Green Plains Inc. (GPRE) Earnings Call Transcript & Summary

Good afternoon, everybody. I would like to welcome everybody to GPRE. As you already know, this is a company which is evolving very quickly. It's becoming an AgTech powerhouse. So I'm going to run through some Q&A with you. If that's okay with you?

Yes, absolutely.

So on the call, you did mention this, but help us understand the EBITDA guidance for non ethanol business for 2022, the various components of it.

Yes. So when we think about the business this year and going forward, and when we talk to the market about kind of basing ethanol at 0 contribution just as a basing point, and we know over the last 10 years, we've averaged about $0.30 a gallon, but we just said, let's make it easy. Then let's look at what we're going to be transforming to, which is protein oil, sugar and carbon. And so we're in -- we're transforming, we're not transformed. This is part of the year where we're building a lot of our assets. We have some [ projects ] and some that are under construction. But when we think about what's happened recently in some of the markets in oil and in protein, it's really starting to -- you can start to see the impact to our strategy. And so with everything we do, we make more oil every day. And so every time we turn on a new Fluid Quip System, it gets us more oil out of that kernel of corn. And so when we look at 2022, and we think about our baseline oil, we're going to make about 300 million pounds of oil this year. And at a market at around $0.60, $0.65 a pound, less a little bit of cost, our contribution margin just from oil is going to be somewhere between $140 million to $160 million. And that's not including the additional contribution that we get in the protein business from oil as well. So just from the base oil business with a 0 ethanol margin, just starting at 0, it's somewhere between $140 million to $160 million. But we're starting to see oil prices go up, so we'll have to wait and see what happens there as well as we're going to see some of these new prices in the 70s and even possibly in the 80s as well. So everything we were talking was based off about $0.65 a pound.

All right. So there's upside. And on top of that $140 million, how does ultra protein add to that?

Yes. So ultra protein is interesting. So we have 2 plants that are running, our plant in Shenandoah, Iowa and Wood River in Nebraska. And the ability of those plants to produce on a daily basis is about 350 tons a day and take -- you can annualize that over your 365 days. And so we're now starting to run out -- we're starting to run towards full capacity. And we think the contribution margin, along with the plants that are going to be coming on this year, will be somewhere between $40 million and $60 million in this transition year as this really the transition where we start to bring a lot more of the assets on from the technology. But in this year, somewhere between $40 million and $60 million.

Okay. And historically, the distillates corn oil, which you produce used to trade at a discount to soybean. Now we have actually seen a change as more and more pretreats come on. Do you feel that market will give you more credit for your lower carbon intensity product versus the higher-carbon intensity soybean oil?

Yes, that's the key. It's really around carbon intensity and the value of our product versus soybean oil and other replacement products. And when you look at our product with a 30 CI score, or carbon intensity score, compared to even just soybean oil, it is a more valuable product when you look at whether it's the RIN or the low carbon fuel standard or other pieces that you earn turning distillers corn oil or any other vegetable oil into renewable diesel. And so we're starting to see -- and we saw it earlier in the year where we were trading at a bit of a premium to soybean oil. We're starting to see that accelerate towards the kind of what we think is the full value, which is somewhere between $0.10 and $0.15 a pound premium to soybean oil. And we're starting to see some of that because low carbon feedstock is going to be deeply -- in deep demand because of -- really, if you're going to make renewable diesel, you have to have some low carbon feedstock coming into this platform. If you're going to do it all on soybean oil, you're really giving away an opportunity. And that's really where the value of our platform has really started to take shape as we, number one, get more oil out of that kernel of corn using the Fluid Quip System. But number two, then kind of think about ourselves as a large quantity. And while it sounds like a lot, 300 million to 400 million pounds of corn oil a year, it's really not that much in barrels per day production capability of our R&D plant. But it really makes the difference in terms of the carbon intensity of the product you're making. So there's a finite amount of low carbon feedstock in the world, whether it's going to be a corn oil, whether that's going to be a choice like grease or other types of tallows and fats and used cooking oils, there's still only a finite amount. And after that, you have to go to the higher carbon oils and that's where you start to give away some of your margin at the R&D plant. So yes, we've seen the premium, I think it's going to stay a premium. I think it's a product that is -- it will be in short supply as all these renewable diesel plants come online. And it's a great opportunity for our shareholders.

