Green Plains Inc. (NASDAQ:GPRE) Q2 2023 Earnings Call Transcript

Green Plains Inc. (NASDAQ:GPRE) Q2 2023 Earnings Call Transcript August 4, 2023

Green Plains Inc. misses on earnings expectations. Reported EPS is $-0.89 EPS, expectations were $0.05.

Operator: Good morning, and welcome to the Green Plains Inc. and Green Plains Partners Second 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 listen-only mode. I will now turn the call over to your host, Phil Boggs, Executive 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 second 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, 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.

Nitrogen, Fertilizer, Agriculture

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. So during the quarter, we were challenged by several events that held us back a quarter from showing you the results of the transformation as we experienced several significant events that negatively impacted what would have been a good quarter. The first was our Wood River incident, which took one of our largest locations down for most of the quarter. This impacted the company was over $18 million in total and we expect some recovery from insurance in the last half of the year so some of this will be coming back. In addition, during Q2 our platform was in need of significant upgrades to prepare for 2024 and beyond. And while we had some planned downtime, we also experienced a high level of unplanned downtime in Gen 1, which also had an impact on Gen 2 production volumes and sales and hedges that we had in place already to lock the quarter in.

The challenges that our other plants came later in the quarter and really was a June event in the highest margin environment, which we were unable to take advantage of. With that said, we had put Q2 hedges onto locking over $0.20 a gallon in results and unfortunate timing of these events took most of that away. On the last call, we indicated $0.12 to $0.17 a gallon opportunity on paper and we were tracking accordingly and better through the end of May, but did not get Wood River released back to us and up and running until weeks later than expected. In addition to unplanned outages, with this downtime behind us, we are now operating at near full rate for both ethanol and ultra-high protein operations. And even more important, Wood River is making new production records as a team has done a great job getting the plant back to service, but more importantly the state of the team there is good after the tragedy they experienced.

Because of these events, our operations team diligently completed extended spring shutdowns and many of our locations resulting in an 81.5% utilization rate for the quarter. Our operations leadership team implemented process control improvements to improve reliability and increase ultra-high production – ultra-high protein production. All-in, this downtime positions our assets to operate reliably during the third and fourth quarter with solid margins on paper today and at least half of our locations now capable of foregoing their typical fall shutdowns enabling additional production during these higher margin periods we are seeing in corn oil, protein, and solid ethanol fundamentals. Now onto the quarter, which Jim will cover more in depth later, our consolidated crush margin was $0.01 per gallon, but again, we are prepared for a solid last half between Wood River, negative absorption, repairs and lost opportunity for both protein and ethanol.

There was a $0.15 to $0.20 impact on the overall consolidated crush minimum. Our financial position remains very strong with significant liquidity and with the last half opportunity in margins, we don’t see a significant change to this strength as we return to free cash flow generation during the last half, which will help pay for the large part of the capital needed for our build out for the rest of the year. In addition, we entered into a sale contract to divest our 55 million gallon Atkinson, Nebraska facility as it does not meet our parameters to justify making investments for our technology improvements. For where we are going with Green Plains, this asset did not fit our long-term vision and once it closes we believe this transaction will be accretive.

We expect to close in the next few weeks and bring the capital back on balance sheet and further increasing our financial strength as we optimize our asset base, we expect to replace these volumes with other expansion at one of our larger locations where our technologies are running, which is very accretive or look for an acquisition opportunity where we can immediately add technologies, therefore not expanding fuel supplies in the market. I will take you through a detailed recap of our transformation progress later in the call and walk you through how we are thinking about the last half of the year. But for now I want to reiterate that the fundamentals across each area of our strategy are strong and improving. Core ethanol demand remains to look – continues to look solid and is tracking higher than prior year with 94 million acres of corn versus 84 million acres of soybeans, the price spreads remain in favor for both protein and corn oil and timely rains this summer have improved the USDF estimates for crop conditions in the west.

Finally, giving an opportunity again to source our inputs a little bit easier than in the past several years. In fact, we have seen continued pressure on the Western corn basis just recently, especially new crop in 2024. Our ultra-high protein production is once again achieving rates of 800 to 1,000 tons per day. After the extensive downtime taken in the second quarter, we are seeing production rates as designed and have hit over 1,000 tons per day on multiple days. We are planning to dedicate one of our sites to 60% protein production later this quarter and begin to build supply chain for delivering 60 Pro to the market during the fourth quarter. I’ll get more into this exciting development later as well. One really interesting data point is our investments were made on a 3 to 3.5 pounds per bushel yield of protein and we have now achieved as high as five pounds with the MSC technology from Fluid Quip and in fact, since Wood River has returned to full rate, they have averaged well over four pounds, which over time increases our capability to produce higher volumes and have better capital efficiencies.

