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

Yes. So every -- so what we basically said when we started this journey is every $100 a ton was worth about $0.06 a gallon uplift to our margin structure. And when we looked at it, just off the top, we said, how do we justify the investment? Well, the investment is $200 a ton premium over soybean -- over distillers to soybean meal that's $0.12 to $0.15 a gallon. Another $200 premium over soybean meal to the traditional spread was actually higher than that. To corn gluten meal is another $0.12 to $0.15 a gallon. That's $0.25 to $0.30 a gallon uplift on whatever we produce, which is recurring, predictable and not very volatile from that perspective. But we've seen those spreads even wider. When we started our investment, we had high-protein soybean meals, $300 over DDGs and corn gluten meal was $300 over soybean meal. We've seen those compress a little bit. But what we've at Green Plains is at 60% protein and higher is really the first plant-based protein product in volume that's when we'll probably produce -- we can produce 400,000 to 500,000 tons of this product in volume available, so people can formulate around it. But we'll just have to watch and see the ebbs and flows. We've an avalanche of soybean meal coming in later this year. So we'll have to wait and see how that hits the market with all the soy crush capacity that's coming out in this year. And will that disappear? How long will that take to clear the market? Our view and my view is while everybody's very worried about this avalanche of soybean meal, markets are very efficient and the market does need protein. And it will find a home. It always does find a home. There won't be -- it won't be sitting around. We might see some weakness to start, but we'll clear the market on that as well.

Can you talk about how you think about the JV opportunities? Because you've Tharaldson coming on or in the process right now. What is the appetite to do a bunch more of those, I guess? I mean, I know this is the biggest -- so there's a volume dynamic and it's a really attractive component. But that would seem like a really attractive opportunity with low-cost capital. So yes, how do you think about it?

So we think we've a strategic advantage with owning and controlling these technologies with Fluid Quip, and they continue to innovate through many of these different technologies. We did the first JV with Tharaldson, it's a big -- one of the biggest plants in the United States and -- from an ethanol production standpoint. And we think there's other opportunities. What happened, though, as we were talking to other people about JVs and partnering, was the IRA came along. And they're looking at their own allocation of capital, they're going to allocation to carbon reduction and try to go after that to start before they allocate to a protein uplift. But that's domestically. But internationally and globally, we're in discussions all of the time to apply our technology and multiple different types of JVs around the world, whether it's going to be in the U.K. whether it's going to be in Europe, whether it's going to be in Brazil, South America, wherever -- I mean there's a lot of ethanol plants around the world that make these distillers grains and want uplift of their value. That's going to be something that Fluid Quip has already footholds in all of these countries. They sell their technology around the world. We're in Brazil with some of our protein technology already as well as their Flex Plant Technology, the global leading technology where you can take a sugar plant when it's not being used and put corn in there and make ethanol out of that as well. And that all of a sudden makes protein. So I mean, our view is that it is going to be a global opportunity. First, Fluid Quip sells the technology or we partner with other people, maybe on a non-GMO product around the world as well because we did produce a non-GMO product in Nebraska. It's not like we did a lot of that, but that has some really great results coming out of our trials in Norway as well. And you've seen -- there are some published reports that it is an absolute winner so far in these feeding trials for salmon in Norway.

So are those conversation -- are you having those conversations now? Is it further out just because priority of capital allocation with the IRA?

Yes. For us, it's priority capital allocation. I mean, there's only so much as we always say, our aspirations are always bigger than our balance sheet. But -- from the standpoint of what Fluid Quip can do and owning and controlling this technology, it's also selling technology too. And that's an undervalued and underappreciated asset that we own today. And I think over the next kind of 3 to 5 years, people will understand the value of why we bought into that technology provider and why we own most of it today. And then leading into the sugar technology is the most valuable thing, I think, that we possess.

So let's talk about that.

Yes.

The first plant is coming online, I believe, as we speak.

Yes.

Can you give us an update kind of on where that stands? What are the next checkpoints and then kind of the contribution ramp as you talk about food grade certification and continuing to build that over time?

