Green Plains Inc. Q1 FY2020 Earnings Call

Good morning and welcome to the Green Plains Inc. and Green Plains Partners First Quarter Earnings Conference Call. I will now turn the conference call over to your host, Phil Boggs, Senior Vice President, Investor Relations and Treasurer. Mr. Boggs, please proceed.

Welcome to Green Plains Inc. and Green Plains Partners first quarter 2020 earnings call. Participants on today's call are Todd Becker, President and Chief Executive Officer, Patrich Simpkins, Chief Financial Officer, and Walter Cronin, Chief Commercial Officer. There is a slide presentation available, and you can find the presentation on the Investor page under the Events & 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 statements. Now, I'd like to turn the call over to Todd Becker.

Thanks, Phil, and good morning everyone and thanks for joining our call today. For the quarter, we reported a net loss of $16.4 million or $0.47 a diluted share, which includes a write-off of goodwill of $24.1 million that affected EPS negatively as well as a tax benefit related to the CARES Act. The goodwill write-off was a non-cash adjustment and has no impact on our financial liquidity. And at this point, we have no goodwill associated with Green Plains Inc. left on the balance sheet. In addition, we expect the tax benefit to result in a cash refund of $40 million to $50 million late in the third quarter or early in the fourth quarter. This will surely be a benefit to Green Plains liquidity as well. We reported $2.7 million in adjusted EBITDA for the quarter. The only impact that was adjusted was goodwill, so the adjusted EBITDA is an operational number the business achieved. The financial results greatly exceeded the negative market during the quarter due to our risk management program, where we were able to lock in margins. We are continuing with this program in the second quarter, which we are achieving better margins than the current market as a result. We produced approximately 240.5 million gallons of ethanol, which put us at an 85% utilization rate for the quarter. While this was lower than our stated goal of 90%, it was the highest utilization rate in the past nine quarters. January ran at a record rate, but the back half of the quarter was impacted slightly by plant maintenance and downtime to complete planned Project 24 technology upgrades. Superior and Fergus Falls are running well, and have shown reduced energy and water usage and a lower operating cost per gallon than we expected. So we're very happy with these results. Due to the current margin environment, which has been negatively impacted by the ongoing COVID-19 pandemic, much of the industry has gone offline or reduced their run rates. We are proactively managing our current utilization but will not reveal our run rates during the quarter as in the past the 'Green Plains Slowdown' was used by others to determine their own run rates and proved to be a disadvantage for us. The industry has reduced its run rate at a record pace never seen before and it's quite frankly about time. We will exercise our operational discretion at each of our plants in order to maximize our variable contribution margin, and we will make decisions at each facility that best maintains our cash liquidity going forward. Since we have done this many times before, our ability to be agile and maintain strong liquidity is our advantage in times like this. Consolidated crush margin for the first quarter was negative $0.01 per gallon, with the spot crush declining sharply late in the quarter as the crude oil war ensued and the COVID-19 began to impact fuel demand. While certainly not a number we strive for, it was certainly better than the daily average market. While the industry production levels have dropped to almost 500,000 barrels per day, inventory levels continue to be at near or record highs. We will continue to focus on the things within our control, reducing operating expenses through our Project 24 initiative and driving additional value through our protein transformation and other product development. I'm very happy to report that our first high-protein facility in our Shenandoah, Iowa location started up during the first quarter, and we have been scaling up to full production rates within the past week or two. Our partners at Fluid Quip, the various contractors and our internal team have done a phenomenal job completing this project on budget, and we are setting the standard for quality control for the customers of this valuable product. Green Plains has a new high-value product that is being used in companion animals and aquaculture markets. As we continue to line out the plant, we will quickly be involving our biotechnology partner to continue to upgrade the nutritional properties in order to move up the price curve. Project 24 modification at our Fergus Falls, Minnesota and Superior Iowa locations were completed, and the results mirror the success we had at Wood River. We continue to be excited about this project and are anxious to roll it out across our remaining non-ICM plants. The operating expense reduction puts these two plants squarely in the top quartile of the industry and leaves us confident in our ability to reach our goals for the platform to be at or below $0.24 a gallon once all are completed. Most interesting is that these were both original Delta-T, 50-million-gallon plants, and are now each below $0.24 operating cost per gallon, actually at par or below some best-in-class ICM 100-million-gallon-plus facilities. We are operating these plants much like an ICM plant as we speak. We are currently evaluating our capital expenditure plan for the remainder of the year, and Patrich will have a little more on this later in the call. Green Plains Partners reported $13.4 million of adjusted EBITDA for the quarter. The recent 75% reduction in the distribution resulted in a coverage ratio of four times for the first quarter and 1.24 times for the trailing 12 months. This distribution cut was to support a more rapid paydown of our debt as we have the goal of being debt-free in 18 months, at which time, we will look to increase cash returns to unitholders again. Lastly, Green Plains Cattle company had another record quarter, and we expect the remainder of the year to be strong as well. This allowed a dividend to be paid to all partners in the second quarter, another factor strengthening our liquidity. We are closely monitoring the current situations with packing capacity being slowed or shut, but since we have supply agreements in place, we have not seen material impacts to our business. So as you can see, our theme is to constantly focus on liquidity, and we believe we are in a good position to weather this market as a result of our risk management programs, reducing our operating cost per gallon, new products like high-protein corn meal and our great results from our cattle investment. Now, I'll turn the call over to Patrich to review both Green Plains Inc. and Green Plains Partners financial performance, and I'll come back on the call to talk about the remainder of the year, some policy updates and provide some more details on our protein initiatives.

