Green Plains Inc. (NASDAQ:GPRE) Q1 2023 Earnings Call Transcript May 6, 2023

Operator: Good morning, and welcome to the Green Plains Inc. and Green Plains Partners First Quarter 2023 Earnings Conference Call. Following the company’s prepared remarks, instructions will be provided for Q&A. At this time, all participants are in a listen-only mode. I would now like to turn the call over to your host, Phil Boggs, Vice President, Investor Relations. Mr. Boggs. Please go ahead.

Phil Boggs : Thank you, and good morning, everyone. Welcome to Green Plains Inc. and Green Plains Partners First Quarter 2023 Earnings Call. Participants on today’s call are Todd Becker, President and Chief Executive Officer; Jim Stark, Chief Financial Officer; and Leslie van der Meulen, EVP of Product Marketing and Innovation. There is a slide presentation available, and you can find it on the Investor page under the Events and Presentations link on both corporate websites. During this call, we will be making forward-looking statements, which are predictions, projections or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ because of factors discussed in today’s press releases and the comments made during this conference call and in the Risk Factors section of our Form 10-K, Form 10-Q and other reports and filings with the Securities and Exchange Commission.

We do not undertake any duty to update any forward-looking statement. Now I’d like to turn the call over to Todd Becker.

Todd Becker : Thanks, Phil, and good morning, everyone, and thanks for joining our call today. Concurrently, with our earnings announcement this morning, we announced an offer to acquire all of the publicly held common units of Green Plains Partners. We believe the proposed transaction will simplify our corporate structure and governance, generate near-term earnings and cash flow accretion, reduced SG&A expense related to the partnership, improve the credit quality of the combined enterprise and align strategic interest between Green Plains Inc. shareholders and the partnership unitholders by regaining full ownership and control of Green Plains total platform, including our terminals. All of this will allow us to be more flexible with our long-term asset and company strategy.

This is as much commentary as we can provide on this potential transaction at this time. So let’s get the first quarter results out of the way. As indicated, ethanol margins were very weak in the first quarter and began to recover too late for us to take advantage if we look backwards. But since we are looking forward, things have changed significantly from the lows we saw in January as market fundamentals look very interesting for the remainder of the year for all of our products, and we’ll get to that later. This was further validated with yesterday’s EIA data. Our overall consolidated crush margin was negative $0.07 for the quarter, leading to a negative EBITDA of $27.7 million. Corn basis has continued to be high, particularly in the West.

We experienced a basis that was approximately $0.25 a bushel over the prior year and $0.40 over the prior 5-year average. Ultimately, margins needed to adjust to this, and they have started to in the Western Corn Belt for the rest of the year based on the current forward curves and markets. Veg oil pricing was weaker than the highs we experienced in 2022, which was also a factor during Q1, even though we had most of our corn oil presold for the quarter. I’ll give you some insight on current events later as it gets starting to get interesting for low carbon intense oils again, which is where we sit with our product. We also saw weak driving demand in the quarter and coupled with continued excess ethanol production, which resulted in a challenging margin environment.

For the last 15 years, we made sure we owned our natural gas for our winter production, and that was the right thing to do historically. But with the unusually warm winter we saw, natural gas pricing decreased below our cost, causing a drag on the spot crush margin. Because of this, we are limited in our ability to benefit from the reduction in spot pricing. Having our natural gas purchase early impacted our cross margins negatively as well, we will assess the best coverage strategy in the future for winter, but we believe this ownership is and always was the prudent approach. Recently, we have experienced significant improvement in overall ethanol margins as U.S. production has trended lower, while gas and driving demand moved above pre-COVID levels in some of the reporting weeks.

Now we have to see if that holds. We believe since 2019, our inputs have driven to lower margins overall as an industry other than a few quarters as the world balance sheet for corn tightened between COVID and the Ukraine situation as well and weather. This may turn in our favor in 2023 and 2024. We are seeing strong early indications that this year’s corn acreage will be expanded and get planted in a very timely fashion as we have a near perfect spring shaping up. We all know the ethanol margin can move quickly and on paper, it is well off the lows experienced in Q1. Going forward, we will choose our spots to lock in available ethanol crush margins to our hedging strategy as there are opportunities along different parts of the curve to lock in a positive base margin even before corn oil and protein contribution.

