Gevo, Inc. (NASDAQ:GEVO) Q3 2023 Earnings Call Transcript

Gevo, Inc. (NASDAQ:GEVO) Q3 2023 Earnings Call Transcript November 13, 2023

Operator: Good day, and thank you for standing by. Welcome to the Gevo, Inc. Q3, 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference call is being recorded. I would now like to turn the conference over to your speaker for today, Dr. Eric Frey, Vice President of Finance and Strategy. You may go ahead.

Eric Frey: Good afternoon, everyone. This is Eric Frey, Vice President of Finance and Strategy. I’m responsible for Investor Relations here at Gevo as well. Thanks for joining us to discuss Gevo’s third quarter results for the period ended September 30, 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 at 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, 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 for questions. I would like to remind everyone that this conference call is open to the media, and we are providing a simultaneous webcast to the public. A replay will be available via the company’s investor relations page. I’d now like to turn the call over to the CEO of Gevo, Dr. Patrick Gruber. Pat?

Patrick Gruber: Thanks, Eric. Good afternoon, everyone, and thanks for joining us on our call. We are filing our 10-Q today and we ask that you refer to it for more detailed information after this call. On our last earnings call I explained what we have been investing in, what it means, how we think about further investments, our use of capital, and progress against milestones. We remain focused on that execution plan. Today, I would like to focus on recent events in the third quarter and provide an update on how things are progressing. First, our Net-Zero 1 alcohol to jet SAF plant is three months into the formal due diligence and term sheet negotiation phase for a U.S. Department of Energy loan guarantee. We said in August that it would take up to 12 months to complete the process, and based upon the positive progress we have made this quarter, we believe we are on track.

Second, our dairy manure RNG business completed its expansion to 400,000 million BTUs per year of capacity. RNG is generating positive standalone adjusted EBITDA, this is in spite of the fact that California LCFS prices are low in the $70 to $80 per metric ton range versus around $200 per metric ton a couple years ago. It is also in spite of the fact that we are operating under our temporary LCFS pathway of negative 150 carbon intensity. So we expect our RNG cash flows to improve next year when we get our anticipated permanent pathway of a minus 350 carbon intensity. We also expect RNG cash flows to improve as we ramp up volumes and de-bottleneck the plant. Third, let’s talk about Verity Carbon Solutions. Last quarter we entered into an agreement with our third ethanol producer customer, bringing our total customer capacity to over 300 million gallons per year of ethanol production.

That’s about 2% of the entire U.S. ethanol market. That’s good work considering our first customer agreement was announced in March, and so that’s lots of progress that the Verity team has made. Verity is Gevo’s measure, report, verify, or MRV business for carbon tracking. This also falls under the industry nomenclature of software as a service, or SaaS. This is a rapidly growing capital light business of ours where we see a lot of potential on its own in addition to being strategically complementary to our Net-Zero alcohol to jet projects. Finally, we are pleased to announce some key new members of our team last quarter, Dr. Angelo Amorelli was appointed to our board of directors. Angelo recently retired from BP, where he held innovation roles for 35 years, focused on development of clean fuels of all types.

He’s a Cambridge University graduate and holds a PhD in chemistry. He’s a fellow of the Royal Society of Chemistry. He’s actually an expert in all types of renewable businesses and technologies. He’s a great addition to our board. We’re pleased to have him. Andy Shafer joined us as our Chief Marketing Customer and Brand Officer. Andy previously worked as leader in the biobased polymers company now known as Nature Works. A number of us here at Gevo worked with Andy when we invented polylactic acid or PLA, which used fermentation technology and chemistry to produce sustainable bio-based substitute to fossil based products from and we’d attract it all the way from the farm to the end customer. It’s very much like what we were doing today at Gevo except for Gevo course we’re doing sustainable aviation fuel.

It’s a pleasure to have Andy with us again. He gets it. He knows what the problem is. He knows how to work with the customers. Now I’ll pass it off to Lynn to talk through the operations and the numbers.