Thank you, Todd. Green Plains Inc. consolidated revenues were $632.9 million in the first quarter, up $194.2 million or 44% from the first quarter a year ago. The increase in revenue was driven primarily by higher ethanol production rates as compared to the first quarter of 2019. Our production run rate was 85.9% of capacity in Q1 of 2020 compared to a 56% run rate for the prior-year first quarter. Our consolidated net loss for the quarter of $16.4 million included a non-cash pretax goodwill impairment charge of $24.1 million comparing favorably to a net loss of $42.8 million in the first quarter of 2019. Adjusted EBITDA for the first quarter was positive $2.7 million compared to an adjusted EBITDA loss of $18.3 million for the same period a year ago. For the quarter, our SG&A costs for all segments was $21.6 million, up $3.2 million from $18.4 million in Q1 of 2019, driven primarily by higher compensation costs related to a one-time true-up of our annual incentive plan. Consolidated interest expense for the company remained relatively unchanged compared to the prior-year quarter at $9.7 million. CapEx for the first quarter was about $34.3 million, with approximately $6.8 million of maintenance CapEx and the balance of $27.5 million being allocated to growth capital primarily for Project 24 and our high-protein production facility in Shenandoah, Iowa. In February, we provided an overview of our capital expenditure plan for the year with a target of $100 million to $120 million, focused mainly on maintenance CapEx, Project 24, and our high-protein initiative. However, given market conditions, we've trimmed back our planned capital allocation by nearly 50% with an overall target of $50 million to $60 million for 2020. For the balance of the year, our capital expenditures will focus on essential maintenance and our Project 24 initiative. Any additional spending related to the expansion of our high-protein development plan will be driven by the successful completion of potential financing arrangements. On Slide 8 of the investor deck, you will see our balance sheet highlights. We had $252 million of cash and working capital, net of working capital financing at the end of the first quarter compared to $373 million for the prior-year quarter. The balances for 2020 exclude our cattle business that was deconsolidated in September of 2019. Adjusting for the cattle business, the prior-year cash and working capital total would have been approximately $316 million, with the difference between Q1 2020 and Q1 2019, being attributable mainly to a change in cash of $43 million and net working capital financing. Our liquidity position at the end of the quarter remained solid, with $205.5 million in total cash along with approximately $260.8 million available under our working capital revolvers. This amount does not include availability under the current credit facility of the partnership. For Green Plains Partners, we had 240.5 million gallons of throughput volume at our ethanol storage assets during the quarter, which was up 85.4 million gallons or 55% from the first quarter of 2019 as a result of higher production rates at Green Plains plants. The partnership reported adjusted EBITDA of $13.4 million for the quarter, consistent with the $13.5 million reported in the first quarter of 2019. Distributable cash flow was $11.4 million for the quarter, also in line with the same quarter in 2019. With a reduction in our distribution to $0.12 per unit declared on April 16, our resulting coverage ratio increased to 4.03 for the first quarter. On a last 12-month basis, adjusted EBITDA was $53.8 million, distributable cash flow was $45.4 million and declared distributions were $36.7 million, resulting in a 1.24 times coverage ratio. Going forward at $0.12 per unit, the partnership will retain $34 million annually that will be allocated to amortizing the partnership's outstanding debt. Now, I'd like to turn the call back over to Todd.