Okay. And normally, when you make ethanol, you make like 0.8 pounds of corn oil. But you are making a lot more with your technology. Can you talk about that?

Yes. So when we talk about corn oil, if you think about a bushel of corn, there's 56 pounds in a bushel of corn. And in that bushel, there's 1.8 pounds of corn oil available. That's all there is. That's all you can get out of a bushel of corn. That's the oil in the corn kernel. And so before, what we were able to do in our traditional system was to get 0.8 pounds of that 1.8 pounds. So there's still 1 pound of oil sitting somewhere in the process that we had to go find and liberate that oil. And what we're able to do now with the Fluid Quip System is when we put it in, we just found another 0.4 pounds, so now we're up to 1.2 pounds per bushel of corn. So we're not even at -- there's still another 0.5 pound or 0.6 pounds left. We're still trying to find ways to go after that oil as well and to liberate more oil because when you think about $0.70 a pound, it's $1,400 a ton equivalent that you would just be selling in your fiber products. So it's a very high value per ton product as well. But yes, so we're -- we started at 0.8, we're at 1.2 when we turn on the system, somewhere in that range, some as high as 1.3 and there's still another 0.5 pound or so of oil that we're going to trying to figure out how to go after that. And that's where we're really focusing the Fluid Quip Technology on as well as what's the next thing we can bring in, what's this next modular component. That's really what Fluid Quip is all about, is just bringing in these modular components into the process to go and get a go after more of that oil because that's -- if you think about a low carbon feedstocks for the next 10 years, that's going to be a very good place to be.

So we have seen some JVs. You saw Chevron and Bunge. And today, [ REGI ] looks like they've entered that partnership, NPC, ADM. But those are more higher carbon intensity feedstocks. You obviously have the lower carbon intensity. Had you been approached by any renewable diesel producer, would you be open to a partnership or financial partnership, operating partnership at some stage?

Yes. I mean you have to assume that when you make 300 million to 400 million pounds of low-carbon feedstock that our office is busy with visitors trying to secure that feedstock. And I think what we said in the market is we were -- we're in -- we're interested in partnerships, we're interested in potential monetization of our feedstock, but we wanted to be very patient. Because if you think, even go back 1.5 years ago, the price of oil was somewhere around $0.30 a pound. And today, the price of oil is over $0.70 a pound. So being patient for us as we're getting more value out of it, as we saw the build path for renewable diesel, has actually done -- paid very well for our shareholders. What I think is really interesting is before you just go and sell yourself to -- or make a deal or do a monetization or a supply agreement or offtake is that as we build out the Fluid Quip Systems, we're going to move from 300 million pounds of oil to 400 million pounds or close to maybe 380 million to 400 million pounds. That's really when we'll see the earnings power of this platform just from oil, the true earnings power. And so between making more oil and prices going up, I think it's been the right move to be patient and let us realize what we said we were going to accomplish. At this point, obviously, we're building out the systems and we just want to get more production. And quite frankly, I think you have to be constructive to the price of vegetable oil, overall. I think you have to be very constructive at the price of low carbon oils. So I don't think we want to give it away too early. But I will tell you, there's some very interesting things that are out there and we're looking at all of them. But there's no shortage of people that want to make a deal on oil and on low carbon feedstocks. And we'll just have to do what's best for our shareholders at the right time.

And coming to the construction schedule, Shenandoah, obviously, I've seen working. Now you have a second facility working. Can you walk us to the part where half your facilities are upgraded by FY 2022? And then when do the remaining come online?

Yes. So the interesting thing is we're doing most of our large facilities first. So we've done Shenandoah and now we've done Wood River. That's about 200 million gallons equivalent of our platform. And we have 360 million gallons under construction in our platform, which is Central City, it's Mount Vernon and it's Obion. Mount Vernon, Indiana and Central City, Nebraska and Obion in Tennessee, that's 360 million. So our own platform will be at the end of '22, and this year, we'll be about 560 million gallons equivalent, which is more than half of our platform. On top of that, we have a partnership on a 170 million-gallon ethanol plant, which we own 50% of the protein that we're going to build there as well. We're building a Fluid Quip System there. We're a partner, it's called turnkey solution partner, where we basically supply our half of the capital, they supply their half and we share in all the economics of the uplift in protein without having to have any of the -- anything happening from the traditional generation one plant. And so that plant should come on. We're going to break ground. Hopefully, we're done by the end of this year. If not, it will be early in 2023. But that plant, because it's winter, that's part of the problems in North Dakota, and we're a little bit harder to turn on, but we should be constructively complete with that plant sometime late this year and we'll be getting ready to turn it on. That will add another 85 million gallons to our half. So between 560 million, about 640 million gallons of total production this year, which we'll be producing about 400,000 to 450,000 tons of protein.

