Earnings Call Transcript - GEVO Q1 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to the Gevo Incorporated First Quarter 2020 Earnings Conference Call. At this time, all participants' lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today’s conference call is being recorded. I now like to hand the conference over to your host today, Mr. Geoffrey Williams. Sir, please begin.

Geoffrey Williams Jr., Host

Good afternoon, everyone and thank you for joining Gevo’s first quarter 2020 earnings conference call. I would like to start by introducing today’s participants from the company. With us today is Patrick Gruber, Gevo’s Chief Executive Officer; and Carolyn Romero, Gevo’s Vice President and Controller. Earlier today, we issued a press release that outlines the topics we plan to discuss today. A copy of this press release is available on our website at www.gevo.com. I would like to remind our listeners that this conference call is open to the media and that we are providing a simultaneous webcast of this call to the public. A replay of today’s call will be available on Gevo’s website. On the call today and on this webcast, you will hear discussions of certain non-GAAP financial measures. Non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in accordance with GAAP. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures is contained in the press release distributed today and which is posted on our website. We will also make certain forward-looking statements about events and circumstances that have not yet occurred, including, but not limited to, projections about Gevo’s operating activities for the remainder of 2020 and beyond. These forward-looking statements are based on management’s current beliefs, expectations and assumptions and are subject to significant risks and uncertainties, including those disclosed in Gevo’s Form 10-K for the year ended December 31, 2019, which was filed with the SEC and in subsequent and other filings made with the SEC by Gevo, including Gevo’s quarterly reports on Form 10-Q. Investors are cautioned not to place undue reliance on any such forward-looking statements. Such forward-looking statements speak only as of today’s date and Gevo disclaims any obligation to update information contained in these forward-looking statements whether as a result of new information, future events or otherwise. On today’s call, Pat will begin with a discussion of Gevo’s business developments, Carolyn will then review Gevo’s financial results for the first quarter of 2020. Following the presentation, we will open up the call for questions. I will now turn the call over to Pat.

Patrick Gruber, CEO

Thanks, Geoff. In the first quarter, we engaged Citigroup Global Markets to assist us in exploring project financing for our plant build-out. Citi will be working with us on both project equity and debt for these build-outs. We envision that we're going to need 60 million to 70 million gallons per year of capacity in 2024. That's way more than the 17 million gallons per year we currently have under contract. The project economics look attractive. We all believe that oil pricing is expected to come back to reasonable prices by the time the build-outs are online, and the value for low fossil carbon products is expected to increase. It is with this background that our customers continue to negotiate additional off-take agreements. Even in spite of the recent crazy oil market and COVID, I hope to get these contracts for renewable gasoline and jet fuel done soon. That would help us in the project financing. We see the opportunity for building out three projects. One, of course, is to expand the Luverne plant to make renewable premium gasoline and renewable jet fuel. We currently believe that we will need two additional plant production sites. The discussions to secure those sites are already underway. Now COVID-19 has provided for an interesting and challenging backdrop for everyone. As previously announced, we shut down ethanol production at Luverne in the first quarter. Initially, we suspended ethanol production operations, as we've done in the past, simply because the margins were too low. But this time, we ultimately shut down ethanol production for the foreseeable future due to the impacts of COVID. In particular, we did this considering that a: ethanol prices are too low; b: ethanol markets for our plant have been very negative; c: and this is really important. We don't have a line of sight to a strong ethanol turnaround; d: ethanol isn't strategic for us. And importantly, we can conserve cash by doing so. Unfortunately, though, to conserve cash, we had to lay off members of our team. The plant in Silsbee, Texas, continues to make renewable premium gasoline or renewable jet fuel, and we continue to sell products. That demand hasn't slowed down. It's been encouraging to see that even in the midst of COVID we actually have new inquiries to buy our jet fuel. It's clear that customers are looking beyond COVID. It's also encouraging to note that carbon value has held through COVID. And there's a lot of talk from governments to push for cleaner fuel products as everyone gets back to work and the economies recover. I think that with the air clearing around the world because of the reduction in the burning of fossil fuel, it's easier for people to understand the potential products like ours deliver low greenhouse gas emissions and low emissions for the pollutants that cause air pollution. We are busy working with our advisors to raise the money that we're going to need. Clearly, we're going to need to refinance white box again. We are also working on the project financing with Citigroup. And as we do these things, we also need to work on financing for Gevo at the corporate level. Many people have pointed out that as we work on these financings for the projects, additional doors for strategic options for Gevo, Inc. could open, especially given the attractiveness of our build-out projects. It seems that we had a lot of key points with what ESG investors talk about. We need to continue to catalyze these things. Now, I'll turn it over to Carolyn, who will take us through the financials. Carolyn?