Thanks, Patrich. The industry is facing unprecedented challenges from two black swan type events. First, the failure of OPEC Plus in early March resulted in a swift decline in motor fuel-related prices. This was quickly followed by the beginnings of a wide-scale shutdown of the US and global economy related to shelter-in-place orders across the country and globe, resulting in significant declines in demand for motor fuels and biofuels. Combined with the macroeconomic impact from the crude oil situation and then you have a perfect storm. At Green Plains, we have acted to keep our employees safe through various work-from-home measures as well as to support our local communities through our contributions of our FCC-grade alcohol for the production of hand sanitizers and cleaning agents to the state of Iowa and Nebraska, and the University of Nebraska for use in hospitals and care facilities. In addition, we donated ground beef to local food banks and charities and provided every Green Plains employee 40 pounds of ground beef to relieve some pressure off our employees and their families. When the pandemic comes to an end and people begin to drive again, biofuels will continue to be an important and strategic part of the fuel supply due to the octane value. So the top quartile plants and those plants that have diversified margin streams will most likely continue to operate during these challenging times. This is why we continue to focus on these areas. While we continue to wait for China to reengage in the ethanol market, we will work to drive this EPA administration to push for the continued rollout of E15 as we need better labeling and a final EPA ruling to allow E15 through an E10 pump. Additionally, we believe the future could look a little different as companies and individuals look for ways to avoid mass transit and air travel and drive more, which could be a potential tailwind. Our protein and Project 24 initiatives are instrumental to the future and direction of this company. We will continue to work through our Total Transformation Plans for Green Plains. At Shenandoah, our early indications from production have shown our protein levels have been consistently around 52% and as high as 53% without any help from outside biological upgrades. This is purely mechanical. In the coming months, we will be working with our biotech partners to continue to enhance the value of this product through enzymatic and biological solutions in order to maximize the nutritional profile. This will enable us to accelerate towards the $0.20 incremental margins and even greater as we advance up the J-curve that we discussed with you on the last call. It's been very exciting to watch this process unfold, and we hope to be able to host an open house someday to show you all what we've been seeing every single day. Additionally, we are continuing the engineering for the second and third high-protein locations. The full construction of these facilities is somewhat dependent on arranging additional financing, and we should have one constructed within nine to twelve months once the financing has been lined up. We continue to arrange these agreements and hope to be able to announce that shortly as well. But to be clear, as there was some confusion on the last call, we are focused on arranging project-level capital to support these initiatives and we will use minimal cash near-term on construction. The balance of the funding will eventually come from the profitability of protein production as it becomes self-financing. Our aquaculture trials to validate novel ingredients that will be used in combination with our high-protein products as either a complete feed or premix are continuing. We're seeing good progress that only adds to our conviction that we are on the right path to transform this company into a world-class protein provider. Our York, Nebraska facility has been instrumental in providing FCC-grade alcohol for the production of hand sanitizers and cleaning products across the US and globally. While we were pleased to be able to support our local communities through much needed donations, this facility also sells this product commercially. The FDA-approved FCC-grade alcohol manufactured at Green Plains, York, Nebraska, is distilled specifically for the production of cleaning products and disinfectants and is higher in purity and quality than traditional fuel-grade ethanol. Green Plains does not and will not sell any fuel-grade ethanol or alcohol for use in disinfectants or sanitizers. We believe fuel-grade ethanol contains certain properties that make it unsuitable for these applications. Interest in our product at York has been strong in the near term and should contribute positively for our second quarter. In fact, many sales we make are replacing batches of sanitizer and cleaning products that are being rejected for quality from some of these fuel-grade plants. York has made both beverage-grade and FCC-grade alcohol in the last 20 years, but currently focuses on FCC-grade at this point. We have now completed three Project 24 locations, and we will have a fourth completed in the next two or three months, so we are nearing the halfway point. As we transform our platforms to sustainable ingredients and protein production, Project 24 also enables our locations to reduce their environmental footprint. Running our plant at the lowest cost structure is key to setting up the next step as we transition into adding high-protein production capabilities across the platform. While I can always talk about a lot of other topics, we are squarely focused on maintaining strong liquidity during these unprecedented times and managing risk. By selling $780 million of assets over the last several years, which reduced our debt balances by almost $1 billion, we are in good shape to weather this storm as well. We are agile and pulling on the right levers that have put all of us as shareholders and stakeholders in a better situation than you probably expected. Our employees are committed to operating safely, squarely focusing on details that matter every day, and I want to thank them as well for their commitment to Green Plains as we continue to transform this company. Thanks for joining the call today and I'll ask the Q&A to start.

And your first question comes from Adam Samuelson with Goldman Sachs.

Thanks. Good morning, everyone. I hope you are all doing well. My first question pertains to the ethanol market environment. Todd, considering the production declines we've observed in the industry so far, and the recent improvement in margins due to stronger dried distillers' prices, can you provide some insight into what you believe the recovery on the production side might look like across the industry? Gasoline demand increased last week from very low levels. Do you think the ethanol industry will experience a delay in recovery by a few weeks? Additionally, do you believe all the plants can resume operations if the margin conditions are favorable and demand is present?

