Gevo, Inc. (NASDAQ:GEVO) Q1 2023 Earnings Call Transcript May 10, 2023

Gevo, Inc. misses on earnings expectations. Reported EPS is $-0.07 EPS, expectations were $-0.06.

Operator: Good day and thank you for standing by. Welcome to the Gevo Incorporated Q1 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to turn the conference over to your speaker for today, John Richardson, Investor Relations. You may go ahead.

John Richardson: Good afternoon, everyone. This is John Richardson, Gevo’s Director of Investor Relations. Thanks for joining us to discuss Gevo’s first quarter results for the period ended March 31, 2023. I would like to start by introducing today’s participants from the company. With us today are Dr. Patrick Gruber, Gevo’s Chief Executive Officer, and Lynn Smull, Gevo’s Chief Financial Officer. Earlier today, we issued a press release that outlines the topics we plan to discuss. A copy of this press release is available on our website at www.gevo.com. Please be advised that our remarks today, including answers to your questions, 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 timing, development, engineering, financing and construction of our sustainable aviation fuel projects, our recently executed agreements, our renewable natural gas project and other activities described in our filings with the Securities and Exchange Commission, which are incorporated by reference. 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 and GAAP reconciliations may be found in our earnings release and 10-Q, which can be found on our website at www.gevo.com in the Investor Relations section.

Following the prepared remarks, we’ll open the call to your questions. I would like to remind everyone that this conference call is open to media, and we’re providing simultaneous webcast to the public. A replay will be available via the company’s Investor Relations page at www.gevo.com. I’d now like to turn the call over to the CEO of Gevo, Dr. Patrick Gruber. Pat?

Patrick Gruber: Thanks, John. Good afternoon, everyone. And thanks for joining us on our call. We are filing our Form 10-Q today and we ask that you refer to it for more detailed information after this call. Now, last earnings call, I said that I expect that Gevo will play the role of project originator, developer and investor in most of our business development projects and that then we expect to generate cash using a developer business model. Well, today, I am glad that I can finally talk about two deals that have been in the work for a long time. The deal with ADM and P66 is an example, in my opinion, of our demonstrating leadership by enabling the production of SAF, the anticipated potential revenue of $125 million from this deal.

[indiscernible] mix of milestone and royalty payments provided certain conditions are met. I like that we are expected to deploy Gevo capital in these projects. And we stand ready to assist ADM and Phillips 66 if they need our assistance. We want them to be successful. We believe it reinforces the view of the readiness of the technology. I think it’s a great outcome for Gevo. A piece of what we bring in building the SAF business is knowledge around the most commercially ready technology and that is Axens’ ETJ technology, Jetanol, integrated to ethanol. Based on interactions and discussions with potential strategic investors and sophisticated Wall Street investment funds working through diligence as they consider investment in our SAF projects, I believe my opinion is shared.

Combining access technology with Gevo’s low carbon integration technologies, we believe, makes for the winning combination, that of low cost production, reliable operations, which is something most people forget about, and low CI potential for SAF and carbohydrate-based renewable diesel. We at Gevo, [indiscernible], we have learned, as we integrate these business systems and technologies, the combination of Axens along with Gevo’s know-how technology, we believe, makes all these hydrocarbons solutions better. Axens has been a great partner, we share a common vision to see the technology is widely deployed and enabled to produce multiple hydrocarbon products and drive CI scores down and even potentially go negative. It’s a business system approach.

We want everyone who makes SAF from alcohols using Axens and Gevo technologies. So this is just one example of us at Gevo leveraging our expertise and converting carbohydrates to fuels and chemicals going through alcohols, coupled with our knowledge and partnerships with farms who grow feedstocks. It puts us in a unique position to seed a number of businesses. That is one example where we’ve identified and brought together the best technologies and partners to deliver low CI SAF. Our expertise and competitive advantage is also being applied to create carbohydrate to chemicals, especially fuel business opportunities, and build the capability to measure and track sustainability attributes and do carbon accounting across the supply chain and teach brand owners about these better ways of doing business.

So I’m glad we can finally talk about our development and licensing deal with LG Chem too. At Gevo, we’ve developed several proprietary technologies to convert alcohol to hydrocarbons. In the past, we’ve talked primarily about these being used for SAF diesel fuel and gasoline. Well, these technologies can also be used to make chemicals materials like polymers and plastics. That’s what the LG Chem development licensing deal is all about. We develop an elegant technology to convert alcohols into a range of drop in polymers and plastics that are used in components for cars, consumer goods, carpet, diapers, packaging and such. Think about what’s possible here, carbon from the atmosphere, captured through climate smart agricultural systems and converted into carbohydrates that have that carbon transformed into durable goods using a Gevo type net zero business system and technologies.