Yes. So for those who don't know, we bought Fluid Quip Technology. Everybody thought we bought up for the protein technology and got the sugar technology. It was actually the opposite. We bought them to control sugar -- clean sugar technology, and we got protein as what I'd say is the icing on the cake. But we've a technology that basically can now divert part of our corn grind at a dry grind facility, which typically dextrose is made at a wet mill. We can now divert some of our grind and make a clean sugar and make dextrose, whether it's a food and an industrial-grade dextros. And so we're literally built the first serial #1 plant, but it's most of the unit operations came from somewhere else. Nothing was invented per se, other than a few little parts of it that are totally proprietary and cannot be recreated. But what we're able to do is divert some of our grind at a traditional ethanol plant and upscale that into a dextrose product, both refined and unrefined. We're now in startup mode in Shenandoah, it's the first one ever built in the world. It's a 250 million pounds facility. It will grind about 1/3 of Shenandoah -- will take about 1/3 of what we did in Shenandoah, Iowa to make ethanol, will make dextrose out of it. We've been in -- we just -- about 30 days ago, we finished the project and now we've been in commissioning, and anybody knows commissioning on a serial #1. It's always fun, interesting and challenging and exciting. But basically, to date, we've been able to make unrefined 95 dextrose, which by the way, is a product today. You can actually go find it on our competitors' website if you want to look at it. So we now have been able to make that. And now what we'll move now is to how do we get to a water-white refined dextrose. And as we kind of turn on each of these unit operations, we find things we need to probably fix something from the manufacturer, maybe something from the construction, maybe a leak in a pipe or whatever it's going to be. So, it's going to continually be a process over the next kind of 30 to 60 to 90 days. We always said it was -- we didn't want to rush the scale up of turning this on. But there is no question in our mind, it's a matter of if we're going to make it, but when we're going to make our water white. And as soon as we make our water white cleared dextro syrup, then we'll go for our food grade certification. We've enough demand to buy the whole plant for next year, if not 2x or 3x the amount of demand that's showing up at our door. We're in negotiations and finalizing contracts as we speak for some industrial uses right now. And then food grade is coming later in the year as we're able to get our certification. But we'll be in food-grade evaluations as soon as we can make the product. We've already made food grade in our York facility, and that's already qualified where we're -- it's much smaller, older, not even as modern, not even close to being as modern, so we know we'll get food grade certified. It's just a matter of time now, but we don't want to rush it. We learned a lot of lessons in starting a protein -- the first protein facility. We thought we'd just turn it on, said it and forget it. And it's just -- this time, we just decided that let's just take the time we need. Now lets not overpromise anything. Let's just get this plant up and running and turn it on the right way so that when we get to our final product, which will be food-grade 95 DE and 43 DE, which should come in next, what we think 30 to 90 days, somewhere in there, then we'll know where we want to build plant #2 and how we want to scale this technology. The uplift in margin is exceptional. I mean, you take an ethanol plant, let's just use 0 or $0.10 a gallon, take your pick, it doesn't matter, contribution. When you turn on sugar, it's an immediate $0.67 to $0.80 a gallon uplift on that same corn kernel, if you'd, instead of converting it into alcohol. So -- and we own it, we control it. We control the IP. It's closely held. We're not selling the technology to anybody. Now we've people around the world that have asked us, will I sell the technology? Will we sell the technology? Well, I always start as no, but then I say, well, if you're sitting in somewhere that I can never get to and you can restrict your area, then maybe I'll. And actually, we've people that are interested in that. There's demand for dextrose around the world today. And today, it's growing way faster than supply, in our opinion.

So 30 to 90 days plus food grade certification plus agreements, do you expect all that to be completed by the end of the year?

Oh, yes, definitely.

So you'd be kind of ready to rock for...

We don't want to miss the contracting season either. So we're pushing real hard as well. We want to make sure that. This contracting season for food grade, food companies, they'd actually do that as you probably know. And so this September, October, we want to have a very clear path to getting something ready for them so that we can be in contracting season. We don't miss it. I mean, 250 million pounds is just not a lot of dextrose in a 15 billion pound market.

So when you think kind of longer term about your ambitions, you're talking about a second plan. But I guess, bigger picture or longer term, what type of player in the space do you want to be?