Yes. We have seen improvements in margins over the past few weeks; however, many plants are still not achieving a positive variable contribution margin. Although the prices of dried distillers grains have decreased, margins have increased because corn prices have returned to recent lows, and ethanol prices remain stable. From our perspective, the industry's recovery may lag behind the driving demand as some plants have temporarily laid off workers or gone into cold shutdowns. The industry can move quickly, and when we make adjustments to our plant operations, we prepare for shutdowns to respond rapidly, though I'm uncertain if others are as prepared. Last week marked a significant draw in EIA reported stocks, with a decrease of 1.3 million barrels. I believe we will see additional draws in the following weeks before leveling out. Ultimately, we need to monitor driving demand to determine when ethanol is falling behind. We witnessed some improvement last week, which positively impacted margins, yet over half of the industry is still operating at negative variable contribution margins. The industry has realized that even if you maintain a positive variable contribution, you can still incur losses and deplete cash reserves. As a result, reducing or shutting down plant operations can actually yield higher profits in many cases. Regarding our financial situation, we have minimal interest obligations on our convertible debt, amounting to $14 million annually, which is our primary commitment. Beyond that, our focus is on working capital financing. Overall, we believe we are in a stable position, but the recovery in gasoline demand may surpass the rebound in ethanol production.

Okay. That's all very helpful. And then just on the liquidity point, just with the revised CapEx plan, how much of Project 24 would be left to finance and spend at the end of calendar '20? And just any updates on the debt maturity at the MLP level?

Yes. Regarding CapEx for Project 24 at the end of 2020, there will be a small amount remaining, but not much. Most of the projects we aimed to complete this year should be finished. We're primarily concentrating on Madison and Mount Vernon as the major projects, along with a few smaller ones. We will carefully evaluate our next steps. It's important for those plants to reduce their costs to the low 20s. Project 24 has exceeded our expectations, and we are now working on Project 24 2.0. The insights we gained from Wood River have led to improved outcomes in Superior and Fergus Falls. These are 50-million-gallon plants functioning like 100-million-gallon plants with operating costs from ICM or lower. One of these plants has achieved a cost of $0.23 per gallon, which aligns with higher-quality facilities. We've made significant progress in this area, but we will continue to monitor the situation. If the market does not improve, we have the option to delay these projects, but for now, we are still planning for them. As for the MLP's debt maturity, we are nearing completion with most lenders and are still finalizing terms with a few. Our goal is to resolve this in the next week or so, and we believe we are in a good position to do so. Would you like to discuss the end of the year CapEx with or without Project 24 and any potential leftover amounts?

Yes. In that forecast of the $50 million to $60 million, I mean, a couple of things that Todd pointed out. Madison and Mount Vernon, depending on how Q3, Q4 go, and then potentially York. The reality is York is doing so well right now, we really wouldn't do anything with Project 24 as it stands right now. So York would probably be the last plant that we would do. And under the capital plan that we have right now, we could get a good way through Madison and Mount Vernon by the balance of the year. So we'd have, as Todd alluded to, we'd have very little left rolling into Q1 2021.

It's very helpful color. I'll pass it on. Thank you.

Thanks.

And your next question comes from the line of Ben Bienvenu with Stephens Inc.

Hey, thanks. Good morning, everybody. I want to ask about, kind of following up on Adam's question, just around the shutdown situation if you could maybe elaborate a little bit about, in this particular shutdown environment, obviously, the severity of the losses is more significant. But is there anything different structurally about the market that you think would allow some of the production to more permanently stay off-line? We saw a big drawdown in production last year, that kind of troughed in September, and then it came back pretty quickly. So is there anything that would prevent that from happening again?

This industry is known for bouncing back quickly. However, I believe that some of the lower-performing plants may need to improve their liquidity before they can reopen. As a result, those plants may take longer to resume operations compared to what we’ve seen in the past. Some companies have already announced extended shutdowns, specifically stating they will be offline for three to five months and laying off workers. Restarting operations after a furlough can be a complicated process. I'm optimistic that the industry has learned from previous experiences, and in many areas, it has. Yet, we will have to wait and see how it unfolds. Nevertheless, I think if we reach 80% or 90% of normal driving activity, the ethanol industry likely has enough resilience to recover. While I am uncertain if this will lead to a rapid recovery for the lower-performing plants this time around, it remains a possibility.