Carolyn Romero, CFO

Thank you, Pat. Gevo reported revenue in the first quarter of 2020 of $3.8 million as compared to $6.4 million in the same period in 2019. During the first quarter of 2020, hydrocarbon revenue was $0.1 million compared with $0.7 million in the same period in 2019. Hydrocarbon sales decreased because of lower production volumes at the South Hampton Resources, Inc. facility in Silsbee, Texas. During the first quarter of 2020, revenue derived at the Luverne Facility from ethanol sales and related products was $3.7 million compared with $5.7 million during the same period in 2019. As a result of unfavorable commodity environment during the three months ended March 31, 2020 compared with the same period of 2019, we reduced our production of ethanol and distiller grains, which resulted in lower sales for the period. Cost of goods sold was $8.1 million in the first quarter of 2020 versus $9.0 million in the same period in 2019. Cost of goods sold included approximately $6.5 million associated with the production of ethanol, isobutanol and related products and approximately $1.6 million in depreciation expense. Gross loss was $4.3 million for the first quarter of 2020 versus $2.6 million for the first quarter of 2019. Research and development expense decreased by $0.4 million during the first quarter of 2020 compared with the same period in 2019, due primarily to a decrease in personnel and consulting expenses. Selling, general and administrative expense increased by $0.7 million during the first quarter of 2020 compared with the same period in 2019, due primarily to an increase in personnel and consulting, partially offset by decreases in professional fees. We incurred $0.3 million of restructuring expenses related to the termination of a total of 30 employees and renegotiating contracts in March 2020. Within total operating expenses for the first quarter of 2020, we've reported approximately $0.2 million for non-cash stock-based compensation. For the first quarter of 2020, we reported a loss from operations of $8 million, compared to $5.6 million for the same period in 2019. In the first quarter of 2020, cash EBITDA loss, a non-GAAP measure that is calculated by adding back depreciation and non-cash stock-based compensation to GAAP loss from operations was $6.2 million compared with $3.8 million in the same quarter of 2019. Interest expense for the first quarter of 2020 was $0.5 million, a slight decrease compared to the same period in 2019. We incurred $0.7 million of legal and professional fees related to the modification of the 2020 notes during the first quarter of 2020. For the first quarter of 2020, we reported a net loss of $9.3 million or a loss of $0.64 per share based on weighted average shares outstanding of 14,472,798. This compares to a loss of $6.1 million in the first quarter of 2019, or a loss of $0.60 per share. In the first quarter of 2020, Gevo recognized a net non-cash loss totaling $0.1 million due to changes in fair value of certain of our financial instruments, such as warrants and embedded derivatives. Adding back these non-cash losses resulted in a non-GAAP adjusted net loss of $8.5 million in the first quarter of 2020 or a non-GAAP adjusted net loss per share of $0.59. This compares to a non-GAAP adjusted net loss of $6.4 million in the first quarter of 2019, or a non-GAAP adjusted net loss per share of $0.63. Now I will turn it back over to Pat to wrap things up. Pat?

Patrick Gruber, CEO

Thanks, Carolyn. Let's open up the call for questions. Operator?