No other technology in the world can achieve these rates. The future of our platform is within site and with our clean sugar facility on track to start up in early 2024, we are fast approaching being able to demonstrate the true potential of our full vision at one of our refineries. And now I’ll hand the call over to Jim to provide an update on the overall financial results.

Jim Stark: Thank you, Todd and good morning everyone. Green Plains consolidated revenues for the second quarter were $857.6 million, $154.8 million or approximately 15% lower than the same period a year ago. The lower revenues correlate to the lower production gallons of approximately 16% year-over-year for the second quarter, our plant utilization rate was 81.5% during the quarter comparing to the 96.9% run rate reported in the same period last year. As Todd mentioned earlier in the call, we anticipate our plants to perform much better in the second half of 2023. Targeting utilization rates in the low to mid 90 percentage range of our stated capacity with all plants now operating. For the quarter, we reported net loss attributable to Green Plains of $52.6 million or an $0.89 loss per diluted share that compares to net income of $46.4 million or $0.73 per diluted share for the same period in 2022.

Adjusted EBITDA for the quarter was a negative $14.9 million compared to the $56.7 million in the prior year as well as 2022. Depreciation and amortization expense was higher by $3.7 million versus a year ago. Due to the addition of the MC technology builds all on a line and operating at the end of last year. We realized a $0.01 per gallon consolidated crush for Q2 of 2023 that compares to $0.28 per gallon crush in the prior year. On a sequential quarter-to-quarter basis, we saw the consolidated crush margin per gallon strength in $0.08 when compared to the first quarter of this year. Our Ag and Energy segment recorded a $2.9 million in EBITDA that’s about $7.9 million lower than the prior year. This decline was driven by lack of opportunities on our merchant businesses, which ebbs and flows with each year, quarter-to-quarter.

For the second quarter, our SG&A costs for all segments was $33.3 million compared to $30.1 for Q2 of 2022. This increase was driven by increased legal fees associated with GPP buy-in and increased personnel costs including severance costs. I’d like to remind our callers we do consolidate GPP and Green Plains in these SG&A costs. So that would be legal fees on both sides for both entities. Interest expense of $9.7 million for the quarter includes the impact of debt amortization capitalized interest which was higher than the $7.8 million reported for the second quarter of last year due to reduced capital interest as certain projects had been completed. I would like to note though our interest income was approximately 2 million higher in the second quarter 2023 when compared to the same period a year ago.

The income tax benefit for the quarter was right at $1 million compared to a tax expense of 2.9 for the period in 2022. At the end of the quarter, the net loss, the net loss carry forwards available to the company were $140 million which may be carried forward indefinitely. We continue to anticipate that our normalized tax rate for Green Plains Inc. excluding minority interest should be around 21%. Our liquidity position remains solid and at the end of the quarter we had $359.8 million in cash, cash equivalent and restricted cash along with approximately $128 million available under working capital revolver. We are focused on executing the next steps of transformation and have the capital and liquidity to do so. For the second quarter, we allocated $17 million of capital across the platform, which included $10 million to our clean sugar build in Shenandoah and MSC protein initiatives.

About 4 million was also allocated to growth, other growth initiatives and approximately $3 million toward maintenance, safety and regulatory capital. For the remainder of 2023, we anticipate CapEx will be in the range of $60 million to $90 million as we continue to work through the timing of permitting for MSC technology deployments at a couple of our larger plants. Green Plains Partners reported net income of $9.3 million and an adjusted EBITDA of $12.7 million for Q2 of 2023, which was in line with the $12.9 million reported for the same period a year ago. The minimum volume commitment supported the partnership steady financials during the quarter while plant utilization rates at Green Plains were lower than the prior year. The partnership declared a quarterly distribution of $0.450 per unit with a 0.99 times coverage ratio for the quarter.