I want to be a profitable player, where we can make the most amount of money that we can. So, I mean that's what I want to be. So we understand that if we bring it on too fast, we could definitely compress margins. We don't want to do that. There's no other -- the only other project that was announced was a project in Fort Dodge for 250 million pounds. That's literally the only other dextrose project announced since we started. So our view is we'll bring on the first plant, the second plant should be somewhere between 500 million to 750 million pounds. We'll get to 1 billion. Our long-term goal is to get to 2 billion to 3 billion, which is really only the equivalent of about 200 million to 300 million gallons of ethanol converted. But 2 billion to 3 billion pounds at the equivalent of 200 million to 300 million gallons of ethanol at $0.67 to $0.80 a pound will take that all day long from a return standpoint. And we're close, but it's definitely disruptive. Well, there's no doubt about it. We're being watched very closely by the 4, what we call the oligopoly, the 4 incumbents and they watch it closely, but you know what, they've all the demand they can take today and growing. I mean, industrial demand for dextrose and some of these biological chemical, those type of -- or green chemicals that are happening in a fermenter and things that are happening in a fermenter are really changing the way that the market is thinking about dextros, so whether it's from some of the seltzer drinks that are out there, all the way through some of the products in gummy bears, all the way into things like enzymes and chemicals. There's just demand, it's growing faster than supply. So I don't think they're really worried about us or should they be. And we're not going to -- certainly not going to ruin the margin structure, but we want to go after some -- we want to go after some of that margin structure. It's frustrating when we sit in Omaha, and there's a plant 30 miles North of Omaha in a little town called Blair. And they grind that same kernel of corn, they make a lot more money than we do, running that same kernel of corn in Shenandoah, and that's what we're going to go after.

Got it. Okay. And then moving on to SAF and carbon. Maybe on the recent announcement on the modeling guidelines around the 40B, just as that sets the stage, will Green Plains be able to participate in kind of SAF, the alcohol-to-jet based on that policy? And what was your take on how that came out, where it might go?

Yes, it's interesting because the ethanol industry and the biofuels industry never want to say anything positive when it comes out. But I'd tell you that, when you look at what happened in this recent modeling, it was actually very favorable to what we're doing as an industry and as a company. If you sequester the carbon, you get 30 CI points, that gets you now qualified under a certain level for SAF without Farm Smart, the climate smart practices on the farm. So we actually -- we got a really favorable ruling from the standpoint of they reduced our indirect land use penalty. That was the start of it. And then from there, they got us to a point -- by doing that, now as we reduce 30 carbon points just by sequestering carbon in a pipeline into geologic formations, we now qualify for SAF, for alcohol-to-jet. You don't need climate smart to qualify now if you've a sequestration program, which I think is really important -- which is a really important point, which really puts us into our plants in Nebraska that are going to be on a pipeline operating sometime next year and very early pipeline project. And we've the -- what we believe will be the largest -- or if not second largest amount of decarbonized alcohol that's made in the United States today and the earliest. And we think it's an advantage to our asset base, and we'll probably look to allocate some capital to get a little bit more out of that asset based in Nebraska. But the economics are excellent. The 45Z tax credit is in place. We want to capitalize on that to start. The 45Q is 12 years of direct pay, on top of that with the 40B guidance. And then the alcohol-to-jet guidance, I think, ultimately, we see sometime in the last half of this decade, alcohol-to-jet plants being -- start being built. But nothing happens in that space until you decarbonize the alcohol. Nobody is going to build an alcoholic-to-jet plant thinking that we're going to bring a bunch of Brazilian ethanol up here to make jet fuel in the United States. We're going to build an alcohol-to-jet plant in the United States when that first carbon pipeline starts operating and people know they can buy decarbonized alcohol along with projects in North Dakota, and there's some geologics in Ohio and Illinois. There's a couple of projects -- great projects that are there as well that some of the industry is working on. So once the market knows, and it's going to be much bigger players, then Green Plains is going to build sustainable aviation fuel. Our ATJ plants, once they know they've supply, and we're getting calls today to talk to people about that supply for next year, to lock it in now because they've to get approvals on projects. These are $5 a gallon type CapEx, maybe $4 to $5 a gallon type CapEx. So you want to build a 500 million-gallon SAF plant. That's -- it's $2 billion. That's not -- that's above our pay grade at Green Plains, but we'll be happy to supply them with decarbonized alcohol at a premium. So -- but it just -- when you look at the conversion, if they want to do 600 million gallons of SAF from alcohol, you got to have 1 billion gallons of ethanol production to do that, because you get the conversion ratio as well. So generally speaking, I mean, it is one of the biggest things that I think is underappreciated about our company today. It's mid-25. We'll start sequestering carbon at some point, and it's going to generate about $100 million of free cash flow a year on a $100 million investment just because of our position in Nebraska.