Yes, this can’t happen in ethanol as well. But it’s been a while since we’ve been able to say this about the forward curve. But this is really a great setup. Our main focus continues to be on executing on the transformation to add incremental recurring margins and cash flow opportunities from our biorefinery platform through expanded protein and ingredients, low carbon renewable corn oil, clean sugar and decarbonization to insulate us from the volatility that we’ve experienced. While the first quarter was tough, we are well underway. With approximately 10% of our plant utilization capacity offline during the first quarter because of margins, our overall production utilization came in about 87%. Improvements in the margin gave us the opportunity to bring back all of our facilities back online.

But it was just in time for us to enter maintenance and turnaround season. So we anticipate only slightly higher run rates nearby and strong run rates for the third and fourth quarter, where the actual highest margins are. Second quarter will be impacted from having Wood River offline for a period of time as we had an explosion of a whole stillage tank when the plant was not operating because of routine maintenance. With current engineering and construction estimates to complete repairs, we are targeting to bring that facility back online by the end of the quarter, at which time we will return to full rates across our platform. Anything longer than that will be covered by business interruption insurance, so we don’t believe this will ultimately have a material effect on 2023, but we hope to be up and running before that kicks in as demand for ultra-high protein from Wood River continues to be very strong.

As we exited the first quarter and early in the second quarter, our transformation strategy began to hit an important inflection. With improved ethanol margins, we brought our ethanol production capacity fully back online and all 5 of our MSC systems were lined out and producing high-quality, high-protein products to benefit our animal nutrition customers and business. For 21 days at the end of March, at the end of the quarter and into the first half of April, we averaged over 900 tons per day of ultra-high protein production with some days achieving over 1,000 tons of production. Some of these days exceeded our initial investment and expected volumes, and we still have more to go as we’ve just begun to truly optimize our process. We have achieved yields that exceeded 4 pounds per bushel pushing close to 5.

We believe the MSE technology is the best and only system to ever see these type of yield numbers and the most consistent in producing high-quality suite of animal nutrition products, continuing to optimize these systems to maximize production provides opportunities to further enhance the potential of our assets. Our platform was performing as designed and at rate and demonstrates the annual run rate exceeding 330,000 tons per year for these 5 locations only and is achievable and more. After the events that occurred in Wood River location in mid-April, the protein location has been offline. And when we started back up, we believe we will once again be running at 900 tons per day, plus or minus day in and day out. Our anticipated MSC volumes for the second quarter are on the 60,000 to 70,000 ton range and as a result of this downtime, moving to 80,000 to 90,000 tons per quarter going forward.

Later in the call, I will review our pricing and financial metrics associated with protein production. As you can see in the volume table in the press release, we added a line for ultra-high protein, and we get the full production, we will give you more breakout of financial outcomes as well. I will also review some of the things we are seeing for the last half of the year sales channels and higher proteins as well. But even more exciting than this is our clean sugar facility in Shenandoah is making great progress, and we have recently gone vertical, which we have posted pictures online, and you can see the walls of the securification takes are being installed. It’s very exciting to see this progress, and we hope to share our vision with what this project can do for the future and our company, and later in the call, I will go deeper on this topic.

I won’t spend a lot of time on the regulatory front except to say things are trending our way as well between RVO staying steady on ethanol and potential upside for renewable diesel, higher blends like E15 taking hold as we enter into our fifth straight summer of year-round sales along with the Midwest E15 waiver, which, by the way, becomes permanent next year, which is very exciting. Renewable diesel supported by state-level programs to help our low-carbon renewable corn oil production achieve higher values, all the way to the IRA, which we have spent a lot of time on our past calls, and you could see it could be quite an interesting market for us to take advantage of. I will cover decarbonization briefly later in the call, but I’m happy to announce June 15 at 10 a.m. Central Time for our teach-in that we have been promising on the IRA and the impact of the future of our company.

Our decarbonized alcohol will be a valuable feedstock to produce alcohol to jet and sustainable aviation fuel at scale, but that is the end game. In the meantime, there are many positives to unpack for our shareholders, and we are excited to educate all of you on this. Our balance sheet and liquidity remained strong, ending the quarter with $408 million in cash. Jim will provide a summary of our financial results and an update to our capital allocation for the balance of 2023. And now I’ll hand the call over to Jim to provide an update on the overall financial results.

