risk and projects which ultimately gets reflected in the project price. We feel good about where we are now that pricing has settled down as has inflation, and we have a road map for improvements in future plants. We're already adjusting our execution approach for future plants to keep these costs down by doing more extensive modularization, which reduces the on-site labor while allowing for testing of the units at the fabrication yards before they're shipped to our site. We have also secured sites that have infrastructure already in place, which reduces overall costs. These are just a couple of the steps in the continuous improvement of our business system. On this Slide 9, I want to acknowledge the partners we've been working with to get us to where we are today and the partners we expect to continue working with through execution. Next, I'll turn it over to Leke, who will walk you through how we plan to finance the project costs.

Thank you, Chris. We are proud to say that we expect this project will be fully financed by project level financiers. This means that no additional Gevo corporate-level equity issuance will be needed. Instead, the equity we raised and our DOE loan will be project-level financings, which we view as more accretive for shareholders. Let me expand a little bit more on this project-level finances. On the DOE loan, we have worked meticulously with the DOE LPO to carefully structure a strategic debt facility for Net-Zero 1. As mentioned at the start of this call, we have now secured a $1.63 billion conditional commitment for this DOE direct loans facility, of which $1.46 billion is available for disbursements during construction, and interest during construction added an incremental $170 million. This loan is a cornerstone of our financing plan as we believe it significantly reduces the execution risk for raising the rest of the capital needed for Net-Zero 1 to achieve project completion. We currently are in the process of raising additional project-level equity capital for Net-Zero 1 construction from third-party private investors. Leveraging our financial advisers, Guggenheim and Citi, we are structuring Net-Zero 1 to deliver high-teens equity returns and offer some downside protection to our financiers. As the DOE loan is a key enabler of our structured project-level financing plan, achieving this conditional commitment is a major milestone, which is why we are so excited about this announcement. By financial close, we expect Gevo will have contributed approximately $250 million of development equity capital at Net-Zero 1. Of that amount, approximately $210 million has already been spent. Again, Gevo does not expect to inject any additional capital in Net-Zero 1 at financial close beyond the development capital already invested at that time. In summation, we have a strong project level financing plan for the Net-Zero 1 project that now instills confidence in raising project-level equity capital and in contributing long-term value accretion for our shareholders. I will now pass it back to Chris to summarize some additional benefits of Net-Zero 1. Chris?

Thanks, Leke. As you can see, the Net-Zero 1 project represents an exciting opportunity, not just for Gevo, but for communities across South Dakota and rural America and of course, for our planet. This is a major step forward for rural development. Net-Zero 1 stands as the largest economic development initiative in South Dakota's history by our estimation, creating over 1,300 indirect jobs during construction and about 100 permanent positions once the plant is operational. We're also supporting rural economies by sourcing 100% of our feedstocks domestically. This will increase domestic energy production, enhance domestic energy resiliency, and promote climate-smart ag practices, which also improve the health of our soils. The combination of economic, environmental and community benefits makes this project a milestone for Gevo and the communities in which we do business. And we're very excited about the path ahead. As we look at the delivery highlights of the Net-Zero 1 project, I want to emphasize the scale and repeatability of this plant. The design we've developed is modular and scalable, which means that once we prove the model at Net-Zero 1, we can replicate it for future projects with greater efficiency and reduced costs. We've also taken significant steps to derisk the project with best-in-class engineering procurement and construction contractors who bring a wealth of experience and reliability. We've built in contingencies and safeguards, such as liquidated damages and cash reserves to ensure we stay on track and manage any unexpected challenges during construction. Our approach here isn't just about building one plant. It's about laying the foundation for an entire industry of net zero carbon fuels plus feed and food. Net-Zero 1 is a template for future projects. And as we refine and expand, we'll be positioned to lead the way in the commercialization of drop-in hydrocarbon fuels with a net zero carbon footprint. What are our next steps? Secure the remaining project level equity, close the project level financing, and then start construction. Back to you, Pat.

Thanks, Chris. I want to reiterate the transformative impact of the Net-Zero 1 project. This initiative represents a significant leap forward for sustainable aviation fuel and the broader renewable energy landscape. We are proud to be at the forefront of this important industry, not just for the economic benefits it brings to our communities, but also for its potential to significantly reduce greenhouse gas emissions and support agriculture innovation. We believe that NZ1 is not just a project, it's a catalyst for change. As we move forward, we are committed to transparency, collaboration with all the stakeholders, including our investors, partners, and the communities we serve. Thank you for your support and confidence in Gevo as we work toward a sustainable future. Back to you, Eric.

