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

Terrific. Well, good morning, everybody. Thank you for joining us. My name is Duffy Fischer. I'm the chemicals analyst at Goldman. Adam Samuelson, our agri-business analyst had to step away from the conference to head back to New York, so he apologizes for not being here, but I'll step in and kind of moderate. We're very happy to welcome Green Plains and CEO, Todd Becker, to the stage with us today to talk a little bit about biofuels and kind of the transformation that they're undertaking. Todd has been at Green Plains for 1.5 decades. He's kind of seen it go from what I kind of call it more commodity corn into ethanol into blended fuel to now trying to do some exciting things around sugars and oils, and I'll kind of let him take the ball and run with that a little bit. But again, thank you all for joining us today.

So Todd, maybe to start us off, walk us through the transformation that you're trying to take the company on today, again, going from kind of a more basic corn into ethanol, now trying to do 3 or 4 different pillars and take advantage of some of the need for the world in different biofuels, different carbon sequestration plans, and maybe just bridge us in a waterfall manner, maybe off kind of where the assets were in 2022, where you're taking the assets and kind of what will contribute to Green Plains in that period?

We kicked off a technology-based transformation a couple of years ago. We knew that it would take us probably 3 to 5 years to get it done. And our goal was to get it all kind of completed in 2025, and kick off from there. And it's really around 4 pillars around protein, oil, sugar and decarbonization. And each of those have a -- we're at a different stage in each of those pieces. And really what it is, is taking a business that was traditionally volatile, unpredictable and nonrecurring cash flows that into more of a less volatility, predictable and recurring cash flows and coming through those 4 pillars, well, understanding that the decarbonization of alcohol and ethanol is actually going to play a bigger role than we probably thought at the beginning of this transformation of how to allocate capital a little bit. When we kicked it off, we thought the first thing we wanted to do was get more out of that kernel of corn that we were crushing every day, cracking open, much like you crack open a barrel of oil, and within there, there's different high-quality ingredients, and we weren't really able to get that as an industry and our purchase of a technology company allowed us to open up several of those different areas. The first one we started with was getting higher quality coproducts from something that was more of a commodity-based co-product around low quality proteins and animal feed into higher quality proteins because that's really what when we think about the transition away from commodity production and thinking about more like a wet milling business that some of the bigger guys have that are a much bigger margin from that same raw material, we kicked it off really by unleashing the power of protein and we're in the middle of that transformation. It's taken us a little bit longer just because we can't get permits as fast as we thought. And the supply chain is still somewhat difficult around gear and electrical gear and those type of things. But we have 5 converted. We were one ready to go when we can get the permit and we have a joint venture that's coming on this quarter as well and the biggest protein system that's ever been built around cracking open this kernel of corn as well. So it's high-quality proteins going after first pet food aqua feed at the 50% protein level and now we're increasing it to the 60% protein. We'll get into that. On the oil side, really getting more low-carbon oils out of a corn kernel. It's a waste feedstock, so it has significant CI benefit when you look at things like renewable diesel and moving into jet fuel and with the IRA, which I'm sure we'll get into a little bit as well. It's a favorable feedstock and we continue to see those yields go higher and getting more and more out of that. And there's still more to go, and I think that's a bit of Pandora's box. On the sugar side, that's the most important part of what we're trying to do, which is make dextrose instead of alcohol. And those margins are significantly better by multiples than what you'd ever earn off of making alcohol today and getting into products, everything from food to industrial products. And when you think about the sugar economy that we're in today and going into even in the future around fermentation and those type of things, more and more dextrose is going to be needed, and there's limited capability to grow that in a traditional way and so we have a technology that unlocks that. And then the last thing is around decarbonization. When we started out, we didn't really know which was going to be the most valuable. We knew sugar was probably going to be the most valuable opportunity for us. But when we look at allocation of capital, we're seeing decarbonization, especially in Nebraska, early decarbonization, be potentially even greater than anything we ever thought because when you look at the ability to take our carbon, put it on a pipeline, sequester it in geologic formations. The first one will happen probably in Nebraska. Well, it will happen in Nebraska in 2025 because the pipeline is already built that we've moved our assets to. And when you look at where we're going with our carbonates to Wyoming, they have primacy already and they've just started to much faster than the EPA could ever do. They just started to approve Class VI wells in Wyoming, which tells you this is not a -- it's not going to be an if anymore, it's just a matter of when we can get that pipeline operating. We believe that will be in 2025. We're just getting ready to order our compression equipment. That's one of the best returns because of the IRA. If you would have asked me several years ago, is decarbonization and sustainable aviation fuel really going to happen out of alcohol, I would have said no way, can't get it done, then along comes the IRA. So when you kind of add all those things up together, the 2025 margin structure and starting a little bit in '24 is going to be much greater than we ever thought we would be able to achieve just making alcohol.