The partnership also reported distributable cash flow of $10.7 million for the quarter, slightly lower than the 11.3 for the same quarter of 2022. Over the last 12 months, the partnership produced adjusted EBITDA of $50.9 million, distributable cash flow of $43.5 million and declared distributions of $43.2 million, resulting in a 1.01x coverage ratio, excluding any adjustment for the principal payments made in the past year. As a reminder, on May 3, 2023, the company submitted a non-binding preliminary proposal to the Board of Directors of Green Plains Holdings LLC, the general partner of Green Plains Partners LP to acquire all the publicly held common units of the partnership not already owned by Green Plains. The complex committee and the Board of Directors of the general partner have been delegated the authority to evaluate and is currently evaluating the possible terms of a proposed transaction.

Now I’d like to turn the call back over to Todd.

Todd Becker: Thanks Jim. So there’s a lot to talk about and I know we have limited time. And while Q2 was challenging, the last half of 2023 and 2024 looks solid and our path forward is gaining traction and looking better. For a couple years now we have been talking about the transformation to a 2.0 ag-tech sustainable producer of high value ingredients focused on the four pillars of protein, renewable corn oil, clean sugar and decarbonization. And the future is now. Quickly on decarbonisation which is a bit out of our normal order, but probably under appreciated. This is one of the several reasons we are gaining traction in our clean sugar technology products and protein. Carbon scores do matter. We are now less than two years away from what we believe is a significant financial opportunity when we decarbonize a majority of our platform as the incentive structures are firmly in place.

Don’t underestimate or discount our carbon and pipeline strategy, as we believe all roads will lead to alcohol to jet sustainable aviation fuel production. Importantly though, CI, carbon intensity of all of our ingredients will be reduced even further, which is a key selling point for our Ultra-High Protein today and our clean sugar technology dextrose in the future. We literally received our latest protein lifecycle carbon intensity yesterday score, which shows a 46% lower score for our high protein products comparing to corn gluten meal globally, aligning this data with PEF, ISO and ISCC PLUS rules. This is very important to pet food and aquaculture producers globally. In addition, our CST, carbon intensity cannot be matched by current products in the market today, which is why we are in significant negotiations with more demand than we can supply over the next several years, more later on this as well.

Our decarbonization opportunities now should at least add $120 million to $180 million annualized economic opportunities starting in the last half of 2025. We have also executed a few different new contracts around our carbon strategy that give us the confidence to use this number and we have more to go. Our protein initiatives remain on track and our commercial successes continue to see strong results even with our reduced rates in Q2, which was a short-term impact. Our turnkey JV with Tharaldson in North Dakota is anticipated to begin operations in the first quarter of 2024 with our Madison and Fairmont locations on deck next pending permitting from Illinois and Minnesota. Completing those three facilities would increase our annual marketing capacity by 250,000 tons, bringing our total annual run rate to 580,000 tons of Ultra-High Protein production, including full turnkey rates, which is very close to what we had laid out for our 2025 volumes.

We believe this number grows as our yields at each site get much better and match Wood River. The 2025 economic uplift remains in the $150 million to $210 million range that we have pointed out for the last couple of years. Protein margins have gotten stronger for two main reasons. First, our reorder rate remains high and even more important our prices continue to increase in relation to our input costs. Second, well, during the ramp up over the first few years, the corn soy relationship narrowed. This is now normalized and we are seeing initial margins on new sales in the range of $0.15 to $0.17 per gallon uplift for that site, which is why our ability to run Gen 1 platform full out is important and that hurt us in the second quarter as we indicated.

We continue to see great success in the marketing of the ingredient and are in significant late stage discussions with commercial counterparties for our 60% protein products. We expect our first commercial shipments beginning in the fourth quarter and we continue to believe that 20% to 30% of our platform could be 60% protein sales during 2024. Our Ultra-High Protein has a higher protein concentration than soybean meal and it does without the anti-nutritional factors. And importantly, our fermented yeast product for pet food application gives a further nutritional advantage versus soybean meal and other high protein offerings. Now, depending on the customer, we can tailor biological recipes now to suit their needs for protein and yeast and our partnership with Novozymes allows this to happen as we are now beginning to see the fruits of those labors as well.

We don’t believe anyone in the world can do what our companies are doing together. We have been pointing to these opportunities for some time now and the future is now. Two other quick points. First, we are now producing for the first time ever non-GMO Ultra-High Protein. We will ship to customers for initial analysis and trials over the next several months. The cost will be high, but the returns will be higher. Second, post this production run being completed next week, we expect to dedicate one of our MSC locations as a 60 Pro facility to produce commercial quantities to ship in Q4 and 2024 and hope to keep that location on this program for the majority of its production. Renewable corn oil prices have seen a recent resurgence in strength as renewable diesel capacity continues to come online.

