Gevo, Inc. Q2 FY2024 Earnings Call

Good day and thank you for standing by. Welcome to the Gevo Incorporated Q2 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is recorded. I would now like to turn the conference over to your speaker today, Doctor Eric Frey, Vice President of Finance and Strategy. You may go ahead.

Good afternoon, everyone. This is Eric Frey, Vice President of Finance and Strategy. Thanks for joining us to discuss Gevo's second quarter results for the period ended June 30, 2024. I'd like to start by introducing today's participants from the company. With us today are Doctor Patrick Gruber, Chief Executive Officer, and Lynn Smull, Chief Financial Officer. We also have Doctor Paul Bloom, Chief Carbon Officer and Chief Innovation Officer, joining us today. 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. 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. Following the prepared remarks, we'll open the call for questions. I'd 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 of this call and other past events will be available via the company's Investor Relations page on our website. I'd now like to turn the call over to the CEO of Gevo, Doctor Patrick Gruber. Pat?

Thanks Eric. Good afternoon, everybody, 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, at the outset of the year, we outlined three areas on which we will report: Net zero one, DOE loan, and project financing achieving revenue from Verity and our RNG business. Today we'll give updates on each of those. We believe that each of those can create tremendous value for us, and of course, the first two are game changers. So, from the outside, it might seem like we've been kind of quiet, but here on the inside, it's been an incredible amount of work in progress. We're not permitted to talk about specifics regarding the DOE loan process, but I can say that the amount of diligence work required is truly impressive and thorough. A lot of third parties are hired by the DOE to scrutinize what we are doing. Everybody is working hard, staying on task. It's on track, and so we can finally give better guidance. We are working to get and we expect the project finance at Grand V one to be closed by the end of the year. That's pretty important that we can articulate that. We very much look forward to that and to being able to announce everything else we're working so hard on, so stay tuned. But we also have good news on the NZ one development costs. Lynn Smull, our CFO, is going to give an update on that and our operations then Paul Bloom will talk about our progress on our Verity business. Lynn?

Thanks Pat. As Pat mentioned, we are excited to report that the US Department of Energy loan guarantee process is progressing as expected and we are targeting a financial close by the end of 2024. We are also pleased to report that our total NZ one development spend to financial close is tracking under the range of $90 million to $125 million that we disclosed earlier this year for the spend expected between January and financial close. At financial close, we expect all of Gevo's cumulative development capital spend to be recovered, and then all or a portion of that recovery to be contributed as equity alongside the third-party debt and equity funding commitments that are necessary to fully construct and commission the project. After financial close for the project, we do not expect to incur additional cash spend during the construction phase. Net zero one's financial close will be a game changer for us. It has been a long road, but if things continue the way they are going now, then we believe we are in the home stretch. We look forward to sharing more details soon. Regarding results of operation in the second quarter of 2024, the RNG business debottlenecking and expansion projects allowed the project to achieve an annualized production rate of approximately 400,000 MMBtu, an increase of approximately 22% compared to the same period last year. We sold approximately 95,000 MMBtu of RNG during Q2. RNG revenue of $4.3 million for Q2 included RNG sales of $0.1 million and $4.2 million net proceeds from the sale of environmental attributes related to RNG. Gevo's Q2 combined revenue and interest income was $9.4 million. Our corporate spend, that is SG&A, was $7 million for the quarter, excluding non-cash stock-based compensation of $4.5 million, which is a $0.4 million increase from the second quarter of 2023, mainly due to increased personnel costs. We ended the second quarter of 2024 with a liquidity position of $315.3 million in cash, restricted cash, and other liquid investments. The restricted cash portion is $69.6 million, which collateralized our RNG bond letter of credit. During the six months ended June 30, 2024, we had $26.7 million in cash used in investing activities comprised of $15.3 million for NZ one development, $9.9 million in the NZ program modularization, design, and engineering work, $1 million in the RNG project, and about half a million in skid transportation costs. Gevo continued to utilize its previously announced stock repurchase program in Q2 and year to date through August 8, 2024, we've repurchased approximately 7.2 million shares of our common stock for $4.7 million, leaving $20.3 million available under the stock repurchase program. Please note that under the stock repurchase program, we may purchase shares from time to time in the open market or through privately negotiated transactions. However, we are subject to various restrictions on our ability to buy back our shares, such as blackout periods under our insider trading policies when we have earnings coming up or we have other material, non-public information. There are also restrictions on the intraday timing and maximum volumes we can repurchase on any given day. The timing, volume, and nature of future stock repurchases, if any, will be our sole discretion and will be dependent on market conditions, applicable security laws, and other factors. I will now hand it over to Paul Bloom, our Chief Carbon Officer and Chief Innovation Officer, to share the latest on our wholly owned subsidiary, Verity Holdings, LLC.