Okay. And is there a way like a walking around number in your head, again, 3, 5 years ago, you took 1 bushel of corn, you converted it into some dollar value of DDGs and ethanol and whatever the 10-year average was for that. How much of an uplift if the dream works and kind of all the processes work as you hope them to -- what's the uplift on a bushel of corn conversion once we're done with all?

Yes, if I put it into a gallon perspective, which is how we think about it, if you go back in time, when we started the company earning $0.15 to $0.20 a gallon on an every-year basis through the traditional. And we really, at that point, didn't get much out of our oil at all. That was traditionally what you were able to earn on an asset that costs you about $1.80 a gallon to build. And maybe some years, you'd earn $0.50 a gallon, some years you're earned $0.05 a gallon. It was really very volatile. Some years, it was negative. So we started there $0.15 to $0.20 long-term margin structures. Oil on top of that for the last couple of years has been showing kind of $0.10 to $0.17 a gallon uplift. Protein, when we built the original protein systems, that's $0.12 to $0.15 a gallon uplift on top of what you would earn in just making traditional ethanol. On the sugar side, that's really what we're focused on. That is about $0.80 to $1 uplift, a gallon. And our first system will come on this year and that we're just finishing up this month to mechanical completion and will start sometime in February, March, really gearing that up for some April deliveries of our first product. That will show the market the true value of our asset base and the true value of our technology. So that's $0.80 to $1 a gallon uplift. We can't move as fast as protein because it's just -- it's -- we want to make sure we don't overflow the market. But generally speaking, the market continues to grow for that type of product. And then decarbonization. I mean -- the first step in any, for example, in Nebraska asset where the pipeline is in place, that's going to earn somewhere around $0.40 to $0.50 a gallon during the first years of the IRA when we look at the 45Z credits that are available, transitioning to a 45Q later on. But the 45Z credit, the faster you can decarbonize and bury carbon and sequester, the more money you're going to make for paybacks. I mean it's going to cost us about $90 million to $100 million to buy the compression and install the compression equipment. And that payback is less than a year. Once you throw the IRA through the 45Z through sequester and that's without California credits and without fuel credits, the period in Wyoming. And like I said, the biggest thing that we saw, which would tell you that this is going to happen is states with primacy in Wyoming, North Dakota are starting to issue Class VI permits, and we just saw the administration say that Louisiana is going to be able to have primacy as well. So you're going to have 3 states that does not have to get tied up in the EPA red tape. And you're seeing that much has been approved out of EPA for Class VI, but all of a sudden, Wyoming last month, just starts improving Class VI. And we expect the ones that we're going to go into. They're not our Class VI wells, but we expect the ones that we're going to go into be approved this quarter. And that's going to be really -- that will be a very big benchmark for our company because we're one of the largest producers in Nebraska. And then he who sits in Nebraska on this pipeline that's built already, only needs laterals to access it, it's going to be at a much advantaged place for the next several years versus where others are going to build pipelines. And we're on others in Iowa as well, but it will just take several years later.

And then obviously, today, you're doing most stuff with retrofitting using existing production assets. You just run through those numbers. What does a Greenfield look like? I mean, one, would it be a different structure than what you had traditionally where you're just going back and retrofitting what does that $1.80 feel like if you did kind of a new greenfield?