We are seeing renewable corn oil pricing consistently achieve premiums to soybean oil due to the lower carbon intensity of our product. As a result, we are once again seeing corn oil pricing in the $0.65 to $0.75 a pound range. And remember, under the 45Z clean fuel production credit, our low CI renewable oil is further advantage to soybean oil starting in 2025. And I think that is also underappreciated. For our clean sugar initiative, our engineering teams and construction crews at Shenandoah continue to make great progress on construction and the project continues to be on track for mechanical completion in late 2023 and startup in early 2024. We are doing something that has never been done at a dry grind facility, creating a truly revolutionary biorefinery and using that to create a lower carbon intensity dextrose than what is available today in the market.

Customer interest remains very high and we are confident we’ll have a majority of the first year’s capacity spoken for prior to startup and expect to have announceable commercial sales commitments before the end of the year. The last half of 2023 obviously looks completely different from the first half for us, as we are operating and positioned to deliver stronger utilization numbers due to the shutdowns we took in the second quarter and we are well positioned to hit the targeted run rates for our protein and oil businesses that we have laid out. At today’s pricing renewable corn oil alone could contribute $70 million to $80 million for the second half of 2023 on pace for the annualized run rate we have discussed in the past. The uplift from our protein business is back on pace for the run rates we have discussed previously and believe there is upside to that number depending on the level of 60% protein sales we have in 2024.

But all in, adding in ag and energy and net of corporate overhead, we are setting up for a strong finish for nonethanol contributions during the back half of the year as we have previously guided to. The current outlook for our Gen 1 platform is materially stronger than the recent past, favorable corn market drivers and an anticipated larger carryout coupled with improved year-over-year driving demand has led to an expansion in the ethanol margin setting the back half of 2023 to be stronger across all of our areas of our business. Finally, I want to provide a brief technology update. As we indicated on our last call, we are working towards some exciting technology news for Fluid Quip technologies. The first, which was fulfilled in our Shell Fiber Conversion Technology or SFCT announcement about our collaboration with Equilon a subsidiary of Shell, one of the largest world – world’s largest energy companies should not be discounted as well because we have been working with them since early 2021 to develop a process to combine fermentation, precision mechanical separation and processing and fiber conversion into one platform.

They are building a very large pilot SFCT facility adjacent to our York Innovation Center where we are adding the MSC process side by side. Recruiting for this venture is well underway and getting into the public sphere helps these efforts. So what is that we are doing this collaboration? Combining MSC with SFCT represents an innovative technology for agricultural processing and allows us to break down a kernel of corn into its high value products leaving nothing behind. In addition to the fermentation and precision separation technology that we have been using at Green Plains and Fluid Quip, this collaboration adds a chemical breakdown step of the fiber portion of what has already been separated through the biological mechanical means, which is significantly different than anything you’ve seen in the past.

Increasing the amount of protein that can be recovered, capturing all remaining renewable corn oil, and producing cellulosic sugars, which expands the ability to make low carbon ethanol, which we believe could be a key component feedstock for SAF and for other low carbon ethanol markets like Canada. Said another way, this process will convert our lowest value co-product DDGS or dry distillers grains into three high value products, renewable corn oil, Ultra-High Protein and cellulosic ethanol. It’s really just the next step in decarbonizing our platform and maximizing the value added products from our biorefining process. We anticipate to start up in 2024, which is not far away and we’ll look to commercialize this technology at one of our MSC facilities that we have already built, which is lower capital intensity for us upon achievement of key milestones.

In addition, Fluid Quip has its first MSC technology sale into Europe. The opportunity not only further validates flu Fluid Quip’s MSC as being the leading precision tech – best separation technology globally, but it also demonstrates feedstock flexibility and efficiency as the application will be for wheat as its primary feedstock. MSC can work with corn, wheat and sorghum blends, which opens the door to additional markets around the world. In addition, Fluid Quip’s patent, we just got stronger as we were issued four new patents this quarter. Two related to clean sugar, one related to protein – which includes oil recovery and one focused on enzyme recycling of converting pulp cellulose based material into sugars. We also expect more broad patent coverage globally for clean sugar technologies to be issued very shortly as we have been informed by several countries they’re coming.