James Stark : Thanks, Todd, and good morning to everybody. Green Plains consolidated revenues for the first quarter were $832.9 million. That was $51.5 million higher than the same period a year ago driven by higher run rates, which enabled us to produce more ethanol, high-protein ingredients and renewable corn oil. Our plant utilization rate improved year-over-year to 87.5% during the first quarter as compared favorably to the 83.1% run rate reported in the same period last year. As Todd mentioned, we are working to restart our Wood River plant, which will have a minor impact on the second quarter utilization rate as that plant represents nearly 13% of our stated capacity. For the quarter, we reported a net loss attributable to Green Plains of $70.3 million or a loss of $1.20 per diluted share.

That compares to a loss of $61.5 million or a loss of $1.16 per diluted share for the same period in 2022. When we look at the bigger cost variances between the 2 periods, higher corn and natural gas prices, combined with higher railcar lease expense were the main drivers. Higher railcar expense as a result of moving to a compliant DOT-117 fleet of rail tankers, which was common across the industry. Adjusted EBITDA for the quarter was a negative $27.7 million, which was in line with the prior year. We did experience a $4.5 million increase in depreciation and amortization expense versus a year ago. Our current expectation is that D&A will remain in the range of $23 million to $25 million per quarter for 2023. The increase is mainly due to the addition of MIC technology bills at 5 of our locations.

We realized a negative $0.07 per gallon consolidated crush for Q1 of 23%, which was in line with the prior year. On a sequential quarter-to-quarter basis, we saw the consolidated crush margin per gallon weakened $0.10 per gallon when compared to the fourth quarter of ’22, and that tends to be the seasonal pattern that we see with the first quarter of the year traditionally being the weakest. Our Ag & Energy segment recorded $5.2 million in EBITDA, about $5.5 million lower than the prior year. This decline was driven by market volatility in our merchant trading and distribution businesses and our distillers grain flows and natural gas storage, yet we expect the year to come in largely in line with previous years. For the first quarter, our SG&A costs for all segments was $31.8 million compared to $30.9 million reported in Q1 of 2022.

This approximately 3% increase was driven by higher wages across the platform, especially at our industrial sites as competition is fierce for planned employees, in addition to higher consulting and professional fees. Interest expense was $9.7 million for the quarter, which includes the impact of debt amortization and capitalized interest. This was higher than the $8.8 million reported in the first quarter of last year. This is due to rising interest rates on floating rate debt and reduced capital interest in the quarter as certain projects have been completed. The majority of our outstanding debt is at a fixed rate and higher interest rates did not have a significant impact on our balance sheet. We have no near-term maturities for the next 3 years and also note that our cash interest paid in the quarter was $10.1 million.

We do continue to anticipate interest expense for 2023 to be approximately $40 million with the current interest rate environment and anticipated debt balances in ’23. With our strong cash balance, we did realize interest income of $3.2 million in the first quarter, which did offset the increase in interest expense. Our income tax expense for the quarter was $3.4 million compared to a tax benefit of $1.2 million for the same period of ’22, even though we incurred a loss during the quarter. At the end of the quarter, the net loss carryforwards available to the company were $108.2 million, which may be carried forward indefinitely. We do anticipate that our normalized tax rate for Green Plains for 2023, excluding minority interest should be around 21%.

Our liquidity position at the end of the quarter included $408 million in cash and cash equivalents and restricted cash, along with approximately $159 million available under our working capital revolver. We remain well positioned to execute on the 4 pillars of our transformation. On Slide 9 of the earnings deck, we do provide a summary of our company’s balance sheet. As shown, we ended the quarter with $376.9 million of cash and working capital, net of working capital financing compared to $464.4 million at the end of 2022. For the first quarter, we allocated $33 million of capital across the platform, including $24 million to our MSC protein initiative, about $4 million to other growth initiatives and approximately $5 million towards maintenance, safety and regulatory capital.