Picture in your mind seeing automobile interiors and exteriors, flooring, diapers and realizing that the carbon in those products came from captured CO2 in the atmosphere, but it’s now sequestered right in front of your eyes. It’s a new paradigm of what is possible. The agreement we executed with LG Chem is specifically designed to develop bio propylene for the production of renewable chemicals using Gevo’s proprietary Ethanol-to-Olefins technology or ETO technology. Our plan is to have LG Chem take the lead in the scale of the process. In this deal, we are co-developing the ETO technology with LG, which will allow Gevo to conserve its financial resources to pursue other projects. The agreement includes a combination of direct payments to Gevo beginning in 2023, commercial licensing terms and potential options for the parties to form a joint venture if the research and development activities prove successful.

LG Chem is a large world class company and is proven to be an excellent partner, sharing our vision for a more sustainable future. I am excited to work together towards our collective success. We also have been developing a new business called Verity Carbon Solutions or VCS. This business is an outgrowth of our proprietary system of accounting for carbon and sustainability across business systems using Blockchain based tools we have previously called Verity Tracking. This business focuses on accounting for, validating, monetizing carbon insets created in the value chain. Carbon insets are carbon reduction credits created inside of a value chain. Gevo’s business system approach and technologies that reach across the whole value chain have provided us with this unique business opportunity.

And we originally developed this intellectual property for NZ1, but realized that this technology could be applied to all types of renewable resource based fuels, chemicals, foods and such. The first test of a new business idea though is showing that someone besides us thinks is valuable. Therefore, I’m very pleased that we’ve entered into a joint development agreement with Southwest Iowa Renewable Energy, or SIRE. It’s an initial validation of our VCS business. SIRE is a leading ethanol a seed company that is using VCS technology to begin tracking carbon reductions across its supply chains and products with the intent of creating carbon insets that can also ultimately be monetized. We expect to grow this business working with other ethanol, nutrition and non-ethanol biofuels companies.

An important aspect of this business is to enable farmers to get credit, and by that I mean get paid for that carbon value that they are delivering. The same is true for production plants. We intend to ensure that real data is used and reported about reductions in carbon and capturing carbon. We believe the potential for this business is vast, given the agricultural industry is so large that it applies broadly to tracking environmental attributes for any supply chain. As we develop this business, we expect to add more customers and partners. We will continue to inform you all and eventually put forth revenue projections. Final note, the VCS business model as a capital light business model. VCS is developing software tools, providing businesses system advice, engineering, sustainability consulting services, and creating the carbon insets.

Ultimately, we’d expect the carbon insets can be monetized one way or another, and that we share that value with our customers and our partners. Before I turn to the SAF projects, I want to make very clear an important point. We are primarily project developers, licensors and business developers. We may indeed invest equity into projects. Our cost of capital is expensive, and we will be prudent with our cash. We expect to secure third party debt investment for our net zero projects. We also expect to secure third party equity. We expect to make money through development fees, licenses, and what commonly is called a carry in the project. A carry means that we expect to receive an equity interest in the project without necessarily making a cash investment per se.

The SAF and hydrocarbon markets are so big, we want to enable as many projects as possible and make money while we’re doing it. In addition to playing the role of enabler and project developer, we expect that for certain projects we can provide operation, maintenance engineering and even trading services or other support as necessary. Now turning to our net zero SAF projects, specifically NZ1, one since our last call, there have been several things that have impacted our thinking. First, interest rates are high and expected to go higher. After discussions with potential equity investors, we believe that the right approach is to secure financing using the DOE loan. This is expected to be the lowest cost source of debt and require the least amount of equity.

However, this will delay the timeframe for financial close, pushing financial close into 2024 based on current expectations and assumptions. The DOE has a lengthy and time consuming process that must be followed. A 2024 close would mean the earliest possible plant startup for NZ1 would be in 2026. In any event, the schedule and timing of NZ1 will be driven by our ability to obtain third party financing, both debt and equity. What does this mean for Gevo? This means that recovery of our development costs and fees for NZ1 will be delayed until the financial close of NZ1 expected in 2024. As a result of this delay, we are reducing our spend of capital for NZ1 to better align with the timing of the DOE loan. Said differently, we are being prudent, careful with our cash, given the timing of the DOE loan and the volatile macroeconomic conditions in the world today.

Another issue that we’re watching closely is a rulemaking regarding Section 45Z for SAF in the Inflation Reduction Act, or IRA law. What is weird is that Section 45Z refers to CORSIA, which it just turns out isn’t even a method of counting carbon. CORSIA is a policy framework, not a scientific method, to measure carbon intensity. We note that according to ICAO’s website, they’re sponsors of CORSIA. CORSIA “moves away from the patchwork of national and regional regulatory initiatives and offers a harmonized way of reducing emissions from international aviation, while respecting special circumstances in respect of capabilities of ICAO member states.” Having CORSIA cited in this bill for counting carbon doesn’t make practical sense. It isn’t a method of counting carbon.