Okay. That's helpful. And then I'd be curious to hear your outlook for corn. There's been a lot of moving pieces, and that's also been a big piece of it as it relates to potential planted acres. What is your current house view on corn? And then if you could give us any update on how basis has been for you guys? And to what extent that potential pressure point has been alleviated over the last few weeks?

We have a negative outlook on corn. Our surveys indicate that the crop was planted at a record pace and is nearing completion in many regions. While this may not be immediately reflected in the weekly data, we expect strong results soon. We plan to plant as many acres as possible, but due to the rapid planting, there isn't much time for adjustments. We don't disagree with the projected 97 million acres. There has been significant weakness in corn basis, primarily due to the ethanol industry's reduced demand, which has removed billions of bushels from the market. Currently, it does not seem like plants are gearing up for increased production. Overall, we maintain a negative stance on corn at these levels and are not optimistic about the corn basis in the U.S. right now. However, if corn is needed, the situation may not be as dire because farmers are actively managing their stocks. Ultimately, as planting progresses and yields potentially improve, farmers will decide when to sell their remaining stocks, likely after planting and into the growing season. We anticipate a continued increase in carryout bushels, which will be reflected in USDA reports for the '19/'20 season and beyond. The market does not seem to recognize the significant reduction in corn demand from the slowing or shutting down of the ethanol industry. Relying on China will not solve issues in the U.S. corn market if the ethanol sector is impaired.

Thanks so much. Appreciate the color. Good luck with the rest of the year.

Thank you.

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

Good morning.

Good morning.

Hey, just wondering on what you're seeing in the market in terms of your off-takers. I know you're not disclosing your utilization, and you've got a lot of it hedged. What are your challenges? Or are you seeing challenges in terms of selling your product, whatever level that may be to refiners if they have no place to go with it? In kind of that balance between forcing them to take product versus having to look towards other markets, obviously, with the long-term relationship with that specific customer in mind?

Yes. Gas demand is going to reflect our customers' ability to take product. The industry has slowed down rapidly, even more than the decline in demand, which is unprecedented. As a result, we haven't experienced any issues with ethanol being left without a market. Currently, we are balanced in terms of production and storage relative to what refiners need. Everyone is collaborating with their customers regarding product and contracts, and we haven't observed significant distressed ethanol trains or inventories entering the market. Although some destination markets are experiencing basis weakness, we are still able to sell some spot values at higher levels than anticipated. Overall, while there was a mention of force majeure, it has not been a significant concern. We are producing in line with usage at a 50% driving rate, which is likely to increase. Therefore, there haven't been many distressed barrels, and the process of dealing with our counterparties has been orderly.

Got it. That's helpful. And maybe last one for me. Just on the hedge, I might have missed it, but did you disclose how much of second quarter you have hedged? How long that lasts or the level of production you have hedged? Or any color there would be helpful.

No, we haven't disclosed that at this point. In the first quarter, it worked pretty well, and we continued it into the second quarter when we saw outside factors affecting the market. We felt it was necessary to protect our cash flows. We believe that what you observed in the first quarter will be somewhat similar to what you might see in the second quarter, possibly even slightly better. Overall, we are in a solid position, taking into account the lower operating costs, the premiums on protein, and some contributions from our York plant. We feel confident about the second quarter and even into the third quarter to some extent. While we won't share our production levels, you can expect that some of our plants are operating slowly or shut down, and we've made necessary adjustments. This is something we are skilled at managing quickly, ensuring we protect our balance sheet at all costs. Our risk management and other initiatives have significantly contributed to this stability.

Thanks for taking the question. You said that China is not the panacea for the ethanol market. But going back three months ago, pre-COVID, there were expectations that China would resume purchases post the Phase 1 trade deal. And obviously, lots have changed, but is there any hope for China to resume ethanol imports sometime in 2020?

Yes. When discussing China, I mentioned that the corn purchases from China won't significantly benefit the US corn market, especially with the sharp decline in ethanol demand for corn. Regarding ethanol, we remain hopeful. There have been some recent actions from the administration that might delay things, but overall, we believe they will adhere to the initial trade deal and its agricultural provisions. We'll monitor this development closely. Our perspective is that China is likely to continue taking some ethanol. We have observed a few small shipments, primarily for industrial purposes. However, there hasn't been a lot of activity in the freight market recently. China needs to tread carefully concerning agriculture amidst the impact of the virus and the notable drop in agricultural prices. They might be hesitant to purchase US products at such low prices, as it may seem like they're capitalizing on the current market conditions. This caution could be why they're hesitating, but that's our interpretation. Overall, we still anticipate that if they engage, it will also include ethanol.