Lynn Smull: Thanks, Pat. Gevo’s Q3 combined revenue and interest income was $9.8 million with the interest income benefiting from higher interest rates. Our corporate spend, that is SG&A, was $6.4 million for the quarter, excluding non-cash stock-based compensation of $4.1 million, which is a $0.3 million decrease from Q2 as a result of our cost control efforts. That related to the Northwest Iowa RNG project with $67.8 million, consisting of $68.2 million face value, less unamortized $0.4 million premium and issuance cost. We ended the third quarter of 2023 with a strong liquidity position of $401.3 million in cash, restricted cash, and other liquid investments. The restricted cash portion is associated with our Northwest Iowa RNG bonds and certain collateral related to the development of Net-Zero 1 and totals $77.8 million.

During the third quarter of 2023, we invested and capitalized $12 million cash in capital projects comprised of $8.7 million into Net-Zero 1, $1.7 million into the expansion of our Northwest Iowa RNG project, 1.4 million into other Net-Zero projects, and $0.2 million into our hydrocarbon skid. We also invested $19.9 million of capital with a Zero6 related [BIE] (ph) to allow the purchase of wind and hydrogen equipment to support Net-Zero 1. On Net-Zero 1, we are working to de-risk the project to non-recourse standards to obtain the DOE loan guarantee and attract the third-party equity capital necessary to finance the construction budget and all the project finance elements such as interest during construction, various reserves, and transaction costs.

The infrastructure and energy transition private equity market, as well as certain strategic investors are reacting well to the process of delivering an investment package that is financeable. The equity process will ramp up next year from the current information sharing and preliminary due diligence to full due diligence and negotiations, which we expect will occur in parallel with closing in on the DOE loan guarantee terms. Our dairy RNG project in Northwest Iowa has been injecting into the pipeline since June of 2022. During Q3, 2023 we sold 81,271 million BTU of RNG. Revenue of $4.5 million for the quarter included RNG sales of $0.2 million and $4.3 million net proceeds from the sale of environmental attributes. During the quarter, we also completed our previously announced expansion to 400,000 MMBtu per annum of capacity.

And I’m pleased to tell you that we have proven that annualized run rate. We are now working through optimization of the whole system, and we expect the operational improvements we’re making will further increase production, increase reliability, and reduce O&M costs. Finally, I’d like to emphasize a comment from the last earnings call. We see a pathway to positive cash flow for the company. This is independent from and in addition to Net-Zero 1 being financed and operating. This is based on our view of the growth of our RNG business and our Verity business, our cost trimming and our flexibility on the pace of discretionary growth related spending. It is too soon to provide exact guidance and timing, but we look forward to doing so when we have our permanent carbon intensity pathway at Northwest Iowa R&G and when we have more information around verity.

Now I’ll turn the call back over to Pat.

Patrick Gruber: Thanks, Lynn. Let me wrap up our prepared remarks by saying even though it feels slow while we’re waiting for the IRA rules to be clarified, we are not sitting idle. We’re making progress, we’re moving ahead, we’re laser focused on being good stewards of our capital. We believe Gevo was undervalued given our balance sheet and growth potential. It’s frustrating. However, we know we are living through a once in a generation transition of our entire economy towards a focus on carbon abatement and Gevo is one of the companies on the forefront of that energy transition. For this reason we have been seizing the moment to deploy well-placed capital into the Net-Zero plant designs for ATJ and ethanol, which Gevo owns.

And of course, we’ve been developing site locations because we plan on growing further plants. We are also executing complementary strategies that will create value for us long-term, such as Verity and RNG, and ethanol to olefins, or ETO, which not only support our Net-Zero ATJ strategy, but have potential to generate maximum value for shareholders, separate then SAF opportunities. As Lynn alluded to, we recognize the importance of being good stewards of our cash and getting to positive cash flow as a company. We can do more than one thing at a time. So even as we are pushing ahead on Net-Zero 1, which we all believe will unlock substantial long-term value for us, we are also pushing the development opportunities, RNG and Verity, which we expect would get us to positive cash flow long before NZ1 comes into operation.

And of course, that should unlock value as well. Let’s open it up for questions. Operator?

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Q&A Session

Operator: Thank you. [Operator Instruction] The first question for the day will be coming from Derrick Whitfield of Stifel. Your line is open.

Derrick Whitfield: Thanks, and good afternoon, Pat and team, and congrats on your progress with the Northwest Iowa RNG project.

Patrick Gruber: Thanks.