Thanks Lynn. Verity is our digital end-to-end carbon accounting tech startup that we launched a few years ago and then formed our wholly owned subsidiary, Verity Holdings LLC, earlier this year. Originally, we designed Verity to track and improve the carbon intensity of Gevo's SaaS production from field to seat on the aircraft. Starting in 2023, we opened up our proprietary platform to provide carbon accounting and supply chain traceability solutions to other biofuel producers, farmers, and value chain partners. Verity plans to derive the majority of our revenue from software as a service or SaaS fees and profit sharing with biofuels partners while helping to reward farmers for reducing their carbon footprint with climate-smart agriculture done right. As previously mentioned, we anticipate first revenue at Verity this year and will share more details as that happens. We have a number of updates on Verity in the second quarter, and I'll cover those now. First, I'd like to highlight our efforts on product enhancements. Verity is working with Google to accelerate the integration of artificial intelligence, known as AI, into our platform. We're very excited about this as AI is expected to provide an improved customer experience and help our users further optimize carbon intensity reductions throughout their business systems and supply chains. The benefits you get from AI make a lot of sense relative to the high-quality, data-driven environment of Verity, and we are thrilled to be working with Google on this initiative. Second, let me highlight a few new collaborations. Verity and Landus, a leading farmer-owned cooperative, signed a letter of intent to work together to provide full end-to-end low carbon commodity solutions for biofuel producers. We intend to do this by leveraging Landus’ deep expertise and outstanding Grower network coupled with our proprietary Carbon Accounting Platform. Landus touches 34 states and 16 countries while serving over 5500 farmers and their families. In addition, we previously announced that Verity and ClearFlame initiated a collaboration to drive decarbonization traceability from field to fleet for the road transportation market, which consumes an estimated 29 billion gallons of fuel every year. Finally, at the end of the second quarter, Verity had 100% farmer retention in our growers programs, comprising approximately 76,000 acres, which includes Zebla's farm-to-flight USDA Climate Smart Commodities Grant. This represents an increase of 17% from the previously disclosed 65,000 acres. We look forward to the continued progress to drive our field level tracking well beyond 100,000 acres next year. That's an overview of the major updates on the Verity front this past quarter. Obviously, there's a lot going on, so happy to answer questions about this to the extent we can. Now I'll hand it back over to Pat.

Thanks Paul. Let's next touch on our renewable natural gas business. Now the project itself is already cash flow positive and helping to cover some of our corporate costs, which is a great thing. Now, we expanded our capacity from about 350,000 to 400,000 million BTUs per year, and it's been operating well. We're now exploring further expansion through incremental debottlenecking in order to achieve an annual RNG production capacity towards 500,000 million BTUs per year, and that's with minimal additional capital expense, minor. We have learned a lot about that business; it's been tremendous, and the team has done a great job. We are starting to develop a line of sight for the timeline we can expect to receive approval under California's low carbon fuel standard, the LCFS program for our final pathway for the RNG project. It looks like another six to nine months, which we don't like. But you know what? At least we can see it now; we know it's being worked on. This would allow us to reduce our carbon intensity score for the project to approximately -350 as the CI score, rather than the temporary score of -150 under which we have been operating with the temporary pathway. This approval is expected to significantly increase the revenue from our RNG project. With the final pathway, and if we see a recovery in California carbon prices, the RNG business could get downright exciting, especially with the expanded capacity. To reiterate, on NC projects, we are targeting completion of the project level financing of net zero one by the end of this year. I'm glad we can finally say that out loud. We also have been moving forward on another potential net zero site. This one ought to catch people's attention and help people understand what else we've been up to. We look very much forward to telling you all about it as soon as we can, so stay tuned. All right, then. Let's open it up for questions.