Understood. Let me ask a question about the hand sanitizer. Since the treasury loosened the rules for who can sell ethanol into the hand sanitizer market, lots of ethanol producers have tried jumping on that bandwagon. How needle-moving in this become in a financial sense beyond just the PR aspect?

Yes. The FDA has fluctuated regulations, and currently, they are stricter. What we're observing in the hand sanitizer market in the United States is a demand for USP and FCC grades. Customers who experimented with fuel realized it doesn't meet their quality and scent expectations. Consequently, we are seeing a greater shift towards FCC and USP grades, where our focus lies. Our plant in York has been producing FCC grade for many years, primarily for export, but now most of it will remain in the domestic market, although some export sales will continue for the rest of the year. We are not providing guidance on future sales for this product. It reflects societal changes and the emphasis on cleanliness, and we believe we are well-positioned to capitalize on this trend. Our plant produces a high-quality product, and we are starting to see positive outcomes from that.

Thank you.

Your next question comes from the line of Craig Irwin with ROTH Capital.

Good morning, and thanks for taking my questions. So Todd, I wanted to ask about opportunistic capital projects at Fairmont, Fergus Falls and Superior. Did you execute any of these over the last six months quarter as you were doing all the work for Project 24?

All of our projects have focused on Project 24 upgrades. Aside from what we discussed regarding Wood River, Superior, and Fergus Falls, we've been working on operating these facilities at significantly lower production costs, and we have achieved remarkable results. For instance, Wood River is now operating at $0.21 a gallon, which used to be a Delta-T 113 million-gallon plant and is now at the lower end of the ICM plant spectrum. In some ways, ICM would agree that it operates even better than some current ICM facilities. We've managed to reduce our operating cost per gallon effectively, which is evident when comparing Wood River's current rate of $0.21 a gallon to three years ago when it was $0.35 a gallon. Similarly, Superior has improved, moving from the mid-30s down to the low-20s. When you consider the volume of gallons processed, this significantly impacts our variable contribution margin, but we haven't implemented many other changes at these plants yet.

Great. York, it's clearly a significant opportunity to offer a product that is currently in demand globally. Can you discuss the additional capacity at the plant? Was there a historically moderate level of utilization? Have we now reached 100% capacity? Additionally, could you provide some insight into the offtake? Do you anticipate primarily supplying FCC-grade ethanol for sanitizer markets, or will York's traditional markets be willing to pay the higher prices driven by scarcity?

York has consistently operated at full capacity and continues to do so, processing about 50 million gallons annually. We are maintaining our delivery schedules for the export market and are beginning to see increased interest, especially in South America, Mexico, and the Far East, as market values rise. We will not discontinue our global distribution, as it is crucial for long-term growth. In domestic markets, we focus on FCC-grade alcohol, which has a higher impurity level. Our plant is not designed to produce fuel-grade alcohol; selling for that purpose defeats its intended use, and we've sold very little to fuel markets in the past four to five years since acquiring it. We've always been producing this product and have been fortunate to be positioned well in the market. Many have tried, but it's impossible to convert a fuel-grade plant to qualify for FCC grade. The FDA has approved our status, and they've extended this approval through the end of the pandemic, while the TTB has extended it through the end of the year. We believe this puts us in a favorable position this year, which could positively impact our performance over one or two quarters.

Do you think there's a longer tailwind, just a couple of quarters or we have to see how the pandemic plays out?

I believe we need to watch how the pandemic unfolds. Everyone can determine how long we will need more cleaning products and sanitizers. This product is not just for cleaning or hand sanitizer; it is a high-quality, high-purity product used in various cleaning solutions. Given the rise in USP prices we've observed, I think we're in a solid position. However, converting a significant number of US ethanol plants to produce FCC grade is quite costly and many plants are not equipped to make that change. Additionally, the conversion process takes a long time. From our perspective, we hope the favorable trend will continue, but we are also prepared if it does not.

Great. Thanks again for taking my questions.

Thank you.

Your next question comes from the line of Laurence Alexander with Jefferies.

Good morning. So can you help us think through what the normalized tax rate should be going forward?

Yes. You first of all have carrybacks. So your normalized tax rate for the company is going to be around 27.5%. But we do, obviously, with respect to CARES Act, have tax carrybacks with respect to NOL. So that affects the tax rate. And obviously, relative to where we end up on PBT, that affects the tax rate. So the real reported tax rate can be a bit misleading. But generally, when we think about things internally, it's kind of at that 27.5% tax rate. But again, we've got both the CARES Act, which will impact obviously the calculated tax rate based on where we are on PBT. And then we've got obviously other credits that will probably come into play with respect to R&D in future periods.