Derrick Whitfield: Starting on SAF more broadly, given the benefit of your completed FEED study and the reset we’ve experienced in [rent] (ph) pricing, could you share your thoughts on the economics of bringing an SAF project to market in the current environment? I know that Net-Zero 1 will be focused on SAF and that’s better than RD, but again, I’d love your thoughts on that more broadly.

Patrick Gruber: Yes, well, the big question around the economics of SAF is all around the ruling for the IRA bill under section 40B and 45Z. And those rules aren’t out yet, because that’s the part that actually will describe how it is that the IRS is supposed to take into account the carbon reductions from a CI score of 50 and less. And remember it’s $0.03 per CI point per gallon. So we’re waiting to see with that. Everything else is transient and it’ll go up and down. The RINs will go up and down and stuff. But we got to see what that rule looks like. And it’s been overdue almost a year already. And so we’re waiting to see what happens. And then we’ll be able to adjust from there. The thing that’s interesting about SAF is that, it is a full drop-in, it’s proven to work, airlines need it.

And so we believe we have the lowest cost route to make SAF, and particularly when you take into account the CI score. So, we know there’s a market here for our stuff. We just got to be able to finalize pricing. We won’t be able to do that until we see that IRA bill rule. So it’s not about RINs at all, it’s about the IRA bill.

Derrick Whitfield: And Pat, maybe just stay on that point, because when you think about the IRA bill and the importance of decarbonization via CCUS, that should inherently make a greenfield project in some ways more economic than a brownfield? Is that a fair assessment?

Patrick Gruber: It is. So, the way to think of it is that, carbon capturing, what we’re talking about is carbon capturing of the Co2 directly off the fermentation of the alcohol. That’s worth about 30 CI points. 30 CI points is quite a lot there. Now for us in our Net-Zero 1 design, we would hope we will take full advantage of that. And it’s very helpful. Throw money. And it’s a competitive marketplace in the states. So a lot of states are saying, we’re for sure going to have CCS. And there’s lots of discussion in other states as to what should happen and how should it happen. But CCS is going to be important in the long run game, and it matters economically. Now here’s the thing about ethanol plants. If you have an existing ethanol plant, you don’t have access to CCS.

You have zero chance, I believe, of producing a jet fuel SAF with a low CI score. The reason for that is, most ethanol plants are probably in the 70 CI score range, so knocking off 30 points is helpful, but it doesn’t get you over the hump of what it takes to make a competitive SAF. So you have to do something about decarbonized energy. Well, of course, that’s what we did in this approach we took up with Net-Zero 1, where we arranged the wind. It’s why you see us doing the green hydrogen too and doing biogas. So we have multiple levers, multiple shots on goal. And that’s how we would approach a brownfield plant as well. And so, when we look at several of those opportunities that we see and we would look at them for their full ability to be decarbonized, of which, CCS is a part.

Derrick Whitfield: That’s great. And maybe staying on — again part of the question, but maybe shifting that over to Verity. When you think about the outlook for ethanol to jet, what’s that near and long-term value proposition look like for Verity?

Patrick Gruber: Well, it’s interesting. There’s actually several. And the one way to think of Verity is just the proof, and really super documented proof that in fact there really was a carbon abatement. And it tracks it all the way across the whole of the business system, all the way from capturing carbon in a field at a farm through the production facilities all the way [indiscernible] actually all the way out to the seat at an airplane. So someone who’s buying that seat could, in theory, when the product is fully implemented, you could know what it is that the exact carbon abatement pathway throughout. That’s the beauty of this technology, it uses blockchain or DLT technology. We’ve already got it working in the field and production facilities.

So it’s pretty darn interesting for the whole SAF chain. Think of it as a really super sustainability certificate that’s bullet proofed. And that’s valuable. That’s going to be valuable and key, because that’s the proof that in fact you got what you paid for. Now when it comes to ethanol, we also — we have been working with these ethanol plants, one of the public ones we announced was [indiscernible] is that, we’re working on verifying their data, taking their process instrumentation data, transforming it into the data that’s used for calculating the CI scores, so that they can actually see what’s going on in their plant. That’s also valuable, because then we can use it to lower CI score of ethanol and measure it and monitor it. The team is working now to figure out how to monetize that and they’re making good progress.