I think all in -- we've been looking at that because capital allocation is how we're focused on kind of the next couple of years and we have significant ability to grow our asset base. We're really focused in Nebraska and because of our advantaged position that we have at 3 of our assets. And we said to ourselves, what could we do there to potentially take care of -- or take advantage of this 45Z and the IRA for the next couple of years? And when can you get it online. So we look at everything from expanding a plant, which is probably not that much different than building these days. They used to be able to expand the plant for $0.50 to $1 a gallon. I'd say it's at least $1.50 to $2 a gallon just to expand the plant. And overall, over $2 a gallon, maybe $2.50 a gallon to actually build something new greenfield or -- and then there's that hybrid in between where maybe we have an asset like York in Nebraska. We've looked at that. It's probably the best location in all of Nebraska. It probably has our worst asset that we have as a company. So we say to ourselves, should we try and take advantage of being the fact that we'll be early pipeline shippers. And so somewhere in between $1.50 and $3 a gallon is where you could probably build today, but with the 45Z credit, you could pay that plant off in probably 3 years just on the 45Z credit alone without any other things that have to happen. So we have a really good position. I'm not sure anybody is going to build greenfield today. I mean we certainly have enough capacity in this industry. I think it's going to come through expansions or maybe like a York, which just needs to be upgraded that we have but the money is there to pay back. But if you were going to design and we've looked at that because Fluid Quip, the company that we own designs, low-carbon ethanol plants in Brazil, low carbon distillation, low energy distillation. And we've looked at doing something in the U.S. as well. You would do it differently. You would really focus on your CI score, your carbon density score if you're going to build a new plant. If you look at your boilers, your natural gas boilers, maybe moving to electric boilers, there's things to do to go after every point, this is really interesting. Every point of carbon that you can reduce from your traditional carbon score under 45Z is worth $0.02 a gallon, [indiscernible] $0.02 a gallon. So when you talk about reducing just 10 points is $0.20 a gallon when you go look back in history, that's better than the traditional margins. So advantaged Nebraska right now, and it's advantaged Green Plains because we're one of the largest shippers.

Okay. And with such competitive economics, what are the odds that, again like when ethanol first came out, whatever we way overbuilt the industry, can others use similar type technologies and do similar things and all of a sudden, you find yourself in kind of an oversupplied situation with where you're trying to take it around the 4 pillars?

It's really going to come through -- you may not be oversupplied because if you decarbonize this alcohol, then you're going to get alcohol to jet. You are going to get SAF. And the administration gave some positive guidance around the GREET model. It won't be great to the same extent that we see Green today, but it will be [indiscernible]. They can't help themselves but to hit ethanol occasionally. From the environmental standpoint, they seem to have take the pressure from the enviro side versus the truth. I'm not sure the truth sometimes matters from that perspective. But we already make a low carbon fuel decarbonizing it through sequestration, make it lower. If we can prove that this -- because we got 30 points of carbon score, that's $0.60 a gallon, just think about that just by sequestering alone is 30 points of carbon, $0.60 a gallon. When you look at it, they're going to be penalized a little bit, I think, but it's not going to be enough to really matter. And I think what's going to happen here is that any decarbonized alcohol in the U.S. once we get the updated guidance on GREET for SAF will we then move into jet fuel. And the demand for jet fuel is so deep from that perspective from SAF versus motor fuel, what's really interesting is even though you might read some of the negatives around aviation fuel that's out there, some of the hit pieces that might be put out there. It's coming and as soon as we decarbonize, there is technology out there that can convert this decarbonized alcohol all the way through to an approved drop in jet fuel and that will be the transformative demand that is needed where I think you then can suck up all the other if you're going to build something new it would just -- you just got to build it around your low carbon side that you can get into jet fuel because that's we're being pulled -- like we pushed our way into motor fuel, right? Through regulation and everything else, we just pushed our way in and not sure that we were really welcome. But it is decarbonizing or it did decarbonize and help our motor fuels, but this time, we're getting pulled from all over the world and all over industries. And I think that's a difference this time when we think about the next 5 years. Like I said, if you would have asked me 5 years or 3 years ago, SAF from alcohol, not a chance. You ask me now absolutely going to happen because of IRA and 45Z.

Okay. I definitely want to come back to some of the technology stuff and some of the future, but I also want to hit kind of on the core today business, if we could. So looking at ethanol, if you would just kind of touch on where you've seen the margin environment go for the last couple of months. Where do you think we sit supply/demand as we kind of enter into 2024, kind of how healthy do you think the industry is the core ethanol industry?