Thank you. At this time, we will conduct a question-and-answer session. Our first question comes from the line of Saumya Jain at UBS. Saumya, your line is now open.

Hey. Yes. I guess I was wondering if you guys could provide more color on the stock repurchase program. I know you mentioned a bit that you guys had repurchased about 7.2 million shares this year. So, I guess. How are you looking at that for the next, for the coming quarters?

Well, we can't really offer any comment on that? I think Lynn outlined some of the restrictions we're under.

All right. Got it. And then could you. I guess, any updates on the collaboration with LG Chem?

Yes, that one's going great. So we had a milestone. You know, we're scaling up this technology called ETO. ETO technology to refresh everybody's memory is a technology that converts ethanol into olefins, hence ETO, ethanol to olefins. It is an innovative technology that addresses the main problem in converting ethanol into these hydrocarbon products. It cuts down the capital and operating costs by significant amounts. That project is working very well. It also has the ability to make propylene. So, we had a set of milestones set up that proved it out at a size bigger than a bench, not quite the size of a giant demo plant, but it's a reasonably sized plant where we did test it out. Where we did test it out, it looks like it hit all the boxes for the next stage of scaling up. So, we're working with LG Chem on that program. The great thing about that is LG Chem covers the bill; they pay us the royalty, and they've been a great partner and they want to see this commercialized. It's all about getting renewable propylene. Now, all of the technology that we develop and the techniques that we develop also apply to us in trying to make hydrocarbon fuels. So, it's hitting its milestones and it's doing well. The next step will be to get it scaled up to a bigger plant, and those plants are being put in place right now.

Got it. Thank you.

Thank you. Our next question comes from the line of Peter Gastreich from Water Tower Research. Peter, your line is now open.

I'm sorry, I muted the, apologies. So, Yes. So, thank you very much for the call today. It's great to hear the status on NZ One financial close, kind of zeroing in a little bit. I think your last guidance was potentially into early 2025. Hearing by end of 2024 is really great to hear. Just a couple of questions. The first one would be just related to the LCFS market. I wonder if you could give any kind of guidance to kind of where things are standing going into the third quarter and kind of what you think, what kind of might need to fall in place to start seeing that turnaround. And the second one is kind of, I know this is, no one has a crystal ball, but this is a year where we have an election cycle sort of coming through. I'm just kind of curious about your thoughts on if there are any certain components of the SAP industry that may face more risk or not? I'm just kind of asking that because I think that there are certain aspects of the industry which to me seem to have some potential for finding agreements on both sides of the aisle. For example, the fact that SAPS is very beneficial potentially to the agricultural industry. There seems to be some agreement from both sides of the aisle with carbon capture as well. So, I would just be curious, kind of your top-down thoughts on that as well. Again, just given that we've got an election cycle coming up. Thank you very much.

Sure. So, first off, in California, the LCFS market, it's hard to predict what's going to happen with carbon prices. When we look at all the consultants and analyst reports, everybody thinks it's going to increase eventually. For us, that's going to be good in the long run. But you know what? When we're selling jet fuel, when we have NZ one running, it isn't going to all go to California anyway. It's going to go to Illinois, where there's a dollar and a half tax benefit. Or it might go up to Washington State or Oregon or Minnesota or one of these other places where there's state-level tax credits. It really is not one of these things where it won't be built to send it to California. It's going to go to wherever they can get the highest margin. So, it's pretty interesting, and that's going well. In terms of an infrastructure development business like ours, we're creating new infrastructure. It's about energy security. Yes, we're solving a carbon problem, and we're doing it cost-effectively. We have published our McKinsey results previously, and anyone should look closely at that, and you'll see that we have the lowest cash cost production. We have capital costs that have to be paid back, but the payback is quite good for those government incentives. There are a lot of good things to rally around, and we can solve some issues together. It's a drop-in fuel; you don't have to create all new infrastructure. We're leveraging existing infrastructure and building new renewable energy infrastructure alongside the jet fuel. There are many positives for rural America, and it helps climate-smart agriculture, rural farms, and the environment. Both sides of the aisle appear to like what we're doing. We see political folks across the spectrum keeping an eye on us because we're attempting to get it done right. So, it's beneficial for everyone. In terms of policy, we must consider the IRA bill so far. The precedent set under 40b was quite good, as it did enshrine the Grete model, albeit a modified Grete model. It remains a solid step in the right direction. It recognizes carbon sequestration and the issues surrounding agriculture inputs. Given our conversations, many political figures want to support this. Reports are coming out indicating both Republicans and Democrats want to extend such provisions. We're in a good spot, and our economics withstand challenges for the future.