Thanks, Pat. This concludes our prepared remarks. A transcript of the call and a copy of the slide presentation will be available on our website at www.gevo.com. Stay tuned for more information in the days to come, including virtual and in-person investor events, which we will also post on our website. And now, we'll take some questions.

Okay. Thank you very much, Dr. Gruber and team for the presentation. Now we'll move on to the Q&A section of this fireside chat. Just a reminder to analysts and investors, you can post your questions online. You should find the Q&A button at the bottom of the screen. So after you submit, we'll either unmute your mic or just read your questions to management in order to make sure we can get through as many questions as possible today. So while those questions are loading, I'll go ahead and kick things off here. So again, thanks so much for the presentations, and really, congratulations on this major point in Gevo's history. So now that Gevo has this DOE conditional loan guarantee under its belt, are you able to give any guidance on what will be the pathway to an operational net zero facility? So from here, what are the main hurdles to closing, what are the signposts that investors should focus on? And how confident do you feel in terms of executing construction within your time frame?

I think, Chris, I'm going to call upon you. You're leading the whole effort. So you and Leke Agiri can team up on this one.

Sure. So the next step is to get through the condition precedents for the loan, which we're working on we're well into and then close on financing, which includes raising the equity, and then we would start construction. And for a plant this size, it takes a few years to build just because of the magnitude of the scope. You're building an ethanol plant and an ATJ plant and all of them, we call it, balance of plant, all the auxiliary pieces. And so, at a high level, that's kind of the path forward. Leke.

No, thanks, Chris. I think you captured it very well. From a financing perspective, we'll work through the documentation and closing process for financings. And obviously, those are prerequisites to commence construction. So well said.

Okay. And just maybe one more question here. And once the Net-Zero 1 site is built, does the site in Lake Preston allow you to do bolt-on projects for further growth? Would you be able to look at further capacity expansions for SAF? Or would there be other low-carbon products you might be looking at, what looks interesting to you there?

Well, I'll answer this first and you guys can jump on if you want to add something to it. So the way we think of this is we think of a business system. So whenever we're looking at something and approaching it, it's not about the SAF per se. Yes, that's driving the economies of scale, driving the scale of a plant, awesome. We need that because that drives costs down. However, when you have a site like this, remember, we're Cargill-trained. We're ADM-trained people, where we've seen how to do these big giant processing facilities, and that's what we're going to have here. And so every time that you can add value somewhere to a stream, we're going to do that over time. And there's lots of opportunities, whether it's on the protein side, adding value to the protein or to the vegetable oil we could produce or you've heard us talk recently about adding the more effort into the chemical space, taking the building blocks that we can take out of our process, divert them a little bit before they go to jet fuel and make them into plastics or other chemicals. That's what that effort is about. And so all of these things come into play, and that's how we have to think of it. And in addition, there's lots of land, there's space. We could put up whole new fermentation plants with other projects if we want. So you think about it as a whole in the system, always about abating carbon, always about maximizing margin and profitability aimed at that site. Chris, add anything?

Yes. So by nature, we're a partnering company. We like to partner because we know we can't do everything ourselves. It's all about expanding the size of the pie and then sharing that with partners. So we've had discussions with other companies that are interested in potentially adding their capabilities to the site to make fertilizer, make feed products, chemicals, as Pat said, there's a variety of opportunities there. And so we've got 240 acres. We're using less than half of it for this plant that we're announcing here. And so we've got plenty of room to add additional capabilities.

I want to add one more thing, and we think about our net zero north site up there in North Dakota, we think of it the same way. Lots of room for expansion, lots of things we can bring to bear and make a great business system.

Okay. Thank you very much. It looks like we have some hands up out there. Maybe we could go ahead and get started. Joe, you want to maybe bring -- let's see, Amit on?

Yes.

Yes. Amit, if you could please repeat your question, you're good to speak.

Can you hear me?

Yes.

Congratulations. Pat, it looks like your decision to wait for the DOE loan process indicates some of the pushouts you've been facing in getting all this done. So congratulations.