Yes. I mean the last couple of weeks have been pretty brutal on -- has been a bit more brutal on the margins than we expected. We saw some inventory builds. But up until that point, what's really interesting about these inventory builds, these demand numbers is that every time you go back and you look at -- like November just came out, demand was better and production was lower. So the idea is not getting it right. And I think we're seeing that a little bit right now, even this week when as soon as they get to 1,100 or 1.1 million barrels a day of U.S. ethanol, we don't stay there very long. Number one, the industry is older and doesn't have the capability to run that nor do we actually believe the numbers were actually over that. So we adjust it back, but we still see stocks somewhat more steady. But we're in a better situation going into winter this year than last year, mainly because we have such a good warm winter and people are still driving a lot. And we'll see what happens with some of these snowstorms that are supposed to come over MLK. But generally speaking, I think we're set up well. But the industry does have a little bit more capacity this year than they did last year, and we'll see how that plays out but it is getting older. So the harder you run, you can't run for very long. But I think generally speaking, in 2024, it might be a bit of a rough January, February. But I think when we come out of that, if the weather is good and driving demand is good and we've seen the higher blends, especially where we're at relative to the price of gasoline. Ethanol is not about a $0.60 discount. And when we get to those wider levels, we see expanded blends. So we'll start to see potentially some of the higher blends come on as we started getting into driving season, especially if we're going to remain at this discount to RBOB. And so I think we're setting ourselves up well, although January, February is going to be that traditional rougher period of time. And I think we'll see some plans start to slow down during that period. And then from there, I think we'll get our stocks back into where we need to be, but we were in really good shape a couple of weeks ago. We're still in pretty good shape relative to traditional levels. But overall, we need a little bit of work to get done and we started to see that -- we started to see some response to that yesterday and we're really in the first, probably a couple of weeks that we've seen margins start to really expand back but we've got a long way to go.

Okay. And if we set MSC aside, how would you analyze your cost position on core ethanol vis-a-vis competitors in North America?

Yes. I mean, look, when we bought a lot of plants over the last 15 years that we would call the misfit toys that we had to fix. And so while we were able to do that from a cost per gallon standpoint, what we were really focused on in 2023 and it's really the tale of 2 halves was getting our plants back kind of running really, really well. And there was a lot of work that we had to get done in 2023. And the first half suffered because of that, we saw 93% run rate of our plants in the third quarter. I think we'll see better than that. We saw better -- at least that in the fourth quarter like we had told the market. So our plants are definitely running better. When the denominator is higher, your cost position gets better, right? I mean so when our denominator is higher on our production levels, our cost position gets better. We're never going to be -- some of our plants are in the top 5% or 10%. Some of our plants are in the top 50%. What we're trying to do is reposition our asset base that we want to get those more consistent run rates to denominators higher and get our position continue to move up, and that's either going to come through. One of the things we did is we sold probably our worst positioned plant in Atkinson from our standpoint, really dragged down our average cents per gallon on operating costs. So we'll look at our asset base to say what do we need to reposition. Is there things we need to sell or are there things we need to buy? Do we need to reposition a little bit? Or do we need to make them bigger to get our denominators bigger to drive down our operating cost per gallon. When you take a look at the justification to do that. And like I pointed out to you, especially in Nebraska, you're going to get paid back very, very quickly for anything that you do. So we're continuing to work on it. We're not happy about first half of '23, but as we start to get into '24, we're much happier with the way that we're running our business.

Okay. And if we don't get the uptake for ethanol into things like SAF, and let's say, electric vehicles continue to take a little bit of market share, in gasoline demand comes down over, let's say, the next 5 years, what happens between the blend wall and the mandate in your view if that gets inverted. What does the industry do then? Or what's your suspicion what the industry will end up doing?

Well, I mean, notwithstanding the fact that we believe SAF will come out of alcohol, let's just say, leave that out for a second. We are going to have to blend more of our fuel into the fuel tank. And we saw the 8 governors in the Midwest that have been pressing the EPA and pressing the White House to go E15 year round, and I think that's happening as we speak. So we'll get some of that demand. Look, 1% maybe a 12% blend instead of a 10% blend takes care of everything. And when you look at 2 more percent that's really the excess capacity. But in any given day, we really start to see significant run and exports again. So if you just think about what we do when you got base demand of about 850,000 barrels a day of just blend stop, blending into the fuel. Some days were 800,000, some days were 900,000 barrels a day. We're exporting about 80,000 to 100,000 barrels a day right now and we're averaging production about [indiscernible]. So we're a little bit over, but we're not very far away and one we're at $0.60 discount to gasoline, we start to see expanded blends. And right now, actually, we're more interesting is the way that Brazil is positioned against the United States, we're starting to see sniffing around again from traditional exporters that we haven't seen for a while, where we would export to and that could clear any -- that will continue to clear any excesses. It's the first time probably in about a year that we've been positioned well against Brazil to go reclaim some market share and because of the way that the sugar harvest happened.