For the remainder of 2023, we anticipate CapEx will be in the range of $120 million to $160 million, and that will depend on the spend at Madison and when it wraps up. For Green Plains Partners, we reported net income of $9.9 million and an adjusted EBITDA of $12.5 million for the quarter. That was in line with the $12.6 million reported for the same period a year ago. Again, our plant utilization rates at Green Plains were higher than the prior year, increasing the storage and throughput volumes for the partnership by 5.5% for the quarter versus the same period a year ago. The partnership declared a quarterly distribution of $0.455 per unit with a 1x coverage ratio for the quarter. For the partnership, again, distributable cash flow was $10.8 million for the quarter, slightly lower than $11.2 million for the same quarter of 2022.

Over the last 12 months, the partnership produced adjusted EBITDA of $51 million, distributable cash flow of $44.1 million and declared distributions of $43.1 million, resulting in a 1.02x coverage ratio, and that excludes any adjustment for the principal payments made in the past year. Now I’ll turn the call back over to Todd.

Todd Becker : Thanks, Jim. We are making great progress in customer acceptance moving into new species, new parts of the ration and targeting new product replacements. Over the past 6 months or so, we’ve experienced a 25% increase in annual commitments from our pet space customers and have sold out approximately 75% of our 2023 anticipated production through a combination of contracted and repeatable committed customer sales. And we have included some customers, as we have had some customers start small before becoming much more strategic to us. As we continue to earn repeat business for our ingredients, we are beginning to see improvements in overall pricing, which we always believed would be the case. We believe there’s a huge opportunity to move into and substitute corn gluten meal and soy protein concentrate in parts of the ration and anticipate having a portion of our portfolio dedicated to that late in the year as we move into 2024 with a 60% protein project — product, which will start to show the real earnings power of this technology upgrade and product suite.

Our MSC operations continue to work towards expanding our average daily production close to 1,000 tons per day from our first 5 installs as I indicated earlier, which should put us on track to hitting our original MSC volume goals for the entire platform without converting all of our locations, increasing the capital efficiency of our investments. From a financial point of view, as we indicated, our premium achieved was approximately $200 per ton since inception, and that basically held in Q1. In Q2, we have widened that premium out to $217 a ton based on the current book, and we are seeing $230 a ton in Q4 as corn has gone down, while meal and equivalent pricing has remained steady. Our path forward for the next MSE protein build is becoming clearer.

We are on track to receive our permanent Illinois for our Madison location late in the third or very early in the fourth quarter of this year based on current discussions with the state. Our turnkey JV with Darolton is on track for an early 2024 startup. And finally, we’re still working through the permitting with the State of Minnesota for Fairmont but we have seen some more optimistic paths on this process than previously discussed. As we indicated, the best locations for protein technologies will be larger plants, so we continue to explore reshuffling of the portfolio to capitalize on that strategy. This is a multipronged approach. We will look to expand at MSC sites, protein sites in order to increase ultra-high production, ultra-high protein production, corn oil production and as a result, some ethanol production, unless it’s a CST site at which point that grind will help us use the back end of the plant, which would not be used for additional ethanol.

We will look to partner or potentially acquire larger plants where we can permit quickly and efficiently to get our technology installed. We are early engineering grind expansions right now. So more to come on this over the next few quarters as we find the right locations to discuss. We will not install protein systems at plant less than 100 million gallons per year until we move into much higher value products like 60 Pro and expand the suite of animal nutrition products that the MSE platform can deliver. As many of you have seen through the visits to our plants and innovation centers, we have a strong pipeline of proof points and products that will increase the value of the ingredients we can produce with our systems. Remember, this is more than a protein system.

It is a precision separation technology, which we believe is global leading, where we can isolate many different high-value products, which we could never tap into the past. Another very appealing point of this is the carbon intensity of our products. We are getting significant attention because of the volumes we produce today and the plan to increase over the next several years from companies who remain concerned with the carbon intensity of their products that they put into the diet of pets and animals. Like we have mentioned in the past, we did not build these systems just to produce and sell 50% protein. That was only the initial investment justification. What we have learned, we can do with our technology that we believe very few in the world can is produced fermented clean proteins as just one example.