Okay. And on the turnkey initiative itself, I think you launched it last year. How has been the response? There's a lot of capacity in U.S. Ethanol margins can be very volatile, we have seen 4Q was amazing. Right now, it's not so good. Have you been approached by other people, besides this one plant, to look at the turnkey initiative end?

Yes. Actually, we have been approached by plants around the world on stuff like that, but -- on that system. But I think what it is, is that we want to -- before we do a lot more of that, we really want to prove out even the higher value of this product, right? And I think from a standpoint of this is -- we're thinking about these in modular approaches, right? We think, firstly, we go after the oil because we have a stand-alone system and can design a stand-alone system to do that. And we want to go after just the basic protein, which we can bring that to our customer and possibly a turnkey partner. Then we have the higher value, which is when we bring biologic solutions into raising the value of the protein concentration. And then even further than that, what are the other modular builds that we're going to do along with that. And so we're talking to potential partners all the time. And I think from our standpoint, these are definitely things we want to do. And I am confident we will continue to get turnkey partners, whether it's in the U.S. or globally.

Okay. Any questions from the audience? Okay. I'll just keep going then. So some of us understand parts of the 50 pro versus 60 pro, not all of us understand. What are the real benefits of the 60 pro? So if you can help us walk through the J-curve. And why is it more important to get to 60 pro?

Yes. So we made it very easy for everybody to understand what we were doing. We were going to make a 50% protein product that was easy to value because there's a market for that product in the world today, and it's very deep. And then we talked about a much higher protein concentration as well. So we made it very easy. We said, let's look at 50 and let's look at 60. I think we have to start with both of these products, which I think is unique. This is a predigested fermented protein with yeast. And while we made it really easy to say, let's look at 50 and 60 pro, we -- actually, the real value in this product is the fact that it's fermented and predigested and it has 25% yeast. It's actually a yeast product, yet we're not -- that market is even more valuable. And there's products out there with 5% yeast that call themselves yeast, and this has 25% yeast. So -- and the delivery mechanism is the protein. And that's what -- that's how you deliver yeast to your customer, whether it be a dog or a cow, a cat or whatever you're going to talk about. So we made it but we -- let's say, let's take that the technical aspects out of this. Let's just look at 50% is 50% and 60% is 60%. 50% competes with high-protein soybean meal, just from a pricing perspective. But because we have those other components of fermented, et cetera, we got -- we have traditionally gotten a premium to that. Sometimes, it will trade a little bit of a discount, sometimes it'll trade at $100 premium. It's hard to say exactly depending on the customer, depending on the use. We try to avoid these -- the discounts. And so that was easy to focus. And that was where we came up with $0.12 to $0.15 a gallon uplift to our margin, which is at 50 pro. It's about a $200 to $250 premium over traditional distillers, $0.06 per gallon per $100 a ton premium. The $250 premium is about $0.12 to $0.15 a gallon. What's unique about this product is that as you increase the protein concentration, the price doesn't increase in a linear fashion. It increases in a J-curve fashion. And so now we -- when we get to 60 pro, we compete against products everywhere from a soy protein concentrate to a corn gluten meal to all the way into fishmeal. And those products are $800 to $1,200 a ton. And so these are -- as you think about it, again, a lot of those aren't fermented and a lot of them aren't predigested. And so we have a very unique product that we get to -- we can displace products at this higher level of the value chain. With our products, they bring additional nutritional characteristics, additional feed conversion ratio opportunities and really starting to drive value at the higher end with customers that want this product. And so -- and if you think about it, why our product is so different and when we say predigested, it's basically when it hits the stomach of the dog or it hits the stomach of the fish or the cow or the swine or anything, it's already been digested. So it's just great conversion. That's what's really unique about this product. So we are starting our 60 pro trial literally within days. And we've already run trials all the way up to 58 and have sublots at 60. But we believe once we're able to achieve 60 pro, that's when we really start the new story where Green Plains is going. You have to remember, in order to sell those high-value markets, what do they want to see? The same thing as a little bit the same at the lower value, which is redundancy, consistency and know you're going to make the product every day. Because when you start paying between $800 and $1,200 a ton for this product, which is starting at $0.35 a gallon uplift, right, when you start paying those, they've changed formulations. They need it every day. They have to make sure it looks the same, tastes the same, feels the same, and they need to see it redundant between plants. And that's really where we were -- and we think we'll be successful, that's when we decide what are we going to make in the future and how quickly do we roll it out. But that's really the difference. It's -- protein concentration is an easier way to look at it, but there's so many other nutritional characteristics that really make the product different.