Operator, Operator

Our first question or comment comes from the line of Amit Dayal from H.C. Wainwright. Your line is open.

Amit Dayal, Analyst

Thank you. Good afternoon, everyone. Perhaps with respect to Luverne, what would it take in terms of changes in the market for you guys to consider restarting production over there? Or should we expect this to be out of commission for the rest of the year?

Patrick Gruber, CEO

I believe the plant will remain out of commission for the rest of the year due to current gasoline demand and initial ethanol balancing. There is a chance we could restart production next year, but that would depend on a broader industry recovery. We are saving significantly by reducing our staff at the plant, though we still have some employees there. The margins need to improve in order to be profitable. With wind power operational and our biogas projects progressing, we aim to have those systems running to help reduce our carbon score and increase margins. If we do resume production, it would likely be in the latter half of next year, coinciding with potential construction of the plant expansion. We will need to monitor how things develop.

Amit Dayal, Analyst

So it's all the sort of layoffs, I guess, with respect to that facility. What will operating costs sort of look like over the next few quarters for you guys?

Patrick Gruber, CEO

Operating costs for the Luverne plant, what are your thoughts regarding the model you're considering or in relation to …

Amit Dayal, Analyst

At the corporate level, including the cost-cutting measures you've taken.

Patrick Gruber, CEO

Our operating costs? We should be zero in on a million a month or less.

Amit Dayal, Analyst

Okay. Understood. And this $2.7 million in inventories that you’re showing in the balance sheet, what is the comparison?

Carolyn Romero, CFO

Hey, Lynn, are you on the line?

Lynn Smull, Participant

Yes. Well, I didn't fully hear the question.

Amit Dayal, Analyst

Yes, I was asking about the $2.7 million in inventory in the balance sheet. I was just wondering what it comprises of?

Lynn Smull, Participant

The inventories primarily consist of corn-based products, and we collaborate with several suppliers for our corn purchases.

Carolyn Romero, CFO

And just to clarify for you, it'll be in our footnote number five, that $1.5 million of that is related to spare parts.

Amit Dayal, Analyst

Understood. And then maybe lastly on any progress towards securing the project financing for the two additional plants you're looking at?

Patrick Gruber, CEO

In terms of something I can point to an announcement say, here it is, it's done, but we're making progress in terms of the models are in really good shape. The reason that this is interesting for people is that the projected levered pre-tax IRRs are 20% to 25%. The amount of capital that we're talking about is quite large, upwards of $700 million across the expansion in Luverne, plus two additional plant sites. We have already under our belt $600 million of contracts to undertake or pay. Those are closed and that's across the life of the contract. We have another $1.5 billion of take or pay contracts that we're negotiating. And what's been surprising for me is that folks have still been plugging along, negotiating even with the craziness in oil; these people who play in oil, they’re continuing to negotiate with us and try to get these contracts done. So almost everybody that we talked to has a view that this oil devaluation is temporary, it will come back, especially as oil is cheap and gasoline becomes cheap, people will drive more. And so it's oddly enough, it's been slightly surprising that people just kept after it, even in the face of all of this. So when you take those projects, you add them up, you have a 20%, 25% levered pre-tax IRR projection. That's pretty darn interesting for people. The models are good, we're beginning the outreach and now Citi feels pretty good about it. So that makes me feel good about it.

Amit Dayal, Analyst

Understood. And with respect to regulations, you touched on it a little bit. Has there been anything brought into play specifically with respect to jet fuels and as part of all this bailout, etcetera, that's in discussion with respect to airlines right now?