And then, can you give some color on how the protein discussions are shaking out? I'm thinking particularly of how should we think about large volume discounts as you scale up? And is there any noticeable pricing differential between what you're getting in the pet food market versus what we should expect in the aquaculture market for the same grades?

We are focusing on large-scale premiums instead of discounts as we increase our scale. Our Fluid Quip system has allowed us to achieve up to 53% protein, which exceeded our initial expectation of around 50% protein, with the first biological uplift being at 53%. We are pleasantly surprised by the capabilities of this technology, which might be influenced by the local corn supply, but we'll assess that in the next location. Currently, there is a global shortage of this type of protein. As we increase our volumes, we will access larger markets that require redundancy and may not pay as much for a product lacking those redundancies. By creating redundancy, we believe we can enter more premium markets that are willing to pay higher prices than we are currently achieving, particularly as we progress up the J-curve. Our immediate plan is to collaborate with our biotech partners to enhance nutritional value and protein levels, aiming for 55% to 56%. The growing anti-soy movement is also beneficial as we explore protein for aquaculture, and our product has features that assist with water management in that sector. Looking ahead, with corn gluten meal prices approaching $600 to $700 per ton, we believe we can eventually reach the 60% protein market. Though we initially thought this would take longer, beginning at 53% to progress is significantly better than starting at 49% or 50%. Our product is already present in pet food and companion animal markets, and it will soon make its way into certain parts of the aqua feed market. The market is more enthusiastic about our production capabilities than about potential shortages, and we are very optimistic about this project.

And then in terms of the project finance, what the payback time frame might be for those?

It all depends on the protein content. Currently, at 50% to 53% protein, we're looking at a payback period of about three years. At 55% protein, you could potentially reduce that by nearly a year, and at 57% protein, you can cut off another six months. This means the payback can accelerate rapidly, making it very attractive for project financing, as the returns on these projects are significant. We need to focus on low-cost plants like Shenandoah and Wood River. Fairmont will be completed soon as well. These plants have ring dryers, putting us in a favorable position since this is a ring dryer product and we already have the necessary equipment, which lowers our capital expenditures for our initial projects compared to building a standard ICM plant without ring dryers. There are several advantages to this approach. We are definitely going to pursue project financing, which we want to clarify after some confusion in the last call about how we plan to raise funds. With time, we expect that one or two or three of these initiatives will become self-financing.

Thank you.

Thank you.

Your next question comes from the line of Ken Zaslow with Bank of Montreal.

Hey, good morning, everyone.

Good morning, Ken.

What percentage of the closed plants will be furloughed for an extended period? You mentioned that some plants are completely shut down while others are temporarily paused. Can you clarify what you are observing and what you anticipate will resume operations?

Yes, we don't have the exact numbers, but anecdotally, I think around 10% to 20% of the plants in the United States that have closed have furloughed employees. I'm not sure how many have transitioned to a cold shutdown compared to a warm shutdown. A warm shutdown means they're prepared to resume operations within a week, while a cold shutdown takes about six weeks and requires retraining and rehiring employees. Some plants have also laid off their workforce altogether. It's important to note that some plants received PPP funding, which allowed them to keep their employees, although that funding will not last much longer. So, anecdotally, I believe about 10% to 20% of the plants are in cold shutdown and furloughs, and the rest likely varies across other options.

As plants restart, how do they secure working capital and bank loans? What does that process look like? Is it possible that we might see a more permanent restructuring of the industry? What leads you to think that might happen, or what makes you doubt it?

I tend to be cautious about claiming that ethanol plants will shut down, as they are not difficult to restart if local capital is available or if an investor group steps in with plans to operate more efficiently than previous management. Either aged or newly built ethanol plants can be activated again. It is important to keep that in mind. However, many of the currently operating plants may have limited working capital, which means they will not restart just to incur losses. Consequently, we might experience a delayed restart compared to demand. Historically, this industry has often done the opposite. We'll have to wait and see how things unfold this time. It is clear that some plants lack sufficient working capital or have existing debt that prevents them from borrowing more. I expect that agricultural banks will influence decisions about which plants will restart. Overall, it seems we will face a mixture of scenarios. I hope our industry has learned from the past two years and maintains discipline to avoid similar situations, but I cannot make any predictions at this time.

And then on the US-China trade deal, President Trump seems to be reversing his role on this or I don't know what your thoughts are on that. Can you provide us with your perspective on how that's playing out? Do you think there could be a reversal where things don't go as expected? If that happens, will it lead to more permanent shutdowns? How does that all unfold? Do you think the industry is just waiting for China to come in? I'll leave it there.