However, applied correctly as a framework and taking into account modern US data in the gold standard for counting carbon that is the Argonne GREET model, I could see how it could work. Contrast this to the sections of 45Z regarding transportation fuels that are specifically called out to use the Argonne GREET model. So something strange is going on in the SAF section that needs to be resolved through rulemaking. It is, of course, the government. So I do expect some sausage making. It’ll eventually come clear. The world needs SAF. And the world really does need to use these excess carbohydrates to make it happen. But enough of that. So to be really clear, for SAF, we do not have a traditional build, own, operate business model. We are pursuing a capital light project developer role that is projected to give an attractive return on our investment, such as in the P66, ADM deal.

The idea that Gevo puts up all the money or is obligated to put up the billions of dollars needed to build the plant is wrong. Wrong paradigm. We expect to play the role of market developer, project developer, technology developer, licensor, all the while managing our cash wisely. When we bring products to financial close, we would expect to recover a project development cost and keep that carry interest in the project. Capital light model. Now, we may choose to invest in particular projects along the way too, but it depends upon our view at the time of what’s the best use of cash on our balance sheet. What generates the greatest potential for Gevo? In this difficult economic environment, we are glad that we have a very strong balance sheet.

We expect to have multiple routes to generate cash for this balance sheet going forward. These routes are expected to include RNG business, Verity business solutions, our project development, businesses, licensing, and eventually our retained interest or equity in the projects that we develop. We’re just beginning. Now I’ll pass it off to Lynn to talk through the operations and numbers.

Lynn Smull : Thanks, Pat. To start off, we have moved our RNG business into normal operations. And I’m pleased to report that we have revenue that exceeds expectations for the quarter on RNG. Given consistent uptime and strong RIN generation, driven in part by a catch up of RINs received for production in the fourth quarter of 2022, our revenue from operations was $4 million. We received some LCFS revenue in Q1 and we’ll continue that going forward based on a default temporary CI score of negative 150 until we receive the final pathway approval from CARBS, expected early next year, which should improve to something like negative 350. We’re off to a great start in Iowa and I expect continued improvement as our capacity expansion from 355,000 MMBtu to 400,000 MMBtu is implemented later in the year.

We ended the first quarter of 2023 with a strong liquidity position of $453 million in cash, restricted cash and other liquid investments. Restricted cash totaled $77.8 million and is associated with the Northwest Iowa RNG bonds and certain collateral related to the development of Net-Zero 1. Long term debt outstanding of $67 million is related to the Northwest Iowa RNG project. Our corporate spend – that is, SG&A – was approximately $6.2 million for the quarter, net of non-cash stock-based compensation of $4.6 million. During the first quarter of 2023, we invested and capitalized $11.4 million cash in capital projects, comprised of $8 million into Net-Zero 1, $1.5 million into the Northwest Iowa RNG project, and $2 million into other projects.

We intend to finance the majority of construction capital at the NZ1 subsidiary level, with project finance debt and third party equity. We have strong interest from several potential equity investors based on the amount of due diligence they are doing, although the macro issues Pat talked about are on everyone’s minds. We do, however, expect to secure one or more investors and we are working through the due diligence process with a number of premier infra funds. It’s also worth mentioning that while the DOE loan is the primary track to secure the debt, we are running a second commercial debt track as we want to keep our options open. Now I’ll turn the call back over to Pat.

Patrick Gruber : Thanks, Lynn. Let’s open it up for questions.

Q&A Session

Operator: [Operator Instructions]. I have the first question that is coming from Dushyant Ailani of Jefferies.

Operator:

Operator: The next question, it will be coming from Derrick Whitfield of Stifel.

Operator: And our question will come from of Brian Koslow of Tomas Capital [ph].

Operator: And the next question will be coming from Amit Dayal of HCW.

Operator: Thank you. And this does conclude our Q&A session today. And I would like to turn the call back over to Dr. Patrick Gruber for closing remarks. Go ahead, sir.

Patrick Gruber: Yeah. Thanks. So, obviously, what we’re trying to get across is to think rationally about how to deploy our money. We actually are in really good financial shape. We are finding that there are people who want to invest in these projects. We don’t have to make investments ourselves to make money on the projects that we’ve been working on. We have multiple opportunities along different threads of business from RNG to chemicals with LG to – I was serious. I’d like to see everybody use the process to make jet fuel from alcohol. I want everyone to do that. And I’d like to take a nick on it too. And so, it’s a different paradigm. And we are developing an intellectual property position. People forget that. We really are technology developers too.

We’re really good at patents. Anyone knows our history knows that that’s the truth, given our track record of winning things. So it is a little bit different. I think our low stock price frustrates me. So I look at it and it’s like, that makes no sense at any level. But I get that people are just doing kind of a simple calculation that I think doesn’t make any sense. So, we’re trying to blow that up and pay attention to what we’re actually doing here. So I appreciate everybody’s investment in us and people listening the call. And it’s going to be fun as we work through all these things and make progress. Thank you.

Operator: Thank you, everyone, for attending today’s conference call. You may all disconnect, everyone. Enjoy the rest of your evening.