So it seems you are having a lot of these negotiations with your customers already. Are these smaller customers? Are these big pet food guys? Who are the guys who are taking the product to test it out?

The great thing is we didn't give the name as our first sale that we made on the product was to a large pet food manufacturer, one of the biggest. And so that was instant validation that this product works at the highest level. I mean, you don't just -- you don't get to go and change a formulation of a pet food bag or any product. And the great thing was is that they came back They didn't buy the product for the protein, they bought it for the yeast actually. So they found this a very high-quality yeast product, which is why we got a premium over soybean meal because of the yeast component. So that was our first customer. And so yes, we've been -- we talk to customers all over the world. We -- it's now just a function of when we're running 4, 5 and 6 of these plants, that's when we can really talk to the customer about volume, about redundancy, about consistency, about quality, about no problems in the shipping and the supply chain. And you're not going to get a large aquaculture producer, let's say, in Chile or Canada, just to make the switch, if they don't know that you don't have -- if you -- if they don't know if you have redundancy or not. They need that product. When you start feeding salmon our product, it has to stay in the diet at the whole time, and it needs to be exactly the same quality. And so once we settle in on whatever that quality is going to be, and we have redundancy, we've been in all the conversations with customers all over the world on this product, and we continue to remain in those, and it's just now a function of time. But if we want to sell out Wood River tomorrow to poultry or swine and earn somewhere between $0.15 and $0.20 a gallon uplift because of where our corn contribution is, that is possible today. But we've been very patient. Shenandoah is sold out. Actually, it's sold out to a point where Wood River has to execute against some of the extra volume. And whenever we have excess, we're basically sending out piecemeal to make sure that when we get to that 60 pro, we have the ability to deliver at much higher value markets.

So let's assume you can successfully move the entire system to 60 pro, then what kind of EBITDA contribution? I think a number came out on the call, and I just wonder on like what kind of EBITDA contribution Ultra Pro alone can deliver if everything can move to 60 pro?

Yes. And again, don't put this in your number for 2024, okay? But let's just say we move the whole system to 60% protein. And let's say, we just started a $800 a ton product, just soy protein concentrate, and that's all we ever get to, right, which isn't where we're going to be. But we're going to use that as your baseline at 60 pro. $800 product is a $600 premium to distillers grains. It's $0.36 a gallon, because every $100 is $0.06 a gallon. Just $0.36 a gallon uplift over about 950 million gallons. So you're about $300 million plus on 60 pro baseload contribution. But our view is that when you're making 60 pro, you don't stop, you try to figure out how to get even better products and you start to go to $1,000 to $1,200 a ton opportunity as well. So our first cut is going to be try to get to 60 pro consistently. Then let's go develop the markets around that globally for our product, which has very specific great uses. And then from there, you start to scale up into those levels. But it's not an immediate that tomorrow, I would switch my whole system to 60 Pro and then sell it all out. That one takes a little bit more time because when somebody is paying you $800 to $1,200 a ton for your product, they're going to make sure it's a little bit different than somebody who's paying you $400 or $500 a ton for your product. They're going to make sure that product does what it says it does, that they're not having any problems in whatever you're feeding it and that it's consistent and the quality is there. But we're confident that will happen as well.