Thank you very much. It's great. It's good. It's a big milestone.

Right. So with respect to the equity portion of the financing, who are you going to? What kind of investments?

Leke.

Sure. So I can speak to that. So for these types of projects, like large capital projects, we are targeting a similar universe. So we're talking to infrastructure funds, private equity funds, just private capital markets ideally. And for that type of structuring, you go through the typical due diligence efforts or processes. And for my commentary, we've actually secured our financial advisers for that process, and we're in great shape to be able to execute that process at this time. And of course, the DOE loan land in that process, that is a shot in our arm for us to be able to move that process along in a successful manner.

One of the things that -- you guys have no appreciation for the amount of diligence that's done by that DOE loan office. They have a tremendous success rate in their history. And I can tell you why, it's because they diligence the h*** out of it and the way they structure the projects to make them so they're derisked. So it is an enormous amount of work. Now that benefits us when we have to go to the equity markets. A lot of the work has been done already.

And then with respect to the feedstock, is there any flexibility on that side? It looks like [ power ] is the primary source, but do you have an optionality…

I'm going to comment broadly, Chris, and I'll let you speak specifically about what the potential is. But, yes, our process, remember, is carbohydrates to alcohol, alcohol into hydrocarbons. That's how -- and generating a huge amount of carbon abatement while we do it. We want to do both those things, and we want to keep driving to the lowest cost systems. Because we use carbohydrates, we go for the -- looking at the -- how -- what's the CI score, sustainability profile of that raw material, that carbohydrate, and what is its cost. Corn is the lowest-cost raw material that we can source in the Midwest. And in other places, it might be different. But in the future, it could change as technologies change around what crops are. Chris, do you want to speak to that?

I didn't completely get the question.

He's asking about alternative feedstocks other than corn.

Yes. So we continually look at feedstocks that either people have developed technology in order to use or it's just feedstocks that you can use today if the farmers would grow them locally. I was visiting a plant outside the U.S. that uses a feedstock that's not commonly grown in South Dakota, could be grown in South Dakota, that has some benefits to the food industry because any time you're looking at feedstocks, you're always looking at, number one, food. So you want to help grow more food, more protein for the world and then use the residue to go make fuels and chemicals, which is what we're doing here at this site. And there's different crops you can grow to give you different food products. So yes, we look at that, we look at cellulosics, people have different cellulose technologies you could potentially bolt onto our plant someday, anything is fair game.

And it's worth reminding people that we've done just about every practical carbohydrate source. We've done cane, sugar, molasses. We've done wood sugars. All those things are possible to use in feedstocks. But Chris is right. One of the things to appreciate in a plant like this is it will produce about 3 tons of protein product and feed per ton of jet fuel produced. And so this is now being referred to in the global community as integrated food and energy systems. That's what we're talking about here. That was one where some of the United Nations groups are starting to talk about it that way because it starts to solve a problem, how do you generate lots of protein for feeding the world, but yet solve an energy problem while reducing greenhouse gases and the pollution that goes with it. That's part of the game. So it's an interesting system, how we think about it is whenever we're using land as a source for our raw materials, we're always paying attention to how much protein gets produced. That's incredibly important.

Just the last one for me. I'm actually…

Amit, I think we can barely hear you. Can you guys hear, Amit?

No.

Do you mind speaking up or moving closer to your speaker, Amit? I apologize.

Can You hear me now?

Just barely. It's a little -- you sound a little distant.

Yes, I'm trying to…

I couldn't hear you, Amit. I mean, we can hear you, but can't quite make out what you're saying.

All right…

What I suggest is that we either do it in writing on this one or -- we can follow up with Amit later and get it answered. It's for whatever reason, that's that connection's garbled.

Yes, Amit, if you want to put the question in the Q&A chat, we can circle back to you.

Okay. Thank you, Amit. So why don't we move on? We've got a hand raise here from Dushyant, who I believe is from Jefferies. Go ahead, please.

Guys, can you hear me?

Yes.

Awesome. Yes. Congrats, Pat, great work team on getting this through. Maybe just a follow-up question. I think this is -- or asked earlier. On the conditional comment, maybe could you talk a little bit more about what some of those conditions are? And then maybe what the timing looks like? Is it going to be by your end or maybe potentially after? And then I have a follow-up.