So when you think about -- I guess, how would you stack up, where you would expect the feedstock to kind of stack up versus some of the others? And when you think about demand -- I mean you talked about the 30 CI point reduction and some of those things. But I guess when you think about the demand build for SAF, how do you think about your CI score relative to some of the other kind of feedstocks and kind of how that sequences the demand builder? What needs to happen in that?

Well, alcohol is alcohol and veg oils are veg oils. I mean, I think there's a very -- half of feedstocks are very different than -- alcohol is just where we're. And I think from a -- Jimmy, you may have a comment on that?

Well, I think when you look at the pathway, if the administration is calling for 3 billion gallons of renewables to be blended in, you've got renewable jet that can take that pathway, but we'd probably consider that there's less likely because of the limitation of feedstock. There's a limited supply of animal fats and tallows and used cooking oil and even our DCO. But when you think about the pathway for corn ethanol, we probably have a better pathway because where you buy the 5.2 billion bushels of corn from farmers, we make more ethanol than we need today. So if all of a sudden, we could grab half of the gallons of demand for renewable jet through alcohol-to-jet, that could disappear 2 billion, 2.5 billion gallons of ethanol out of the system. Then we don't have enough ethanol. We need to start thinking about exports, blending, domestic blending and going into SAF. So our view is we stack up nicely. Yes, you've got the last piece. Really, the first piece for us is to decarbonize. And those advantages start to come to us as soon as that decarbonization happens. We've got 45Z, 45Qs in place today. That's automatic for us. And then the advent of there are LCFS markets that we can take advantage of with our low carbon ethanol as well. But then that, as Todd mentioned, that's going to put these bigger entities that want to continue to control the supply of jet fuel to the airline industry, they're going to be highly interested in wanting to make sure they make the investments to get that alcohol-to-jet going.

You've talked about a number of potential kind of strategic actions, I guess, in terms of pivoting the asset base, selling plants, scaling capacity maybe reprioritizing some of the initiatives, I guess, can you just kind of share your thinking or the framework behind what you're approaching that piece of the longer-term strategy?

I mean we've been at it for a while, right? And so we know that the traditional fuel-grade ethanol market has been no less than a challenge over the last 15 years. We've our ebbs and flows and highs and lows and everything in between, but we survived all that. So when we look at the future of where we're going, it's first and foremost, upscaling our products. Where can we go get recurring, predictable and nonvolatile cash flows. We know we can get it in protein. That's just taking time. We know we can get it in sugar. We know today, we can get it in decarbonizing our alcohol. And so when we think about how to allocate capital, what's the best and highest use of our money and where do we invest behind our asset base. So we've an asset that doesn't have a carbon plant, that cannot be necessarily decarbonized. It may not fit the way we want to look at it unless we could make -- put protein or sugar there. So we're evaluating all of our assets and also looking at our -- we just believe that we're in a such an excellent position in Nebraska today with 3 plants there, 2 that are very large scale. One is one of the oldest plants in the world, but we'll still make ethanol there every day. And we're going to even invest some money to lower our carbon score there as well. We think we're just such an advantage there. So when we're looking at the investments that we're going to make next, we'll build more protein. We're not going to stop that. I'd never take that back, and I think we need more of it as we go through because I think our Sequence product. And I think we're going to make breakthroughs as well to even get higher protein concentrations. We're already starting to see that and the ability to do that with some of the things that we're doing as well. So we're not stopping there at all and then scaling sugar at some point. We always said the first sugar plant is paid for the second, it's not. So when we look at capital, we got to say we're -- if that truly is where we're going to go to go after those highest margins that are available, that's going to be a big allocation of capital. And maybe if we can't -- getting a permit in the State of Minnesota is like 3 or 4 years from now, you might be able to start construction. Illinois, we finally got a permit in Illinois, but then the IRA came along. So we're just going to make more alcohol to start and use that capital than just to invest behind the IRA, but then we'll come back in the Illinois and build that protein facility. So there's going to be things that we've ebb and flow. We're always looking at our asset base. We're also looking at the fact we want to acquire. We're thinking about are there things that we can acquire because of our ability to layer on technologies, but also the fact that we do have access to capital as well. So -- and we do have a public currency. So we're not done growing this company at all. And today, when we look at it, we think we're -- markets are always ebbing and flowing, they'll recover this. And this sector has been under pressure, and we're part of that being under pressure. The veg oil markets, we'd like to see a recovery there. But overall, we think the products that we make are very valuable and the decarbonization hasn't even started yet and the value we can get from that.