Patrick Gruber, CEO

There's been talk, but I haven't seen anything concrete that's going to stick. There has been talk. People are talking about bringing the airline industry back and having it be green. There was language put in to the bill so far that got taken back out by the Senate, but that would have funded projects that build cleaner, greener jet fuel. It's possible that something like that could get back in there. We see some interest from some of the Senate offices, some of the House players. They definitely are interested. In Europe, it's there. It's been more of a doubling down. People are saying when it comes back, it's going to come back green. And that's what we're hearing from our European partner customers, that they're going to put more requirements in. So that's good. California is something to watch. Everyone should take a look and see how carbon values are trading. They've actually gone up, which is fascinating. The underlying fuels demand has gone down. So that bodes well. And as we've talked in the past, many other states are working to adopt California-like systems and that work continues. So I think the airline industry, since some of them are down to just 5% or 10% capacity or something, it could take a little while for them to recover. One of the important things when you look at Gevo, everyone should understand this, is that we're doing premium renewable gasoline. That's our isooctane. It's premium renewable gasoline. It's a premium product that works exceptionally well, hydrocarbon. And that's actually in greater demand than the jet fuel. And so we're not a one-trick pony, thank God.

Amit Dayal, Analyst

Got it. That's all I have. I will get back in queue. Thank you.

Patrick Gruber, CEO

Yes.

Operator, Operator

Thank you. Our next question or comment comes from the line of Poe Fratt from Noble Capital Markets. Your line is open.

Poe Fratt, Analyst

Good afternoon, Pat. Could you please clarify where your $1 million a month in expenses is coming from? Are we considering that in SG&A? Additionally, is the total R&D expense around $3 million per quarter, or how will that be reflected on the income statement?

Patrick Gruber, CEO

Yes, yes, that's right. With the reduction in R&D.

Poe Fratt, Analyst

Okay. You will be operating the hydrocarbon plant in Texas, which will impact your cost of goods sold structure. What will happen with the depreciation of the Luverne plant? Will it be considered a held for investment or something similar?

Patrick Gruber, CEO

We have not shut down the hydrocarbon plant in Silsbee. We are still operating it and plan to keep it that way. There are no changes in that regard. We will continue to produce isobutanol, which will be used to make premium renewable gasoline for Europe, and we will also produce jet fuel. We may even attract some new customers for jet fuel. Carolyn, would you like to address how we are handling the depreciation for the Luverne plant?

Carolyn Romero, CFO

Yes, since it is still operational, we intend to use it going forward. It is continuing to be depreciated.

Poe Fratt, Analyst

Great. And, Pat, does this change your strategy at all or are you going to continue to move forward on the biogas strategy?

Patrick Gruber, CEO

We're continuing to move forward in the biogas strategy. We've actually signed a very exclusive deal so far with something we haven't announced yet. Who is looking at putting up the money to build the plant. And then we are taking a developer role. And so we get paid back out of that. It's possible, depending on how things unfold and how people view it, that we may want to roll those into one of the bigger projects. I don't know that the timing will work for that. But what I can say is that we have a serious counterparty that we're working with during the diligence phase. The way that this deal would work, is I guess the gaps that I need for the Luverne plant, but they take on all that capital burden.

Poe Fratt, Analyst

Okay, great. And then when you talk about starting up, I think the wind power generation started up a few days ago, will we see that as far as any value potentially there accrue in your equity investment in fuel power, is that correct? Or will there be any cash?

Patrick Gruber, CEO

Yes, that's correct. I do not expect any cash. We have renewable energy credits available for trading and we will collaborate with Juhl on that. However, our focus will be on benefiting the project, as we have invested around $1.5 million out of the total of over nine million to get it constructed, and that is where the benefits will accumulate.

Poe Fratt, Analyst

Okay, great. When I consider the impact on your cash burn, it seems that you might be able to reduce it to around $4 million per quarter. Pat, is a range of $4 million to $5 million a reasonable estimate?

Patrick Gruber, CEO

I think it should be to the lower side of that.

Poe Fratt, Analyst

Okay, so we probably won't have any CapEx either. So then…

Patrick Gruber, CEO

We have already completed most of the planned spending for this year, so we should be at a relatively low level. That's correct.