Yes. I don't know if the industry is naturally waiting for China. It's going to be very helpful. We do need this overzealous EPA to make some changes for ethanol that are positive, and they're just so focused on the oil industry that it's definitely a challenge. Even though the President supports it, the EPA doesn't. And we even need the US Department of Agriculture to weigh in as well. They're very focused on direct farmer payments and less on industry payments. And so we're kind of in the middle once again as an industry. But I think, overall, the Chinese say they're committed to fulfilling their obligation under the trade deal. Ethanol is part of that. But again, we can't predict what's going to happen there. But if they do engage, we do believe there will be some ethanol sold. And then, obviously, we want to get more E15 in the market, and we were making good progress when people were driving. So we need to get the economies opened up as well. So I think all of those could be potential tailwinds. But we've been talking about those tailwinds for several years. And I think this industry just needs to stay disciplined and not overrun against demand, which is what we're famous for.

Great. I really appreciate it.

Thank you.

Your next question comes from David Driscoll with DD Research.

Great. Thank you. Thanks for taking the question.

Thanks, David.

Great. I wanted just to start off with ethanol exports. I apologize if you said it earlier, but do you have any guess as to what you think exports will be in 2020? And then just could you make a comment on how that export market price is? Does it price on energy equivalence or octane substitution?

It's difficult to forecast 2020 at this moment. We are definitely observing customers postponing and canceling some shipments. Beyond June, we still have a solid backlog of business. However, as we progress through May, we will determine how June will shape up. We are beginning to see some short-term export demand either being deferred to 2021 or completely canceled. For now, anything scheduled for June and July is still in the pipeline. I believe we might still fall within the $1.1 billion to $1.3 billion range, but that's probably the upper limit. The RenovaBio program in Brazil is starting to take effect. Even though they may defer some of their export plans, they will still require U.S. ethanol to support the RenovaBio initiative. Ethanol pricing globally varies, as it is based on gasoline, octane, and different clean air standards across countries, each having its own perspective. Much of it centers around octane blending. While certain regions will consistently purchase ethanol, overall, we will likely face challenges with our export program until the global situation improves and demand increases.

On Green Plains Partners, I think you mentioned that you wanted to be debt-free in 18 months. Can you just describe how you get there at the end of 18 months? How does it actually work? Because I don't think there's enough cash flow in order to get there. So there's some other actions that I think you alluded to.

Yes. We have a plan in terms of monetizing assets continually at Green Plains Inc., which then obviously is a benefit to Green Plains Partners. In addition, obviously, through the normal cash flows, that will help reduce it. And then they have some assets there as well that if we need to monetize, we'll be willing to do that. We want to get this cash flow to be very clean and the stream to be very clean, and we'll do everything we can to get as close as we can. And at the end, if there's a little bit left, that's fine. But our overall goal is to be as close to debt-free as we can after 18 months.

I just have one last question as a follow-up. It seems you're very enthusiastic about the high protein, but I understand that your capital expenditures have decreased this year due to the current margin environment. If ethanol margins improve and demand returns, is it reasonable to think you might reconsider your CapEx plans and advance the high protein initiatives? I'm trying to get a sense of how aggressively you would pursue implementing these high-protein technologies in your plants, especially since they seem to be very beneficial for margins, making it difficult to see why you wouldn't want to accelerate the progress.

I want to move forward very quickly, which is why we're seeking project-level financing. However, securing attention for project-level debt right now, due to COVID, is quite challenging. We are aiming to obtain between $75 million and $150 million in project-level financing, and I believe we can achieve some of that before the end of 2020. We're committed to acting swiftly from a capital standpoint. If we can get two of these projects operational, they will begin to fund the third project and help in obtaining additional financing. We want to proceed as quickly as possible, but we also need to be mindful of our current environment, safeguard our balance sheet, and maintain our liquidity at all costs to ensure that Green Plains emerges strong in 2021. That's our strategic focus. While I would prefer to move faster, it's important to prioritize the protection of our balance sheet.

Very helpful. Thank you.

Thank you.

At this time, there are no further questions.

All right, everybody, thanks for coming on the call. Obviously, a challenging environment, but we're doing everything we can to manage the risk of that and put ourselves in a position to come out stronger on the other side of this. We have good strong liquidity, we've got some other things coming in like the tax refund and uplift from other areas around the company. And we think we've set ourselves up well to get through the second quarter, and we'll see what the third quarter brings. But overall, thanks for your continued support, and we'll talk to you soon. Thanks.

Thank you for participating; this concludes today's conference call. You may now disconnect.