And then you -- we only have another minute or so, but you touched on this a little bit from a funding perspective. I mean, how do you -- can you just talk about the balance sheet? Can you talk about what you've allocated where in terms of a funding perspective and the go-forward opportunities?

I mean, right now, our balance sheet continues to remain strong. We always try to stay in a strong liquidity position. We had about $280 million of cash or so plus $250 million of available capacity on top of the fact that margins have gotten better since the conference call as well. So we've ebb and flow little bit there as well. But we're looking at now refinancing some of the debt we've on the balance sheet. When you -- everybody loves the SOFR plus 400 when they got it, now everybody hates SOFR plus 400 or 500. But -- so there's some opportunities, I think, to get some longer tenure debt, a lot cheaper than what we've today. So we're focused on that. Should we look at some assets and reallocating those assets to do something else as well? And then from there, it's how -- what capital can we generate from free cash flow? I mean, we really don't, our intent is not to issue a bunch of equity to do any of these things. We do have debt capacity available, if we can get the right structure in place. And then also, we're really excited about 2025, when we kind of get through this market, get ethanol margins a little bit better and trying to get into a full year of 60 pro, a full year of carbon, a full year of sugar and start to really generate those free cash flows and all that is unencumbered to be invested in the business.

We've a question from here. So I want to just ask that real quick. I know we're out of time. But your view on the premium that's available on low-carbon ethanol when used as a SAF feedstock?

Well, nobody is using it. So -- but I think there's definitely calls coming, and we feel like it's a little bit of Déjà vu from the corn oil days when everybody was calling and we were the supplier that everybody wanted to talk to. It's happening again in the low carbon alcohol because in order to get FID from -- and some of these companies, they want to build jet plants. They need to start to secure supply. So we think there's an opportunity there. We don't really know what kind of premium yet. I'll just tell you this is that I think it's -- when you look at the carbon credit, a biogenic high-quality carbon credit, it's actually -- we think it's actually the -- more valuable than LCFS today. And we haven't even seen the value of that in any size, scope or scale. So we're going to produce 750,000 tons of carbon credits next year when we start up, high-quality gold standard biogenic carbon, and it's not going to be the mom and pops that are going to buy the credit when you fly in your airplane and you pay the extra money, it's going to be the Googles and the Facebooks and the -- or the Metas and the Microsofts and anybody that's committed to decarbonization, those are high-quality credits that they can't buy in the world. And 750,000 tons of credits that we're going to possess sometime middle of next year, available on the market, it will be the first true test of the value of a carbon credit. I think of a high-quality carbon credit. And we look at LCFS today under $50 and you look at carbon credits probably over $50 today, who cares about an LCFS market, quite frankly. I mean -- sorry, Jim. But who cares about an LCFS market, quite frankly. The 45Z today, if you sequester carbon, that is a national low carbon fuel standard. And we're going to be very early adopters and very early participants of that. And that's what we think will be the advantage. And we don't know the true value of that yet, but the value of the decarbonized alcohol, we believe will be a premium to non-decarbonized alcohol.

Perfect. I think we'll go ahead and end it there.

Thank you. Sure.

Something to look forward to that's for sure. Thank you very much. Thank you. Sorry, after you. Thank you.

Appreciate it.