Poe Fratt, Analyst

And then when you look at it, I think since last call, the framing is a little more aggressive on the total size, the capital commitment or the capital projects. And it sounds like you may have added a third plant or did you break the second plant that you expected into sort of two parts to get some geographic diversity or can you help us understand how that …

Patrick Gruber, CEO

Yes, we previously disclosed that we had about 70 million gallons and expect to maintain that amount in our contracts, which are take-or-pay agreements totaling over a couple of billion dollars in revenue throughout their duration. We're optimistic about these contracts. As we evaluate the size of the plants needed, we're focusing on capital optimization based on insights from our work with Citi. For the Luverne facility, a size of 10 to 12 million gallons of hydrocarbons seems optimal, and we have already invested in infrastructure for isobutanol there. This allows us to stay within our budget as we add a hydrocarbon plant to enhance efficiency and returns. Next, we need to plan for an additional 55 to 60 million gallons. We're exploring opportunities with existing ethanol plants, many of which are currently inactive, since larger plants tend to be more economical. We're considering medium-sized plants, particularly those with a capacity of around 50 million gallons, which would align well with our needs for hydrocarbons. We are in the diligence phase with several potential partners, examining their facilities closely. Key factors include production costs, infrastructure, and alignment with our sustainability goals, as we aim for net zero carbon emissions. We see some promising candidates and are pursuing this strategy.

Poe Fratt, Analyst

Great. Pat, what is your next trigger or gating factor? Is your plan dependent on signing more gallons? How many additional gallons do you need before the $700 million CapEx plan is fully committed? Are we 75% there, or what is the gating factor as we move forward with this project?

Patrick Gruber, CEO

Yes. As we consider the stages, I don't think we'll execute everything simultaneously at the three plants, but they will be close together. We already have additional production capacity at Luverne, as one plant is nearly filled. As we secure more contracts that exceed the capacity of the second plant, we will then focus on the third. Finally, once we finalize a deal with a customer to fill the last plant, that will establish the order of events. These are all developments expected in the coming months as we finalize contracts. Additionally, it's interesting to note that project financing involves private conversations, as the financiers have access to confidential information about the counterparties we're dealing with. This process differs from public company operations because we're engaging with private, separate entities for this off-balance sheet project.

Poe Fratt, Analyst

Okay, great. You mentioned the need to refinance the white box, followed by project financing, and then you highlighted potential opportunities at the corporate level. Could you elaborate on that for us? Is it part of your potential development role or can you provide more details regarding your comments on core productions?

Patrick Gruber, CEO

Yes. As a developer and licenser, we have to handle both the engineering and culinary aspects of our projects. This includes completing the necessary engineering tasks and presenting our work effectively. We will need to secure funding for these initiatives in the future. It's interesting to note that funding is closely linked with our project timelines. We must raise money to continue, especially since our balance sheet raises questions about our ability to sustain operations through the year, although it seems manageable at this point. We are capable of refinancing our existing projects. We are exploring ways to bring in funding without diluting equity. We are also investigating potential fundraising options and how to approach the equity markets in a manner that maximizes value. These considerations are a part of our ongoing discussions. We are collaborating with Wainwright and Citi, and it will be fascinating to see how everything aligns, as the timing is crucial.

Poe Fratt, Analyst

Great. Thank you so much.

Patrick Gruber, CEO

You bet.

Operator, Operator

Thank you. I’m showing no additional questions in the queue at this time. I would like to turn the conference back over to Mr. Gruber for any closing remarks.

Patrick Gruber, CEO

Well, thank you all, for staying with us during this time with COVID. I hate that we've had to shut down the ethanol part; the ethanol margins are so bad that it's the right thing to do, it does save us money. Well, I like the fact that our projects are turning out very good in terms of what they have the potential to return based upon the pricing that we have in those. And that's even in light of all the world changes that we see regarding the oil industry. So we feel pretty good about that. And there aren't that many projects like ours, especially ones that touch gasoline as well as jet fuel. So thank you all for joining us today on this call. Have a great evening.

Operator, Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone have a wonderful day.