We have been working on augmenting specific functional characteristics of our protein in conjunction with our partners that will make the product even more attractive. We are in final stages of development of this project and believe that this work is unique in the world of Animal Nutrition, let alone the U.S. grain processing industry. This is another example of the power of our fermentation platform over traditional solvent extracted feed ingredients. We have now developed a clean fiber fraction for a variety of animal feed markets, paving the way to add fermented fiber to our portfolio of animal nutrition ingredients and offering yet another new and scalable source of feed to markets, both domestic and international. Scientific validation and fingerprinting of the clean fiber fraction for a variety of animal feed market is ongoing, and this can add a significant financial uplift to a plant where our precision separation technology is installed.

Overall, our commercial product testing and validation activities have created significant traction in the aquaculture opportunity. The supporting science portfolio on both 50 and 60 Pro continues to show areas of real value differentiation between our fermented products and traditional solvent extract and the concentrated ingredients. We are being very careful to make sure that we get the real value for our products in agriculture and not buy our way into this ration. We just completed a trial on specific species with significant global demand and have once again confirmed that our products nutritionally perform as designed, but are seeing increased availability of key certain nutrients in our products that continue to differentiate us and add value to aquaculture farmers far beyond just fish performance and growth.

While we have been delayed in some of our builds by a quarter or 2 or it took longer to get to full rate than we originally thought, including now having our Wood River facility offline through the end of the quarter, we are seeing the full potential of this product long term. While the first half of the year has been challenging, the back half of the year is in line with our original projections with an opportunity to go higher if we are successful at hitting higher production goals and moving more towards the 60 Pro product. Demand for renewable low-carbon corn oil continues to grow, and we believe the incremental renewable diesel capacity that comes online throughout the year, this market will tighten up and be bullish for vegetable oils pricing overall.

We continue to discuss monetizing our corn cash flows, and we would do that in the right situation with the right economics, but it’s worth letting the demand for low CI feedstock to accelerate later in the year with a significant increase in demand right around the corner. Our corn oil is advantaged to other feedstocks due to its lower carbon intensity and will be a crucial feedstock for these start-ups. However, with pricing coming off of 2022 highs and now in the low to mid-50s per pound for soy oil, we’ve also seen a drop in corn oil pricing as well, but most interesting is as of late, we started trading at a premium to soy again as high as $0.07 or $0.08 a pound for a while during the first quarter and early in the second corn was trading at a discount to soy, which is absolutely crazy.

But with our new increased production from existing renewable diesel capacity, that changed very quickly to our advantage. These lower overall prices have reduced the contribution from oil overall, but it remains one of the biggest value drivers above base crush for quite a while. But we have seen — but we have seen a recent resurgence of interest in premiums. So let’s see where this actually settled out for the year and next. Our clean sugar technology construction is in full swing right now in Shenandoah, as I mentioned, and on track to be completed by the end of the year. Even more exciting are the potential commercial partners and the progress we are making in those discussions. We are building a first-of-its-kind clean sugar facility sized initially to produce 200 million to 300 million pounds with options to expand that to 500 million pounds in a quick manner.

By diverting a portion of the corn grind, we can separate the starch and converted the dextrose while sending the remaining protein fibers and oils back into fermentation to produce other high-value products. While certain volume buyers will want to validate the product once this facility starts up, we are confident in our ability to meet and even exceed our customer expectations because of the success we’ve had producing these innovative ingredients at our innovation center at York and many discussions with potential customers who have trialed our products, which meets or exceeds other wet milling dextrose performance products on the market today. The gating item has been electrical gear and continues to be so. We are trying every which way we can to accelerate as our construction will outpace the gear delivery.

Mechanical completion is tracking for year-end and MCC gear will determine when we turn it on. Let me give you a few updates on this initiative. Our lower carbon intensity of our clean sugar product has been reaffirmed by life cycle associates even lower than originally thought, with opportunities to reduce even more. In the month of May, we have devoted the York CST semi-works facility to finalize our capability to produce 43 DE products, which is used in confectionery and fruit products at a much higher value. We already know when we turn the plant on, we can produce a 95 DE from the start, both refined and unrefined. The last step we will explore is using our systems to make crystal in dextrose, and we believe we can crack that as well. It will take 3 to 6 months after startup to get food safety certified.