Okay. So we can talk Ultra Pro and DCO all day, but you also have an opportunity in clean sugar. Can you talk about the clean sugar opportunity? When do you plan to start your first full-scale facility? And what's the attractiveness of clean sugar here?

Yes. So when we bought Fluid Quip Technologies, it was a great IP portfolio. Market looked at it and said, you bought it for protein and you got sugar and maybe a little bit more oil. And I would argue, and I said this before, is we actually bought Fluid Quip ourselves, BlackRock and Ospraie and we're the largest of the 3 in the company. We bought Fluid Quip for sugar and got protein. Because when you think about what we do is we make 4 or 5 products out of a dry mill, a dry milling ethanol plant. We grind that kernel corn open, we make byproducts. A wet milling ethanol plant, what the big wet millers do, they grind up corn kernel and get 200 different products. And those other 195 products are worth a lot of money, a lot of margin. And so what the Fluid Quip Technology does is it goes after some of those products and grabs them. High protein, grabbed it, right? Now we're going to go after dextrose, cause our clean sugar, a reason we call it that is because the dextrose molecule we make and will make is a 50% lower carbon intensity than what comes out of a wet milling operation. And so what this technology does is that basically you grind up the corn and instead of going into fermentation, you go into secure -- into the technology with a securification and beyond, and you're going to make dextrose instead of making alcohol. And why is that important? Because dextrose is trading at $0.15 a pound. And where you can buy your corn and make your dextrose from that kernel of corn using this technology, the first margin on that is over $0.50 a gallon. So if you think about that, as you start to -- if you're successful and you can grind less corn for alcohol and more corn for dextrose through literally almost the same facility, you just have to do some retrofit, you literally can get a massive uplift in the margin. Now they've done this at scale before, so it has been scaled. We descaled it and brought it back to our York Innovation Center to really reengineer for what we do. And now we've announced on our conference call that we've begun engineering on what we'll say is the first large-scale deployment of this technology at a dry milling operation that we expect to break ground this year. And it will be a 30,000 bushel a day system that makes about 400 million pounds of dextrose. What does that mean? The dextrose market in the U.S. is about 14 billion to 15 billion pounds and it's expected to double in the next decade. And by that, I mean, there's just not enough. And so we believe we own an amazing disruptive technology in this portfolio that instead of making ethanol, you can decide any given day what do you want to make, ethanol or dextrose. And I would argue where the margin is, you'll always make dextrose. And dextrose, what's it used for? This isn't necessarily a food grade. It's used for industrial green chemicals. It's used for lactic to PLA, it's used for bioglycol or a bio-plastic type thing that people are using. It's used for -- it's enzyme production that's used for. That's what you can do with our dextrose today. And even at just $0.15 a pound, which is the traditional pricing over the last 20 years, even though today it's $0.20 to $0.30 a pound, just at that $0.15 a pound first cut, that's $0.55 a gallon uplift on the technology. And so when you think about what we're going to do, we're going to convert 30,000 bushels a day of our grind into dextrose and break ground on that. We grind 1 million bushels a day. So it's only 3% of our grind, but it is a massive disruptive technology to the people that make dextrose today. And I think if you really think about it, when you start adding all that up, you're still making protein and you're still making oil. So instead of making alcohol protein and oil, you're going to make sugar protein and oil and you're not releasing any carbon anymore. So I would -- and I said -- and I would argue this, is that the best carbon capture technology available for the ethanol industry is clean sugar technology because you're not sending biogenic carbon off the stack of a fermenter anymore. You're actually keeping that carbon back in the dextrose molecule. And then you're selling that to make a green chemical. So I think we possess not only the ability to capitalize on this technology, but also to use it as even next step in carbon reduction. And that's what we're really excited about as well.

So one thing which was I was amazed about is I think we discussed this a long time back is, I thought once you're taking out all the protein and DCO from the distillers' dry grain, the resulting distillate dry grain would actually set at a big discount. But actually, you guys were indicating because of the consistency, it probably gets the same price or even slightly higher price. Explain to us that line.