Great. Thank you very much.

Thank you. Our next question comes from the line of Amit Dayal from HC Wainwright. Your line is now open.

Thank you. Good afternoon, everyone. So, hey, Pat, with respect to the non-GAAP adjusted EBITDA range of $7 million to $16 million for RNG, it's a pretty wide range, Pat. Like, what are the drivers? Is it just the CFS pricing that is going to sort of drive where you come out with this? Or is there something else?

No, this year we thought we were going to. Originally, we should have had the -350 pathway approved at the beginning of the year. That's what should have happened. But they had everything on hold in California while they were doing whatever they were doing. Now they've picked up pen again, and now they're working on it. That delay affected us. We would have been solidly in that range with the pathway change. Now, the carbon prices have been low, so we would have probably been nearer the lower end of that range. But that's really due to the fact that we just didn't get the pathway approved. It was out of our control. The good news is, we know for sure they're working on it currently. Our team has also figured out ways to expand our operation cheaply and make more gas. We're in the top five size of projects in the country for dairy manure, and I think we could be even bigger. If we can get to 500,000 million BTUs, it's good and should generate nice profit.

So if these two things come into play, say, by this time next year, would you be above this range for the non-adjusted EBITDA contribution?

If the carbon price improves, and we see more gas as we expect with the -350 pathway, that would potentially double the revenue from California. At a low carbon price, we did $1 million of EBITDA positive cash flow, which would at least double in good conditions. There are a lot of variables: more gas, carbon prices, and the pathway.

Understood. No, that's very helpful. Thank you. With respect to the DOE loan, are there any specific catalysts or aspects of the NZ one build-out that the DOE is looking into, or is it just the whole application that they are going through? Any color on that would be helpful?

I can't give any specifics. We're under orders not to talk about it. The only thing I can say, though, is the amount of effort required is immense. We plan to do an after-action report about how we did it once it's all done. Everyone is doing a good job. It's a super professional and thorough process, and we are making progress.

Can you remind us how much the application for the DOE loan is for? Is it like $900 million or a different amount?

It's in that quantum. It's a big grant, and it's a DOE loan guarantee.

Okay, just the last one for me. Google's involvement in Verity, are they making any investments or are they just supporting the effort and providing resources to get traction and development for this offering?

Paul, why don't you address that?

Google has been a partner with us on the USDA grant that we've had for some time. So, we've developed a great relationship with them. We’re implementing the AI tools they provide into the Verity platform. That's how to think about it.

Okay, understood. All right, looks like you're making good progress on that front, so congratulations. Thank you. Yes, that's all I have, guys. I'll take my other questions offline.

Thank you. This concludes the question-and-answer session. I would now like to turn it back to Doctor Patrick Gruber for closing remarks.

Well, this is a lot of stuff that’s going on behind the scenes. We're hitting all of our internal milestones that we set and feel pretty good about that. We're making progress, and soon we'll be able to talk about things more robustly and explain them. We're in a great cash position. We see good opportunities in front of us to invest cash, and we are in the tunnel, and I can see the light. Our team feels that way too. We're getting there. I also like our opportunities to generate cash and start to work towards being a profitable company because I think that has potential as well. With that, I want to thank you all for joining us and have a good afternoon. Thanks.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.