So our initial customers will be industrial, and we are seeking in discussions on early offtake agreements as we speak. Remember, we’re already food safety certified in New York. So getting Shenandoah there will just be a process and time as it will be the most modern and efficient facility in the world producing this product. More to come on that, but customer engagement is high. And by the way, margins are even higher as evidenced by recent validation of this by current companies that own and operate wet mills. Our decarbonization strategy remains on track. The summer Carbon Solutions pipeline project, which continues to make progress, has over 2/3 of the right-of-way purchase, and we anticipate this pipeline to be operational sometime in 2025, which can benefit from early days of the 450 clean fuel production credit.

The future of this industry is low carbon, and we are at the forefront of these efforts. Our JV with United Airlines and Tallgrass, Blue Blade Energy is in the process of optimizing the catalyst for our exclusive keystone technology from PNNL, and depending on the success of key gating items could be constructing a pilot facility as early as 2024. We continue to evaluate other technologies out there as well, and there are many promising that we are looking at. All roads lead to SAF and ATJ, though it is a second half of the decade story. Bottom line, it provides a valuable additional outlook for ethanol volumes and increases the value of our assets significantly when we get there. With bipartisan support for certain provisions in the IRA bill, such as the 450 clean fuel production credit, we remain confident that decarbonization will be a crucial factor driving the future of our industry.

We are developing strategies to deploy combined heat and power systems direct injection for carbon capture and sequestration in certain locations and more. At the teach-in, we will do a deep dive on all of this, so I’ll leave it with the program — leave it with you with the programs to in place that we discussed. What you have heard today have some common intersections. The value of our IP portfolio embedded in fluid technologies truly separates Green Plains from anyone else. We believe this is truly underappreciated. Some examples additionally that we are working on are 70% protein upgrades, there is an ongoing initiative to achieve this level and could accelerate in late 2023, which will be a big value driver to the future. Increased oil yields as we continue to use our technology portfolio to press towards 1.5 pounds per bushel with a goal of proof of concept in mid-2024 moving to an engineered solution.

We believe Blue Blade has the world’s leading separation — precision separation technology for growth in synthetic biology and other industrial applications. In almost all cases, solids need to be separated from the process, and we have some of the largest solutions operating today in the world, quite frankly, it’s our MSC systems. This part of the business alone can be very valuable. We expect in the last half of 2023 to be able to deliver some exciting news on several initiatives we are working on. I assure you that’s going to be very exciting, please stay tuned. Lastly, when we deliver our first load of dextrose from a dry grind facility, the world will know what the value of our IP portfolio is and in turn, the value of Green Plains. Through our 4 pillars of protein oil, sugar and decarbonization combined with our Gen 1 platform and the potential for Alcohol to Jet Sustainable Aviation Fuel, it sounds like we have a lot going on, but first and foremost, we are focused on delivering right now.

These initiatives are complementary and aligned with one another, and we have confidence in this strategy and we remain squarely dedicated to achieving our vision. Thank you all for joining the call today. I know it was a little long, but we can start the Q&A session now.

Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Adam Samuelson from Goldman.

Operator: Your next question comes from the line of Kristen Owen with Oppenheimer.

Operator: The next question comes from the line of Manav Gupta with UBS.

Operator: Your next question comes from the line of Andrew Strelzik from BMO.

Operator: Your next question comes from the line of Eric Stine with Craig-Hallum.

Operator: Our next question comes from the line of Jordan Levy with Truist Securities.

Operator: There are no further questions at this time. I would now like to turn the call back over to Mr. Becker for closing remarks.

Todd Becker : Yes. Thanks. We really appreciate you being patient for this call. We know they don’t go long sometimes, but we try to give you as much information on what we’re working on as we can. There’s a lot, and we think it’s very valuable for our shareholders and stakeholders to understand what not just the near-term opportunities are, but the future opportunities. When we look at one of the most valuable opportunities for us is getting this clean sugar system up and running. And our view is that we want to have 200 million to 300 million gallons converted to sugar by 2027, which is a significant increase than from what we are building today, and that really is where the game changing starts to happen relative to everything else that we’ve been doing on top of everything else we’ve been doing.

And so we’re working on all of that, and we’re working on behalf of all of you, hopefully, in the next couple of months, we have some more good news around the things that are important to you around technology and demand and offtakes and having a nice steady ethanol market for a little while would be nice, too. So we’ll see you next quarter, and thanks for all of your support.

Operator: Ladies and gentlemen, that concludes today’s call. Thank you for joining. You may now disconnect.