Yes. So this is a true modern day biorefinery story, right? We're no longer just going to be an ethanol plant. We're changing the asset to look very different. And it's no longer just going to make ethanol and some low-value proteins. It's going to make all these different high-value opportunities, whether it's a high-value DCO, high-value protein and a high-value sugar. That's really what we're doing. We're transforming these assets. I know it will take people in their mind to quit thinking about alcohol, but that's okay. We still have a long -- several ways to go on that. But when you kind of look at what's left when you think about it, there's still that old -- that product that was -- we were making before still left. But what's different about the traditional distillers grains that we now make is what we call post MSC distillers, which is post the process. It actually became much more fibrous, much more consistent. And the traditional distillers grains has lots of deviations to it. It's not consistent. But once you ran it through the Fluid Quip System, you all of a sudden put this beautiful fiber product back into what was traditionally a commodity product and it still is. For the most part, we're starting to transition thinking where people actually say, oh, I want that. Number one, it's consistent. I can formulate around it. It gives you better results. It's got high fiber. And fiber is the next game where I think you're going to be able to extract more value out of the fiber down the road. So when you think of modular approaches, fiber is the next thing that we're going to start to look at what can we do with this high-quality fiber we're making, even though we're getting pretty much the same price we got before, before we extracted some high value out of it. But I think there's even more to go after because I think looking forward in the future that the world needs better, cleaner fibers as well, and that's really what we're going to be making as well with the products. So it's really just grabbing different pieces of this corn kernel that traditionally we were a high volume, low margin, very volatile and unpredictable business. And we're in the middle of our transformation to become a high margin, not as high volume, predictable recurring cash flow business with a growing higher and higher gross margins. And that's really where we're heading with this company. It's all really around this modern day bio refinery, all built off of this Fluid Quip IP that we have and then capitalizing on that.

I'm running out of time, but I did want to ask you about the carbon capture and sequestration. So there are 2 different ways this is progressing. One is take or pay; and the other is all partners come in, put up their share. Do you believe both can succeed? Why do you believe yours would succeed and you'll get more partners than pure take-or-pay?

So there's 3 things you can do with your carbon today basically is how the markets think about it. Number one, you can put it on a pipeline and send it into the ground. Number two, you can direct inject it if you have that capability underneath your plant. And number three, there are products you can actually capture that carbon and make out of it. For example, we make in our dextrose. But there's other very interesting technologies that are out there to go capture some of that carbon, combine it with some other things and make syngases or other things like that. But when you look at our -- the project we're on, we're on the Summit Carbon Solutions pipeline, and we're basically an early partner. We haven't made any decision yet whether we want to invest all the way up with them because we are focused on best capital allocation for Green Plains, but it's a great project. We believe it's the winning project. We believe it will be the project that attracts the best capital and gets funded and builds and has the best tailwind behind it just because -- it's really for the benefit of U.S. agriculture, and it's not just building a pipeline on somebody's farm. I think the farmer is involved because ethanol plants that have signed up are farmer-owned ethanol plants. So I think there are some really positives around this pipeline. But in the meantime, obviously, we've got to build it. We got to get right away. I'm doing a great job on getting the permitting, starting to get that set up. They're looking at long lead time equipment. And so we're going to sequester some of our carbon on that pipeline. And being an early investor is beneficial to our shareholders in many different ways. Again, we haven't made the decision yet on the full investment. We have time on that. And then from there, we'll look at what other things we can do with our carbon. But I believe that the best opportunity out there is sitting on the Summit Carbon line, right, because they're taking a lot of risk away from -- the ethanol plant doesn't want to take the risk of saying. We would necessarily, but a single farmer-owned ethanol plant doesn't want to do take-or-pays, doesn't want have [ MDCs ]. Just says, here's my carbon, you're helping me decarbonize, I get a piece of whatever the credit is and I'll let you take all that risk and you go find a place to put in the ground and then there's 45 Qs in the middle of that, that there's some sharing. So I like the project that we're in. I think it's a great opportunity. It's still all about decarbonizing. And whether there's a lot of value there or not, we all -- we're going to make low-carbon proteins, low-carbon oils, low carbon sugars, low carbon alcohols. And we continue to drive our carbon scores lower. And I think the world is -- that's what society is asking of us. But I think we have some ways to monetize some of that, and that's what's exciting about that.

Perfect. Looks like a very exciting set of opportunities for 2022 and '23. .

Thank you. Appreciate it.

Thank you for coming.