The value of Fluid Quip’s IP portfolio is a key differentiator for Green Plains and while often underappreciated these latest announcements begin to demonstrate the value of the investment in Fluid Quip made we in 2021. We truly have a revolutionary technology company whose IP we are deploying to reinvent our platform into Green Plains 2.0. We have been pointing to this future for some time now and although we have seen some setbacks, with the success we are seeing across all of our pillars, the opportunities we are executing on are just ahead of us and we believe the future is finally upon us and is now. And with that, I’ll leave it there. Thanks for joining our call today and let’s start the question-and-answer session.

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Q&A Session

Operator: Thank you. [Operator Instructions] Your first question comes from Craig Irwin from ROTH Capital. Craig, please go ahead.

Craig Irwin: Good morning and thanks for taking my questions.

Todd Becker: Good morning, Craig.

Craig Irwin: Todd, so – hey, good morning. So High Pro 900 tons a day, line of sight on 60 Pro. You did exactly what you said you would do, right? There’s been a lot of learning there and it’s kind of been nothing ever goes in a straight line, right? And most investors these days are now starting to look forward to clean sugar. Can you maybe just describe for us some of the things that you learned from the rollout of High Pro that translate into clean sugar? Obviously you’re starting in a different place given the own Fluid Quip here. But I’m sure there’s some important things you can share with us to help us understand what clean sugar looks like from an execution standpoint with all the learnings you’ve had in the last couple years.

Todd Becker: Yes. I think – thanks for the question. I think our ramp up for sugar will be significantly different from the learnings we had in our ramp up from protein. We underappreciated the difficulty at times to put a new technology in place. But I think as we rolled out more and more of our sites, we learned every day and then we saw better results in terms of how we built them and how we run them. And we’re even seeing today it just as we optimize our protein technologies, when we built these assets, we thought we’d have a 3 to 3.5 pound per bushel yield. And we now know, based on our partnership with Novozymes as well as things we can do mechanically, we will be able to achieve 5 pounds per bushel consistently, which allows us not only to hit our laid out numbers that we put out there in terms of volumes for 2025, but exceed them as well as we continue to get more and more out of these systems and debottleneck them.

It took a little bit longer than I think we appreciate it, but we’re going to take those learnings, apply them to sugar. Sugar is a 200 million to 300 million pound system that we’re building right now. And the difference as well is that we went out and hired what we believe are experts in wet milling and making dextrose, going all quite frankly to crystallize dextrose as well. And so we have set up very, very differently so that it’s not Gen 1 dry grind management running these assets. It’s actually a wet milling team that we hired from several of the largest in the world that wanted to come work for us on this revolutionary technology implementation because we believe this is really the future of our company. And so on top of that then we wanted to get ahead of marketing the product.

In terms of – this takes a product longer to market all the way through food, but industrial use of dextrose remains high. And so one key differentiator for us was to get on our carbon scores very early because this product is a significant reduction in carbon intensity, which is a big deal for both industrial and food products. So when we start up, we’re focused on hopefully selling out to industrial markets and then ultimately it should take us about four to six months to get food grade certified. And we are already food grade certified in the process at our York facility. We’ll get food grade certified at a better facility in Shenandoah and then start to hit the food market later in 2024 and start to look at where do we go next? Do we increase Shenandoah capacity, which is fully expandable, that’s how we designed it or do we move to other locations where we have interest in geographic demand that they want us to build closer to their sites or they want to co-locate on our properties.

And we just approached it very differently, but this product is so much more valuable in total to what our bottom line impact can be versus protein, which is why this technology we believe is just such a game changer for us. But this one we’re going to roll out very carefully and make sure that, number one, we don’t overload the market, but number two, we come online and think about all the things long before we start these up that can take away some of the length that it takes to start up technologies.

Craig Irwin: Thank you for that. So the other big question out there right now is with the MLP, not too many weeks away from being consolidated, right? Let’s hope for a small number. This opens up the field for you to much more easily execute on M&A. And in the past you’ve been very active and even had some interesting situations where one of the chunky portfolios you had an opportunity to offer a vastly superior proposal to one of the sellers, I think because of a tax advantage structure for them. Can you maybe update us on how active you’ve been over the last couple years as far as evaluating assets? And whether or not your appetite is likely to be for single plants or possibly portfolios? And what are the complications these days as far as actually executing acquisitions in the broader sort of ethanol plant market?